Books

The World Bank: Its First Half Century

Devesh Kapur, John P. Lewis, and Richard Webb

Brookings Institution, Washington, 2 vols. (Volume 1: History (xviii + 1275 pp.); Volume 2: Perspectives (xviii + 766 pp.)), $79.95 each volume or $159.90 for both (cloth).

What is the World Bank? It turns out that knowledgeable and serious people have been asking that question ever since the Bank was conceived at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire in 1944. The first attempt at an answer is still the most famous, and in some ways the best. It came at the end of the three-week conference, in which delegates from 44 countries labored to create the Bank and the IMF as the two great pillars of the postwar international economic system. The head of the British delegation, John Maynard Keynes, explained the difference between the two proposed institutions with characteristic irony. "The Bank," he is said to have remarked, "is a fund, and the Fund is a bank." Behind the bitter mordancy of the remark was a sense that the delegates had failed to define the Bank's mandate and had left the door open to the vagaries of future shifts in the political winds. As Keynes' biographer, Roy Harrod, later observed, the "biggest question at issue was never fully discussed, namely, whether the Bank should be a sound conservative institution on normal lines, or depart from orthodox caution in the direction of greater venturesomeness."

The question remains open today. Is the International Bank for Reconstruction and Development (the Bank's full and proper name) to be regarded primarily as a bank, or as an agency for economic development? If faced with a challenge that would call for it to finance risky and expensive programs that might make a real difference for growth in developing countries but that might threaten the excellence of its credit rating in the world's bond markets, where would the Bank draw the line? What does one make of a bank that declares its "overarching objective" to be "the fight against poverty"? What does one make of a development agency that has had to struggle with "unseemly high profits" from its loans? No answers to such questions could ever be definitive, and a strength of this new history is its thoughtful attempt merely to put them in perspective.

During the first quarter-century of the Bank's existence, its main task was to finance specific capital investment projects, most often for the development (or reconstruction) of public sector infrastructure: highly visible projects such as hydroelectric dams, roads, and railways. To finance this activity, the Bank had to supplement its meager paid-in capital by borrowing in private capital markets. By 1959, when two-thirds of the Bank's resources were from operations and borrowings, the Bank's bonds were awarded a triple-A market rating. Getting, and then retaining, that standing became an essential preoccupation of the staff. Without a top bond rating, the Bank could not have raised enough capital on favorable terms to become a leading lender for economic development. Becoming a major bank and succeeding as a development agency were not in conflict.

A surprising finding in this history is that the period of greatest growth, and the beginning of great change, in the Bank came in the 1960s before the arrival of Robert McNamara. By then, the Bank was seriously questioning its emphasis on project lending. Investment in large-scale projects was not necessarily the best use of either the Bank's money or borrowers' scarce resources. Moreover, there was increasing concern that Bank loans enabled countries to finance projects they would have undertaken anyway and use the additional money to increase spending however they wished. The Bank therefore began to give greater emphasis in its appraisals to countries' overall investment programs and to the strength of their macroeconomic policies. In the process, the institution began to look less like a traditional bank. An even greater force for change was the creation in 1960 of the International Development Association (IDA) within the World Bank. IDA "breached the institutional walls, bringing the Bank face to face with a redefined, revitalized development mission, now charged with political urgency, a larger cast of characters, and a strong association with poverty" (p. 153). The Bank was still a bank, but it now had a soft-loan window that imposed a "schizophrenia" that "settled in as a permanent feature of the institution" (p. 173). Even apart from IDA, the Bank began shifting its focus and its money into softer fields such as agriculture and education reform, where development gains were potentially large but difficult to quantify.

McNamara took over as President of the Bank in 1968 and immediately accelerated the shift toward poverty reduction as the top priority. That shift, or rather that cyclical swing, culminated a decade later in a McNamara-led drive to lend for the provision of society's "basic needs." The Bank was looking less and less like an extension of Wall Street, but it would soon be snapped back toward a more traditional approach by the Thatcher-Reagan revolution of the 1980s. When the Bank "rededicated" itself to the eradication of world poverty in the late 1980s, its focus shifted further. No longer did that term mean just reducing poverty by stimulating economic growth. It now included the direct alleviation of poverty by redirecting spending toward lower-income and other disadvantaged groups. The authors take this compelling story almost up to the present, stopping at the end of the presidency of Lewis Preston, owing to his untimely death, in 1995.

Proliferation of goals and tasks, and the consequent vacillation over priorities form only one strand in the complex tapestry of the history of the World Bank, but it has provided the team of Devesh Kapur, John P. Lewis, and Richard Webb with a unifying theme. Lewis (a Princeton University historian) and Webb (a former governor of the central bank of Peru) began working on this book in 1989. Although an earlier history of the Bank through 1971 was of similar scope (Edward S. Mason and Robert E. Asher, The World Bank Since Bretton Woods; Brookings Institution, 1973), Lewis and Webb made the daunting choice to...