World Bank in Asia
The World Bank is an internationally funded development lender, a specialized agency of the United Nations. The Bank was a product of the 1944 Bretton Woods Conference, at which the imminently victorious allies—notably the United States and Great Britain—sought to lay the basis for postwar reconstruction of the world's monetary system. Since the 1960s, it has been a prime lender to the newly industrializing countries (NICs) of Asia.
Founding and Early Years of the World Bank
When discussions were under way at Bretton Woods for the creation of the World Bank, U.S. distaste for the "beggar-thy-neighbor" protectionism of the 1930s that had contributed to the worldwide economic depression and subsequent rise of totalitarianism had a large influence. The United States, possessing a flourishing and ultracompetitive industrial plant, championed free trade, monetary stability, and elimination of tariff barriers. Great Britain, the other leading western industrial power at war's end, was not as unreservedly in favor of free trade, having adopted an Imperial Preference scheme a few years earlier at the Westminster Conference in order to protect Empire and Commonwealth markets. U.S. economic predominance meant, though, that its vision would prevail.
The Bank eventually evolved into five major components, each of which had its own function in promoting international economic development. These units are the International Bank for Reconstruction and Development; the International Development Association; the International Finance Corporation; the Multilateral Investment Guaranty Agency; and the International Centre for Settlement of Investment Disputes.
The Bank's immediate postwar task was to assist with the reconstruction of Europe. By the mid-1950s, Europe had fully recovered and the Bank turned its developmental interest elsewhere. Its interest was global, but Asia received special attention. Asian countries were just emerging from colonial status and now assumed full responsibility for their own economic development. This, naturally, prompted an urgent need for development capital and financial expertise. In addition, this same era saw the end of American occupation of Japan, and that country, already a major economic power, faced the task of full and peaceful integration into the postwar economic order. Also, the communist takeover of China prompted concern in Western capitals that the newly independent Asian countries have an alternative model for economic progress. The mission of the Bank in Asia was to act as a catalyst for economic development among the Asian NICs, many of which were newly independent. However, it differed from commercial lenders in that its goal was not simply profit but rather to help develop institutions and industries that would, in turn, further the long-term maturation of local economies. In this sense, the Bank provided "seed money" for future growth.
From Project-Oriented Policy to Structural Change
During the 1960s and into the 1970s, the Bank was essentially project-oriented. Typical ventures were a series of dams constructed in Asia. These dams were not conceived of as profit-making entities and, as such, would have held little attraction for investors looking for an immediate return. They did, however, offer the potential to control flooding and enhance agriculture, as well as generating electric power that might fuel industrial development. Such projects were well in line with the Bank's vision of investing in projects that would generate long-term wealth. Examples in Asia include the 1960s Phasom Dam Project in Thailand and the Tarbela Dam Project in Pakistan. The increase in agricultural production derived from these efforts caused a rise in rural living standards, while electrification made possible a considerable expansion of industry. Besides money, the Bank provided technical expertise and experienced personnel.
A change in the Bank's modus operandi occurred during the late 1970s and into the following decade as it increasingly concentrated on structural change in Asian economies. Whereas, in an earlier period, the obstacles to economic growth were seen as chiefly material—lack of electrical generation or flood control, for example— attention now focused on government policies that impeded capital formation and its effective utilization. A government that shielded inefficient industries through subsidies or tariffs, and thus impeded the more efficient use of capital, was seen as at least as great an impediment to economic growth as a material lack. This shift occurred at a time when economic theory in Western nations moved away from Keynesian government "pump-priming," in vogue during the immediate postwar era, toward monetarist policy that emphasized profound economic reform, not individual projects underwritten by government.
The new orientation of the Bank put it in conflict with local Asian economies. For instance, from independence India had adopted a socialist economic model that stressed extensive government ownership of key industries and state-directed economic growth. Foreign investment was discouraged and import substitution was selected as a growth mechanism, which meant protective tariffs. For the favored industries, this approach produced pockets of prosperity along with stable employment. Such local stability was, however, more than offset by sluggish overall economic performance at the national level.
Bank economists became convinced that project lending was of relatively little good if financed within a national economy made stagnant by inefficient industries that were kept afloat only by wasteful government subsidies, nationalist import-substitution strategies, protective tariffs, and overvalued currencies. The emphasis of the Bank thus changed to "structural reform," by which was meant an end to statism in economic planning, the elimination of state subsidies to inefficient industries, lowering of protective tariffs, and revaluation of national currencies at realistic levels. Such restructuring might be painful in the short term but, it was believed, would open the Asian nations to broad and sustained future growth and further their integration into the world economy.
Structural Reform and Its Consequences
As part of structural reform, the Bank stressed export-oriented industrial growth, privatization of industry, curtailment of state economic planning, and currency devaluation. It was hoped that these changes would encourage exports, halt wasteful subsidizing of weak import-substitution industries, lessen bureaucratic interference, and increase international demand for local products through depreciated currencies.
This program was so in line with the economic interests of the developed countries, the United States in particular, that some charged that the Bank ignored indigenous Asian needs in favor of the creation of a world economic order that simply slotted Asian economies into western capitalism. Local effects of this restructuring, in some instances, were devastating. Currency devaluation made essential imports hugely expensive and contributed to inflation. Local industries lost their umbrella of tariff protection, failed, and threw thousands out of jobs. The mild global slowdown of the 1980s left the new export industries without markets. One academic observer dealing with the Philippines, wrote in 1988, "Structural adjustment has also been . . . a disaster for the majority of the Third World, that is, for most workers, peasants, and small entrepreneurs producing for the domestic market" (Broad 1988: xviii).
These charges were amplified when the Asian economies were hammered during the late 1990s by the so-called Asian financial crisis. Some have noted that Malaysia's prime minister, Matahir Mohamad, refused to follow many of the Bank's prescriptions and that his nation's economy was spared some of the worst hardships.
Nevertheless, the general restructuring sought by the Bank has generally occurred. India, formerly a quasi-socialist, protectionist economy, moved toward an open-market economy with overall positive results. In the long run, it may be that the undoubted pain brought about by the Bank's change in philosophy enabled the Asian NICs to become competitive in the new global economy.
Further Reading
Broad, Robin. (1988) Unequal Alliance: The World Bank, the International Monetary Fund, and the Philippines. Berkeley and Los Angeles: University of California Press.
The East Asian Miracle: Economic Growth and Public Policy. (1993) Published for the World Bank. New York: Oxford University Press.
Guhan, Sanjivi. (1995) The World Bank's Lending in South Asia. Washington, DC: Brookings Institution.
Vines, David, and Christopher L. Gilbert, eds. (2000) The World Bank: Structure and Politics. New York: Cambridge University Press.
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