Journal Issue

Responding to the Development Challenge

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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World Bank President, Lewis T. Preston, speaks with Finance & Development about how the Bank is trying to meet the needs of its members, both old and new


In making the transition from being the head of a big money center bank, J.P. Morgan, to being the head of a development agency, the World Bank, what element of your earlier experience is going to be most useful in your new job here?

I suppose that the managerial experience, both at Morgan and as the director of various companies, is something that is immediately transferable. There is, however, a great deal of difference between commercial banking and development banking, as I am finding out, and it didn’t take long for me to realize how little I know!

You have already made some changes in the management structure of the Bank, eliminating the layer of Senior Vice Presidents and setting up three Managing Directors in the Office of the President, for example. Is there any other change you feel the institution needs at this juncture?

No. Those changes have speeded up the response time. The new structure allows line managers to function with greater autonomy in their areas of authority, speeds up decisionmaking and communications, and helps us better coordinate our activities with other agencies. Human resources are the Bank’s most important asset and their development is critical for its operational excellence. We have centralized the personnel function so there will be a Bank-wide view of how best to enhance the skills and experience of our staff and how best to deploy them effectively and efficiently. A new well-defined and easily applied budget process will also be put into place. It is too early to tell if the recentralization of the personnel function and the new budget procedures have succeeded. I certainly hope they will.

It is the responsibility of management to energize and motivate staff. To the extent we have simplified the organization and made it more responsive to the new challenges of development, we have started in the right direction.


This “new” World Bank is going to be tested in your involvement with the former Soviet Union. What has been the experience to date?

The decision to initially establish a resident mission in Moscow enabled us to respond more quickly than if we had simply sent missions from Washington. It allowed us to begin and continue a dialogue with the Russian authorities and, using Moscow as the base for contacts with other republics, to begin to ascertain their needs. We also mounted a technical assistance program, providing expertise where needed, but most important, helping to train local counterparts to take over the planning and management of economic ministries. As always, the proof of the pudding will be in the eating. How soon will we be able to begin normal lending operations to Russia and the other republics? I am confident that we should be able to present two, or possibly three, loans to our Board of Directors before the end of 1992.

What sort of lending do you hope to undertake in the republics?

The former-Soviet republics pose a great challenge. They have many different needs. We have to help them overturn many decades of inappropriate policies while putting in place new institutions, legal systems, and policies that will allow them to become more productive. The institutional frameworks are more firmly in place in the Baltic states and in Russia, so initially that is where much of the early lending will go. But policy reviews and technical assistance will continue in all the states of the former Soviet Union.

Some immediate problems must be addressed. For example, we, together with other multilateral organizations, focused our efforts quickly on the food sector. Working with the Russian Commission on Technical Assistance, we have produced a “Review of Food Policy Options and Agricultural Sector Reforms.” We were fortunate to work with a team representing all regions of the former Soviet Union so that even though the study focused primarily on policy requirements in the Russian Federation, much of its analysis and proposed actions will be appropriate to other states of the former union. This was confirmed during a conference on the food sector in Moscow on April 2 and 3. We are also shaping an import rehabilitation loan to shore up infrastructure.

What is the nature of this food policy study and what is its main agenda?

There are short-term aims and longer-term aims. In the short term, we hope to ensure food production during 1992–93 will reach at least the level of the previous year. That still means dependence on food imports, worth some $11 billion, to fill the gap between domestic supply and demand. The state’s role in food procurement will be cut drastically—confined primarily to purchasing sufficient food to maintain a safety-net for low-income groups. This will help cushion the poor against the full impact of food price increases. We will also help strengthen food distribution and marketing systems to ensure food is available where needed. And, we will speed up the process of changing the structure of food production, distribution, and marketing.

This will involve many interlinked actions over the medium and long term: land reform, providing essential inputs and credits for farms, privatizing transport and distribution systems, and better disseminating information on prices to assist farmers, wholesalers, and retailers.

For the next year or so, the republics will need help to finance critical imports of food and other crucial inputs, such as spare parts, pharmaceuticals, veterinary medicines, and equipment Donors should also be prepared to help finance public investment in the infrastructure needed to transform the agricultural sector.

To what extent are you coordinating your work in this region with the IMF?

The relationship between the two institutions has been intense. The process of membership and allocation of shares for the republics of the former Soviet Union has proceeded well. We hope that the membership arrangements in both the IMF and the Bank will be buttoned up by the end of June.

What elements of the Bank’s experience in Eastern Europe will come into play in the work with Russia and the other former Soviet republics?

Our experience in Eastern Europe will obviously be useful. But there are clear distinctions between the former Soviet republics and Eastern Europe, where most countries had institutions that were not centrally directed and where there was some semblance of private enterprise. Indeed, parts of those economies—such as agriculture in Poland—remained in private hands. While the Eastern European experience will be useful, it is not necessarily transferable. The situation in the former Soviet Union is unique, particularly in the areas where we are presently active. The farm project is concerned with the whole food chain—from farm to distributor. We will also be involved in the energy sector, especially in modernizing oil production. Both the agriculture and the energy sector require specialized assistance, based on purely local conditions.

On looking at the Bank’s work with centrally planned economies, or formerly centrally planned economies, one sees two models at work. One is the China model, where the Bank has taken a gradualist approach, and the other is the “Big Bang” approach of Eastern Europe. Why this difference?

There is no model that can be applied without regard to specific national circumstances, needs, and aspirations. Our membership is diverse and socioeconomic conditions, not to mention political conditions, vary between nations. We have to remember that it is respective governments that chose the “Big Bang” or the “Slow Bang” approach, not the Bank.


You have recently been in Africa. What impressions have you brought back about the development problems of the region?

This was my first visit to southern Africa. It was a fascinating trip and, in many ways, enormously instructive. The three countries I visited at any length—Tanzania, Zambia, and Zimbabwe—are examples of the new phenomena of democratic and transparent regimes in various stages of adjustment. All that has been accomplished there, of course, is being dramatically affected by the drought. It is enormously important that in looking at those countries we distinguish between, and adequately address, the hopefully short-term effects of the drought and their long-term efforts to restructure their economies.

It is clear that African countries that have chosen to adjust their economies and stayed the course have come out ahead. They have shown improved growth rates and attracted external assistance. It is important for their people and for donors to understand the importance of persevering on the adjustment path. The Bank and other donors can help by providing safety nets for those most severely affected in the early stages of adjustment programs.

One of the fears that African commentators and others have expressed is that the enormous attention and pull of resources toward the former Soviet Union might lead to the neglect of Africa. How are you going to avoid doing that in the use of Bank staff resources, as well as financial assistance?

It is terribly important to remember the Bank’s primary objective is the alleviation of poverty. We realize that Africa must have our constant attention. There is no reason to expect that we will not be able to continue our existing programs in Africa. No Bank financing will be diverted from Africa to any other part of the world. The question of diverting human resources is a little more complex. When you are faced with 15 new members and have to move experienced Bank staff to form the nucleus of a group to serve these new clients, one has to face the issue of diversion or reallocation of staff. In this process, we have to be conscious that the reallocation is not based on withdrawal of staff from needy areas. But there will be some diversion of human resources—a modest one—based on a careful consideration of its effects on the regions from where staff are being moved.


Could I take your attention back over the last decade—the so-called Decade of Debt. How well did the multilateral institutions react to the debt crisis?

Without the attention and skill of both the IMF and the Bank, the world financial system still would be mired in a very difficult and dangerous situation. Both institutions played a critical role, helping the indebted countries adjust their economies, providing financial assistance and policy advice, and encouraging additional financial flows. It was a role that was forced upon the institutions but they responded very well indeed.

Latin America has recently seen a reflow of voluntary financing. What more needs to be done to speed recovery of Latin American nations?

In the relatively near future, I hope we will see the completion of new structural adjustment agreements in Argentina and Brazil. Without wishing to sound dramatic, one could describe these developments as the conclusion of the debt crisis. What remains to be done is enormous, because, inevitably, in the adjustment process, infrastructure and human resources have been neglected. It is to those areas that the Bank will turn its attention.

In the case of Argentina, for example, the Bank may be willing to support a commercial debt-reduction package, provided the agreed level of debt service is appropriate and the country takes into account the need for significant investments in infrastructure and the rehabilitation of social services. Argentina and other Latin American countries that have seen a return to voluntary private financing also face another problem: the need to ensure that these flows do not create inflationary pressures. Their central banks will need to sterilize such flows. Both the IMF and the Bank can help governments formulate proper policies in this regard.

What about the poorest countries that still have a lot of official debt? Do you think that the Paris Club has done enough in moving from the Toronto to the Trinidad Terms for debt rescheduling?

It seems clear to me that better governance gives countries a better chance to use development assistance successfully.

A significant development in the debt strategy for low-income countries has taken place in recent months with the agreement by Paris Club creditors to provide enhanced relief going beyond the Toronto Terms. But these enhanced terms fall short of the proposed Trinidad Terms. Obviously, the recovery of some of the poorest countries with un-usually heavy debt loads is virtually impossible without writing off some of their official debt.

Is there any possibility that some multilateral debts, including the Bank’s, might be written off at some point for the poorest of the poor?

The position of the multilateral as preferred creditors has been institutionally important. The indebted countries own this institution. It is inconsistent for them to undermine the status of the Bank. There are three sound reasons why the Bank should not get into the business of writing off or rescheduling its loans. First, it tries to help countries restructure their economies and work their way out of debt by providing them with investment and structural adjustment loans. This allows countries to undertake economic reforms and grow out of their difficulties. Second, Bank claims are a relatively small part of the debt- service obligations of the middle- and low-income countries. Third, IBRD loans are funded by borrowings in the world’s capital markets. The Bank’s ability to raise money in these markets is affected by its high credit rating there. Reschedulings or write-offs would undermine that rating and add to the Bank’s borrowing cost. This, in turn, would increase the cost of Bank loans to its borrowers.

We can certainly do what we can to relieve the burden. The IDA Debt Reduction Facility, for example, helps severely indebted low-income countries reduce their long-term commercial debt. We set aside $100 million from IBRD net income for grants of $10 million to countries with appropriate adjustment programs and debt strategies in place to help them buy back debt or to discount exchanges of commercial bank debt. Bilateral donors have also helped provide grants in support of the facility. Grants from France and Switzerland combined with funds from the IDA Debt Reduction Facility, for example, helped Niger almost completely eliminate its $111 million external debt.

Donors and creditors have agreed to extend for a second three-year term the Special Program of Assistance for debt-distressed low-income countries in Sub-Saharan Africa undertaking adjustment programs.


A topic that has been much in the public debate in the last few years has been military spending within the rubric of unproductive spending. Your predecessor spoke on this. Mr. Camdessus, the IMF Managing Director, has spoken on this. Is this something that concerns you too?

That excessive military spending is unproductive is a pretty good rubric, and hopefully the events of the last year will enable both industrial and developing countries to declare the famous “Peace Dividends.” But I concur with Barber Conable and Michel Camdessus on the importance of getting a proper balance between funds for development and funds for military purposes.

The Bank recognizes the legitimacy of military expenditures for sovereign countries, especially those that face external or internal threats to their security. It is a government’s sovereign right to decide on such matters, but it is equally important that institutions such as ours focus on the most economic and efficient use of resources. As a result, our discussions with governments that need to pay attention to serious imbalances in their allocation of resources to unproductive expenditures will continue.

You mentioned earlier in the comments on Africa the question of governance. Why is this important in your view?

My direct experience is limited. But, what one sees in the new democracies are the advantages of transparency: the advantages of policies that prepare people for the adjustment process, that enable governments to make provisions for the least advantaged by providing safety nets of one kind or another. It seems clear to me that better governance gives countries a better chance to use development assistance successfully. Good governance is very important to the development process.

You cannot have effective and long-lasting development in a situation characterized by maladministration or general unrest. The Bank’s mandate, through its Articles of Agreement, is to promote sustainable economic and social development, and its concern for governance is guided by that mandate. The Bank does not, nor can it, interfere in a country’s internal political affairs. It does not advise on the kinds of political structures that countries ought to have.

Yet, the Bank can help improve governance. It can help improve public sector management. It can ensure economic and financial accountability through reviews of public expenditures and encouraging the efficient use of resources in public investment programs. It can institute predictability in its operational work within countries so that rules and regulations are clear and applied evenhandedly.


Another issue on which discussions now are quite frequently held with borrowing countries is the environment. The Bank is, of course, under constant attack from critics who feel it hasn’t done enough and yet some borrowers feel that this is becoming yet another onerous condition on Bank lending. How do you hope to strike a balance between these two views?

I’m interested in your comment about the borrowers’ view because, on the contrary, I have been enormously impressed by the understanding on the part of borrowers that these two issues, development and environment, are interrelated and in many cases mutually reinforcing. One of the pleasant surprises in coming into this job was to find that the tension between development and the environment is considerably less than I had anticipated.

To aid understanding of the complexities involved in the issue, we have made environment and development the subject of this year’s World Development Report. The major lesson that emerges from this enterprise, which, incidentally, involved our own experts and experts from around the world, is that there is no choice between preserving the environment or promoting development You cannot have one without the other.

What expectations do you have for the Rio de Janeiro “Earth Summit”?

The preparatory meetings have been discouragingly emotive. The expectations of some participants may well have been unrealistic, but, I hope that these will have been rethought and recast by the time of the conference. We, in the Bank, are looking forward to the UNCED meetings in a constructive manner. We will present the fruits of our work on the World Development Report 1992 and our project experience.

The Global Environment Facility (GEF), in which the Bank is an important participant, has an important role to play here. It is far wiser to have the same institution looking at both national environmental issues and international issues. We hope the Earth Summit will bring about a more enhanced role for the GEF which, until now, has been in a pilot phase.


On IDA and negotiations underway for the Tenth Replenishment, do you hope to get a real increase this time?

We must get a real increase. With eight new eligible countries since IDA 9 and a couple of countries waiting in the wings—Vietnam and Cambodia—who will be eligible, and maybe two or three Central Asian Republics, the needs are going to be great.

The resource requirements of IDA 10 are going to be every bit as onerous as the resource requirements of IDA 9, so we really do need an increase—a real increase.

Do you think the emphasis will still be on the United States playing the lead role in this, or will Japan and Germany be expected to take over that part?

It is still early in the discussions. Obviously, the budgetary stringencies facing some of the major donors are real. On the other hand, the demands are real and I sense in Europe and Japan a realization that IDA is a very efficient and useful way for them to make a contribution. I am hopeful that the United States, Europe, and Japan will all make significant increases to their IDA contributions.

IFC has been much in the public eye, particularly since the Bank itself has been involved with private sector operations, and you have tried to integrate the operations of the Bank and IFC to some extent. Will IFC continue as part of the World Bank Group or could it be spun off as a separate autonomous entity?

No, I see almost the reverse in the sense that the complementarity between IFC’s activities and the Bank’s have become even more important than in the past. The coordination that will be required between the two institutions has increased rather than decreased. I would think it pretty unlikely that we would spin off IFC.


Looking to the future—five years from now—how would you like people to characterize the Preston era at the World Bank?

I am not sure that I would seek or want that sort of a characterization for an institution as complex as this one. I would like the world to think that the intellectual leadership for development continued to flourish in the institution and that the new diversity caused by the geographical spread of our membership was served in a timely and thoughtful way. To go from the special skills that are required in Africa to those required in, say, the Russian Federation, is going to take a diverse and agile Bank. This is a great challenge for me and my colleagues here, and I hope we can deliver on it.

Lewis T. Preston

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