World Bank’s Benign Image Fading Fast : Shift in Policy Is Pushing Poor Nations to Revamp Economies

In the tiny West African nation of Togo, fundamental economic change is under way. The country’s farmers, who have long suffered from low, government-controlled prices for their cotton, cocoa and coffee, are beginning to receive market prices for their crops. Togo’s inefficient, state-run transport, milk and steel companies are being transferred to private hands.

The goal of the policy shift is to improve living standards for Togo’s impoverished 2.9 million people and to reduce its crippling debt to foreign lenders. The change, as much political as economic, is being financed by loans from the World Bank, including $27.8 million in 1985.

The Togo program represents a new type of loan and a new role for the World Bank, which itself is going through a transformation as it prepares for a change in leadership later this year when A. W. Clausen leaves after five frustrating years as president.

The 62-year-old former Bank of America chief executive departs somewhat embittered because the Reagan Administration, which rebuffed Clausen’s efforts to expand the bank’s influence, has now come to accept the vision of the bank he has long championed.

For 40 years, the 149-member-nation international lending agency has devoted itself to rebuilding countries devastated by war and natural disasters and financing development projects such as roads, dams and ports. The only conditions for World Bank loans were that the projects be worthy and the money be repaid.

Today, however, the World Bank increasingly is attaching strings to its loans, demanding that borrower nations such as Togo restructure their economies to reduce public deficits and encourage private enterprise. The World Bank began such “policy-based” lending in 1980 on the premise that it could spur growth and democracy with financial incentives. Last year, 11% of its $11.3 billion in new loan commitments carried such conditions and the share is growing yearly.

The change is welcomed by the Reagan Administration as an overdue shift from what it considers the bank’s “socialist” philosophy. Yet it threatens to shatter the bank’s carefully crafted benign image in the developing world, where it risks being seen as yet another enforcer of the industrial world’s economic imperialism.

Clausen recognizes the danger but insists that the bank must alter its approach or slide into irrelevance.

“As we move more into policy-based and adjustment lending, there is a possibility that we’ll be charged with interfering and meddling,” Clausen acknowledged in an interview in his Washington office. “That need not happen if we comport ourselves intelligently.

“Our role is to help countries sort out their economic and policy alternatives and assist them in putting in place policies that help them generate more growth. We’re helping them get rid of the incest and inefficiencies in their economies.”

And the best way to do that, Clausen the banker is fond of saying, is with cold cash.

“Money is what counts, not a handshake and a warm, friendly smile.”

Role Is Expanding

As Clausen winds down his presidency of the World Bank, the role of the institution is expanding.

The bank will be a pillar of the so-called Baker Plan for dealing with Third World debt, announced by Treasury Secretary James A. Baker III in October at the annual meeting of the World Bank and International Monetary Fund. After five years of only grudging support for the bank, the Administration now wants to increase its lending capacity and broaden its power in dictating the terms of its loans.

The plan calls for $29 billion in new loans to the Third World over the next three years: $9 billion from the World Bank and IMF and $20 billion from commercial banks. The loans will carry the conditions that the recipient nations adopt free-market economic policies, stem corruption and capital flight and encourage greater domestic savings and investment.

These are policies Clausen has advocated since he joined the World Bank. But he will not benefit from the policy shift nor will he be given credit for bringing it about.

“He (Clausen) was frustrated by the Reagan Adminstration’s attitude of being standoffish and doubtful early on,” said William R. Cline of the Institute for International Economics, a Washington research organization. “When it finally got religion and proposed the Baker plan, they decided that Clausen wasn’t the man that would be allowed to carry it out.”

Instead, the Administration let Clausen know that he would not be asked to stay when his term ends July 1.

Several Candidates

White House Chief of Staff Donald T. Regan tried to persuade Federal Reserve Board Chairman Paul A. Volcker to take the job but Volcker refused. A number of other candidates’ names have been floated, including Deputy Secretary of State John C. Whitehead, investment banker Richard Debs of the Wall Street firm of Morgan Stanley, Labor Secretary William E. Brock III, retired Citicorp Chairman Walter B. Wriston and J. William Middendorf II, U.S. ambassador to the European Economic Community.

The United States contributes about 20% of the World Bank’s funds and traditionally names its president.

Clausen looks back on his term with a mixture of gratitude for the privilege of serving and frustration with his inability to achieve his goal of increasing the bank’s funding and prestige.

President Jimmy Carter named Clausen to the World Bank post late in 1980 after the banker had spent 32 years with Bank of America, the last 11 as chief executive. He arrived in Washington at what proved an inauspicious time.

He assumed the World Bank presidency following the 13-year reign of Robert S. McNamara, the dynamic former auto executive and defense secretary. Under McNamara, the bank’s lending to the developing world increased elevenfold and the institution and its ever-growing staff were in the forefront of intellectual debate on the industrial world’s obligation to help poor nations and the best means to do so.

Great Policy Shift

The imperious, independent McNamara became chief spokesman for the developing world and oversaw the World Bank’s first great policy shift, away from reconstruction of war-ravaged countries to an ambitious effort to lift the developing world out of poverty.

When President Reagan took office in 1981, his key policy advisers were openly hostile to the World Bank and other multilateral development agencies, preferring to give aid directly to recipient nations for specific political, economic or military reasons.

Beryl Sprinkel, then-Treasury undersecretary and now Reagan’s chief economic adviser, publicly declared, shortly after Clausen’s term began, that he suspected that the World Bank was furthering world socialism by lending too generously to left-wing regimes. And former Budget Director David Stockman, in a widely leaked memo, suggested that the United States could save a few billion dollars by dropping out of the World Bank.

Then came a deep worldwide recession, exacerbated by high oil prices and soaring interest rates. Commercial bank lending to the Third World, which boomed in the 1970s, virtually dried up. By mid-1982, the inevitable payment crisis in heavily indebted nations exploded with Mexico’s default on billions of dollars of loans from private and public lenders.

“This was a tough time for the bank. At a time when the Third World was desperate for money, the bank couldn’t grow,” said Richard E. Feinberg, vice president of the Washington-based Overseas Development Council. “At the same time, the IMF came on like gangbusters and became much more influential. The World Bank ended up playing second fiddle.”

Lack of Charisma

Many observers blame the World Bank’s declining influence in this period on Clausen’s lack of charisma and his reluctance to fight the Administration for more funds and a more active role in the debt crisis.

“Clausen’s stewardship is viewed as somewhat bland. He hasn’t left a mark,” an executive of a major multinational bank said. “He’s seen as ‘competent,’ in the pejorative sense of the word. The blandness of Clausen is all the more apparent by contrast to McNamara.”

Clausen responds that he never viewed the World Bank post as a soapbox and properly concentrated his efforts on tightening the management of the institution. Staff growth has leveled off, information systems have been modernized, accountability has been restored and the bank’s finances have never been stronger, he argues.

The bank posted healthy profits in each of Clausen’s years as president, reaching a record $1.13 billion last year. The bank’s credit rating remains Triple-A while the ratings of even the best-run commercial banks have slipped. Because of its financial strength, the bank has been able to lower interest rates on its loans to troubled borrowers.

Yet in the major policy crises that confronted the international financial community during his tenure, Clausen was the invisible man.

“Clearly I’ve been disappointed in the amount of support we have gotten on some of the critical issues that the bank is best suited to address,” he said.

Associates say the frustrations of the World Bank job came as something of a surprise to Clausen after his years at Bank of America, which he helped build into the nation’s biggest bank. He has had to learn to operate in a more collegial way, accommodating the varying interests of the bank’s staff and the 149 constituent countries. He cannot dismiss--or dictate to--subordinates.

Hefty Pay Cut

He also had to adjust to a $650,000-a-year pay cut. The World Bank post pays a tax-free $120,000 in salary and $55,000 in expenses.

“I think he’s been getting rather a bum rap,” said a World Bank official who has worked closely with Clausen. “He came in at the worst time of any president. By and large, he has been a crisis manager of some considerable ability. One should judge his performance in that light, rather than against the go-go years of the McNamara era, when there was plenty of money around.

“What you hear is that the size of the problems here overwhelmed him. I say, show me someone who wouldn’t have been staggered by the problems faced by our member countries.”

As Clausen scans the huge lighted globe in his stately office, his gaze continually returns to sub-Saharan Africa, to such countries as Togo and Mauritius and Guinea-Bissau whose economies have been devastated by falling commodity prices, mismanagement and heavy foreign debt.

These countries’ problems are proportionally much greater than those of Mexico, Brazil and Argentina, which receive most of the world’s attention because of the sheer size of their foreign debts. Mexico, for example, will need an estimated $7 billion in 1986 just to meet interest payments. That is more than half of all expected World Bank lending this year.

Clausen noted that the World Bank is best suited to address the needs of the smaller, poorer countries, where the judicious application of relatively small amounts of aid can have dramatic effects.

As Clausen reviews his career at Bank of America and the World Bank, one senses that he views his current job as, in a way, rehabilitation for his previous life as a merchant banker. He expresses heartfelt concern for the financial problems of the countries whose debt grew in large measure from the aggressive Third World lending of Bank of America and its competitors. He acknowledges that Bank of America and the other commercial banks lent too much to the developing world.

He adds, however, that some countries borrowed more than they should have, thinking that the loans were shortcuts to economic development.

Task Half Completed

Clausen will leave the World Bank with the task he set for himself only half completed. He succeeded in streamlining the World Bank’s operations, speeding up its lending channels and making the institution more responsive to its client states. The bank’s balance sheet is strong and its donor countries are preparing to commit new resources.

A much larger job remains undone, however. Nearly 100 nations around the world are in dire need of financial help and economic guidance. The World Bank increasingly will be called on to deliver them.

“The World Bank can play an even more effective role in adjustment to create growth and wealth in these very difficult times,” Clausen said. “I’m very pleased the institution is getting this added support. The next president will have a strong position to step into.”

He added, almost wistfully, “There’s never a perfect time to leave.”