When Barber Conable, the incoming president of the World Bank, takes office in June, he will face two equally daunting challenges: How does one coax money out of a Gramm-Rudmanized Congress, and what should one do with the money that does become available?
A former ranking member of the House Ways and Means Committee needs little advice on how to extract resources from ex-colleagues on the Hill; but a few words on the second topic might be timely, since the linkage between the bank's various lending operations and progress in the developing countries is a much more hotly debated topic than is commonly assumed.
The World Bank is popularly thought of as a "project lender" -- that is, as a financier of dams, railways and power plants. Although the bulk of its early lending programs in the '50s and '60s was concentrated in these types of projects, it has always made general balance-of-payments credits available to its borrowers. A number of its early reconstruction loans to European countries were of this nature, and India was a heavy user of thinly disguised balance- of-payments loans in the 1970s.
But nonproject credits can easily turn into unconditional balance-of-payments financing and, in effect, a subsidy to cover up problems caused by a borrower's poor economic policies. On the other hand, individual project loans can be rendered useless or even counterproductive if overall economic policies are undermining the project.
A new irrigation system may bring water to farmers. But if prices for crops are fixed below the market, out of deference to politically powerful city dwellers, the project will not live up to its expectations; furthermore, if farmers are not charged for the cost of maintaining the canals, the waterways will rapidly deteriorate and silt up, a notorious problem in certain Indonesian projects.
Sometimes policy is much more important than money. Simply breaking up a government monopoly on the importation and distribution of medicine may do far more for public health than the construction of public health clinics.
Thus, the dilemma of the World Bank. If project loans are a poor use of bank resources because the surrounding economic climate is counterproductive, how do you get the climate right? The bank's traditional answer, under its earliest presidents, was to refuse to make any loans, project or "nonproject," until the appropriate broad economic policies were in place.
Enter the "structural adjustment" loan. In the late 1970s it became increasingly clear to the bank and its economic advisers -- of all stripes -- that the overall policy environment was a serious impediment to any further lending in a number of its borrowing countries. However rather than close up shop and wait until better macroeconomic policies returned (presumably under the guiding hand of its sister institution, the International Monetary Fund), the bank, with the support of the Reagan administration, began to take a much more activist role. Nonproject or program lending was stepped up but with increasingly greater conditionality concerning basic economic policies bearing on agricultural prices, interest rates and government monopolies. Thus was born the structural adjustment loan.
The record of such lending is mixed. In some cases, such as Turkey, substantial inflows from the World Bank and other lenders, conditioned upon the adoption of broad policy changes, have helped -- but only because the government in power basically agreed with the premises and likely outcome of the policy prescriptions. In other cases, such as Bolivia and Jamaica, the bank misjudged the commitment of the government; funds were disbursed and elatively little of substance has happened, other than an increase in the country's debt to the bank.
To these complications must now be added the pressures emanating from Treasury Secretary James Baker's debt "initiative" and from commercial banks for the World Bank to play a greater role in resolving the financial problems of many overindebted middle-income countries.
But project lending pays some subtle dividends for the bank. Supporters have always been alert to the U.S. political implications that can flow from "hard" projects. Massive civil works and projects with hefty engineering and machinery components can be used to generate contractor and supplier political support for the bank when it comes to appropriation time on the Hill.
Finally, there is the growing friction that inevitably arises with its sister institution. A greater role for the bank in broad policy matters has brought it into greater contact with the IMF. With substantially different boards of executive directors, frequently representing different ministries in their governments, and turf-minded staffs, the issue of bank-IMF collaboration is increasingly discussed, and the likely merits of a merger have also been considered.
In short, it may be even more important for the bank's new president to chart a strategy for its lending operations before undertaking the familiar ride, hat in hand, up Pennsylvania Avenue to Capitol Hill.