McNamara's Bank

Roger Bate & Benjamin Schwab | 29 Jul 2023
TCS Daily

In dealing with authoritarian governments, Robert McNamara's legacy as president of the World Bank has always been controversial. Mr. McNamara is back in the news as the theme of the TV series The Fog of War: Eleven Lessons From the Life of Robert S. McNamara. It is quite natural therefore, for people to think of him and his Vietnam policies as Secretary of Defense, rather than for his tenure at the World Bank from 1968 to 1981. But as a legacy, his work at the Bank is of more long term and more widespread significance.

To some, McNamara greatly enhanced the Bank's development role by expanding its mission to include the eradication of poverty, overseeing a six-fold increase in "development loans," instituting an environmental dimension to lending practices, and tripling the Bank's staff. To others, McNamara's most enduring stamp on the World Bank was his penchant for rewarding dictatorial regimes with generous funding.

Indeed, McNamara's example highlights a crucial dilemma: how to deal with oppressive dictatorship. This has always been a serious question, but it's one made even more vital by the threat of terrorism. Businesses, especially oil companies, are routinely criticized for "profiteering" in these countries. But if human rights is an issue worthy of corporate boycotts, shouldn't multilateral lending agencies that distribute taxpayer's money, such as the World Bank, also be required to consider good governance in their funding decisions? As the Bank turns 60 this year it is time to answer this question.

During McNamara's presidency, the World Bank funded dictators and repressive governments on nearly every continent. Oppressive regimes in Uruguay, the Philippines, Egypt, Zaire, Bangladesh, and Romania -- to name a few -- all received international support in the form of World Bank loans.

Since the end of McNamara's tenure, Bank policy has paid much more attention to encouraging democracy in recipient countries. However, despite a good deal of reformist rhetoric, it has made only limited progress since the days when Bank funds aided Ceausescu's efforts to transform wide swaths of land, replete with villages and prime farmland, into open-pit mines and imprison or kill all opposition. In fact, from a quick review of the countries presently receiving World Bank loans, it seems that the Bank still lends to dictators and democratically-elected leaders almost without discrimination. Of the $18.5bn loaned out last year by the Bank, recipients include Chad, China, Congo, Laos, Tajikistan, Uzbekistan and Yemen, amongst others that have bad or appalling human rights records. The pressure groups, Amnesty International and Human Rights Watch, as well as the United Nations, identify these countries as "failing" in numerous ways.

One could make the case that if all the democratic countries had all their projects funded first, then money could be allocated to the less democratic ones. But this is not plausible. Current World Bank head, James Wolfensohn, claims that another $50bn granted to the poorest countries of the world could easily be absorbed, so there are obviously projects he considers worthy of funding going begging while despots fill their boots. As this year's Nobel Peace Laureate, Shirin Ebadi, asked recently in the New York Times: Why doesn't the Bank channel the money to the democratically-elected governments instead of funding dictatorships? The Bank has yet to respond.

The Bank's generic claim is that people living under dictatorships would be worse off without the loans, since social and health programs would fail. This may be true, but it's a highly risky strategy. Surely supporting democratic regimes makes more sense, and is politically easier to defend. For example, development loans to democratic countries have a greater chance of actually reaching their intended recipients. Just last month, Senate Foreign Relations chairman Richard Lugar cited estimates that $26 billion of the $130 billion loaned out by the Bank since its inception in 1946 had been misused. Continued efforts by the Bank to ensure that its loans build infrastructure and productive capacity, not tanks and palatial villas, will surely be more successful in countries with at least some degree of transparency.

Without transparency more countries will become indebted to the Bank as dictators embezzle money. This leaves the Bank subject to pressure from debt-relief groups like Jubilee 2000. Generally, there should be little support for such pressure groups because they threaten to disrupt the availability of needed financing (from private as well as public sources) for sound governments and projects. Put simply, if people do not repay their loans now, why should anyone ever lend to them again? However, exceptions should be made, because the Bank should never have made some of the loans. It is a travesty that the poor people of the Congo are still repaying money stolen by their previous, despotic leader Mobuto Sese Seko.

We do not advocate massive World Bank loans to the current Congo Government, especially since that country may descend, once again, into Civil War. Its reforms are probably moving in the right direction, and should be rewarded with some small grants, but it is not doing enough to warrant vast loans that could easily be stolen and so start the whole sorry cycle again. Indeed, the Bank should probably move away from loans for development and instead provide much smaller and targeted development grants, says Harvard Professor Kenneth Rogoff -- we agree.

Lending large amounts of money to tyrants reinforces their bad behavior and encourages pressure groups demanding debt reduction. This is the unfortunate legacy of Mr. McNamara. Before we can dictate to others what to do with their money, taxpayers in developed nations need to take some stewardship with our own. It's time to heavily reduce the lending power of the Bank.

Dr Roger Bate is a visiting fellow and Benjamin Schwab a researcher at the American Enterprise Institute.