In a speech to the United Nations Conference on Trade and Development in Manila on May 10, 1979, Robert McNamara announced that the World Bank would consider making loans to assist developing countries to undertake “needed structural adjustments for export promotion.”1 The statement came toward the end of a long speech on the role of trade in development and did not make a significant impression at the time. Nevertheless, McNamara’s words marked an important development. The onset of structural adjustment lending (SAL), in which the Bank provided loans to developing countries on the condition that they adopt certain policy reforms, was a seminal moment in the organization’s history. From 1980, when the Bank made its first structural adjustment loans to the governments of Bolivia, Kenya, the Philippines, Senegal, and Turkey, SAL became an increasingly prominent activity. The following year, the Bank issued six more structural adjustment loans. The next year, it made eleven. In 1989, that number increased to fifty-two. Indeed, although no longer termed “structural adjustment,” policy-conditioned lending continues to occupy a central place at the Bank, which before 1980 almost exclusively funded discreet development projects.2
SAL emerged for a variety of reasons. Foremost among these were problems in the Bank’s project-based lending approach. Because project loans required that staff identify and appraise specific development projects before the Bank disbursed money, they tended to be a relatively slow means of channeling capital to developing countries. This became an issue in the late 1970s as developing countries’ balance of payments deficits worsened and as repayments on outstanding Bank loans threatened to exceed disbursals. The Bank’s inability to induce policy change in developing countries also frustrated the organization’s management. The need to find a way to transfer capital to developing countries more rapidly, combined with the desire to make developing countries heed the Bank’s policy recommendations, convinced McNamara to propose SAL.
SAL brought the organization into the IMF’s territory, further blurring the line between the two institutions. Because the conditions tied to adjustment loans covered issues like exchange rate policy and levels of government spending, SAL also led the Bank to become more involved in the internal affairs of developing countries.
Aware that the Bank’s Articles of Agreement allowed nonproject lending only in exceptional circumstances, McNamara portrayed structural adjustment as a temporary solution to a short-term problem. In private, however, he acknowledged that adjustment lending would become an enduring part of the Bank’s work. This development was unsurprising. SAL marked the apotheosis of the Bank’s approach under McNamara. It formalized the organization’s shift from a focus on project financing to policy advising and gave operational significance to the emerging consensus that developing countries needed to reduce the level of government intervention in their economies if they wanted to grow. Like McNamara’s earlier moves to elevate poverty alleviation on the Bank’s agenda, SAL was predicated on a belief in the utility and necessity of comprehensive intervention in the affairs of developing countries. But, as with his war on world poverty, SAL would have negative effects for the Bank’s intended beneficiaries.
As the 1970s drew to a close, there was a growing realization that the international development endeavor was at a critical juncture. Despite slower growth in many developed countries, the gap between the North and South remained wide. Developing countries accounted for 16 percent of global output in 1970, but nine years later this figure had risen to just 19 percent, with most of the gains attributable to increased oil revenues.3 Rather than leading to greater cooperation, global inequality caused developing countries to reiterate their demands for a New International Economic Order. Meanwhile, the foreign aid levels of developed countries declined to around 0.3 percent of their income in the late 1970s, a far cry from the 0.7 percent the Pearson Report had called for a decade earlier.4
These trends reflected and reinforced the decline of development economics as an intellectual endeavor. In the mid-twentieth century, development had been an influential discipline within economics. Development economists studied challenges poor countries faced in trying to stimulate growth and tended to argue that government intervention was critical to this process. The economist Paul Rosenstein-Rodan, for instance, famously advocated for large-scale public investment programs in developing countries, arguing that only a “big push” could overcome structural deficiencies in these economies and foster sustained growth.5 As noted earlier, the idea that developing economies faced unique challenges in fostering growth, as well as the notion that government intervention was a prescription for these ills, went out of fashion in the 1970s. Reflecting the broader rejection of Keynesian approaches during the time, economists concluded that the problems of development, not unlike the stagnation then afflicting many developed countries, was a product of bloated public sectors and that governments were generally incapable of intervening productively in the economy. Contributing to these trends, development economists struggled to translate their ideas into the mathematical models that were becoming popular in economics departments.6 As a result, by the late 1970s, scholars began to speak about the “death of development economics.”7
Morale in the Bank was at a low point, as well. Staff members were frustrated by waning U.S. support for the Bank and the difficulties they faced in trying to promote development.8 For his part, McNamara was aware that, despite his success in increasing the Bank’s size, in key respects the organization was weaker than it had ever been. Although it had devoted a greater amount of attention to advising developing country officials, partnering with private banks, and expanding its research and publication programs, the availability of private capital—in 1979, private lenders committed fifteen times as much money to developing countries as did the Bank, up from just two times as much at the beginning of the decade—rendered the Bank less relevant as a development financier.9 It was also becoming clear that the Bank was having mixed success promoting development. While some of the organization’s projects had yielded impressive results, evidence began to accumulate that many had failed to meet their objectives. Developing countries struggled to mobilize their share of funds for large infrastructure projects, and many projects intended to alleviate poverty and promote bottom-up growth had crumbled.
While these problems were not entirely the Bank’s fault, they signaled that the organization had overextended itself. McNamara’s drive to increase the Bank’s lending strained an organization that had long operated in a conservative fashion. The introduction of quantitative lending targets created a constant pressure to lend, and in McNamara’s first years the Bank began to have trouble processing and supervising its loans. One internal Bank study found that 45 percent of projects presented to the Board in the Bank’s 1973 fiscal year were either poorly prepared or lacked a strong justification.10 In 1974, Bank managers noted that “programming and budgeting exercises” had “place[d] undue emphasis on speed . . . in completing programs,” and officials in developing countries complained about a “general deterioration of Bank operations.”11
These concerns grew more pronounced as the decade progressed. In 1975, the Bank’s Operations Evaluation Department reported growing delays between the time the Bank signed a loan agreement with a borrowing country and when the loan was disbursed.12 The following year, Japan’s representative to the Bank resigned his post claiming that McNamara’s drive to expand lending had caused a decline in the quality of Bank projects.13 The representative of the Scandinavian countries at the Bank echoed these concerns by criticizing the “excessive demands” that were placed on staff to come up with projects to fund.14 As an internal Bank report noted, “staff felt that nobody at the beginning of the year admitted that the program could not be fulfilled and that management did not listen when they argued that the project was not ready.”15 Pressure to lend consequently forced staff to “invent numbers,” and some laughed when asked how often supervisors listened to these concerns.16
World Bankers were particularly frustrated by McNamara’s emphasis on quantitative analysis. “There was cynicism among staff as to the reliability of the figures used in measurements of absolute and relative poverty,” a Bank official noted. Despite the fact that various “standards and reporting procedures had been designed and frequently . . . carried out before project implementation,” staff were convinced that the “quantification of project targets was subject to a large margin of error and involved a cascade of assumptions; even the best estimate was not very good . . . results tended not to be comparable and staff were uncomfortable about aggregation of figures.”17 As a result, staff began to demonstrate “a serious lack of confidence” in McNamara. Shahid Husain, head of the Bank’s East Asia and Pacific Department, informed McNamara of complaints about his “excessive obsession with control” and the “one-way flow of ideas from the top to the bottom.” Staff considered the organization “autocratic,” complained that they were “overworked,” and felt that the focus on meeting quantitative targets made them feel as if they were “factory workers on an assembly line.”18
Figure 9. “Sometimes I have the funny feeling that the lunch lines are getting a bit longer.” Bank Notes, April 1978, 7, World Bank Group Archives.
Despite such concerns, McNamara remained fixated on increasing Bank lending. He dismissed reports of declining staff morale, deteriorating project quality, and overprogramming by arguing that the organization had an obligation to lend as much money to as many countries as rapidly as possible. “The Bank exists only to the extent that it can serve the purposes of development,” he told the President’s Council.19 “The development assistance needs of the country, and not staff or budget constraints, should be the determining factor” in lending decisions.20 McNamara thus resisted efforts to reign in the Bank, at one point threatening to resign when the Colombian representative to the organization proposed a special committee to investigate problems relating to the procurement of materials for Bank-financed projects.21
Still, many in the Bank continued to criticize the direction McNamara was taking the organization. The governments of Germany and Japan complained that they had little input in selecting Bank projects, and in January 1977 an internal Bank investigation reported a precipitous decline in staff morale.22 In addition to complaints about deteriorating project quality, staff felt that the organization was plagued by “serious lateral communications problems.”23 The Bank’s managers corroborated these findings. “There was no voluntary spirit of cooperation” in the organization, they informed McNamara. Staff “felt left out of the decision-making process.” The Bank’s programming systems had “led to overcontrol.” And “loan officers were too often caving into time and pressure.”24
McNamara downplayed these reports. Informed that the Board was frustrated by its inability to review projects, he responded that the situation was “inevitable” given the nature of the organization’s work. Developing countries “need and can absorb far more resources than the Bank can provide,” he explained, and “operations must be over-programmed if maximum available resources are to be provided.”25 As a result, concerns about deteriorating project quality were overblown. As Warren Baum, vice president of the Bank’s Projects Department, argued, “projects were riskier than in the past but they were also reaching the right beneficiaries.”26
More than project quality, Bank officials were concerned about their ability to induce policy change in developing countries. They attributed some of these difficulties to the organization’s procedures. Mechanisms such as the Country Program Paper (CPP), created by McNamara in 1969 to coordinate Bank operations by country, had led to a dilemma. In order to increase their power, the regional departments in charge of drafting CPPs tended to inflate their requests for funds. Additionally, quantitative planning limited the organization’s leverage, since the Bank could not easily reduce or increase lending to punish or reward borrowers for their behavior. The organization was operating on a “dual system,” Willi Wapenhans, head of the East Africa Department, complained to McNamara in 1977. Instead of serving as an “instrument of planning” with governments, CPPs had “become an instrument of resource allocation and hence an advocacy document for the region[al]” departments. Other Bank officials noted that “forecasts in CPPs often were too optimistic” and that this hamstrung the organization’s relations with borrowing governments. “The Bank-wide lending program should not be a summation of CPP programs,” they argued. Reliance on inflated country plans had led to an “improper, overconstrained and overloaded . . . programming system.”27
McNamara was also worried about the organization’s ability to channel capital to countries on a rapid basis. The Bank disbursed funds only after a project had been appraised and approved. The growing complexity of projects increased the time needed for such preparation, and as a result the organization’s lending pipeline became backlogged. In the late 1970s, annual disbursements averaged about half of annual commitments. In fiscal year 1978, for instance, the Bank’s Board approved $6.1 billion in new IBRD loans, but the organization disbursed just $2.8 billion.28 McNamara felt the Bank had an “obligation” to maximize lending to developing countries.29 In 1978, he told Bank managers that he was “not comfortable with the [organization’s] disbursement performance” and began to look for ways to enhance the organization’s ability to channel capital to borrowers.30
Figure 10. IBRD/IDA commitments and disbursements, 1969–1981. Source: IBRD/IDA, Annual Reports, 1968–1981.
McNamara was concerned about disbursements because they drew attention to the fact that, when taking into account repayments on outstanding loans, the Bank was channeling increasingly fewer resources to developing countries. In the second half of 1970s, the ratio of repayments on outstanding Bank loans to dispersals steadily increased. In 1980, for instance, the Bank disbursed $5.8 billion and collected $3.1 billion in interest and amortization payments on previous loans, meaning that it transferred only $2.7 billion to borrowing governments that year.31 Net transfers became a considerable source of consternation for Bank management in the late 1970s, drawing criticism from the Board and raising questions about McNamara’s demand that wealthy governments increase their contributions to the organization. “People [saw] all this money piled up in the Bank, immobilized and not being put to constructive use,” Burke Knapp, the Bank’s chief of operations, later recalled. “We were under a great deal of pressure.”32
The need to speed up lending, combined with the desire to influence the policies of developing countries, led McNamara to create structural adjustment. Formulated in discussions among the Bank’s senior management in 1978, unveiled by McNamara in 1979, and approved by the organization’s Board of Executive Directors in 1980, SAL was portrayed as a means to augment the Bank’s project lending and policy advising operations by providing program loans to developing countries on the condition that they institute Bank-prescribed reforms. The Bank made its first structural adjustment loans to Kenya and Turkey in March 1980, and as the balance of payments positions of developing countries worsened over the coming years, SAL became a centerpiece of the organization’s work.
Program lending was not a new concept at the Bank. As noted earlier, the organization’s first loans to Western Europe in 1947 for postwar reconstruction were program loans. While project lending eventually came to dominate the organization’s portfolio, the Bank made a number of program loans during the 1950s and 1960s, usually to countries suffering budgetary shortfalls. The primary benefit of program loans was that they were quick disbursing. Unlike project loans, which required identification, development, and assessment of a particular project, program loans provided general budgetary support. Accordingly, these funds could be transferred quickly. The Bank had also experimented with conditionality before embarking on SAL. The Bank’s founders were intent on avoiding the sort of unaccountable lending typical of the interwar period, so Bank project loans often contained clauses governing implementation.33
The Bank continued to make non-project loans during McNamara’s presidency. Because the Articles of Agreement permitted the use of non-project loans in “special circumstances,” the organization wielded program lending as a tool to deal with certain emergency situations.34 For example, most of McNamara’s initial focus at the Bank was on India’s need for assistance to finance food and energy imports.35 In the winter of 1968–69 he pushed through a $125 million program loan to the government because of its inability to afford these critical imports.36 Similarly, in 1971 the Bank issued a program loan to the government of Nigeria for reconstruction after the country’s civil war.37 The Bank also provided program loans to several nations adversely affected by the 1973–74 oil crisis.38 And, though described as project loans, the organization issued quick-disbursing assistance to Romania after floods in 1976 and Lebanon in 1977 after its civil war.39
Nevertheless, project lending remained the Bank’s primary focus, not only in adherence to its governing documents but also because of a sense that the financial community might view program lending as a riskier use of Bank funds, thereby making it more costly for the organization to sell its bonds.40 External factors further slowed the shift to program loans. For most of McNamara’s tenure, developing country calls for increases in the Bank’s program lending—seen as favorable because they went toward general budgetary support—encountered opposition from the U.S. government and the Bank’s other powerful members, who argued that “lending for anything other than specific projects would lead to a loss of control over the Bank’s loan funds and an attendant loss of confidence by bondholders in the organization.”41 As a result, non-project lending declined as a percentage of the Bank’s portfolio under McNamara, dropping from 13 percent of total Bank lending through 1968 to just 4 percent in 1979.42
It was only as the limits of project loans as a means of channeling capital to developing countries became evident that McNamara came to support increasing the Bank’s program lending. McNamara first voiced his frustrations about the Bank’s ability to transfer large sums of capital to developing countries during discussions over the organization’s fiscal year 1979 budget, when he told the President’s Council that he was “not comfortable with the [Bank’s] disbursement performance.”43 The Bank’s staff had projected a significant reduction in net transfers to developing countries in the coming year, which McNamara considered a “serious” problem that “could lead to the conclusion by [the Board] that commitments should also be slowed.”44 In response, the head of the Bank’s Programming and Budgeting Department floated the idea that the organization “change the mix of lending toward fast-disbursing programs.” Meanwhile, McNamara reiterated his desire to increase the Bank’s lending despite arguments that the organization was having trouble effectively processing its loans and despite indications that there were limits on how much developing countries could borrow.45 In response to worries that “there was clearly a short-term problem of absorptive capacity in a number of countries,” McNamara replied that he “could not believe that countries . . . could not absorb a high level of resource transfers, if their finance ministers got to work.” To help them in this task, he told his aides that “rather than cutting back on lending programs the Bank should talk to the governments concerned.”46
Indeed, at the same time that McNamara was growing frustrated by the disbursal problem, he was becoming more open to using Bank loans as a vehicle for inducing policy change. In May 1978, he noted his agreement with one senior Bank official’s recommendation that the organization look to “combine the two aspects of projects and policy work,” and shortly thereafter he ordered Bank managers to search out new ways of giving “economic policy advice” to borrowers.47 Ernest Stern, who took over from Burke Knapp as the Bank’s head of operations in July 1978, pushed McNamara in this direction. Stern adamantly believed in the importance of economic reform in developing countries.48 He presented McNamara with several compelling arguments for greater conditionality: that developing countries needed to adopt market-oriented reforms (such as reductions in government expenditures and relaxation of price controls) in order to maintain growth rates; that the Bank’s traditional methods of influencing borrower behavior (through informal country dialogues) were ineffective; and that the Bank’s projects were failing because of the misguided policies of borrowing nations.49 In May 1979, Stern sent McNamara a memorandum outlining the need for “macro-economic conditioning” in the Bank’s loans. He insisted that the Bank’s efforts to promote poverty alleviation and growth would become “increasingly inadequate unless we can also say that we are satisfied with their general development strategy and overall economic management.” He also noted that some of the Bank’s previous program loans had included reform conditions. “But,” he concluded, “why should we wait until countries are in difficulty before we take such an approach?”50
Stern was not the only proponent of policy-conditioned lending. By 1979, the Bank’s management had come to believe that the organization needed to change the way it did business. In a President’s Council meeting that April, Shahid Husain, head of the Bank’s East Asia and the Pacific Department, argued that the organization’s lending and advising operations were significantly flawed. The Bank’s country missions had proven to be “an act of diminishing returns,” since governments simply ignored the organization’s advice.51 In addition, the Bank’s ability to transfer funds to developing countries had been “more difficult than expected.” Indeed, the Bank had reached the limits of project lending. “Experience now indicated that the [lending] pipeline could not be improved by simply adding more staff and financial resources,” he explained, since “the Bank’s program in many countries and sectors relied heavily on repeater projects which in turn depend on the implementation of previous projects.”52
To address this problem, Husain asked “whether the same amounts could not be lent through fewer projects.” By increasing the average size of Bank loans the organization would be able to lend more money more rapidly. McNamara concurred. “There were many reasons for increasing project size,” he noted, especially the fact that it was “difficult . . . to believe that the envisaged increments in lending could not be absorbed by the developing countries.”53 To this effect, McNamara explained that he and Stern had already concluded that the Bank would institute an across-the-board increase of 7 percent on the price of its loans. McNamara also argued that the organization should focus more attention on its policy reform efforts. The “non-lending contributions of the Bank had expanded dramatically” in the recent past, he said, and he was “anxious to increase the Bank’s non-lending activities and to get the recognition and acceptance of governments of this work” in the coming years.”
McNamara proposed SAL at the fifth meeting of UNCTAD in Manila the following month. He initially hoped to use the occasion to call on wealthy nations to make it easier for developing country exporters to access their markets. Attila Karaosmonoglu, a director of one of the country divisions in the Bank’s Europe, Middle East, and North Africa Department, encouraged McNamara to bolster his calls by signaling that the organization would simultaneously help developing countries expand their export sectors.54 McNamara agreed, and in his speech to UNCTAD announced that “in order to benefit fully from an improved trade environment developing countries will need to carry out structural adjustments favoring their export sectors.” This, he went on, would require “both appropriate domestic policies and adequate external help.” McNamara declared that he was “prepared to recommend to the Executive Directors that the World Bank consider such requests for assistance, and that it make available program lending in appropriate cases.”55
Less than a week later, Stern sent McNamara a memorandum detailing the form this lending might take. The Bank should “better condition its country lending programs by linking them, more explicitly, to the macroeconomic policies of our member governments,” Stern wrote. Specifically, the organization should extend program loans to countries, to be disbursed in stages over three to five years, to help them cope with a deteriorating balance of payments. Unlike the Bank’s regular program loans, however, these loans would be conditioned on the borrowing government agreeing to a range of Bank-prescribed economic policy changes. Stern acknowledged that this might “be strongly resisted by the developing countries.” As such, he argued that these loans should initially be undertaken in only “a few countries annually after a considerable effort at preparation.”56
The chain of events triggered by the Iranian revolution lent further momentum to SAL. The destabilization caused by the Shah’s downfall in January 1979 led to another round of oil price increases. As a result, oil-importing developing countries soon faced increased financing needs. In a joint response to this crisis, staff at the Bank and the IMF issued a report calling on the two institutions to channel more capital to oil-importing developing countries.57 The report focused particular attention on the need for “expanded sector and program lending by the World Bank . . . in support of adjustment measures taken by developing countries both in situations of extreme balance of payments difficulties . . . as well as adjustment measures taken in less difficult circumstances to encourage domestic production in line with the borrower’s comparative advantage.”58 In so doing, the report argued that the Bank could complement IMF efforts to promote macroeconomic stability in developing countries. Although this level of conditionality would bring the Bank into the IMF’s territory, the Bank could play an important role in these “parallel” efforts, since it had the unique ability to “dialogue with governments on their public investment programs,” which was vital to ensuring that “the necessary adjustment policies were carried out.”59
By the fall of 1979, McNamara was convinced that a large program of adjustment lending was needed. In President’s Council meetings leading up to the Bank-IMF annual meeting, to be held in Belgrade in October, he remarked that developing countries’ primary requirement over the coming years was “new funds connected with program-type lending in order to finance the necessary adjustment process.”60 For the Bank, the major question to be resolved at the annual meeting was simply whether such assistance would be “additional or a substitute for project financing.”61 Meanwhile, other Bank officials began to recognize the advantages of SAL as a policymaking tool. As Moeen Qureshi, the Bank’s vice president of finance, explained, “in the case of long-term structural problems governments were inclined to hope that they would go away or that the succeeding government would deal with them. The Bank could help in making the political costs of addressing long-term structural problems more acceptable to governments and in ensuring sufficient support for such long-term measures.”62
On the plane ride from Washington to Belgrade, McNamara and Stern hammered out the specifics of SAL, which McNamara announced in his speech to the opening session of the conference.63 A “new international development strategy” was needed, he declared. Only through a series of “interconnected actions,” including increased flows of capital to developing countries, would these nations be able to overcome adverse conditions in the world economy and accelerate their growth in the coming years. Success also hinged on leaders in developing countries making “hard decisions.” Without specifying what these entailed, McNamara announced that the Bank was ready to provide financial and technical assistance to developing countries that were willing to undertake “difficult structural adjustments.”64
After the speech, McNamara’s focus shifted to securing the approval of the Bank’s Board. He argued that large and growing current account deficits in developing countries constituted the “special conditions” required by the Articles of Agreement for non-project lending. As he told his aides, “the Bank should decide that the doubling of the balance of payments deficits of the developing countries over the next few years had created a new situation which required an expanded Bank mandate to help undertake the structural adjustments needed to overcome these deficits.” In other words, SAL would be a “pre-crisis program loan.”65
Some were skeptical. Roger Chaufournier, head of the Europe, Middle East and North Africa Department, told McNamara that “no dent could be made in the problems of the poorest countries through program lending,” and, as such, the organization “should not entertain excessive expectations that program lending to the poorest countries as budgetary support would be forthcoming.” For his part, Bank Treasurer Eugene Rotberg warned McNamara that “the financial world considered [SAL] to be a major shift in Bank policy.”66 Whereas the organization’s focus on funding discreet projects had allowed it to establish its creditworthiness, some viewed McNamara’s announcement of SAL as a sign that “IBRD money would now be channeled to non-creditworthy countries.”67 Longtime World Banker Bernard Chad-enet, then head of the organization’s Projects Department, worried that “new activity would stretch the Bank’s functions and make them overlap more with the IMF” and questioned the organization’s ability to prescribe policy reforms. The Bank “had obviously made mistakes in the past in dealing with simple projects and sector-level matters,” and it would be “prone to making more serious mistakes in imposing conditions for structural adjustment lending based on macroeconomic models developed by the ‘dismal science.’ ”68
Bank management dismissed these concerns. Hollis Chenery, the Bank’s chief economist, stated that, while economics was “indeed an incomplete and imperfect science,” this was no reason for “leaving the Africans alone.” Shahid Husain added that SAL was “badly needed in order to enable the Bank to continue high levels of project lending.” As Baum put it, “without structural adjustment, an increasing number of countries would have only a very limited ability to absorb new project lending.”69 McNamara also brushed aside concerns about the market’s response to SAL, telling Rotberg that “IDA resources would continue to go to IDA countries and IBRD funds would continue to go to IBRD countries.” He further stated that policy-conditioned lending would be more than a short-term fix. Rather, he told the President’s Council the day after his speech in Belgrade, that SAL was “a major and new initiative” that would define the organization over the coming years.70
As senior Bank officials reiterated their concerns about the organization’s ability to channel capital to and influence the economic policies of developing countries—a 1979 OED report noted that the organization had failed to “supervis[e]” its borrowers, and in January 1980 McNamara admitted that “the Bank’s projects were becoming too complex and overstrained the administrative capabilities of governments”—governments expressed doubts about SAL.71 In early 1979, nine members of the Bank’s twenty-person Board argued that it was the IMF’s job to promote adjustment.72 And the conservative government of Margaret Thatcher considered SAL “money down the drain.”73 To stave off criticism, McNamara told his aides to keep the details of SAL secret by demanding that they “not go too far in spelling out this issue” in the paper on SAL being drafted for Board approval. Instead, the proposal “should be finessed for the time being.”74
McNamara thus secured the Board’s approval for SAL in February 1979 by assuring them that it “was to be a short-lived program to meet immediate needs.”75 The following month, the Board approved the Bank’s first structural adjustment loans, a $55 million IDA credit to the government of Kenya to reform its “foreign trade and industrial structure” and a $300 million IBRD loan to the government of Turkey to “improve its capacity to earn foreign exchange through industrial and agro-industrial exports.”76 These were followed by a $50 million structural adjustment loan to Bolivia in June, a $200 million structural adjustment loan to the Philippines in September, and a $60 million structural adjustment credit to Senegal in December.
The U.S. government supported these efforts. Members of the Carter administration noted that SAL would give the Bank an “important, flexible capability to respond to near-term financial needs of [developing countries] with constructive longer-term results.”77 U.S. support for Bank adjustment lending increased after Ronald Reagan assumed the presidency the following year. Although Reagan officials were suspicious of foreign aid, they soon came to view SAL as an effective tool for promoting free market reforms in developing countries.
But this support should not be mistaken as a cause. Rather than the result of pressure from the U.S. government, SAL emerged as a response to factors internal to the Bank. McNamara created SAL as a means to solve interrelated problems that had been building up over the course of his tenure and that found their expression in the loan dispersal and net transfer crisis at the end of the 1970s. In some ways, SAL was attributable to McNamara’s desire to increase the Bank’s prestige. “McNamara was very . . . publicly minded,” Burke Knapp remembered.
He wanted the Bank to look like it was expanding its activities at a great rate . . . that was part of the whole game of building up the reputation and the power of the Bank, both in developing countries and in the donor countries . . . When he caught up with reality and realized that the actual impact we were having on net disbursements, it would dismay him. He would say, ‘My God! What’s happening here? We’ve got to accelerate disbursements!’ You can’t accelerate disbursements very much on project lending . . . The shift to policy-based lending was driven very much by the desire to accelerate disbursements.78
Signed in September 1980, the Bank’s $200 million structural adjustment loan to the Philippines highlighted key aspects of SAL. These included the specific policies the Bank advocated, the relative roles of the Bank and IMF in promoting policy reform, the ways adjustment lending was being considered well before McNamara formally announced the proposal, and the manner in which these loans allowed the Bank to intervene in the politics of developing countries.79
The Bank played a significant role in the Philippines prior to the 1980 structural adjustment loan. Early in McNamara’s tenure, he remarked that Philippine President Ferdinand Marcos was “an impressive leader,” and lending to the country increased significantly in the late 1960s.80 The Bank stepped up its operations in the Philippines after Marcos declared martial law in 1972.
In addition to the Bank, the Philippines borrowed heavily from the IMF during this time. The two organizations divided their labors in the first half of the decade, with the Bank largely focused on rural and urban development and the IMF playing the dominant role in economic policy advising. In 1976, the Philippines agreed to borrow $250 million from the IMF over three years from its Extended Fund Facility (EFF), which the IMF had created in the wake of the oil crisis to augment its regular lending.81 As part of this agreement, the IMF called on the government to eliminate certain policies that protected domestic industry, such as import restrictions. However, Marcos hesitated to carry out some of these measures for fear that they would reduce his political support.82
Meanwhile, the Bank began to take an interest in Philippine policy. In 1976, a Bank staffer working out of the country’s National Economic and Development Authority (NEDA) drew up a “basic economic report” of the long-term prospects of the Philippine economy. In 1977, the Bank sponsored an influential study at the University of the Philippines that detailed the gains that the country could make through trade liberalization. And shortly thereafter, the organization drafted a detailed report on the nation’s industrial sector that advocated liberalizing import and export controls.83
With the EFF winding down, the Bank sought to influence Philippine policy directly. The 1978 CPP for the Philippines noted that the “major objective” of Bank operations in the country would be to encourage “policy improvements.”84 Bank officials reiterated the view that import controls should be lifted and that the government should seek to expand the manufacture of labor-intensive products85 A Bank mission then went to Manila to secure “a comprehensive understanding . . . at the highest levels on the objectives that could be reached through a series of staged industrial policy reforms.”86 Bank staff proposed making a loan to the government that would be conditioned on undertaking these measures. “Graduated action by the government to implement industrial and financial policy improvements would provide the basis for substantially expanded World Bank support for the industrial sector over the next few years,” a summary of the negotiations read.87 “The Bank laid it on the line,” a Philippine official involved in the negotiations recalled. “No policy announcements, no new legislation, no loan.”88
Philippine officials agreed to the proposal, and the government began to implement some of the recommendations shortly thereafter. A few weeks after the Bank mission left Manila, Marcos announced efforts to expand the export of labor-intensive manufactured goods, as the Bank had required.89 The Bank’s management subsequently declared that “most of the reforms discussed during the review of the industrial report are either satisfactorily accomplished or progressing as rapidly as could reasonably be expected,” and the Board unanimously approved the first structural adjustment loan to the Philippines.90
One reason for the Bank’s ability to convince the government to adopt reforms that had been rejected when proposed by the IMF was its ability to navigate Philippine politics. In negotiating the structural adjustment loan, the Bank worked with and bolstered the positions of likeminded officials in the Philippine government. “Whereas the IMF had dealt almost exclusively with a Central Bank not yet dominated by new technocratic elements,” one observer noted,
the World Bank turned its back on these “old boys.” Instead, it focused on strengthening the positions and furthering the viewpoints of sympathetic technocrats in ministries that could be played off [the] Central Bank. Furthermore, the Bank learned from the IMF’s mistakes and consciously strove for a different sort of image in the Philippines. Pervasive among government officials was the feeling that the IMF stood as a “watchdog disciplinarian,” to be approached with caution. In contrast, World Bank missions moved in and out with ease, maintaining relative freedom to contact whomever they wanted directly without seeking highest-level Philippine government approval first—and vice versa. At any given time, went the standard joke among Philippine technocrats, there were at least five World Bank missions somewhere in-country.91
As the Philippine loan demonstrates, SAL entailed a significant expansion of Bank conditionality. Whereas the organization had long limited its loan conditions to the level of specific projects or sectors, with SAL the Bank began to engage in macroeconomic conditionality. This made the conditions of great importance. Although differing in the specifics, the Bank’s early structural adjustment loans encouraged borrowers to liberalize trade and reduce government spending. The Bank’s first structural adjustment loan to Turkey, for instance, aimed to promote “greater reliance on market forces and less on direct state intervention and control” by devaluing the lira, reducing import controls, and creating incentives for export promotion.92 The Bank’s initial structural adjustment loan to Bolivia called for privatizing state-owned enterprises as well as currency devaluation.93 And early structural adjustment loans to Kenya and Senegal required reductions of agricultural price controls and import restrictions. As such, SAL gave operational significance to the emergent notion at the Bank, detailed in Chapter 5, that developing countries needed to reduce government intervention in their economies.
SAL marked the culmination of ongoing changes in the organization’s conception of the development process and its role therein. Specifically, it formalized the Bank’s shift, underway before McNamara’s arrival but accelerated as a result of his leadership, from a focus on project financing to policy advising. As the Bank adopted a more interventionist posture—viewing its mandate as improving conditions within developing countries as opposed to improving conditions of those countries—its operations began to expand, and by the mid-1970s many of its projects encompassed countrywide economic sectors. In a sense, SAL enabled the Bank to extend the definition of a “project” to encompass an entire country. As one Bank official later explained, under McNamara the Bank moved “from a narrow project approach to a broader sector approach and then to a broad economic approach.”94
In this way, SAL can be seen as a product of organizational learning. Over the course of the 1970s McNamara and others in the Bank became convinced that the success of the organization’s projects depended upon the policy “environment” or “framework” in which they were carried out.95 As McNamara explained in 1980, in order to promote development the Bank would have to grapple with “fundamental issues of national policy” and not concentrate “solely on investment projects.”96 This belief meshed with the organization’s adoption of a more consultative orientation. “Here you had this institution that was building up a tremendous analytical capacity during the 1970s,” a former Bank staff member explained. “But project loans are not very good vehicles really for this kind of general macro-policy advice because you are trying to carry too much other baggage with the project on the project side.” As a result, “when the second oil shock came and there was this need for quick, fast-disbursing money, . . . this was really an opportunity for getting your policy advice listened to.97
SAL thus offered the Bank a novel tool with which to promote development. Freed from the constraint of lending for specific projects, the Bank was now able to put major resources behind its policy advising work, which itself came to include a greater range of issues. As Stern noted approvingly, “structural adjustment lending enables the Bank to address basic issues of economic management and development strategy more directly and more urgently than before.”98 McNamara was equally optimistic. “Structural adjustment lending opens new fields of opportunities,” he told Bank managers in 1981. “The main difference between the 80s and that of the 70s will be in the intellectual contribution of the Bank.”99
But these opportunities would come at great cost. Although the impact of SAL continues to be debated, evidence suggests that these operations largely failed to achieve their objectives.100 While the financial assistance that developing countries received afforded them a greater degree of economic stability than would have otherwise been the case, the broad-based growth that was intended to result did not come to fruition.101 Some researchers have even concluded that the Bank’s initial structural adjustment loans depressed growth.102 What is more clear is that requirements to cut spending tended to reduce borrowing governments’ ability to provide public services.103 As a result, early structural adjustment loans generally harmed low-income groups, something the Bank has admitted.104
Many observers have argued that the reason for these failures lies in the specific adjustment policies pursued.105 Yet conditionality was never that strong in practice. Instead of undertaking the full range of prescribed measures, officials tended to adopt only those reforms that were easiest to implement. For instance, public opposition often hamstrung efforts to privatize state-owned industries, and fear of alienating domestic constituencies meant that protectionist measures often remained in place.106
Even so, SAL demonstrated considerable staying power. Rather than serving as a solution to temporary problems, SAL became an enduring part of the Bank’s work. By 1989, the organization had issued over 200 adjustment loans, and some countries made yearly requests for aid.107 The popularity of adjustment lending, in fact, was evidence of its failure—had the programs worked as intended, there would be little reason to continue them. As the economist William Easterly, a former Bank staffer, has concluded, “there is not much evidence that structural adjustment lending generated either adjustment or growth.”108
