Chapter

4 Establishing a Vision for Promoting Economic Development

Editor(s):
James Boughton, and K. Lateef
Published Date:
April 1995
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Richard N. Gardner

I have been given a double privilege today by the organizers of this splendid conference: to say a few words about the historical origins of the Bretton Woods organizations and to introduce a most distinguished financial statesman and former World Bank President, Tom Clausen.

The victorious allies in the Second World War had a basic choice to make as they faced the task of postwar economic reconstruction. They could return to the selfish economic nationalism, currency controls, and high tariffs of the prewar period, or they could seek shared prosperity in a world of open, multilateral trade. Fortunately for all of us, they chose the latter.

The “founding fathers”—John Maynard Keynes, Harry Dexter White, and the other members of the Bretton Woods cast, some of whom are with us today—were united by a common commitment to constructive internationalism. They wanted to create permanent institutions for international cooperation on monetary, trade, and development problems. Today, we take their achievements for granted, but it is worth recalling that the Bretton Woods institutions were created in the face of powerful opposition in the United States and the United Kingdom, the two leading countries in the work of postwar reconstruction.

In the new Spanish edition of my book, Sterling-Dollar Diplomacy: The Origins and the Future of the Bretton Woods-GATT System, which Círculo de Lectores was good enough to publish this week, I give some examples of the British and U.S. moods at the time of Bretton Woods.

On the British side, there was profound skepticism throughout the establishment that a system based on open, multilateral trade would be in the country’s interests. The Federation of British Industries and the London Chamber of Commerce were hostile. Many felt that the wave of the future was barter trade, managed markets, discriminatory arrangements, and currency controls. Many believed that the United States was destined to go into a deep depression after the war, dragging Britain into the abyss and destroying its postwar commitments to the welfare state and full employment. To these people, it seemed folly to lie down with the United States in an international system based on liberal economic principles. And, of course, there were those who wanted to make the sterling area and the system of Imperial Preference the basis for a postwar order.

Those two pillars of establishment opinion in the United Kingdom, the Economist and the Times, looked at postwar planning with deep misgivings. As the Times put it:

We must reconcile ourselves once and for all to the view that the days of laissez-faire and the unlimited division of labor are over; that every country—including Great Britain—plans and organizes its production in the light of social and military needs; and that the regulation of this production by such “trade barriers” as tariffs, quotas, and subsidies is a necessary and integral part of this policy.

The U.S. Ambassador to Britain, John Winant, cabled Washington in 1944 that “a majority of the directors of the Bank of England are opposed to the Bretton Woods program …. It is argued by those in opposition that if the plan is adopted financial control will leave London and sterling exchange will be replaced by dollar exchange.”

One British Member of Parliament warned that acceptance of the U.S. postwar monetary proposals “will be the end. The end of all our hopes of an expansionist policy, and of social advance. It will be the end of the Beveridge Plan, of improved education, of housing reconstruction, the end of the new Britain we are fighting to rebuild. It will lead again to world depression, to chaos, and, ultimately, to war.”

The postwar economic plans had no smoother reception on the U.S. side. The Wall Street Journal called the Keynes plan “a machine for the regimentation of the world.” The New York Times considered the Bretton Woods proposals unnecessary; it favored going back to the gold standard, which it considered “the most satisfactory international standard that has ever been devised.” The American Bankers Association objected to the International Monetary Fund because, it said, “we should be handing over to an international body the power to determine the destination, time, and use of our money”—abandoning, without receiving anything in return, a vital part of U.S. bargaining power. The Guaranty Trust Company, progenitor of Morgan Guaranty, called both the British and U.S. plans for Bretton Woods “dangerous,” on the grounds that they would “enable nations to buy merchandise without being able to pay for it.” Senator Robert Taft denounced the Bretton Woods agreements, charging that the United States was “putting all the valuable money into the Fund,” and would be “pouring money down a rat hole.” A Senator from Utah rose in indignation on the floor of the Senate, brandished a fistful of foreign currencies, and defied any one of his colleagues to “go downtown in Washington and get his shoes shined with this whole bunch of bills.”

It is in the light of such attitudes in the two countries that the creation of the postwar institutions deserves to be called a “political miracle.” The miracle was only possible because it was accomplished at the end of a war, when public opinion could be mobilized in the hopeful enterprise of building a better world, and because both countries were led by men of great vision, surrounded by dedicated internationalists of outstanding ability. Today, when many people despair of undertaking necessary new initiatives because of what they see as implacable political realities, it is worth recalling how the founding fathers were able to enlarge and reshape those realities 50 years ago.

There is another political miracle that may be of interest today. We now take for granted that the world’s pre-eminent institution for economic development in terms of the size of its resources and the weight of its influence is the International Bank for Reconstruction and Development. Yet in the early planning for the postwar economy, the Bank came almost as an afterthought. Virtually all the attention of the British and U.S. Governments was focused on the International Monetary Fund.

When, on the eve of Bretton Woods, the negotiators finally focused on the World Bank, they were in a conservative mood—the British did not expect to be beneficiaries, the Americans were afraid of Congress. The Bank’s lending capacity was limited almost entirely to what it could raise by bonds issued on the private capital market. There was simply no conception of the vast needs of the developing countries and of the role the Bank should play in meeting them.

Indeed, the World Bank was conceived mainly as an institution for reconstruction. Incredible as it seems today, the word “development” did not even appear in Harry White’s first draft circulated within the U.S. Treasury Department. So another political miracle has been the extraordinary evolution of the World Bank’s development policies, assisted by the creation of its two key affiliates, the International Development Association (IDA) and the International Finance Corporation (IFC).

I close with a brief word about a third political miracle. I refer to the mutual learning process that enabled the two key actors in the world economic drama—national governments and the private banking community—to overcome their mutual hostility and work together in support of economic development in the developing world. Recall that U.S. Secretary of the Treasury Henry Morgenthau told the assem-bled delegates at the closing plenary session of the Bretton Woods conference that one of their major purposes was “to drive the usurious moneylenders from the temple of international finance.” Two years later, when he heard that Lewis Douglas was under consideration to be the first President of the World Bank, Morgenthau (now back in private life) declared: “The idea that it is necessary to have a Wall Street financier to head the World Bank in order to sell the bank securities is quite shocking.”

I wonder what Morgenthau would say today, when the “usurious moneylenders” are providing two thirds of the capital flows to developing countries (a sum of $113 billion of private capital in 1993). What would he say of the presence at the Fund and World Bank Annual Meetings of over 10,000 private bankers, or of the successive and successful Bank presidencies of bankers such as Eugene Black, George Woods, Lewis Preston, or of our distinguished speaker today, Tom Clausen?

Tom Clausen’s career helps to illustrate why Henry Morgenthau was wrong. A true financial statesmen, Tom has made historic contributions as head of one of the world’s major private international banking institutions, the BankAmerica Corporation, and as head of the world’s principal public international banking institution, the World Bank. His long list of associations with nonprofit organizations, including important educational institutions as well as business advisory groups, testifies to his continuing contribution to the general welfare both in the United States and overseas.

A.W. Clausen

It is a great honor indeed to have been invited to address this distinguished group on such an important occasion—the celebration of the fiftieth anniversary of the Bretton Woods conference. I must confess, however, that I have arrived at a time of my life when I think of 50 years—a mere half century—as being rather young!

Despite what I perceive as the “youth” of the Bretton Woods organizations, we have come a very long way since that first conference in July 1944 in Bretton Woods, New Hampshire—and we have a record of achievement and global advancement of which we can be very proud:

  • the reconstruction of economies devastated by World War II;
  • successful development in East Asia;
  • movement of project expertise to developing countries;
  • widespread recognition of the World Bank as a repository of knowledge, experience, understanding, and research about development issues;
  • development of customized structural and sector adjustment lending as a way of providing a more compatible policy framework in which development projects and programs may prosper; and, as a culmination of all these activities,
  • improvements in the vital human condition by increased levels of literacy (through emphasis on basic education) and by dramatic increases in longevity and the lowering of infant mortality (through emphasis on public health programs).

Notwithstanding the substantial progress achieved in these last 50 years, however, economic progress has been very uneven across regions and between countries. More than a billion people continue to live at below poverty levels of less than one U.S. dollar a day. Sub-Saharan Africa remains the greatest regional development challenge for the future—be-cause poverty is still on the increase and development investment is so dependent on foreign aid.

The environment is under severe attack from population growth that is far too fast for too many developing countries. Given the critical mass of the societal and economic deficiencies that still exist, sustainable development is the single largest challenge for the world to deal with in the next 50 years.

We stand today on the brink of a chasm. On one side are the economic and political realities that nations must address to achieve prosperity. On the other are the expectations of their peoples. The chasm itself might be called the “expectations gap.”

The focus of the Bretton Woods organizations since their founding is to help nations build or rebuild their infrastructure and put in place sound economic and financial policies. The World Bank and the Fund have worked very hard at being apolitical in this endeavor—a sound policy that has contributed to the credibility and success of these multilateral institutions.

But the needs of many nations have changed, largely owing to the collapse of communism and the political chaos that many countries now suffer as they attempt to rebuild their economies on a free market basis. When historians or anthropologists look back on the twentieth century, they will surely view the discrediting of communism as an economic, political, and social system as one of the century’s major events. In some ways, they might argue that it has been the most important and dramatic event. However, when communism disintegrated, the Cold War (which existed for most of the life of the Bretton Woods institutions) ended quite abruptly. It left the economies of many of the former republics of the U.S.S.R. in tatters.

Unfortunately, the abrupt dissolution of the old order led to the soaring of expectations of the peoples of those nations. They believed (and the free world probably played a role in that expectation) that with elections and free market economies, they would rather quickly and perhaps almost automatically enjoy the benefits that the nations of Western Europe, North America, and Asia had spent generations developing and nurturing.

This is clearly an unrealistic expectation. That is why today we may have to consider looking beyond pure economic and financial issues to help nations without a tradition of free markets to find their way through the political wilderness created when trying to establish new, market-based economies. To my mind, there is no question that—much as we would like to separate finance and economics from politics—economic development must go hand in hand with political and social development.

Here is our dilemma. While the Bretton Woods institutions stand ready to participate in economic development, we must ask who stands ready to help newly liberated nations understand the kind of political development required to provide the environment for market economies. Who will, or can, take up that challenge?

Let me make myself very clear. By no means do I suggest that we impose any mandate on nations to set up political environments emulating those in the West. However, it is very clear that many nations that understand their people’s economic needs also need guidance in establishing the political environment to permit those needs to be met by market dynamics. And they need guidance on how to prepare their people for the tensions and upheavals that are inherent in the free enterprise system.

The developed nations are accustomed to the constant tension between the public and private sectors. We know that, while we may disagree strongly on the best way to achieve any given goal on any given day, we have generations of history in forging compromises that will bring the greatest good to society at large. And our success shows that so far the market approach has worked much better than any other system to unleash the most powerful force for economic development on planet earth—the power of individual entrepreneurs. In recent years, the world has turned rather dramatically toward the market principles espoused by Adam Smith more than 200 years ago.

But market economies cannot be created in a day, or in a year, or perhaps even in a decade. Even the most brilliant idea cannot be imposed on a society or a culture by mandate—it can be implemented only by a process of education, example, visible successes, and clear and continual communication. Even where there is consensus on the goals, it takes great effort and frequently excruciating pain to achieve them. There’s an old saying in almost every country and every language that exclaims, “No pain—no gain!”

We say that the Bretton Woods institutions are not political institutions. They are not! Rather, they are economic and financial institutions, and their decisions are based on the economic and financial analysis of a given country, taking into consideration the complexities and dynamics of that country—all based on the pragmatic experience of the Fund and the World Bank, developed in other countries over these last 50 years.

My own experience—as a managerial executive in both the public and the private sector—is that it is so much easier—easier by factors—to make changes of emphasis and direction in the private sector than it is to do so in the public sector! I say that as a broadly based fact that not everyone realizes. The political considerations that governments must heed are at best terribly complex and interrelated with many other complicated aspects of governance, and yet the political realities are just as much a fact as the economic realities with which the Bretton Woods institutions must deal.

The nations of the world need to see role models—that is, success stories—as evidence of what can happen if appropriate government policies are adopted: policies that provide incentives for disciplined but suitable fiscal and monetary actions; policies that are conducive to sustainable development programs; and programs that reduce poverty levels in developing countries and raise the standards of living of their peoples. Fortunately, there are many examples—many success stories—for which the World Bank and the Fund deserve much recognition for their help and assistance in removing or moderating the impact of obstacles impeding economic development.

My purpose here is not to list all of the success stories or to imply that nothing more needs to be done—that the mountain of “development” has been conquered—development is never completed. But Chile and Mexico are two countries that come to mind in this connection. China is another that deserves mention, particularly in its success in raising the standard of living for approximately 100 million of its people above the poverty level in the last 15 years or so.

The Republic of Korea is indeed a success story. It was important for the 1985 Annual Meetings of the Fund and the World Bank Group to be held there so that other developing nations could see how a country that had the same per capita GDP as India in 1960 could prosper and grow faster than most other developing countries—the result of implementing appropriate policies conducive to accelerating economic growth and development. There are many other success stories. But developing countries need to have hope for the future. Solutions cannot be found if leadership of a country despairs. And success stories can raise hopes by presenting examples of what works—and what does not work!

I confess that my personal “expectations” of the time it would take to establish a Multilateral Investment Guarantee Agency (MIGA) is but one example of how difficult it is to achieve results in the public sector, and BankAmerica Corporation, on the other hand, is an example of how quickly and dramatically changes can occur in the private sector. But my experience in the public sector helped me enormously when I returned to the private sector to help a major financial institution put its house in order once again.

Similarly, the World Bank and the IMF can play an important educational and informational role in causing countries’ expectations to be realistic. These institutions have both the experience and the access to help local government officials, entrepreneurs, and consumers to understand the realities of the difficult changes they are living through—and to bring expectations more closely in line with realities.

The expectations gap has led to disappointment and to disillusionment for millions of people. What is of even greater concern, the disillusionment suffered could put some countries in jeopardy of a nostalgia for those “good old days” of the managed economy, where one’s most basic needs were attended to automatically. A relapse to repressive forms of government and to governments that have policies not conducive to economic growth would be tragic indeed.

Yet who is to help both the millions of citizens and their leaders come to grips with the chaos that is the immediate aftermath of the dramatic shifts to a more free and open economic and political system? The two Bretton Woods institutions are in the best position in the world to extol the virtues—in a non- “conditional” way—of the advantages of liberalizing economic regimes.

Those of us who have been involved for long periods with the Bretton Woods institutions know the elements that are critical for economic stability in nations: the creation of strong yet environmentally sensitive infrastructures; the adjustment assistance necessary to encourage developing nations to implement policies conducive to achieving the levels of sustainable economic growth necessary to raise their peoples’ standards of living; sound family practice and population control policies; and serious attention to human rights and social needs, such as education, health, and the status of women.

Many, if not most of us here today—government officials, business people, financial experts, and academics—are individuals who have spent major portions of our lives focusing on the economic and financial requisites for viable nations. We know what is needed. But do we have the political will to get there? How do we begin to advise nations on how to cultivate a political climate that will promote economic development and stability in the light of a rapidly changing landscape?

Some of the finest minds in the field of international economic development will be discussing these challenges this afternoon and tomorrow, and I do not wish to pre-empt them. But I do have a few thoughts on the potential for expanding the roles of the major players who are carrying heavy responsibilities in the area of international economic development.

First, the international development institutions: the premier institutions for international economic development are, of course, the International Monetary Fund and the World Bank Group. They have been responsible for the lion’s share of the development that has improved the lot of nations and their peoples over the past 50 years.

The Bretton Woods Commission issued a report in July of this year with some sound ideas for streamlining and updating the IMF and the World Bank, in order that they may adapt “to a world that has turned from public sector dominance towards private enterprise and free markets.” Although I am not in total agreement with all of the Commission’s recommendations, I think the report does send a clear call for the World Bank and the IMF to develop even stronger ties of cooperation in dealing with the new economic and political realities and to work more transparently and more closely with the other development bankers—the Inter-American Development Bank, the Asian Development Bank, the African Development Bank—and with Jacques de Larosière’s European Bank for Reconstruction and Development.

And let us not forget the growing importance of nongovernmental organizations in many countries. I think that development needs in the future will be met more and more by the private sector and by these organizations.

The World Bank disburses huge sums of money every year, but equally important to developing nations, and in some cases even more important, is its policy advice—macro as well as micro—because I am a strong believer in “adjustment” lending—structural as well as sectoral. And that advice can only be effective when both institutions are reading from the same script. This is particularly critical if the institutions choose to lean a bit more (in a nonmandatory way) into the challenge of offering political development counsel as well as economic development counsel, and, of course, it goes without saying that close coordination on projects can maximize the effectiveness of all of these governmental development institutions.

I would submit that if we did not have an International Monetary Fund and a World Bank today, we would want to invent new institutions to fulfill their missions. Perhaps we could even create new institutions that proved to be more efficient, less bureaucratic, more flexible, and more dynamic than the ones we now have. But let us think that through just a bit. These institutions—the Fund and the Bank—are clearly not perfect! But they have adapted rather well to the changed world of today, which was not envisioned 50 years ago. Perfection is largely in the eye of the beholder. I think almost all of us could and would agree that it is a better world today because of the Fund and the Bank.

Why don’t we resolve at this conference to work more effectively in support of our institutions—to ensure that the IFC, for example, has enough capital really to exploit the global movement toward the private sector whose momentum is increasing rather remarkably? And the same goes for the Fund as it argues for its next quota increase.

MIGA, which has just recently started to get its head above water, needs nurturing and support as it assists the development process by guaranteeing against political—noneconomic—risks in the developing countries.

The Bretton Woods report suggested that the World Bank require government performance guarantees to protect private enterprises from unpredictable changes in policy. Unfortunately, a government given to unpredictably changing its policies would probably change its policy on performance guarantees as well. I think it would be far more realistic to expand the role of MIGA, to provide insurance where development funds might be at risk.

Cynics would probably say that one who suggested in the fall of 1981 that we try once again to create a multilateral guarantee agency might well be expected to hold this view. The role of the private sector in economic development must and will grow and increase spectacularly in the decades ahead, and we should encourage the private sector to play as large a role in the future as it possibly can. Developing countries can to a large extent influence these private sector flows by making themselves more attractive. The most valuable resource in the world and in any nation is people! I believe the World Bank should devote even more attention than it has in the past to helping governments identify projects that can quickly and very visibly improve the lot of their people: hospitals, schools, housing, and a pollution-free living and working environment. And we all realize that Lew Preston and Barber Conable before him have both been giving special emphasis to this effort. More is even better!

Only by creating some visible successes can nations begin to move toward the political consensus needed to make the tough economic decisions necessary to help make steady progress toward prosperity through a market economy. National leaders must find the will and the voice to convince their populations that freedom is hard work but is well worth the prize.

We should work through the public sector wherever we can to enable the private sector to develop itself. Government alone cannot fulfill the expectations of people! Communism taught us that. But public-private partnerships can help provide the political and economic education that must underpin growth and development.

Shareholder developed nations should become more supportive of the Fund, the World Bank, and the regional development banks and develop more consistency in dealing with them. They must also be prepared to play a role in the political education of the emerging market economies.

Developed nations must get their own economic houses in order. None of our domestic populations will be willing to support economic assistance abroad if they are suffering from unemployment, poverty, and homelessness in their own backyards.

May I also suggest that the world would benefit from having stronger, more experienced Executive Directors appointed to both the Fund and the World Bank boards of directors. I also believe the world would benefit from having a stronger Development Committee to discuss the more substantive and new issues of development that are presenting themselves.

There has been a tendency in recent years for some developed nations to try to impose their own political agendas on the World Bank. This could be disastrous in the extreme, because the true magic of the World Bank has been its ability to be apolitical in its recommendations. It must continue to be so if it is to retain its credibility and effectiveness.

But, even while remaining apolitical in the sense of not advocating any particular political system, the Bank can do more to help educate political leaders about how best to harness the energy of their peoples to achieve realistic economic goals within a realistic period of time.

The newly industrializing economies must be encouraged to participate much more strongly in development financing. Although many of these countries belong to IDA, they must be urged to increase their support for the agency, and also to participate more fully in the international organizations that are seeking to promote world growth and stability. Because they represent recent success stories, their advice to the new market economies can have great credibility and timeliness. They should be encouraged to become role models, sharing their experience and achievements.

Finally, the IMF and the World Bank need to market their services and accomplishments more effectively to their shareholder countries, their client countries, and the citizens of those countries. In my view, the world would benefit if both institutions were to extol their virtues a bit more aggressively than their modesty currently permits! We also must extol their virtues. It is in our self interest.

We are living in perilous times, facing a future that can either bring unprecedented prosperity to the world or send large segments of its population careening back into repression and darkness. In the Bretton Woods organizations and in their memberships, we have the resources and abilities to create a better future. Let us all work positively and cooperatively in really supporting the development process in future years.

I have every expectation that even greater progress can be made in the next 50 years than has been accomplished in the first 50 years of the Bretton Woods development process. And I further expect not to be disappointed in that expectation!

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