World bank

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Last updated: February 24, 2019

The World Bank’s lending policy has been formulated in response to the strong leadership of Bank presidents, based on abundant economic analysis of borrowing countries by the Bank’s staff.

  The Board of Executive Directors has formal responsibility for developing the Bank’s lending policy, but its role has generally been passive.  The history of Bank lending can be classified into three periods, based on its lending policy: (1) fiscal years 1946-67, (2) fiscal years 1968-81, (3) fiscal years 1982 – to the present (Caufield, 1996).Before Robert McNamara became President in April of 1968, the World Bank had a strong tendency to equate development with economic growth.  The objective of Bank lending was to assist in the economic growth of developing countries, which it was thought could be achieved technically regardless of political factors within the borrowing countries.  Accordingly, infrastructure-related projects, such as electric power projects, transportation facilities, port development, telecommunications facilities, and other public utilities, were considered to be worthy of finance by the IBRD and the IDA.  The Bank also recognized investments in social sectors, such as education, health, nutrition, and family planning, to be fundamental to development.

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  However, the Bank’s lending criteria were based on rather conservative market-economy and growth-oriented principles, such as financial returns on invested capital, creditworthiness, and economic performance of the borrowing countries.  The contribution of social sectoral projects to increased production and the rate of return of such projects are less measurable and less direct than those of infrastructure projects.  Accordingly, financing of these projects was considered to be inconsistent with the Bank’s conservative lending criteria.  The Bank’s lending policy was strictly constrained by its need to borrow the funds needed for lending from private capital markets.

  Therefore, the Bank feared that lending for social sectoral projects would might raise suspicion among private lenders as to the “soundness” of its management.The Bank became increasingly devoted to the alleviation of poverty in developing countries after Robert S. McNamara took over the presidency in 1968.  This orientation was solidified following McNamara’s Nairobi speech to the Board of Governors of the Bank in September of 1973.  McNamara emphasized the Bank’s role in attacking poverty-related problems directly.  Consequently, the Bank did actually shift its attention to the questions of poverty and income distribution.

  The Bank’s new lending policy was based on the idea that income redistribution could take place without slowing down the growth rates of developing countries ().The World Bank argued that productivity gains from outlays for rural development, education, population, health and nutrition, water supplies, and housing were worthwhile economic investments.  Mahbub ul Haq, an economist and director of the Policy Planning and Program Review Department at the World Bank between fiscal years 1974-1982, classified poverty alleviation lending into (1) new-style projects, which included rural development and small scale industrial projects where over 51 percent of the total benefit is directed toward poverty target groups, and (2) basic needs programs, which included education, population, health, sites and services, and water supplies (Ul Haq, 1980:34).

The Bank’s shift of emphasis from traditional sector lending to poverty-alleviation project lending did not guarantee the smooth expansion of lending for poverty-alleviation projects nor did it result in a rapid decline in the importance of traditional sector lending, however.  The Bank staff remained faithful to the rigorous application of lending criteria such as creditworthiness and economic performance as it had done previously.  Therefore, the necessity arose for a cost-benefit analysis for poverty-alleviation projects as had been applied in the case of traditional projects.

  However, taking into consideration the many factors that cannot be measured easily when dealing with poverty-alleviation projects, such as the evaluation of the effects of training programs or the socially demonstrative effect on a target group, the Bank’s economists were reluctant to finance poverty-alleviation projects.  Moreover, the policy of the Bank during McNamara’s tenure never deemphasized funding for traditional projects which produced a greater impact on the national economies of the recipient nations.POVERTY-ALLEVIATION SECTORSThe poverty-alleviation sectors include the education sector, the population, nutrition, and health sector, the small industry sector, the urban development sector, the water supply and sewerage sector, and the rural development which is a part of the agriculture and rural development sector.  The Bank under Robert McNamara began to emphasize projects that directly benefit the poor, criticizing Lhe Bank’s past lending policy of allocating most of its loans for infrastructure and large-scale industry projects. However, the new lending policy was not welcomed by all of the Bank staff or governments of developing countries at the beginning of the 1970s.

  First, the objectives and designs of poverty-alleviation projects are more ambiguous than those of traditional infrastructure and production projects. Therefore, the Bank’s economist staff was reluctant to make a significant commitment to poverty-alleviation projects. Second, it was also dubious whether authoritarian regimes or political elites in developing countries would be willing to undertake poverty-alleviation projects and develop appropriate policies to support them, since such projects often deal directly with the problem of domestic income redistribution.In spite of these internal and external obstacles, data on Bank lending shows that the Bank under President McNamara was successful in increasing its lending amount to the poverty-alleviation sectors in the 1970s.  Bank lending provided for these poverty-alleviation projects, excluding the lending amount for rural development projects, rapidly increased from $387 million in 1966-70 to $2,155 in 1971-75.

This amount  further rose to $6,470 million in 1976-80 (Caufield, 1996:115).  The share of total Bank lending allocated to poverty-alleviation sectors also greatly increased from 5 percent in 1966-70 to 11 percent in 1971-75 and to 15 percent in 1976-80.  If the amount lent for rural development projects is added to these figures, then both the amount and the percentage of the Bank’s total lending allocated to the poverty-alleviation sectors were greatly expanded, to $13.

2 billion and 30 percent of total lending in 1976-80 (Caufield, 1996:115).The expansion of the poverty-alleviation sectors was basically due to the strong leadership of President McNamara.  He introduced the Country Programming System, in 1972, which emphasized countries rather than individual sectors as lending units.  As a result, the influence of the departments of traditional sectors, such as the Agriculture Projects Department or the Industrial Projects Department, was weakened.

  In addition, McNamara reorganized the Agriculture Projects Department into the Agriculture and Rural Development Department in fiscal year 1973, and created the Urban Projects Department in fiscal year 1975 and the Population, Health, and Nutrition Department in fiscal year 1979.  These organizational reforms enabled McNamara to exercise strong leadership in Bank lending.The Bank under McNamara expanded lending not only for poverty-alleviation projects but for infrastructure and production projects in absolute terms.  This fact helped weaken the resistance of the Bank staff members who preferred traditional lending to poverty-alleviation projects.In the 1980s, the Bank has faced new difficulties concerning the enlargement of poverty-alleviation projects. First, the increasing importance of external debt problems and budgetary crises in developing countries has shifted concern to intensifying export sectors and decreasing social programs. Second, the change in Bank Presidents from McNamara to Clausen resulted directly in a shift in emphasis from poverty-alleviation project lending to structural adjustment lending.

  Clausen, as former President of the Bank of America, was sensitive to the interests of U.S. commercial banks, many of which suffered from problems relating to debt-issues in developing countries.  The U.S. government also placed greater pressure on the Bank to play a leading role in the resolution of debt-issues and expand adjustment lending for that purpose.Third, Bank staff members themselves became more suspicious of the macro-economic approach of redistribution with growth.  The Bank officially claimed success in creating new productive assets for the poor through poverty-alleviation projects.

  However, a few Bank staff members voiced criticism that this approach did not in fact lead to fundamental and thoroughgoing redistribution of productive assets.  The number of such staff members increased by the beginning of the 1980s.  In fact, Bank experiences in the 1970s made it clear that the Bank had overestimated the productivity of poverty-alleviation projects.  For example, the rates of economic return for poverty-alleviation projects are generally lower than those for traditional projects.  Bank projects for making loans to small-farmers and micro-entrepreneurs showed that repayment rates were worse than those for loans to large farmers and wealthier entrepreneurs.  Opposition from political classes that benefited directly from existing land systems and subsidy structures also prevented the implementation of poverty-alleviation projects.

  Problems were also induced by conflicts of interest with foreign private enterprises.  For example, the World Bank doubled its lending program to support the land reform introduced by the Ethiopian Revolution in 1974.  However, the Labor government of the United Kingdom pressured the Bank to stop lending for this program for the reason that the promotion of land reform led to a serious compensation problem in Ethiopia.  Thus, Bank lending for this program was ultimately stopped entirely (Brett, 1986:84-85). As a result, the senior staff members in the Research Department of the World Bank and the new members of the Board of Executive Directors have developed unsympathetic attitudes toward the redistribution with growth approach (Brett, 1986:75).In spite of these difficulties, the Bank still expanded lending for poverty-alleviation projects, including rural development, to $20.

5 billion in 1981-85, which was more than a 50 percent increase over the amount provided in 1976-80 (Caufield, 1996:118).  The percentage of the Bank’s total lending allocated to the poverty-alleviation sectors continued to increase, reaching 29 percent in 1981-85.One of the reasons why the Bank continued to increase lending for poverty-alleviation sectors as a whole lies in the economic crises in sub-Saharan Africa in the early 1980s (Collier, 1991:360).  In fact, Bank lending to sub-Saharan African countries, where the need for poverty-alleviation projects is much higher, has received emphasis even in the 1980s.  In add it ion, a few staff members have warned that an expansion of adjustment lending would increase the difficulties, particularly for the poor, because adjustment policies often include a reduction of social expenditures and an increase in unemployment in public sectors.  Therefore, the Bank under Clausen had to avoid a drastic decline in poverty-alleviation lending.

  Barber Conable proposed an approach which integrated McNamara’s poverty-alleviation lending policy with Clausen’s approach to expand adjustment lending (The World Bank, 1987:15). He mentioned the Bank’s struggle against poverty as one of the five priorities of the Bank.Even if Conable, and Clausen before him, have stressed poverty-alleviation projects, their approach is more growth-and market-oriented.  They placed added weight on the cost-recovery problem and the efficient use of the private sector even when undertaking poverty-alleviation projects (World Caufield, 1996). Therefore, there may be variations among the poverty-alleviation sectors themselves rather than the fact that the Bank increased its commitment to all of these sectors as was the case during the presidency of McNamara.BASIC NEEDS APPROACH: POPULATION, NUTRITION, AND HEALTHPopulation, nutrition, and health projects were newly undertaken in fiscal year 1970.  When President McNamara insisted on initiating these projects, the issue that came under dispute by the Bank staff was whether such concerns were related to development and therefore concerns that should be addressed by the Bank.

  At that time, many Bank staff members were of the idea that economic development basically contributed to poverty-alleviation, and so the objectives of Bank lending should be direct assistance for economic development.  In addition, the Bank was faced with the fundamental problem of insufficient data necessary for undertaking population, nutrition, and health projects. Most developing countries in the mid-70s lacked reliable data on food consumption and spending patterns, on households with malnourished mothers, or even on nutrition. Per capita calorie consumption was often used as an index of malnutrition, but that number was calculated as a national average, and so the figures understated the seriousness of the situation of the poor.The Bank issued its first IBRD loan to the population, nutrition, and health sector in fiscal year 1970, based on the idea that economic development was not a sufficient response for alleviating such problems.  Bank lending to this sector tended to increase gradually until fiscal year 1978.  Then it was rapidly increased from $58 million in fiscal year 1978 to $114 million in 1979 and further to $143 million in fiscal year 1980 (Owoh, 1996:211).

  However, despite this, the Bank’s total lending amount to this sector is one of the smallest among all sectors financed by the Bank.  The percentages of IBRD loans for this sector were 0.4 percent in 1971-75 and 0.6 percent in 1976-80, and those of IDA credits were 1.3 percent in 1971-75 and 1.8 percent in 1976-80 (Owoh, 1996:212).Family planning services were the main activity of Bank population projects, and Bank-assisted nutrition projects included nutrition education, supplementary feeding, health services with nutrition, and food subsidies.

  Population, nutrition, and health projects are closely related to one another and also have a close relationship with other sectors like agriculture.  For example, a Bank report argued that population growth rates above 2.5 percent a year were offsetting GNP growth and creating food and nutrition problems (World Bank, 1982:54). Therefore, the Bank undertook population, nutrition, and health projects not only as independent projects but as components of other sectoral projects, e.g.

within agriculture projects.The substance of projects related to population, nutrition, and health changed in the 1980s, however.  First, the institutional aspects of projects, such as strengthening management ability and organizational reform, began to receive more attention.  Second, the Bank emphasized the efficient use of resources.

  For example, it insisted on the necessity of a user charges system although it recognized that user charges were not appropriate for all types of public services. 


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