An imperfect system

The most important source of its failures was its commitment to lending — almost regardless of what was happening in the country it was lending to.

Bank lending made it easier for corrupt and occasionally vicious governments to ignore the interests and wishes of their peoples.

This was an inevitable flaw, since the institution could hardly admit that what it could offer — money — would often make little difference. But this flaw was magnified by the personality of Robert McNamara, former U.S. Defense Secretary, who was the World Bank's dominating president from 1967 to 1981.

McNamara was a man of ferocious will, personal commitment to alleviating poverty — and frighteningly little common sense. By instinct, he was a planner and quantifier.

A growing business in a dying industry

Supported by his chief economic adviser, the late Hollis Chenery, he put into effect a Stalinist vision of development. Faster growth would follow a rise in investment and an increase in availability of foreign exchange. Both would require additional resources from outside — and much of these needed resources would come from the Bank.

Under his management, the World Bank and its lending grew enormously. Every division of the bank found itself under great pressure to lend money, virtually regardless of the quality of the projects on offer or of the development programs of the countries.

Harmful fictions

During my own time at the World Bank in the 1970s, every developing country — however limited its intellectual resources — was expected to produce a five-year economic plan in pale imitation of the Stalinist model.

McNamara was a man of ferocious will, personal commitment to alleviating poverty — and frighteningly little common sense. He put into effect a Stalinist vision of development.

Sophisticated developing countries, such as India, produced sophisticated plans. Less sophisticated countries produced less sophisticated plans. All these plans had one thing in common, however: They were fictions.

But they were not harmless fictions. They inflicted grave damage on the economies and people of these supposedly "planned" societies.

Anti-capitalists of today talk as if these experiments with planning had never happened — or if they did, have no significance now that state-socialism has collapsed. They are wrong.

A lesson to be learned

The experience with national economic planning has important lessons. It helps us understand what a state can usefully do — and is obliged not do — if it is to see a rise in the living standards of the people for whom it has responsibility.

This undermined the professional integrity of the staff and encouraged borrowers to pile up debt, no matter what the likely returns. This could not last — and did not do so. As Montek Ahluwalia — former economic secretary and later finance secretary — once told me, the Bank was a growing business in a dying industry. It was certain to reach the limit to its growth.

Too late to help

I worked on India as senior divisional economist for three years. During that time, my chief function, so far as the Bank was concerned, was to justify the provision of significant quantities of aid — even though this money was helping the government of India avoid desperately needed policy changes.

To defend a liberal world economy is not to defend the IMF, the World Bank, the WTO or any specific institution.

As it turned out, those changes were made in the midst of a deep foreign exchange crisis in 1991 — almost two wasted decades later.

The changes were made under the direction of Manmohan Singh — then finance minister — with the assistance of Montek Ahluwalia.

Major set-backs

This experience confirmed three lessons: Policy changes could make a huge difference to economic performance. Such changes could be put into effect by relatively small teams of intelligent, motivated and well-disciplined individuals. And most important of all, those changes could not be imposed from outside.

Unfortunately, lending too much was not the World Bank's only fault. It also had to lend to governments.

Governments make a difference

This had two undesirable consequences. It had to assume that the government represented the interests of the country. And it reinforced an unjustifiably collectivist view of that national interest.

The Bank was a growing business in a dying industry. It was certain to reach the limits of its growth.

Bank lending made it easier for corrupt — and occasionally vicious — governments to ignore the interests and wishes of their peoples.

By the end of my time at the World Bank, I came to the conclusion that its borrowers fell into three categories. Those that did not need the help, those that would not use the help — and those that needed the help and would use it.

New conclusions

The World Bank was constitutionally incapable of concentrating its efforts on this third, often quite small group. As a result, its efforts were often either unnecessary or wasteful.

The notion that one can rely on governments, particularly in the developing world, to make an honest and disinterested effort to protect private property, provide other public and merit goods and so raise national economic welfare is mostly laughable.

The future

In the 1990s, at last, even the World Bank admitted the seriousness of bad government as a constraint on development.

The most important source of the World Bank’s failures in the 1970s was its commitment to lending.

Indeed, that is probably the most important development of the era of James Wolfensohn as the World Bank’s president.

The realization that the institutions designed to oversee aspects of the global economy might fail, even though integration was an important element in successful development, has stayed with me to this day.

To defend a liberal world economy is not to defend the IMF, the World Bank, the WTO or any specific institution. These must be judged — and reformed or discarded — on their merits.