On September 24, 1973, Robert McNamara delivered the World Bank president’s annual address to the Bank and IMF Boards of Governors. Speaking to government officials and press assembled in the auditorium of the new Kenyatta Conference Center in Nairobi, Kenya, he recounted the Bank’s tremendous expansion over the previous five years. During his first term as president, he noted, the Bank had met or exceeded all the goals he had set for the organization when he arrived. These included doubling the Bank’s lending, channeling a greater share of its funds to the world’s poorest countries, and increasing its support of education and agriculture.
These accomplishments notwithstanding, McNamara announced that the Bank still had important work to do. Although the economies of many developing countries were growing at an impressive rate, conditions for the poorest people were not improving as rapidly as he hoped. Calling on wealthy nations to increase their foreign aid commitments, McNamara implored his listeners to think about “a condition of life so degraded by disease, illiteracy, malnutrition, and squalor as to deny its victims basic human necessities.” Unlike the “relative poverty” found in many developed countries, such “absolute poverty” affected “hundreds of millions” of people in the developing world. “One-third to one-half of the two billion human beings in those nations suffer from hunger or malnutrition,” he noted. “Twenty to twenty-five percent of their children die before their fifth birthdays . . . the life expectancy of the average person is twenty years less than in the affluent world . . . and eight hundred million of them are illiterate.”1
McNamara declared that eliminating absolute poverty was both a “moral obligation” and necessary for the “expansion of trade, the strengthening of international stability, and the reduction of social tensions.” In order to address these issues, he announced that the Bank would continue to expand. It would double its lending over the next five years, conduct more research on the causes of and solutions to poverty, support “policies and projects which will begin to attack the problems of absolute poverty,” and adopt “socially oriented measure[s] of economic performance” in its operations.2
McNamara’s speech was not supposed to be the main event in Nairobi. A few days earlier, government officials, bankers, and journalists from around the world had gathered in the Kenyan capital for the first IMF-World Bank annual meetings held in Africa. Preparations for the conference had been intense. Because of the large number of visitors, hotels were overbooked, and some tourists had to rent space in hastily erected tent cities on their way to and from the country’s wildlife parks.3 Observers expected the demise of the Bretton Woods monetary system to dominate the proceedings.4 Accordingly, attention focused on the IMF, which played a central role in such issues, rather than the World Bank.
Yet McNamara’s address turned out to be the seminal moment of the conference. While the discussions over international monetary policy stalled, McNamara’s speech left a lasting impression. Representatives from developing countries applauded the former defense secretary’s call for increased foreign aid.5 The press praised his “eloquent reminder” of world poverty.6 And development specialists saw the speech as evidence that the Bank had assumed a leadership role in the field.7 Decades later, scholars would describe the Nairobi address as a “landmark” that provided momentum for global antipoverty efforts.8 Some have even credited McNamara’s speech with introducing the concept of absolute poverty.9
McNamara’s words were important. Following the speech, poverty alleviation became a central objective at the Bank and the broader development community. Nevertheless, his war on world poverty would soon face its greatest challenge. Less than two weeks after the Nairobi meetings concluded, Egypt and Syria launched a surprise attack on Israel seeking to reclaim territory that they had lost in the Six Day War. Shortly thereafter, Arab members of the Organization of Petroleum Exporting Countries (OPEC) placed an embargo on oil exports to the United States in response to the Nixon administration’s decision to aid Israel. Although the fighting ended in late October, OPEC continued to deploy the “oil weapon” over the coming months. In November, OPEC cut oil production 25 percent below September levels. The following month, it doubled the price of crude. By January 1974, world oil prices were four times higher than they had been at the beginning of October 1973.
McNamara was far away from these events when they began to gather steam. A lifelong mountaineer, he spent much of November 1973 on vacation in Nepal, catching his breath after a decade that had seen him rise to the heights of power as John F. Kennedy’s secretary of defense, fall to personal and professional lows as the architect of the Vietnam War, and then resurrect himself in unexpected ways as president of the World Bank. McNamara did not have much time for reflection. Upon returning to Bank headquarters in early December, he became aware that OPEC’s actions posed a direct threat to the economies of oil-importing developing countries. When OPEC announced further price hikes later that month, he and others in the Bank panicked. “After the quadrupling of world oil prices,” read a memorandum that McNamara found on his desk the morning of January 1, 1974, “things will never be the same again. We cannot expect a return to normality.”10
Those words proved prophetic. In addition to the oil crisis, over the coming years a host of external events, including reduced support from the U.S. government and increasingly vocal critiques of mainstream development approaches, influenced the Bank. Although in many ways the organization proceeded down the path that McNamara had laid for it—it continued to expand, it further refined its procedures, and it devoted more of its resources to poverty-oriented lending and research—the upheavals of the 1970s ensured that things were never the same for the Bank or its president.
The 1973–74 oil crisis came after years of increasingly tense negotiations between oil-rich countries and Western petroleum companies operating in those nations over oil pricing. In 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela organized themselves into OPEC with the purpose of advancing their interests as oil-producing countries vis-à-vis the handful of foreign-owned energy companies that had dominated the industry since the 1940s. Until the oil crisis, these “Seven Sisters”—the Anglo-Persian Oil Company, Gulf Oil, Texaco, Royal Dutch Shell, Standard Oil of New Jersey, Standard Oil of California, and the Standard Oil Company of New York—enjoyed wide latitude in determining oil production and setting prices. By the early 1970s, however, OPEC, whose membership grew to fourteen in 1973, had declared that countries had a right to exercise absolute sovereignty over their natural resources.11 When hostilities between Israel and Arab countries renewed in 1973, Arab members of OPEC asserted this right by increasing the posted price of crude and placing an embargo on oil exports to the U.S. and other countries that were supporting Israel.12
The oil crisis was one of the most significant events in contemporary history. By wresting control of this vital commodity OPEC challenged U.S. hegemony in the Mideast and beyond, inspired developing country leaders around the globe to demand changes to the international political economy, and created rifts among Western nations, some of which disagreed with the U.S. decision to aid Israel. The oil crisis also sent shockwaves through the world economy. It exacerbated economic difficulties facing many Western countries, placed a tremendous burden on oil-importing developing nations, and generated windfalls for many oil-producing countries.
McNamara and other Bank officials recognized that the oil crisis would have dire consequences for most developing countries. In addition to seeing higher energy bills, slower growth in developed countries promised to reduce demand for developing country exports and further depress foreign aid levels. Early in the crisis, the Bank’s staff estimated that the foreign exchange required by oil-importing developing countries to fund their energy imports would increase fivefold by the end of the decade.13 Agricultural sectors, which had become the Bank’s main priority, would be particularly hard hit. As a report prepared by the Bank and the UN Food and Agriculture Organization (FAO) noted, “the critical impact of the energy crisis [would be] immediately felt on the generation of power for irrigation [the] . . . accentuated the rise in fertilizer costs” and “severe” increases in the price of pesticides and herbicides.14 One Bank official put it more bluntly. “The Green Revolution would receive a serious blow from the increase in oil prices.”15
Bank staff issued even grimmer predictions after OPEC announced another price hike at the end of December 1973, estimating that the current account deficits of oil-importing developing countries would jump by 67 percent in the coming year. Whereas foreign aid and private borrowing had covered previous shortfalls, staff now worried that “no immediate solutions seem in sight to cope with this additional deficit.” For low-income developing countries like Pakistan, Bangladesh, Sri Lanka, and Kenya, the effects would be devastating. In the case of India, staff estimated that the cost of oil imports would increase from $400 million in 1973 to $1.35 billion in 1974. Middle-income countries such as Ghana, Korea, Morocco, the Philippines, and Thailand would not fare much better. Since these countries were in “no position to incur new debt by borrowing at conventional terms to pay their oil bill,” it appeared that “a drastic reduction in their living standards, unemployment, and social unrest” would ensue. Even relatively well-off developing countries like Argentina, Brazil, Turkey, and Uruguay would suffer. Although these nations could meet some of their financing needs through borrowing, doing so would increase their debt burdens and negatively affect growth.16
Recognizing that the consequences of the oil crisis were even more dramatic than he initially feared, McNamara moved quickly to position the Bank to meet the financial needs of oil-importing developing countries.17 Rather than speak out against the price increase, he sought to convince OPEC members to increase their foreign aid. In January, he requested personal meetings with the Finance Ministers of Iran, Kuwait, and Saudi Arabia and dispatched Munir Benjenk, the head of the Bank’s Middle East and North Africa Department, to the region to “collect intelligence about the intention of oil-producing nations regarding aid” to oil-importing developing countries.18 McNamara was “disturbed by the apparent lack of concern [among OPEC members] for the problem facing developing countries” and wanted to impress upon them the developmental impact of their actions.19 McNamara also tried to get OPEC members to partner with the Bank in helping oil importers finance their energy bills. Rather than calling for reduced prices, McNamara offered OPEC members “an unqualified guarantee of assistance” if they agreed to channel some of their profits to the Bank, which would relend these funds to oil-importing developing countries.20 McNamara also pledged that the Bank would help OPEC “identify and prepare development or sector projects” in these countries for OPEC financing and manage a “special soft-loan fund on behalf of OPEC.”21
McNamara’s outreach to the oil rich nations of the Middle East was not simply a result of the oil crisis. Rather, he had courted these countries since his first days at the Bank. In the ninety-eight point agenda that he drafted for himself in 1968, he wrote that he planned to devote “particular emphasis to Kuwait, Saudi Arabia, and Libya” in his fundraising efforts, and during his initial years as president he stepped up the organization’s borrowings in the region.22 Beginning in 1968, the Bank raised $20 to $30 million annually from the Saudi Arabian Monetary Agency (SAMA), and between 1968 and 1973 the organization sold over $400 million of its bonds in Kuwait and Libya.23 McNamara’s interest in OPEC had even led him to predict a spike in oil prices months before the oil crisis. Returning from a trip to the Middle East in February 1973, he told his aides that “there was an emerging oil monopoly on the part of the producing nations [and] . . . eventually the consumers in the West would have to pay.”24 Like a good banker, McNamara was aware that this presented an opportunity. Since there was “a lack of planning on the part of producer nations on how to use the enormous future revenues from oil,” he felt that it was imperative that the Bank “continue to borrow in the area in the future.”25 As he put it a few months later, the oil-rich countries of the Middle East constituted “the largest . . . pool of medium—and long-term investable capital in the history of the world.”26
In the wake of the crisis, McNamara reiterated his desire to tap OPEC surpluses by advocating for increasing assistance to oil-importing developing countries, telling a meeting of development officials that they should round up “Arab funds for aid.”27 Failing to provide this assistance would ensure that the war on absolute poverty would be over before it began. As the Bank’s 1974 Annual Report explained, “without a major effort by the international community 800 million people around the world can expect almost no improvement in their conditions of life for the rest of the decade.”28
Despite such pleas, wealthy countries were unwilling to help. Reporting on a visit to Europe, a Bank staffer observed that “the substantial increases in oil prices are expected to have a profound [negative] effect on the willingness of the European populace and its leaders to make major efforts toward increased development aid.”29 The same story was playing out in the United States, where the Nixon administration felt that helping to offset the cost of oil imports would signal acceptance of OPEC’s actions. Perhaps most concerning was the fact that no assistance was forthcoming from OPEC, either. “Oil-producing countries still displayed a lack of understanding for the magnitude of the problem,” Benjenk told other members of the President’s Council upon his return from the Middle East. Governments in the region believed that the Bank was “exaggerating the problem” and officials had “given little thought to aid programs.”30 “The climate regarding aid had deteriorated,” a Bank senior manager concluded.31
The only place the Bank could look for help, it seemed, was across the street. At the same time that Bank officials were growing concerned about the international community’s lack of a response to the oil crisis, the IMF began exploring ways that it could help countries cope. To this effect, in early 1974 IMF managing director Johannes Whitteveen initiated plans to have his organization provide concessional loans to oil-importing countries. Shortly thereafter, senior Bank and IMF officials agreed to “exchange information . . . and remain in close contact” as their respective responses took shape.32
Some good news arrived in February, when Jahangir Amuzegar, the Iranian representative to the Bank and IMF, informed Bank management that Iran was thinking about establishing an organization that would provide assistance to oil-importing developing countries on favorable terms. During his visit to Iran, Benjenk had apparently managed to convince Iranian authorities that the country should help poor countries finance their oil imports. According to Benjenk, Iranian Prime Minister Amir-Abbas Hoveida had been “surprised at the magnitude of the needs of the developing countries” and had asked him to put the Bank’s concerns in writing so that he could show them to the Shah.33
The Bank’s senior managers had reservations about the proposal. “There was no need for a new institution,” Burke Knapp, the Bank’s vice president of operations, told Amuzegar. Instead, “the new funds could be handled under existing procedures.” Nevertheless, the Iranians insisted on the need for their own organization—oil producers must, Amuzegar responded, “have some say in the disposition of the funds they provided”—and a week later McNamara and Whitteveen were in Tehran to help hammer out the plans.34 During the meetings, McNamara and Whitteveen convinced the Shah to contribute $1 billion for a new concessional lending organization whose day-to-day operations would be jointly managed by the Bank and the IMF. The Shah also agreed to lend $700 million to the IMF and $200 million to the World Bank for their efforts to help oil-importing developing countries cope with the increased price of oil.35
“The scheme which had been proposed by the Shah was unusual,” McNamara confided to Bank and IMF officials during a break in the meetings, “even irrational,” and demonstrated the Shah’s desire to bolster his image in the developing world. But since he “saw no chance of getting more concessionary funds from developed countries,” he felt that he had to support the Shah’s plan.36 To press gathered in Tehran, McNamara described the proposal “as imaginative a proposal and important a proposal as was the Marshall Plan.”37
Other oil producers soon followed suit. In March, the head of SAMA assured McNamara that Saudi Arabia would “tak[e] care of the Bank’s future financing needs.” Meanwhile, Libyan leaders informed Bank officials that they were ready to invest “substantial amounts” in the organization. And Algerian President Houari Boumediène even gave McNamara a “tentative commitment” to lend to the Bank—a significant event considering that the government of Algeria had previously criticized the Bank as a neocolonial institution.38
Within months, the Bank ramped up its OPEC borrowings, raising $200 million from Iran, $101 million from Libya, $76 million from the United Arab Emirates, $85 million from Kuwait, and $23 million from Venezuela in 1974 alone. The Bank’s operations in Iran, Venezuela, and the UAE constituted its first long-term borrowings in those nations.39 All totaled, the Bank raised over half a billion dollars from oil-exporting countries in the year following the oil crisis, about 31 percent of its total borrowings during the period and more than double the amount raised from those countries in the previous year.40 In 1974, the Bank raised $240 million and $30 million from the governments of Nigeria and Oman, and in December of that year it borrowed $750 million in Saudi Arabia, which at the time constituted the single largest bond placement in the Bank’s history.41 All totaled, in the year and a half after the oil crisis almost 80 percent of the Bank’s borrowings came from OPEC members.42
McNamara’s World Bank was not the only beneficiary of oil money. In the wake of the crisis, OPEC members also expanded their bilateral assistance programs. Mainly, though, they invested their surpluses in Western capital markets. By one estimate, more than 80 percent of the current account surpluses of oil exporting countries went to developed countries and offshore markets.43 By comparison, from 1974 to 1981 OPEC members contributed 1.4 percent of their current account surplus to the Bank, which was not their preferred multilateral lending vehicle.44 OPEC members provided more assistance to the OPEC Fund for International Development (OFID), created in 1976, and the International Fund for Agricultural Development (IFAD), established the following year, than they did to the Bank.45
A few reasons account for the Bank’s relative lack of success in raising funds from OPEC. The primary one was financial. Bank bonds were less attractive than other investments. In negotiations with Saudi officials, for instance, Bank staff struggled to explain why, as a development bank, the organization offered lower interest rates than private borrowers; indeed, the Bank was only able to secure its $750 million issue in Saudi Arabia by borrowing at a relatively high rate.46 The Bank was also hamstrung by a perception that the major countries controlled it and, through the institution, advanced their foreign policy interests. That the Bank’s vice president of finance at the time was a former British colonial officer did not alleviate such concerns.47 Finally, OPEC leaders appear to have grown tired of the Bank’s fundraising pleas. As one staff member put it to McNamara, officials in the region did “not appreciate advice on how to invest their money.”48
Compounding these difficulties was the fact that OPEC’s surpluses turned out to be lower than expected. Over time, increased oil prices reduced demand for oil, and OPEC’s profits did not continue to increase quite so rapidly in the years after the crisis.49 Thus, in March 1975, McNamara noted that he had encountered a “depressed mood” on a recent trip to the Middle East, where current account surpluses had been cut in half from the previous year.50 This, compounded with the organization’s difficulty raising funds in the region, meant that by the mid-1970s the Middle East had become almost an afterthought in terms of Bank fundraising.51
At the same time, the Bank continued to have difficulty convincing developed countries to increase their foreign aid budgets. Reporting on a trip to Japan and Europe in the summer of 1974, Bank vice president of finance Siem Aldewereld informed McNamara that domestic concerns, not the plight of oil-importing developing countries, predominated. Japanese authorities were “worried about the lack of growth of their economy and inflation,” and European officials were focused on “the stability of the banking system.”52 Indeed, despite the financial needs of oil-importing developing countries, official development assistance from developed countries actually decreased in 1975 and 1976.53
In addition to its fundraising struggles, the Bank’s relationship with the U.S. government deteriorated. This rift was significant given that the two had always enjoyed close relations. Since the Bank’s founding, the United States had provided critical financial and political support, and the Bank, in promoting market-based development, had advanced U.S. foreign policy interests. Although McNamara’s Bank continued to work toward this goal, Congress’s desire to exert more control over U.S. foreign policy, growing discontent among the American public with foreign aid, and the predilections of the Nixon and Ford administrations produced a number of conflicts.
Tension between the Bank and the U.S. government was not on the horizon at the beginning of McNamara’s presidency. Rather, McNamara’s early efforts to increase the Bank’s reach dovetailed with the Nixon administration’s foreign aid goals. Reflecting mounting budgetary pressures, in 1969 Nixon announced that the U.S. government would seek to reduce its relative contribution to international development efforts. This entailed a greater emphasis on stimulating private investment in developing countries as well as encouraging other governments to increase their foreign aid outlays, including by channeling more funds through international organizations like the World Bank.54
Yet Nixon’s desire to internationalize foreign aid generated a backlash in Congress.55 Concerned about the executive branch’s dominance of U.S. foreign policy, in the early 1970s members of Congress sought to increase their oversight of the World Bank and other international development organizations. The Foreign Operations Subcommittee of the House Appropriations Committee, chaired by conservative Democrat Otto Passman, was central to this effort. Passman, a prominent critic of foreign aid who once boasted that his “only pleasure in life is to kick the shit out of the foreign aid program of the United States,” had voted against every foreign aid bill since the Truman Doctrine loans to Greece and Turkey in 1947. In 1955 he assumed the chairmanship of the Foreign Operations Subcommittee and, in this role, regularly secured deep cuts in executive branch foreign aid funding requests.56 In the early 1970s, Passman turned his attention to international organizations. In the spring of 1971, the Foreign Operations Subcommittee rejected a Nixon administration request for appropriations for the World Bank and the Inter-American Development Bank (IBD), which led to the first time in history that Congress failed to fulfill an executive request to allocate funds to a multilateral development bank (MDB) in which the United States was a member.57
While Passman tried to starve the Bank, others sought to control its behavior. In the late 1960s and early 1970s, the U.S. government grew concerned about the expropriation of American property by foreign governments.58 The Nixon administration employed a variety of means, including using its influence in the World Bank, to prevent expropriations. In 1969, Nixon requested that McNamara try to dissuade Peruvian president Juan Velasco Alvarado from nationalizing U.S.-owned oil companies operating in Peru.59 Two years later, Nixon convinced McNamara to strengthen Bank rules against lending to governments that had expropriated foreign property without adequate compensation.60 Although they also sought to discourage expropriations, however, many members of Congress opposed the administration’s efforts to deal with expropriations in an informal manner. Accordingly, Henry Gonzalez, a Democratic representative from Texas, led a campaign to extend prohibitions on issuing bilateral aid to expropriating governments by requiring that U.S. representatives to the MDBs vote against loans to such governments.61 The Gonzalez Amendment to the Foreign Assistance Act, which was signed into law in 1972, demonstrated Congress’s interest in maintaining its oversight of the U.S. foreign aid program as it became more multilateral.
Congress was particularly interested in supervising the World Bank. In 1973, the U.S. General Accounting Office issued a report that criticized the Bank over its lack of transparency. Because the Bank did not make information about its operations publicly available, the report concluded that Congress could not be sure that U.S. contributions to the organization were being used “efficiently and effectively.”62 As a result, U.S. resistance to the Bank increased. Over the coming years, legislators attempted to place numerous restrictions on appropriations bills mandating how the Bank could use U.S. funds. The scrutiny that accompanied Bank funding legislation caused delays in U.S. contributions to the Bank, and by the middle of the decade the United States was consistently behind on its payments to the organization.63
Initially, it seemed that the Bank would be able to rely on the support of the Nixon administration to overcome congressional opposition. The Bank’s management had long enjoyed favorable relations with the executive branch, and Nixon’s vow to increase the percentage of U.S. foreign assistance that was channeled through multilateral institutions aligned with McNamara’s expansionary plans for the Bank. Even though McNamara had served in Democratic administrations, Nixon also appeared to value his perspective. For instance, in 1969 they met to discuss Japan’s plans to increase international development assistance.64 As one Bank staffer who worked with McNamara recalled, the Nixon administration was “favorably disposed” to the Bank and McNamara had “a lot of credibility” as its president.65
Nevertheless, U.S. officials soon came to feel that they were losing control of the Bank as it grew in size and as McNamara consolidated his power over it. Signs of trouble emerged after Bangladeshi demands for independence from Pakistan erupted into a regional war in the spring of 1971. Pakistan was an important U.S. ally, and the Nixon administration pressured McNamara to cut off lending to India, which had come to the aid of Bangladesh.66 At the time, India was the Bank’s largest borrower, and McNamara, eager to assert the Bank’s autonomy, rebuffed the administration.67 Nixon’s feelings toward the Bank were further inflamed that summer when the United States failed to convince McNamara to withdraw loans to Guyana and Bolivia because of expropriation disputes in those countries. The United States subsequently voted “no” when the loans came up for a vote, marking the first time in the organization’s history that the U.S. government formally opposed a loan that had been recommended by management.68
Frustrated by its inability to control the Bank, the Nixon administration gave only “belated and grudging support” to McNamara during initial discussions over his appointment to a second term as Bank president in 1972.69 Although the United States eventually supported McNamara’s reappointment, relations between the Nixon administration and the Bank remained poor. In a direct rebuke of McNamara’s expansionary plans, in the spring of 1973 the U.S. representative to the Bank called for capping the organization’s operating budget, and later that year it was revealed that Nixon had placed McNamara on one of his “enemies lists.”70
Deliberations over the fourth replenishment of IDA (IDA IV) in 1973 and 1974 brought tensions between the World Bank and the United States to a boil. It was clear from an early point that IDA IV would be trouble. In 1971, U.S. treasury secretary John Connally informed McNamara that the Nixon administration would seek to reduce the U.S. contribution to IDA.71 The following year, the administration signaled its reluctance to expand U.S. multilateral aid commitments by reducing U.S. funding of the IDB and the Asian Development Bank (ADB).72
Negotiations for IDA IV began in December 1972 with McNamara seeking $4.5 billion in new commitments, a doubling, in nominal terms, of the previous IDA replenishment.73 At a meeting in London the following March, donor countries agreed to contribute 60 percent toward this goal on the condition that the United States provide the remaining 40 percent. U.S. representatives countered by offering to contribute 30 percent. McNamara proposed a compromise: the United States would contribute 33 percent but would be allowed to stretch its contributions over five years instead of three.74
While other countries were willing to accept this deal, negotiations with the Nixon administration stalled, and by the time of the Bank-IMF annual meetings in Nairobi that fall the fate of IDA remained uncertain. In a private meeting with U.S. treasury secretary George Shultz, McNamara laid out the stakes of the impasse. Other countries were waiting on the U.S. to solidify its commitment before they contributed their own funds, McNamara noted. Because no country was willing to step forward, IDA would soon run out of money. This would not only hurt developing countries—many of which were struggling to cope with the fallout from the oil crisis—but also raise questions about the West’s commitment to development. McNamara was so frustrated he threatened to resign if the Nixon administration failed to come around. There was no way, he told Schultz, that he would “continue as president of a bankrupt organization.”75
Events in Nairobi put McNamara’s concerns to rest. After McNamara delivered his opening address calling for an attack on absolute poverty, U.S. negotiators agreed to their share of the IDA IV replenishment. But U.S. support came with a number of conditions, including demands that the United States be allowed to stretch out its contribution to IDA IV over four years, that the Bank establish more sophisticated procedures for evaluating the impact of its projects, that IDA’s future growth be curtailed, and that the Bank lend to South Vietnam.76
The contribution still required Congressional approval. Discontent over the Nixon administration’s prosecution of the Vietnam War had led to significant deterioration in congressional support for foreign aid, however.77 In 1971, the Senate rejected a bill authorizing the U.S. foreign aid program, and two years later Congress amended the Foreign Assistance Act to require that the foreign aid program jettison short-term security concerns in favor of meeting basic needs of people in developing countries.78 Congress voted down the IDA IV appropriation bill in January 1974. Although McNamara had arranged to keep IDA afloat, the defeat came as a surprise, and over the coming weeks he scrambled to convince other donor countries to release their contributions in advance of the United States. Meanwhile, the Nixon administration lobbied Congress to secure passage of the bill.79 After much handwringing, Congress eventually approved the U.S. contribution in July.
Tensions between the Bank and the U.S. government continued to deteriorate over the coming years. McNamara’s efforts to formulate an international response to the oil crisis ran counter to the Nixon administration’s cultivation of a system in which OPEC countries invested their surpluses in Western banks and government securities.80 Administration officials also considered the Bank’s failure to condemn OPEC a direct rebuke of their efforts to force a reduction in prices and worked behind the scenes to derail the Iranian plan to establish a Bank-IMF managed concessional lending agency.81 And in 1975, the Senate’s Permanent Subcommittee on Investigations alleged that in failing to condemn OPEC’s actions the Bank was working toward “the establishment of a permanent floor price for crude oil at such a high level [so as] . . . to benefit primarily the OPEC countries.”82
William Simon, U.S. treasury secretary from 1974 to 1977, was the Bank’s most powerful critic. Simon believed that free market capitalism was the surest route to economic growth and viewed the Bank as an overgrown bureaucracy that, in lending to socialist governments, hindered, rather than promoted, development. In a speech to the Bank and IMF annual meetings in Manila in 1976, he argued that when it came to development there was “no substitute for a vigorous private sector mobilizing the resources and energies of the people.”83 In articulating this vision, Simon reflected conservative critics of foreign aid who argued that official development assistance prevented poor countries from addressing fundamental economic problems.84 McNamara, who while sharing a positive view of the private sector believed that governments could play a positive role in development, complained to his aides that Simon “operated from the basic belief that private enterprise could solve the problems of the [developing world] and that the Bank should be judged on conventional terms as applied to commercial banks.”85
Simon was particularly critical of McNamara’s effort to formulate an aid-based response to the oil crisis. He saw as hypocritical McNamara’s efforts to raise funds from OPEC at the same time that he warned about the developmental impact of oil price increases. He also opposed the Bank’s policy of borrowing from and lending to oil-producers in relatively equal amounts, a practice known as “offset borrowing.” Simon viewed such arrangements as antithetical to U.S. interests because they rewarded oil-producers and denied the United States a source of foreign exchange. “When an OPEC country lends funds to the Bank, it is in fact only a transfer from holdings of treasury bills to holding of Bank bonds and does not burden that country’s foreign reserve holdings,” a treasury official informed a Bank staffer in 1974. “On the other hand, it gets an additional loan from the Bank.”86
Simon frustrated some of McNamara’s major plans for the Bank. Because of U.S. pressure, McNamara put the brakes on his plan to double the Bank’s lending, which he had announced in his Nairobi speech.87 The Bank’s Articles mandated that the organization not have outstanding loans that exceeded the amount of its subscribed capital. Doubling the Bank’s lending thus required increasing the Bank’s capital base. McNamara began discussing with some of the organization’s members increasing the Bank’s capital in 1974, but he soon ran into resistance. At a Board meeting that March, the U.S. Executive Director questioned whether “a marked expansion of the Bank’s program was really necessary,” and shortly thereafter Nixon officials informed McNamara of their opposition to his proposed second five-year lending plan because it would require an increase in the Bank’s subscribed capital.88 This was enough to scuttle McNamara’s plans. Whereas he initially sought a general capital increase of $40 billion, double the Bank’s existing level, after two years of frustrated negotiations he had to settle for an increase of just $8.5 billion.89
The United States also prevented McNamara from changing the terms of Bank assistance. Frustrated that the United States had “held down” the Bank and IMF in securing financial agreements with Iran and other oil exporters in the months after the oil crisis, McNamara began looking for other ways to increase the Bank’s ability to provide financial assistance to oil-importing developing countries.90 In late 1974, he floated a proposal that the Bank begin issuing debt instruments to middle-income developing countries on terms that were more favorable than IBRD loans but less concessionary than IDA credits.91 Negotiations over the establishment of this Intermediate Financing Facility, or “third window,” commenced in January 1975, and that summer the Bank’s Board of Governors authorized McNamara to proceed toward a goal of making $1 billion in third window loans the following year.92 Nevertheless, the proposal failed to go far. While the Bank initially sought to mobilize $225 million in donations from its members to subsidize interest payments on $1 billion third window loans, just $154 million was committed.93
Unlike Simon, Henry Kissinger, who served as national security advisor and secretary of state under Nixon and as secretary of state under Ford, considered the Bank a useful instrument of U.S. foreign policy. Kissinger was particularly interested in using the Bank to undermine proposals for a New International Economic Order (NIEO), a set of demands issued in 1974 by the Group of 77 developing countries for global economic reform. For years, intellectuals such as Argentine economist Raúl Prebisch had argued that developing countries needed to demand changes to the international economic order. With the oil crisis fresh on everyone’s mind, in May 1974 the UN General Assembly adopted a resolution for the “Establishment of a New International Economic Order” (NIEO). Among other demands, the resolution called for a moratorium on developing country debt payments, easing developed country import restrictions, and the creation of an international fund to stabilize commodity prices.94 At root, the NIEO was intended to encourage the distribution of resources to the global South.95
At first, McNamara was interested in the proposals. A few days after passage of the resolution, he met with UN secretary general Kurt Waldheim to discuss how the Bank could help mobilize increased foreign aid and stabilize commodity prices.96 But McNamara’s support ended there. He considered the demands too political for the Bank and informed his aides that he questioned “the appropriateness of the Bank openly taking policy positions on most items.”97 McNamara also saw the NIEO as a threat to the Bank’s work. For instance, developing country proposals to create permanent machinery to restructure sovereign debt would render irrelevant the informal “Paris Club” meetings of government creditors that the Bank managed. As a result, McNamara maintained the Bank’s distance from the NIEO. He refused to address developing country demands in public statements, and he had the organization avoid fora that focused on the proposals.
Kissinger tried to bring the Bank into the fray. He sought to counter the NIEO’s demands for structural change by indicating that the U.S. government was prepared to increase its multilateral aid commitments.98 He supported McNamara’s goal of increasing the Bank’s capital and in 1975 proposed the creation of an “international resources bank,” to be managed by the World Bank, that would facilitate investment in minerals, oil, and natural gas projects.99
Kissinger’s interest in using the Bank to blunt developing country demands for an NIEO ran up against Simon’s attempt to reign in McNamara and touched off a struggle within the Ford administration over U.S. policy toward the Bank. In addition to the capital increase over which Simon prevailed, the two clashed over Bank lending to Nigeria, an OPEC member. Whereas the Treasury Department had opposed Bank lending to Nigeria since the outbreak of the oil crisis, Kissinger viewed Nigeria as an important U.S. ally and encouraged Simon to call off his campaign to terminate Bank lending to the country.100 Kissinger informed Simon that “more detriment than gain” would result from a cutoff, given that this would jeopardize relations with “the largest, most powerful black African nation.” Instead, Kissinger argued that it was in the U.S.’s best “interests to assist the Nigerians in constructing a policy framework for development which is generally Western-oriented with a large role for market forces,” something toward which “the World Bank can play a major role.”101 Kissinger also claimed that by lending to Nigeria the Bank could undermine the NIEO. “Nigeria is expected to play a key role” in negotiations over the NIEO, Kissinger informed Simon, and “we will need moderate friends in the developing country group.” As if this were not enough, Kissinger pointed out that the United States could not unilaterally control the Bank. “Other major donors have given us virtually no support in our earlier efforts to persuade the Bank to stop lending to OPEC countries,” he wrote, and, if the Treasury Department continued to oppose Bank loans to Nigeria, the United States “would be fighting alone a battle we are going to lose.”102
There were, in other words, limits to how far the United States could push the Bank. As Kissinger predicted, the organization continued to lend to Nigeria over the coming years. Moreover, for all William Simon’s problems with McNamara, he never thought the United States should withdraw from the Bank, as some conservatives had begun advocating. In fact, Simon agreed with the Bank’s president on the need to expand the International Finance Corporation (IFC), the organization’s private sector investment arm.103 Still, the U.S. government’s opposition to many of McNamara’s efforts, particularly his desire for a large increase in the Bank’s capital, demonstrated the extent to which the U.S.-Bank relationship had deteriorated and portended more serious problems in the years ahead.
Increased U.S. scrutiny of the Bank reflected broader dissatisfaction with mainstream development efforts. During the 1970s, intellectuals and activists from across the political spectrum challenged the concept and practice of development, as well as the operations of the Bank itself.
Despite the fact that mainstream development theorists argued that the state should play a strong role in guiding the development process, their emphasis on the positive role of private capital and prioritization of growth over equity had long left them open to attacks from the left. In the 1950s, critics began to take particular issue with the notion that economic ties between rich and poor nations were mutually beneficial. Significant in this regard was work done by economists Raúl Prebisch and Hans Singer, who examined historical patterns of world trade and concluded that commodity producers suffered from declining terms of trade (the relative prices of a country’s exports to imports) compared to producers of finished goods.104 The implication of this observation was that trade with industrialized nations hindered rather than assisted the economic growth of poor countries.
This “structuralist” thesis overlapped with a more radical critique of the international political economy known as dependency theory. Beginning in the late 1950s, thinkers such as Paul Baran, Celso Furtado, Samir Amin, and Andre Gunder Frank expanded on Marxist critiques of capitalism and imperialism by arguing that the West had grown wealthy by actively suppressing the nations of the developing world.105 As Frank explained in 1966, “contemporary underdevelopment is in large part the historical product of past and continuing economic and other relations between the satellite underdeveloped and the new developed metropolitan countries. . . . When the metropolis expands to incorporate previously isolated regimes into the worldwide system, the previous development and industrialization of these regions is choked off or channeled into directions which are not self-perpetuating or promising.”106
Inspired by dependency theorists, in the 1970s critics took issue with the World Bank’s lending and advising activities.107 Early in the decade, British researcher Teresa Hayter published a book chastising the organization for pressuring developing countries to liberalize their economies.108 Others argued that, despite the Bank’s new focus on small farmers, large landowners continued to receive most of the benefits of the organization’s agricultural loans.109 Still others saw the Bank’s antipoverty campaign as a rhetorical maneuver designed to undermine support for more radical development approaches.110 Aart van de Laar, a Bank staffer turned critic, encapsulated many of these views when he explained that, given that organization’s dependence on private funding, “it would be wrong . . . to expect too much from the envisaged distributional slant of Bank policy.”111
Observers also highlighted the negative environmental impacts of development projects. In the late 1960s researchers drew attention to the ways large-scale development projects, such as hydroelectric dams, disrupted local ecosystems. Concerns were also raised about the Green Revolution’s environmental impact.112 As one critic wrote in 1973, “many awful things can happen when science and technology are turned loose on the orders of planning officials in Washington.”113 Such concerns gave rise to the idea that global development was unsustainable. Important in this regard was the 1972 publication of The Limits to Growth, a compilation of computer projections that purported to show that the earth could not sustain continued economic expansion.114 As a result of such views, some analysts argued that international development efforts needed to be scaled down. A year after the publication of Limits to Growth, British economist E. F. Schumacher released Small Is Beautiful: A Study of Economics as if People Mattered. Schumacher argued that natural resources limited the potential for continued economic growth and, as a result, development efforts should focus on sustainability. To this end, he advocated for decentralized, labor-intensive, and environmentally friendly methods of production, so-called “intermediate or appropriate technologies.”115 People affected by Bank-financed development projects also pushed for change on environmental and social grounds. For instance, in 1974, local communities in the Cordillera region of the Philippines, worried that a Bank-financed dam would displace hundreds of families in the area, prevented construction from getting underway, which forced the Bank to cancel the project two years later.116
Such resistance highlighted the overlap between environmental critiques of development and those focused on the need to ensure that aid did not serve as a tool of repression. In the 1970s, members of the emerging human rights movement described foreign aid as problematic insofar as it often propped up abusive regimes. In addition to facing challenges over the ecological impacts of its projects, the Bank was criticized for providing funds to authoritarian governments. Bank support for the government of Augusto Pinochet in Chile drew particular condemnation. By the middle of the decade, the organization’s Public Affairs Department reported it had been inundated with complaints about Bank lending to Chile.117 McNamara himself noted that “he had “hardly visited a country where there was not an article in the local newspapers about Chile and the World Bank.”118
Gender-based challenges also emerged during the time. Before the decade, development theorists paid scant attention to the specific contribution that women could make to development. To the degree that they considered gender issues, they generally held that development would equalize relations between the sexes, including by allowing more women to enter the formal workforce.119 This changed in the 1970s. Second-wave feminists in Western nations started to draw attention to the status of women in the developing world, while people in developing countries stepped up their efforts to place development issues onto the agendas of international bodies such as the UN Commission on the Status of Women (CSW).120 Development experts also began to focus more attention on gendered aspects of development.
A key moment came in 1970 with the publication of Woman’s Role in Economic Development by Dutch agricultural economist Ester Boserup. Boserup argued that the introduction of modern market relations disrupted economic systems in which women played a more central role and documented the barriers women in developing countries faced in gaining formal employment. To Boserup, this situation not only increased gender inequality but also slowed developing countries’ growth.121 Over the coming years, scholars researched the informal labor markets in which women participated, issues of sexual discrimination in developing countries, and the impact of technological change on gender relations, among other topics.122 Meanwhile, government officials heeded calls to place women’s issues on the development agenda. In 1973, the U.S. Congress amended the Foreign Assistance Act to mandate that more of the county’s aid go toward projects specifically designed to improve the status of women (although the same Act limited the amount of funds that could go toward family planning services).123 And the International Women’s Conference in Mexico City in 1975 held special seminars on the importance of integrating women in development projects.124
The ideological development that would have the most lasting impact on the Bank and the broader development community took place in the field of economics. During the 1970s, a growing number of economists argued that only market forces were capable of producing the conditions needed for sustained growth and poverty reduction in developing countries.125 The father of this “counterrevolution” in development economics was P. T. Bauer, who, beginning in the 1950s, challenged development theorists’ optimistic views of government intervention. Instead of productively guiding the development process, Bauer argued that the state fostered corruption and inefficiency. As he put it in 1959, development required “a redirection of the activities of government away from policies restricting the energies and opportunities of its subjects and away from acts of emulation of the pattern of the Soviet world.”126 Bauer further argued that foreign aid exacerbated these problems. In his view, aid-financed projects were more likely to be unproductive since they were not subject to competition, drew scarce resources away from more productive endeavors, and enabled borrowing governments to avoid making necessary policy changes.127
Bauer remained a solitary figure for most of the 1950s and 1960s. Nevertheless, the economic dislocations of the 1970s brought new adherents to his side. Mirroring the broader rejection of Keynesian approaches, a growing number of economists argued that state-led development strategies, which included government ownership of industry and efforts to restrict imports to protect domestic industry, were hindering growth. One of the earliest and most vocal proponents of this view was Harry Johnson, a Canadian professor of economics at the University of Chicago.128 Johnson considered multinational corporations potentially useful “development agent[s]” that could provide capital and expertise to poor countries. As such, he called for greater levels of foreign investment.129 In the 1970s, Bela Balassa, a Hungarian economist and consultant to the World Bank during the McNamara years, provided empirical data demonstrating the adverse impacts of trade restrictions on economic growth.130 Anne Krueger, an economist at the University of Minnesota who would become the Bank’s chief economist in the early 1980s, also drew attention to the inefficiencies of import restrictions.131 At the same time, Oxford economist Ian Little, a pioneer in the movement to develop a framework for appraising the social impact of development projects, called for developing nations to turn away from strategies designed to protect domestic industry.132 Even Yale economist Arthur Okun, who had chaired President Johnson’s Council of Economic Advisers, reflected a growing distrust of the government’s ability to reduce poverty and inequality when he argued that such efforts could impede growth.133
Such critiques found many adherents, including U.S. treasury secretary William Simon. Although Simon was largely unable to force the Bank to change course, his opposition reflected the erosion in the Bank’s relationship with the U.S. government as well as mounting discontent with prevailing development approaches. This discontent, in turn, formed part of a larger change in the Bank’s world. Increased oil prices presented a dire challenge for many developing countries. The decline in U.S. support for the Bank raised questions about the West’s commitment to foreign aid. And the consensus that “development” was something that could, or should, be attained eroded.
The Bank, which had undergone a profound transformation in McNamara’s first years, was caught off guard by the challenges of the 1970s. Eventually, however, it regrouped and, under McNamara’s direction, adapted to its new economic, political, and intellectual environments. In so doing, it emerged a fundamentally different organization than the one that it had been at the start of the decade.