Robert McNamara's Other War

The World Bank and International Development

Patrick Allan Sharma

• Publisher: University of Pennsylvania Press
• Year: 2017
• Print ISBN:
  9780812249064
  9780812249064
• eBook ISBN:
  9780812293937
• Topic: History
• Subtopic: Development Economics
• Index: History

Robert McNamara is best known for his key role in the escalation of the Vietnam War as U.S. secretary of defense under Presidents John F. Kennedy and Lyndon Johnson. The familiar story begins with the brilliant young executive transforming Ford Motor Company, followed by his rise to political power under Kennedy, and culminating in his downfall after eight years of failed military policies. Many believe McNamara's fall from grace after Vietnam marked the end of his career. They were wrong.In Robert McNamara's Other War, Patrick Allan Sharma reveals the previously untold story of what happened next. As president of the World Bank from 1968 to 1981, McNamara changed the way many people thought about international development by shifting the World Bank's focus to poverty alleviation. Though his efforts to redeem himself after his failures in Vietnam were well-intentioned, Sharma argues, his expansion of the World Bank's agenda contributed to a decline in the quality of its activities. McNamara's policies at the Bank also helped lay the groundwork for the economic crises that have plagued the developing world during the past three decades.Not only has Sharma crafted an engaging chronicle of one of the most enigmatic figures in modern American history; he has also produced one of the first detailed histories of the World Bank. He mines previously unstudied Bank documents that have only recently become available to researchers as well as material from archives on three continents. Sharma's extensive research shows that McNamara's influence extended well beyond Vietnam and that his World Bank years may be his most enduring legacy.

CHAPTER 1

An Unlikely World Banker

Many people in the Bank were worried when Lyndon Johnson announced Robert McNamara’s appointment to the Bank presidency.¹ McNamara was, to say the least, a strange choice to head the organization. The former defense secretary’s role as an architect of the Vietnam War made him unpopular around the globe and demonstrated his limited understanding of at least one part of the developing world. McNamara also lacked experience in finance and development, the main components of the Bank’s work. This dual role was a product of a complex history that shaped the organization’s activities before, during, and after McNamara’s tenure.

The Bank Before McNamara

The World Bank was conceived in early 1942, shortly after the Japanese attack on Pearl Harbor, when U.S. treasury secretary Henry Morgenthau, Jr., asked Harry Dexter White, his chief international advisor, to draw up plans for a postwar system that would prevent a repeat of the economic conditions that had led to world war. White, a committed internationalist (who was later discovered to have passed secrets to the Soviet Union during the war) responded by suggesting the creation of two intergovernmental organizations. The first would bail out countries experiencing balance of payments difficulties and coordinate international monetary activity, thereby preventing a repeat of the currency wars of the 1930s. This organization would become the International Monetary Fund (IMF). The second organization would, in White’s words, “supply the huge volume of capital that will be needed virtually throughout the world for reconstruction, for relief, and for economic recovery.”² This would become the International Bank for Reconstruction and Development (IBRD), or World Bank for short.

White’s ideas found favor in Washington, and over the next two years he led a team of U.S. officials in refining the plans. The proposal for the World Bank almost never got off the ground, however. While the Allies were interested in the international stabilization fund, the proposal for the Bank drew little attention. When preparations for an international conference to discuss the plans began in earnest in 1944, so few nations had shown interest in the Bank that U.S. officials feared the organization might never come into existence.³

The inattention that greeted the proposal for the Bank was due in part to the organization’s limited mandate. Although White envisioned a broad role for the Bank as a coordinator of postwar relief efforts, other administration officials believed this would engender opposition in Congress.⁴ Thus, the plan for the Bank that the United States circulated to other governments outlined a limited role for the organization. With start-up capital provided by member countries, the Bank would raise money through the sale of its bonds and use these funds to make long-term, low-interest loans to governments for specific development projects. In so doing, the organization would help restore international lending, which had collapsed in the interwar period. As Morgenthau noted in 1943, “the primary aim of such an agency should be to encourage private capital to go abroad for productive investment by sharing the risks of private investors in large ventures.”⁵ The Allies were also disinterested because the Bank would privilege U.S. interests. Although any country could be a member, voting power would depend on how much money a country provided. In practice, this meant that the United States, the only nation capable of making a significant contribution, would control the Bank.⁶

John Maynard Keynes, the famed British economist, was particularly lukewarm about the proposal. Like White, Keynes viewed expanded international trade, the stabilization of exchange rates, and the revival of foreign investment as necessary conditions for peace. However, he was worried about U.S. dominance of the world economy and argued against the proposals. Rather than have the dollar serve as the world’s reserve currency, Keynes suggested the creation of a new international currency to prevent large trade imbalances.⁷ Though he supported an organization for postwar reconstruction, he also disagreed with the specifics of the Bank, particularly the idea that countries whose resources had been drained by the war, including the United Kingdom, contribute to its funding.⁸

Nevertheless, Keynes recognized the reality of U.S. power and, once it became clear that the United States would insist on seeing its plans through, dropped his resistance.⁹ He acceded to the U.S. proposals onboard the streamliner that carried European delegations across the Atlantic to the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, in the summer of 1944.¹⁰ Even then, the Bank’s fate remained uncertain. Although delegates to preparatory meetings in Atlantic City, New Jersey, managed to come up with a general outline for the Bank, delegates made no mention of the organization during the first week of the conference at Bretton Woods. Officials only agreed to take time form the monetary deliberations to discuss the Bank at the insistence of a handful of representatives from Latin America and Europe, who were interested in obtaining low-interest loans for their countries.¹¹

The ensuing negotiations resulted in an organization fairly similar to the initial U.S. proposal. The Bank’s founders wanted to avoid the reckless foreign lending of the 1920s and sought to ensure that the organization operate conservatively. Accordingly, the Bank’s Articles of Agreement mandated that funds would finance only clearly defined projects, rather than be provided directly to governments to use as they pleased. The Articles also required that the value of the Bank’s liabilities remain less than its reserves, that it would lend to central governments only if no alternative sources of capital were available on reasonable terms, and that countries that wanted to join the Bank would have to become members of the IMF, which would have the power to monitor their economic affairs.¹²

Wartime conditions further constrained the Bank’s structure. European countries convinced the United States to limit the amount of money governments would contribute directly to the organization. Instead of the U.S. plan, which called for governments to contribute at least 20 percent of the total amount of the Bank’s funding, with that percentage increasing over time, the Articles capped direct contributions at 20 percent. The remainder was to take the form of assurances from national governments that could be used as collateral for the Bank’s borrowing. The agreement to accept this level of callable as opposed to paid-in capital meant that the organization would have less money on hand and that demand for its bonds would be lower.¹³

The United States was, however, able to ensure that it would control the Bank. The capital contributions of member countries determined voting power, which meant that the United States would wield the most power within the organization. To assuage the Soviet Union’s concern that the Bank would serve as an instrument of U.S. foreign policy, the Articles prohibited the Bank and its officers from interfering in the “political affairs” of the organization’s members and from taking the “political character” of countries into account when making lending decisions.¹⁴

The delegates at Bretton Woods could not help but marvel at their strange creation. Keynes, who presided over the negotiations, noted that the restrictions on the Bank’s lending meant that it would operate like a fund, while the IMF would be more like a bank.¹⁵ Although the Bank’s Articles allowed for nonproject loans in special circumstances, neither the conditions for nor the content of these activities were clear. In addition, while the Bank was to operate only on the basis of economic considerations, nobody was sure how it would remain apolitical. The relationship between the Bank’s president, staff, and representatives of its member countries was also undetermined. The peculiarity of the Bank so struck Georges Theunis, a member of the Belgian delegation, that he later observed, “It was accidentally born with the name Bank, and Bank it remains, mainly because no satisfactory name could be found in the dictionary for this unprecedented institution.”¹⁶

The Bank’s founders were correct in emphasizing the organization’s uniqueness. Never before had so many governments pledged to pool their resources to promote reconstruction and development. Indeed, until Bretton Woods, international organizations had concerned themselves primarily with political, rather than economic, issues.¹⁷ Despite its limitations, the Bank thus represented an unparalleled experiment in global governance.

To be sure, there was some precedent for the Bank. The idea of a public international development bank had been around since the nineteenth century, and calls for a multilateral investment agency circulated in the interwar period.¹⁸ In the years before Bretton Woods, the United States had also sought to institutionalize international economic cooperation. In 1930, U.S. officials and private bankers spearheaded the creation of the Bank for International Settlements (BIS) to manage the repayment of World War I debts.¹⁹ And the following decade, the U.S. government attempted to establish an organization that would serve as a lender-of-last resort, guarantor and supplier of investment capital, and coordinator of monetary policy for nations in the Western hemisphere.²⁰ These efforts not only demonstrated the U.S. government’s reliance on public-private cooperation but also formed part of a longer American tradition of promoting the global expansion of capitalism.²¹

While the creation of the Bank marked the culmination of certain long-term trends, it also represented a break from tradition. In order to counter the tendency of nation-states to compete against each other, the postwar planners sought to institutionalize multilateral decision-making. The shared experiences of depression and war, as well as memories of the failed World War I peace agreement, created unique conditions for this ambitious endeavor, and U.S. leadership ensured that these plans were realized. The Roosevelt administration recognized that World War II presented an opportunity to transform the international system in much the same way that the Great Depression had enabled it to recast domestic policy. Indeed, the principle that animated the New Deal—that government could productively intervene in the economy—drove the proceedings at Bretton Woods. As Roosevelt put it in describing the plans for the IMF and World Bank, the postwar order would bring about “expanded production, employment, exchange and consumption—in other words, more goods produced, more jobs, more trade and a higher standard of living for us all.”²² In this respect, Bretton Woods formed part of an unprecedented U.S.-led effort to promote global peace and prosperity through international organizations, which the historian Elizabeth Borgwardt has termed a “new deal for the world.”²³

One of the most significant aspects of the postwar order was the way it crystallized understandings of the proper relationship between the public and private sectors. Although they disagreed on the specific form the system should take, the postwar planners believed in the need to strengthen economic ties between countries and, at the same time, improve conditions within them. This was no easy task: the breakdown of the world economy in the interwar period had shown how difficult it was to maintain both an open global economy and robust welfare states. The postwar planners thus faced a dilemma: how to reconstitute international trade and investment while ensuring that countries remained protected from the vicissitudes of the world market. What emerged was a shared understanding that governments should be free to maintain domestic policy autonomy while integrating into the international economy on their own terms, a process of managed globalization that political scientist John Ruggie has termed “embedded liberalism.”²⁴ The faith in government’s ability to control economic forces informed the creation of the Bank. As much as they viewed the revival of global capital as vital to the postwar recovery, the postwar planners understood the need for public oversight of the private market. Viewed through this lens, the constraints on the Bank’s lending operations reflected a keen understanding of the perils of unregulated finance.²⁵

Despite the consensus that globalization needed to be managed, international cooperation remained elusive following Bretton Woods. The Soviet Union rejected the agreement after failing to secure a reconstruction loan from the United States. The UK also balked at signing on to the plans in the hopes that it could convince the United States to ease the terms of postwar aid. Support for Bretton Woods was uncertain even in the United States, wh...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Dedication
• Contents
• Introduction
• Chapter 1. An Unlikely World Banker
• Chapter 2. Modernizing the Bank
• Chapter 3. Developing Development
• Chapter 4. Global Shocks
• Chapter 5. Navigating Turbulence
• Chapter 6. Fighting Poverty
• Chapter 7. The Birth of Structural Adjustment
• Conclusion
• Notes
• Index
• Acknowledgments