HISTORY MATTERS: ESTABLISHING THE WORLD BANK & IMF

February 21, 2011

The whole history of civilization is strewn with creeds and institutions which are invaluable at first, and deadly afterwards.                       Walter Bagehot (1826-1877)

The international framework for development assistance that continues with almost no real changes until today was officially agreed between July 1944 and October 1947. The first piece of that institutional architecture was agreement by forty-four countries to establish the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) during the Bretton Woods Conference in New Hampshire (July 1-22, 1944).1 The second piece was the agreement by fifty countries to establish the United Nations during the Conference on International Organization in San Francisco (April 25 – June 26, 1945) while the third piece was the agreement of twenty-three states to abide with the draft terms of a General Agreement on Tariffs and Trade (GATT) on October 30, 1947. All of those entities were established largely at the initiative of American and British intellectuals and political leaders for purposes substantially different than many of the missions pursued today by those organizations, including the World Trade Organization (WTO) that has since January 1, 1995 served as the organizational expression of the GATT. This post focuses on the establishment of the IMF and the IBRD. Future posts will focus on the establishment of development-oriented United Nations’ specialized agencies and the inauguration of the Marshall Plan.

Precursor Programs (1941-1943)

The primary precursors of today’s development assistance architecture were the Lend-Lease program established in 1941 and the United Nations Relief and Rehabilitation Administration (UNRRA) established in 1943. Both of these were established as temporary agencies with no expectation that they would be continued much beyond the end of World War II. Lend-Lease initially provided for the transfer of food, machinery, war supplies, and services to China and the countries of the British Commonwealth, although it was expanded almost immediately to the Soviet Union and the “Free French.” The Lend Lease Act authorized the American President to sell, transfer, lend, or lease such goods and services and to establish the terms for such transfers.  Repayment could be –

in kind or property, or any other direct or indirect benefit which the President deems satisfactory.

By the time of its official termination in August 1945, total Lend-Lease commitments exceeded $ 606.60 billion in constant 2010 dollars (all dollar amounts are presented in constant 2010 dollars throughout the remainder of this post).

When UNRRA was established In 1943, the United Nations as we know it today did not exist. Although President Franklin Roosevelt had used the term “United Nations” in 1941 to describe countries fighting against the “Axis,” the first official use of the term was on January 1, 1942, when twenty-six states signed the “Declaration by the United Nations” committing them not to enter into any separate peace with the Axis Powers.

Although the Lend-Lease program was established to meet immediate needs faced during the War, UNRRA’s mission was to provide assistance to areas liberated from German, Italian, and Japanese occupation.2 About $40 billion of emergency assistance was disbursed through UNRRA, including financing of food and medicine, the restoration of public services, the revitalization of agricultural and industrial production, and, ultimately, the return of approximately seven million displaced persons to their home countries. By the time its functions were transferred to other newer United Nation’s specialized agencies in Europe (1947) and Asia (1949), fifty-two countries had participated in UNRRA’s programs. Of the total amount disbursed, approximately sixty-two percent went to the United Kingdom followed by the Soviet Union with about twenty-two percent. China, Czechoslovakia, Greece, Italy, Poland, the Ukrainian SSR, and Yugoslavia were the other primary recipients.

The most interesting aspect of the UNRRA experience was that it served as an organizational and financial model for future multi-lateral assistance agencies. More than half of UNRRA’s budget was financed by the United States, but the remainder was provided by other member-countries through financial subscriptions equivalent to two percent of their 1943 gross national incomes (GNI). As will be discussed in a future blog post with respect to the World Bank, financing through member-country subscriptions has been the primary way most international organizations have been financed since the end of World War II.

The Foundation of The Current System

The period between 1944 and 1947 differed from the present in two significant respects. First, in 1945 the international political status of the world’s peoples remained largely divided among those in independent and dependent territories. Second, as already discussed in The More Things Change: Development’s Colonial Heritage posted January 10, 2011, the economic landscape in 1945 was littered with post-World War II wreckage over which the United States dominated as a largely unscathed economic colossus, holding approximately ninety percent of the entire non-communist world’s official gold reserves and producing at least seventy percent of the entire non-communist world’s GNI. 

It was in that context that delegations representing almost all of the Allied anti-Axis countries convened at Bretton Woods to consider the establishment of the IMF and IBRD to provide short-term loans to sovereign-state governments when necessary to meet immediate international debt repayments and long-term investment capital to sovereign-state governments. Seventeen months later, on December 27, 1945, both organizations were officially established.3

Similarities

Although the original objectives and membership of the IMF and World Bank have changed dramatically since 1945, the international balance of power existing at the end of World War II continues to be reflected in the Articles of Agreement of both organizations. In addition to both organizations being headquartered in Washington, D.C., members of both organizations adhere to the original tacit agreement that the President of the World Bank is always an American nominated by the United States’ Government and that the Managing Director of the IMF is always a European. Further, the United States and its current allies together still retain a majority of weighted voting rights within the IMF and World Bank.

The IMF and World Bank are organized and managed in similar ways. They are both membership organizations, the members of which are sovereign-states represented by their respective governments. Only member-states may serve as guarantors of any financing received by their governments or other entities within their jurisdiction. Both organizations assign weighted voting shares to their indivudal sovereign-state members proportional to the number of “Quotas (IMF) or “Shares” (World Bank) assigned to them. The IMF and World Bank are each governed separately by their own Board of Governors consisting of senior serving officials of member-state governments. These Boards normally meet only once a year during joint IMF/World Bank Annual Meetings. The on-going governance of both organizations is delegated to resident Executive Directors, a few of whom are appointed by countries that have sufficient voting rights to cast their own whole vote, one or two others who choose to be represented full-time even though they have only a partial vote, and the remainder elected by a combination of member-states that together have the equivalent of approximately one vote.

Differences

Despite similarities, there are substantial differences between the IMF’s and IBRD’s purposes, organizational arrangements, and operational procedures. 

International Monetary Fund

As clearly laid out in the IMF’s Articles of Agreement,” its purpose is not “development;” nor is that its main purpose today. Rather, it was established to facilitate the balanced growth of international trade through the maintenance of market-determined currency exchange rates and balance of payments among trading partners. Its primary mechanism for achieving those objectives was the provision of short-term loans to governments in countries not able to pay their immediate foreign currency denominated international debts. Why was this viewed as important during 1944 and 1945? 

By 1944, the United Kingdom and the Soviet Union alone had already accumulated a Lend-Lease debt of $384.7 billion and $136.5 billion respectively. More than $86.9 billion had been borrowed by China, France, and other countries of the British Commonwealth under Lend Lease and another fifty-two countries had borrowed an additional $49.6 billion from UNRRA. World War II had devastated European and Soviet economies. Their own currencies were worth even less in 1944 than they had been in 1939. By normal market standards, those currencies had no real value internationally at all. So how could the victorious European countries be reasonably expected to get their hands on sufficient amounts of United States’ dollars to pay back both current and projected debt while also financing imports of both capital and consumption goods? Institutionalizing an organizational mechanism to meet those requirements was the immediate issue that the IMF was expected to address when created in 1945.

But the founding members of the IMF were concerned not only with that immediate short-term problem. They also recognized that maintaining balance within the global international trading system over the longer term could not reasonably be expected under the conditions prevailing at the end of World War II. The need to smooth-out short-term international currency shortfalls and maintain stable international exchange rates was perpetual. Responsibility for responding to those longer range issues was also assigned to the IMF.

Powers of the IMF. Most founding members of the IMF and World Bank viewed the former as more important for international peace and stability than the latter. The IMF’s assigned responsibility to “oversee the international monetary system” was extremely comprehensive. As outlined in the IMF’s Articles of Agreement

In order to fulfill its functions.., the Fund shall exercise firm surveillance over the exchange rate policies of members…. Each member shall provide the Fund with the information necessary for such surveillance…. The Fund may determinethat international economic conditions permit the introduction of a widespread system of [currency] exchange arrangements based on stable but adjustable par values [Article IV]…. A proposed par value shall not take effectif the Fund objects to it…[Schedule C]. 

The primary mechanism for surveillance are “Article IV Consultations” normally conducted every year with each member-state to assess whether or not –

a country’s economic developments and policies are consistent with the achievement of sustainable growth and domestic and external stability.

The original intention was that Article IV Consultations would focus exclusively on a country’s –

exchange rate, fiscal, and monetary policies; its balance of payments and external debt developments; the influence of its policies on the country’s external accounts; the international and regional implications of those policies.

However, such consultations have been expanded to include –

all policies that significantly affect the macroeconomic performance of a country, which, depending upon circumstances, may include labor and environmental policies and governance…; [as well as] capital account and financial and banking sector issues… [and] the identification of potential [international financial] vulnerabilities

Penalties made available to the IMF to punish member-states that pursue exchange rate policies not approved by the Fund are potentially draconian — equivalent to being “cast-out” into the international financial wilderness. Article XXVI provides for a three-step sequence of actions: (1) suspension from access to loans; (2) suspension of voting rights; and (3) expulsion from the IMF itself. And again, if expelled, what then? Article XI is clear enough –

Each member undertakes (i) not to engage inany transactions with a non-member or with persons in a non-member’s territories which would be contrary to the provisions of this Agreement or the purposes of the Fund; (ii) not to cooperate with a non-member or with persons in a non-member’s territories in practices which would be contrary to the provisions of this Agreement or the purposes of the Fund; and (iii) to cooperate with the Fund with a view to the application in its territories of appropriate measures to prevent transactions with non-members or with persons in their territories which would be contrary to the provisions of this Agreement or the purposes of the Fund.

According to Chittharanjan Felix Amerasinghe, the expulsion power has only been used once against Czechoslovakia in 1954 for failing to provide data requested by the Fund. That action followed Czechoslovakia’s explusion from the World Bank for non-payment of its authorized share capital that same year. And although attempts to expel Zimbabwe have been under consideration for years, no action has yet been taken. But when those powers were first authorized for the IMF in 1944, the objective was to ensure compliance of members in future — it had no history at that point. And it is clear that the objective of establishing and maintaining stable exchange rates linked to the needs of international trade were of sufficient importance to the founding members to provide for those previously unheard of powers by the IMF; powers that it still has today. And it is likely that Article XI reinforced the “Iron Curtain” separating the United States and its allies from the Soviet Union and its allies into not only different political camps but into distinct financial and economic camps as well. Indeed, it is likely that the Soviet Union did not become a member of the World Bank in 1945 because it was not willing to accept the IMF’s powers to interfere in its internal monetary affairs. And membership in the IMF is a pre-condition for membership in IBRD even though membership in the Bank is not required to join the IMF. Finally, it is important to keep in mind that the governments willing to accept the extensive powers of the IMF in 1945 were substantially more like-minded than is the case today. Almost all of those countries shared similar political cultures and basic premises about their national interests.

Financing the IMF. The IMF’s primary source of financing are “Quotas;” which consist of the capital subscriptions paid by each member-state revenues generated from the investment or use of Quotas. A member-state must pay its entire subscription in full; a major difference from the way the IBRD is financed. At the time the IMF was created, the requirement was that twenty-five percent of the subscription was payable in gold pegged to the United States dollar with the option of paying the remainder in the member-state’s own currency; although the requirement for payment in gold was abandoned in 1978.4 

Poverty Reduction.  Given those international trade and monetary objectives, why is the way the IMF was organized in 1945 important for the way attempts to reduce poverty within developing countries is implemented today?  There are at least two important reasons. First, the IMF was provided with substantial powers to intervene in the internal decision-making of its sovereign member-states – even though at that time those powers were limited essentially to currency exchange rate policies. Second, those powers were carried forward when the IMF expanded its limited original role to the fundamental reform of domestic economies (late 1970s) and, more recently, policies directed to the reduction of poverty (late 1990s).

World Bank

When established, the IBRD was viewed as having a relatively limited mandate. For economic and financial matters, Keynes clearly viewed the IMF as substantially more important; one of the reasons why membership in the fund is a pre-requisite for membership in the bank but not the other way round. It certainly was not the dominant organization in the development assistance arena; indeed there was no such thing in 1944 or during the years immediately following World War II. And no one envisaged anything like today’s “World Bank Group” consisting of five distinct organizations: (1) IBRD; (2) International Finance Corporation (IFC,1956); (3) International Development Association (IDA; 1960); (4) International Centre for the Settlement of Investment Disputes (ICSID, 1966); and (5) Multilateral Investment Guarantee Agency (MIGA, 1988). Each of those five organizations are governed according to their own Articles of Agreement (IBRD, IFC, and IDA) or Conventions ICSID and MIGA). Indeed, the designation “World Bank” has never been formally adopted; instead it is the result of evolving usage and is most often limited to the IBRD plus IDA.   

With specific reference to IBRD’s Articles of Agreement, its purpose is to —

 (i)   …assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes….

(ii)   …promote private foreign investment by means of guarantees or participations in loans and other investmentsand…supplement private investment…for productive purposes out of its own capital, funds raised by it and…other resources. 

(iii) …encourage[e] international investment in the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories. 

(iv) …arrange…loans made or guaranteed by it…so that the more useful and urgent projects, large and small alike, will be dealt with first. 

(v) …conduct its operations with due regard to the effect of international investment on business conditions in the territories of members assist in bringing about a smooth transition from a wartime to a peacetime economy. 

It is clear that almost all of the early advocates of the proposed international investment bank viewed reconstruction – the “R” in IBRD — as the “more useful and urgent” and, therefore, that it should “be dealt with first. Development was clearly intended to take a back seat during the years immediately following World War II, much to the dismay of the Latin American counties. But it is important to remember, as was discussed in The More Things Change: Development’s Colonial Heritage, that “development” was understood to mean improvement of the infrastructure required for efficient extraction of raw materials rather than today’s emphasis on macro-economic growth and the reduction of poverty.

Powers of the World Bank.  The IBRD was invested with nothing like the expansive powers assigned to the IMF. IBRD’s Articles include no provisions analogous to the IMF’s powers to “oversee the international monetary system or to “exercise firm surveillance” over the economic policies or investment decisions of its member-states. Nor is it suggested anywhere that economic policy or investment decisions not financed by the Bank are subject to approval by it. Nor are there any Articles specifying the “General Obligations of Members,” restrictions on the relations between member and non-member states, or compulsory withdrawal (with the exception that if a member-state of the World Bank ceases to be a member of the IMF, its membership in the Bank automatically ceases after three months). Although the Bank may “suspend” a member, it does not have the IMF’s power to expel. Thus, a member of the Bank may be expelled only if that action is taken by the IMF. And finally, while the IMF was clearly empowered to interfere in the financial and economic policies of its member-states, the Bank was explicitly prohibited from doing so:

The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned.

Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially in order to achieve the purposes stated in Article I” [Article IV]. 

The closest the IBRD’s Articles come to providing authority to intervene in the domestic affairs of member states is the provision that –

the Bank shall make arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency and without regard to political or other non-economic influences or considerations [Article III]. 

That provision to “make arrangements to ensure…” has been interpreted to allow continuing “supervision” of activities financed by its loans. And that has ultimately served as an effective instrument for the World Bank’s direct involvement in the economic policy and investment decisions of its member-states. 

Financing IBRD.  The primary difference between the manner in which the IMF and IBRD are financed is that the Bank’s member-states are not required to pay-in the full amount of their capital subscriptions. Rather, the overwhelming bulk of IBRD’s resources come from its borrowing in private sector financial markets, the collateral for which are the guarantees represented by the unpaid capital subscriptions of its member-states.

Summary Conclusion

The first IMF and IBRD loans were made to France one day apart on May 8th and May 9th 1947 respectively. The transition by IBRD from a primary focus on “reconstruction” to “development” and subsequent redefinition of “development” is discussed in several forthcoming blog posts. Suffice it to state here that today’s world is substantially different than it was when the World War II allies gave birth to the IMF and IBRD in 1944. Clearly, the Articles of Agreement of both organizations have been sufficiently flexible to allow for the many adaptations deemed necessary over the last half-century. But the core institutional architecture created those many years ago still dominates the process through which international development assistance is provided today.     

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NOTE:

[1]  The IMF’s Articles of Agreement have been amended only four times since first adopted at the United Nations Monetary and Financial Conference (Bretton Woods, New Hampshire) on July 22, 1944 while IBRD’s Articles, also adopted on the same date at the same Conference, have been amended only twice. The IMF’s amendments are: (1) effective July 28, 1969 to introduce Special Drawing Rights (SDRs) as the Fund’s unit of account of the Fund; (2) effective April 1, 1978 that completely rewrote Article IV to promote a “stable system of exchange rates” through “firm surveillance” by the IMF over each member’s exchange rate policies; (3) effective November 11, 1992  to suspension of voting and other membership rights for members that do not fulfill financial obligations to IMF; and (4) effective August 10, 2009 to expand the Investment Authority of the International Monetary Fund to allow all members to receive an equitable share of cumulative SDR allocations. See IMF Chronology: IMF Evolves in Response to Over Half a Century Of Challenge and Change available at http://www.imf.org/external/pubs/ft/survey/sup0998/14.htm and, for the first two amendments, James Boughton, Silent Revolution: The International Monetary Fund 1979–1989 (Washington, DC: The International Monetary Fund, 2001) available at http://www.imf.org/external/pubs/ft/history/2001/front.pdf. IBRD’s amendments are: (1) effective December 17, 1965 to allow loans from IBRD to the IFC in support of IFC’s own lending program loans and (2) effective February 16, 1989 to change the percentage of votes required to settle a disagreement between the Bank and any of its members from 85% to 80. For 1965 amendment to Article IV, see http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20049603~pagePK:43912~menuPK:58863~piPK:36602,00.html and for 1989 amendment to Article IX  http://go.worldbank.org/XKTZCBVRE0

[2]  George Woodbridge et al, UNRRA: The History of the United Nations Relief and Rehabilitation Administration, 3 volumes (New York: Columbia University Press, 1950).

[3]  The requirements for the official establishment of the two organizations were different. In the case of the IMF, 80% of Quotas assigned to the initial group of forty-five countries expected to join were required to be subscribed (including an 18% share to the Soviet Union that, in the event, did not join). That was not expected to be a problem since the Quotas assigned to the United States and United Kingdom alone equaled 58% of the total required (39% and 18.5% respectively). For IBRD, the signature of countries holding only 65% of assigned Shares was required. And again, the United States and United Kingdom alone were together assigned 49% of those required shares.

[4]  See Tamir Agmon and Robert Hawkins (eds), The Future of the International Monetary System (Lexington, Kentucky: Lexington Books, 1984) and Robert Hormats, Reforming the International Monetary System: From Roosevelt to Reagan (New York: Foreign Policy Association, 1987).

Keywords:  Allies, Axis, Bretton Woods Conference, British Commonwealth, China, Conference on International Organization, Czechoslovakia, Declaration by the United Nations, development, France, Franklin Roosevelt, Free French, GATT, General Agreement on Tariffs and Trade, Germany, Greece, IBRD, ICSID, IDA, IFC, IMF, IMF Quotas, International Bank for Reconstruction and Development, International Centre for the Settlement of Investment Disputes, International Development Association, International Finance Corporation, International Monetary Fund, Italy, Japan, Lend-Lease, Marshall Plan, MIGA, Multilateral Investment Guarantee Agency, Poland, reconstruction, San Francisco Conference, Second World War, sovereign-states, Soviet Union, Ukrainian SSR, United Kingdom, United Nations, United Nations Relief and Rehabilitation Administration, UNRRA, United States, USSR, World Bank, World Bank Shares, World Trade Organization, World War II, WTO, Yugoslavia.


FROM COLONIAL ADMINISTRATION TO DEVELOPMENT FINANCE

February 15, 2011

Insanity is doing the same thing over and over and expecting different results.                               Albert Einstein (1879-1955)

Papua New Guinea: Where are the Americans? (A Personal Reminiscence)1

It was sometime in 1980 and I was making my first trip to Papua New Guinea (“Papuaniugini” or PNG), a country that only five years before had achieved independent sovereign-state status from Australia. My purpose was to scout marketing opportunities for my employer, an American consulting firm providing technical assistance services primarily to the United States Agency for International Development (USAID). It was my hope that a former Ph.D. student of mine teaching political science at the University of Papua New Guinea would introduce me to key PNG Government decision-makers responsible for designing and implementing decentralized rural development efforts.

Up to this time, my career had been largely limited to service in or on behalf of USAID and I was struck by the absence of a USAID mission in PNG. Instead, the Australians completely dominated international development assistance there. As I subsequently learned, Australia’s overwhelming dominance in post-independence PNG followed a pattern set by European colonial powers following the transition of their colonies to sovereign-state independence beginning in the 1960s.

PNG’s entire territory had been administered as a single “integrated” colonial entity for only thirty years before independence as different regions were colonized at different times by different colonial powers. In 1883, the Australian territory of Queensland annexed southeastern New Guinea and that territory plus various offshore islands became a British Protectorate the following year. That same year Germany annexed northeastern New Guinea and various other off-shore islands. In 1906, the United Kingdom transferred colonial responsibility to Australia for the southeastern section. In 1914, Australia invaded and occupied the northeastern section administered by its World War I enemy Germany. Australian administrative responsibility for those segments of today’s PNG was affirmed by the League of Nations in 1920. Japan invaded and occupied most of New Guinea and several of the outer islands in 1942, but Allied forces reoccupied those territories during the waning years of World War II, Australia’s jurisdiction was re-established, and the United Nations reaffirmed its authority in 1947. Two years later the two Territories of Papua and New Guinea were merged administratively, followed by self-governing status as the single entity of Papua New Guinea in 1973. And full independent sovereign-state status was achieved only two years later.2 Indeed, Australia established the Australian Development Assistance Agency (ADAA) in 1974, the first of three predecessors to today’s Australian Agency for International Development (AusAID),3 in anticipation of PNG’s scheduled independence the following year.

Australia’s initial focus on PNG was emblematic of the priority given to former colonies by the British, French, and Belgians before them. Thus, despite a more than five-fold increase of total Australian foreign aid worldwide between 1975 and 2003 and its role as the largest bi-lateral donor in Southeast Asia, PNG remained the primary beneficiary of Australian aid until the early 1990s. Indeed, PNG accounted for a third of all AusAID assistance worldwide between 1995 and 1999 and a significant sixteen percent as recently as 2003. And although PNG’s share of Australia’s expanding bi-lateral aid budget has decreased significantly, the real value has remained fairly constant and still accounted for eighty-five percent of total bi-lateral aid received by that country as recently as 2003.4  Even today, USAID’s assistance to PNG is limited to assisting that Government to —

improve…the capacity, quality, and effectiveness of programs…[to] prevent.., care, support, and treat…at-risk populations and people living with HIV/AIDS

plus access of that country to a regional Responsible Asia Forestry and Trade (RAFT) program.5   

Overview: Distribution of Bi-Lateral Aid

With sixteen bi-lateral development assistance agencies each providing $1 billion or more during 2004,6 it is easy to forget that only a very small number of development assistance agencies existed before January 1, 1960. At the beginning of that decolonization decade, only four multi-purpose multi-lateral agencies had been established7 while the United States was the only country with an established bi-lateral aid agency.8 That changed dramatically after the 1960s as former colonial powers, Japan, and the Scandinavian countries also established significant aid programs. But among those various bi-lateral aid programs, those of the most significant former colonial powers were marked by the connections between them and their respective dependent territories. Perhaps more significantly, as late as 2004 a full twenty-three countries received more than a third of their bi-lateral official development assistance (ODA) from the country that had previously exercised sovereign authority in their territories and, of that number, thirteen had received more than half from such sources.9 Although the United Kingdom and France accounted for fifty-nine percent of all dependent territories between 1949-60, the transition from colonial administration to bi-lateral aid by Belgium, The Netherlands, and Portugal is also instructive.

United Kingdom

The United Kingdom was clearly the “big elephant” among colonial powers. Indeed, more than a quarter (28%) of today’s United Nations’ member-states were at one time or another British colonies or protectorates, accounting for a third of all colonies world-wide.10 Included among those former dependencies were some of the largest: India, Bangladesh, Nigeria, and Pakistan. The transition from that vast colonial empire to today’s Commonwealth of Nations began in 1867 when Canada was the first colony to achieve self-governing “Dominion” status. But it was another thirty-four years before Australia too achieved that status in 1901; followed by New Zealand (1907), South Africa (1910) and the Irish Free State (1922). The British Commonwealth of Nations was established as an association of autonomous Dominions “united by common allegiance to the Crown” by the Statute of Westminster in 1931.11 But as discussed in “The More Things Change: Development’s Colonial Heritage” (posted January 10, 2011), the British were not committed to granting independence during the years immediately following the end of that war. Instead, they established the Colonial Development Corporation in 1948 to finance projects for “developing resources of colonial territories.”12

But by the 1960s half of all British colonies existing at the end of World War II (34) gained their independence; requiring a transition from former colonial to post-colonial development policies and organizations.

Responding to the Government’s assertion in a 1960 White Paper that:

the best way to lift poorer nations out of poverty is through economic development…,

a Department of Technical Cooperation was established in 1961 –

to deal with the technical side of the aid programme…. [by] bring[ing] together the expertise on colonial development previously spread across several government departments [emphasis added].13

Two years later, the Colonial Development Corporation was transformed into the Commonwealth Development Corporation (thus retaining the same initials)14 and the functions of the Colonial Office were split between the Ministry of External Affairs and an entirely new Ministry of Overseas Development (ODM) in 1964.15

But whatever the sequential reorganizations of the United Kingdom’s international development program and the claim One year later, the Government issued its first post-colonial White Paper on “development” asserting that it had a – 

moral duty for development and development is in the nation’s long-term interest,16

But as argued by a senior staff of the United Kingdom’s Department for International Development (DFID), the policy set forth in that White Paper: 

did not make an entirely clean break with the past…. Not only were many of the ODM staff former colonial civil servants, the Overseas Development and Service Act was perceived and drafted as the latest in a long line of Colonial Development and Welfare Acts…. Right up to the present time, a prevailing self-image of ODA has been a Whitehall Department with special skills and responsibilities connected with working overseas to promote the development of former colonies or the welfare of their people [emphasis added].17

The transfer of many Colonial Office staff from both headquarters and the colonies to the new Ministry of Overseas Development in 1964 reinforced that evolutionary approach to relations with former colonies. Indeed, a former Governor of Colonial Kenya served as Chairman of the Colonial Development Corporation as it was transformed into the Commonwealth Development Corporation. And although it is not possible to precisely determine the exact numbers or percentages, anecdotal evidence suggests that the bi-lateral aid agencies subsequently established by Australia, France, Belgium, and The Netherlands were also largely staffed by former colonial administration officials. The United Kingdom’s direct bi-lateral aid was also heavily skewed toward former British dependencies, accounting for more than eighty percent of the United Kingdom’s total world-wide bi-lateral aid between 1965 and 1984. Former British colonies still received more than sixty percent of British aid throughout the 1990s. Similar patterns hold for France and Belgium and, to a lesser extent, The Netherlands and Portugal.

France 

France first transitioned from its policy of imposing self-financing on its colonies to a new policy of providing “development” investment by establishing an Investment Fund for Economic and Social Development (FIDES) in 1946. The establishment of FIDES was a dramatic shift from France’s pre-World War II colonial policies.18 Nonetheless, FIDES’ objective was still premised on the continuation of the French Empire. However, with French colonies beginning to achieve independence in 1960, FIDES was replaced in 1963 by a Ministry of Cooperation with responsibility for providing grant assistance to Africa and a Department of Cooperation to provide concessional credits to selected developing countries worldwide. But even more important was the establishment of the African Financial Community (the “Franc Zone” or “CFA”) on December 26, 1945 only months after the end of World War II.

The CFA manifests itself in both currency19 and organizational forms. Organizationally, it consists of seven former colonies in the West African Economic and Monetary Union (WAEMU) and another six former French colonies plus the former Spanish colony of Equatorial Guinea in the Central Africa Economic and Monetary Community (CEMAC); each of which share a Central Bank. France was represented directly in both Central Banks and guaranteed a fixed exchange rate between the CFA and the French Franc until the mid-1990s. That meant that decisions to devalue the CFA required the agreement of France; an issue that became a source of tension between France and both the World Bank and IMF during the 1980s and early 1990s. Nevertheless, following the major devaluation of the CFA on January 12, 1994, France’s role shifted to ensuring unlimited convertibility of the CFA pegged, since January 1, 1999, to the Euro. In exchange, the CFA central banks are required to maintain at least sixty-five percent of their foreign exchange reserves in operating accounts within the French Treasury.20

The distribution of post-independence French bi-lateral aid reflects its attempt to preserve its pre-eminent role as the primary source of international development assistance to its former colonies; especially in Africa.21 French Government ministers did not hesitant to remind World Bank managers and staff that the countries of the CFA Franc Zone were “an important dossier” of France.22 The importance of that commitment was clearly demonstrated when France effectively assumed responsibility for financing the re-payment of the CFA’s member-countries’ debt to the World Bank, IMF, and other multilateral organizations as their economies declined during the 1980s23 and the fact that more than sixty percent of France’s world-wide bi-lateral assistance was provided to former French dependencies between 1965 and 1999. The share received by the thirteen former French colonies of the CFA Zone, representing fifty-four percent of France’s former colonies, received sixty-three percent. But more importantly, thirteen of the fourteen CFA Zone countries received more than thirty percent of their bi-lateral financial assistance from France; and eight of them received more than fifty percent. Only six of France’s former dependencies (25%) received less than thirty percent of their total bi-lateral financing from France between 1960 and 1999 and, of those, Cambodia, Laos, and Viet Nam (50%) had been “inherited” by the United States – at least until 1975 followed by the early 1990s by the World Bank.

Belgium

All three of Belgium’s former colonies are located in Africa and achieved independence between 1960 and 1962. Belgian aid has also conformed to the pattern established by the United Kingdom and France. During the period from 1960 to 1994, Belgian aid to its three former colonies averaged forty percent of Belgium’s worldwide total. More important, between 1960 and 1974, Belgium accounted for sixty-three percent of all bi-lateral financing received by Rwanda and for sixty-six and fifty-nine percent received by the former Zaire and Burundi respectively through 1979. However, it is also important to note that from 1995 to 1999, the total amount of Belgium’s worldwide bi-lateral assistance directed to its three former colonies dropped to only ten percent.

The Netherlands

Only two Dutch colonies have achieved independent sovereign-states status; Indonesia in 1949 and Suriname in 1975. Indonesia incorporated Western New Guinea in 1969. Most of the remaining Dutch overseas dependencies are small islands in the Caribbean and have the legal status of internal Departments of the Netherlands itself. The pattern of Dutch bi-lateral assistance to Suriname and Indonesia both conforms to and contradicts the British, French, and Belgian pattern summarized above. The Netherlands never accounted for more than fifteen percent of total bilateral assistance to Indonesia and dropped to five percent or less from 1965 to 1969 and again from 1990 to 1999. However, the pattern of Dutch assistance to Suriname conforms to the more usual pattern; as that country has relied almost exclusively on The Netherlands for bi-lateral aid since independence in 1975. The Dutch share of assistance to Suriname ranged between eighty-six and ninety-eight percent through 1999. But with the exception of the period prior to 1965 and again from 1970 to 1974, less than twenty percent of total Dutch bi-lateral aid has been allocated to its two former colonies. That low share of total Dutch aid is due primarily to that country’s substantially increased global aid budget between the early 1960s through the 1990s; from the equivalent of $250 million to $24 billion in constant 2010 dollars.

Portugal

Portugal emerged as a powerful colonial power during the fifteenth century; maintaining that position for almost 300 years until defeated in a series of wars with the Dutch, British, and French. By the middle of the twentieth century, Portugal retained colonial authority in only seven overseas territories. Among those territories, Goa and Macau were peacefully transferred to India and China respectively. Indonesia invaded Timor-Leste and asserted its sovereignty over that Portuguese territory in 1975. Portugal never officially recognized that act, and Timor Leste was able to wrest its own sovereignty from the Indonesians in October 1999 during a period of political instability in Jakarta. The other five former Portuguese territories — Angola, Cape Verde, Guinea-Bissau, Mozambique, and Sao Tome and Principe — all achieved independence during 1974 and 1975 when Portugal abruptly withdrew in response to its own domestic revolution at home. That revolution led to Portugal’s withdrawal from the OECD/DAC in 1974, requesting that it be included in the list of DAC eligible recipient countries. Portugal rejoined the OECD/DAC in 1991 and, therefore, data on the allocation of its bi-lateral aid is only available from that date forward. The pattern of its assistance conforms to that of The United Kingdom, France, and Belgium. Portuguese assistance to its five former independent territories during the last decade accounted for a full sixty-one percent of its total worldwide bi-lateral assistance. More important, Portugal alone accounted for more than half of the bi-lateral aid received by Timor Leste and Sao Tome and Principe during the 1990s, while Guinea-Bissau and Cape Verde depended on Portugal for thirty and twenty-five percent of such financing respectively. Nonetheless, it now appears likely that Brazil will exceed Portugal’s level of aid to Angola, Cape Verde, Mozambique, and Sao Tome and Principe, suggesting that some aid flows are determined by shared language.

The United States of America

The United States is not easily classified with respect to the discussion here.24 Technically, it has exercised colonial authority over only eight territories not located in North America: Cuba, Guam, Hawaii, the Marshall Islands, Palau, The Philippines, Puerto Rico, and American Samoa.25 However, fifty percent of those territories were administered for fifty years or less while Hawaii was incorporated as the 50th State in 1959. Today, only Guam (1898), Puerto Rico (1898), American Samoa (1899) and the United States Virgin Islands (1917) remain as American dependencies. However, the United States also intermittently exercised administrative responsibilities in Mexico and several Central American and Caribbean states during the nineteenth and twentieth centuries and more recently in Iraq from mid-2003 through much of 2004. Notwithstanding such engagements, neither formal nor de facto “dependencies” have received significant amounts of United State’s bi-lateral assistance; although nine of them received more than thirty percent of their total bi-lateral assistance from the United States in 2004.26 Finally, given American foreign policy objectives during the post-WWII Cold War period, it has exercised an important role in support of its political and economic objectives in such countries as Korea, Viet Nam, the Middle East, The Persian Gulf, and The Balkans.  That expansive involvement in the global political and economic arena, combined with an increasingly reduced foreign aid budget, has resulted in the absence of any priority extended to its own former colonies.

Summary Conclusion

The notion that aid flows are determined by the need of potential recipients, the quality of project or program proposals, and adherence to sound economic policies without political considerations is belied by the patterns of bi-lateral development assistance summarized above. The pattern of United States’ bi-lateral aid is not influenced by its colonial legacy to the extent of the United Kingdom, France, and Belgium. However, its status as a superpower and current focus on aggressively defending against international terrorist threats strongly influences the allocation of its development assistance. This will be discussed further in the forthcoming blog post “From ‘Reconstruction’ to ‘Development’” available at www.internationaldevelopmentshould.com no later than March 8, 2011.

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NOTE:

  [1]    All “Personal Reminiscence” posts are stories told about one or more of my own personal experiences as I remember it. They are true to the best of my ability to recollect them and reflect my view of how they illustrate “lessons learned” from that experience even if one or another aspect of the story as told might not be completely correct in each and every detail. Further, I have done my best to disguise the identity of other persons referred to in these stories, including not using their true names unless references to their presence at that time or circumstance has already been published by others in other media.

  [2]   See Diane Conyers and R. Westcott, Regionalism in Papua New Guinea, Administration for Development 13 (1979) and Roger Berry and Richard Jackson, Interprovincial Inequalities and Decentralization in Papua New Guinea, Third World Planning Review 3 (1981).

  [3]    The Australian Government officially traces its bi-lateral aid program back to resources transferred to the various regions of PNG beginning in 1946, although those transfers were managed by several different Australian Government departments. In any event, the Australian Development Assistance Agency (ADAA) was followed by the Australian Development Assistance Bureau (ADAB) within the Ministry of Foreign Affairs two years later, the Australian International Development Assistance Bureau (AIDAB) in 1987, and finally AusAID in 1995. See Australian Agency for International Development, Brief History of AusAid available at http://www.ausaid.gov.au/about/history.cfm.

  [4]    The remaining 3.5% of development assistance to PNG during 1980 was provided by Germany, Japan, and The Netherlands. Statistics reported throughout this story for Australia’s direct bi-lateral development assistance to PNG and world-wide, as well as the data about aid received by PNG from Australia and all OECD sources were calculated by Jerry Mark Silverman from data provided by the Organisation for Economic Co-operation and Development (OECD), Development Assistance Committee (DAC), International Development Statistics (IDS) online: Databases on aid and other resource flows available at www.oecd.org/dac/stats/idsonline.

  [5]   United States Agency for International Development (USAID), Papua New Guinea, USAID Asia available at http://www.usaid.gov/rdma/countries/png.html .

  [6]       The sixteen bi-lateral ESA’s providing $1 billion or more during 2004 were, in rank order: USA ($19.0); Japan ($8.7); France ($8.5); UK ($7.8); Germany ($7.5); The Netherlands ($4.2); Sweden ($2.7); Spain ($2.6); Canada ($2.5); Italy ($2.5); Norway ($2.2); Denmark ($2.1); Australia ($1.5); Belgium ($1.5); Switzerland ($1.4); and Portugal ($1.0). See Larry Nowels, Foreign Aid: Understanding Data Used to Compare Donors, CRS Report for Congress (Washington, DC: Congressional Research Service, UNT Digital Library, May 23, 2005) available at http://digital.library.unt.edu/ark:/67531/metacrs7336/m1/. Excluding the more than fifty percent of USA economic assistance provided for Iraqi Reconstruction ($8.1 billion), Egypt ($663 million), and Israel ($555 million) alone, the United States still ranked first in total amount of economic assistance ($9.6 billion). The UK’s economic support of “reconstruction” in Iraq during 2004 accounted for about four percent of that country’s worldwide economic assistance. See Organisation for Economic Co-operation and Development, Development Assistance Committee, International Development Statistics (IDS) online: Databases on aid and other resource flows; available at www.oecd.org/dac/ stats/idsonline.

  [7]    The four multi-lateral agencies with a world-wide and multi-sectoral mandate established prior to January 1, 1960 were: (i) the International Bank for Reconstruction and Development (IBRD, 1946); (ii) the United Nations’ Expanded Program of Technical Assistance (EFTA; 1949) and (iii) the United Nations Special Fund (1958) to complement and expand on the work of EFTA (both replaced by the United Nations Development Programme in 1965); and (iv) the European Economic Community’s European Development Fund for Overseas Countries & Territories (1957). The Inter-American Development Bank was the only one of the nine regional development banks already established as of January 1, 1960. Further, only nine of more than 50 other multi-lateral agencies had yet been established.

  [8]    With the end of the Marshall Plan in 1952, the European Cooperation Administration (ECA) was succeeded by two different American agencies. The Department of State’s Technical Cooperation Administration (TCA) was responsible for assisting non-European “poor” countries while responsibility for all other non-military foreign aid was assigned to a new self-standing Mutual Security Agency (MSA). “Food for Peace” was inaugurated in 1954 and integrated, along with all other American non-military foreign aid programs, into the new International Cooperation Agency (ICA) that, in turn, became the United States Agency for International Development in 1961. See United States, Agency for International Development, About USAID (January 7, 2005) available at http://www.usaid.gov/about_usaid/usaidhist.html.

  [9]    All of the statistical data presented below with respect to British, French, Belgian, Dutch, and Portuguese bi-lateral aid flows was calculated by Jerry Mark Silverman from data provided by the Organisation for Economic Co-operation and Development, Development Assistance Committee International Development Statistics (IDS) online: Databases on aid and other resource flows; available at www.oecd.org/dac/ stats/idsonline.

[10]   We count 68 sovereign-states as former dependencies of the United Kingdom here. Technically, however, a complete number would be 69.5 current states because the territories of three of today’s sovereign-states (Cameroon, Somalia, and Yemen) were divided between the United Kingdom and one or another colonial power.

[11]      The Commonwealth of Nations has provided a framework for relationships between the United Kingdom and its former colonies since 1931, but membership accelerated in the early 1960s. Membership in the Commonwealth is strictly voluntary and decisions are not binding on members. Today’s 54 members are all former British colonies except for Mozambique and Rwanda; former Portuguese and Belgian colonies respectively; see Commonwealth Secretariat, History available at http://www.thecommonwealth.org/Internal/191086/34493/history/ and Member States available at http://www.thecommonwealth.org/Internal/191086/142227/members/.

[12]    It is also interesting to note that on January 1, 1950 the British “discontinued” negotiations with the World Bank for loan of approximately $5 million (equivalent to 2010’s $45.75 million) to the United Kingdoms’s Colonial Development Corporation because the CDC “was unable to accept certain of the Bank’s requirements, especially the non-financial covenants,” that would impinge on its colonial prerogatives. See World Bank, World Bank Group Historical Chronology: 1950-1951 (Washington, DC: World Bank, 1949) available at http://go.worldbank.org/0K2T0GA1I0.

[13]   United Kingdom, Department for International Development, History, About DFID available at www.dfid.gov.uk/About-DFID/History1/

[14]    United Kingdom, Competition Commission, Commonwealth Development Corporation: A Report on the Efficiency and Costs of, and the Service Provided by, The Commonwealth Development Corporation (1992) available at http://www.competition-commission.org.uk/rep_pub/reports/1992/320commonwealth.htm#full .

[15]    The Ministry of Overseas Development (ODM) was the United Kingdom’s first bi-lateral aid agency. But that function was downgraded from ministerial to agency status when the Overseas Development Agency (ODA) succeeded ODM in 1979 until that status was upgraded again with the establishment of the Cabinet level Department for International Development (DFID) in 1997; see United Kingdom, Department for International Development, History, About DFID available at www.dfid.gov.uk/About-DFID/History1/.

[16]    Rosalind Eyben, Globalisation: Implications for How We Work, presentation within the United Kingdom’s Department for International Development in London on May 30, 1997.       

[17]      Ibid.

[18]   See Richard Fanthorpe, Fonds d’Investissement pour le Développement Economique et Social (FIDES) in Kevin Shillington (ed.), Encyclopedia of African History, Volume 1 (London: Routledge Taylor & Francis Group, 2004), p. 905-909 available at http://books.google.com/books?id=Ftz_gtO-pngC&pg=PA905&lpg=PA905&dq=french+Investment+Fund+for+Economic+and+Social+Development+fides&source=bl&ots=IuDIvkkzlU&sig=bu_yS2n6AejZ0J7LW97_YITE-5s&hl=en&ei=zp1ZTabBDIeWtweCs_23DQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBMQ6AEwAA#v=snippet&q=fides&f=false.

[19]   As currency, the CFA was first established as the “Franc of the French ‘Colonies’ of Africa” on the same day that France ratified the charters of the World Bank and IMF. Anticipating de-colonization in 1958, the CFA became the “Franc of the French ‘Community’ of Africa,” even as it also retained its earlier initials. One year later, separate monetary unions were established for West and Central Africa and the common initials since then denote two different currencies: the “Franc of the African Financial Community” in West Africa and the “Franc of Financial Cooperation” in Central Africa; see Banque de France, What is Franc Area? (November 26, 2004) and La Banque Centrale des États de l’Afrique de l’Ouest,  History of the CFA Franc (no date).

[20]   Ibid.

[21]   Devesh Kapur, John Lewis, and Richard Webb, The World Bank: Its First Half Century, Volume 1 (Washington, DC: Brookings Institution Press, 1997), p. 769 recommend Guy Martin, “Continuity and Change in Franco-African Relations,” Journal of Modern African Studies, 33 (March 1995), p 1-20 as a good summary of the extensive literature devoted to analyses of French political and economic power in Africa. 

[22]    As only one example of the French Government’s assertion of primary influence within the CFA zone, see Memorandum, Jean-Louis Sarbib to Edward Jaycox, through Edward Lim, “Meeting between Mr. Qureshi and the French Minister of Cooperation,” August 23, 1991; cited in Devesh Kapur, John Lewis, and Richard Webb, The World Bank: Its First Half Century, Volume 1 (Washington, DC: Brookings Institution Press, 1997), p. 776.

[23]    Devesh Kapur, John Lewis, and Richard Webb, The World Bank: Its First Half Century, Volume 1 (Washington, DC: Brookings Institution Press, 1997), p. 76, 776, 1072.

[24]   Total United States’ development assistance to non-European areas between 1946-61 amounted to $26.9 billion – almost equal to the $28.3 billion provided to Europe during that period; United States, Agency for International Development, About USAID (January 7, 2005) available at http://www.usaid.gov/about_usaid/usaidhist.html.

[25]    Of the eight United States’ colonial territories, Cuba was administered directly for only four years (1898-1902) and The Philippines for 49 years (1898-1946) following several centuries of Spanish rule. The Marshall Islands was under American authority for 43 years (1943-1985) following colonization by Germany in 1885 and administration by Japan between 1914 and 1943. Palau was administered by the United States for fifty years (1944-1994) following 300 years under Spanish (c. 1600-1899), German (1899-1914), and Japanese (1914-1944) colonial rule. The Hawaiian Islands were incorporated as the 50th State of the United States by the popular vote of its residents in 1959 following 61 years of colonial administration (since 1898). American Samoa (1899), Guam (1898) and Puerto Rico (1898) remain dependencies of the United States today.

[26]      As classified and calculated by Jerry Mark Silverman, the ten “de facto dependencies’ that received more than thirty percent of their total bi-lateral assistance from the USA during 2004 were: the Dominican Republic (35%), Guatemala (40%); El Salvador (46%); Panama (57%); Haiti (59%); Liberia (60%); Palau (67%); Marshall Islands (90%); and The Federated States of Micronesia (92%). As calculated by the Author from data provided by the Organisation for Economic Co-operation and Development (OECD), Development Assistance Committee (DAC), International Development Statistics (IDS) online: Databases on aid and other resource flows available at www.oecd.org/dac/stats/idsonline and United States, Agency for International Development (USAID), U.S. Overseas Loans and Grants: Obligations and Loan Authorizations July 1, 1945 – September 30, 2003 available at http://pdf.usaid.gov/pdf_docs/PNADH500.pdf.

Keywords:  ADAA, ADAB, Africa, African Financial Community, AIDAB, American Samoa, Angola, AusAID, Australia, Australian Agency for International Development, Australian Development Assistance Agency, Australian Development Assistance Bureau, Australian International Development Assistance Bureau, Balkans, Bangladesh, Belgium, bi-lateral aid, bi-lateral donor, Brazil,British Commonwealth of Nations, British Empire, British Protectorate, Burundi, Cambodia, Cameroon, Canada, Cape Verde, Caribbean, CEMAC, Central Africa Economic and Monetary Community, Central America, CFA, China, Colonial Development and Welfare Acts, Colonial Development Corporation, Colonial Office, colonies, Commonwealth Development Corporation, Commonwealth of Nations, Commonwealth Secretariat, Cuba, DAC, Denmark, Department of Cooperation, Department of Technical Cooperation, Development Assistance Committee, development assistance, DFID, Dominican Republic, Dominion, ECA, EFTA, Egypt, El Salvador, Equatorial Guinea, Euro, European Cooperation Administration, European Economic Community’s European Development Fund for Overseas Countries and Territories, Federated States of Micronesia, FIDES, First World War, Fonds d’Investissement pour le Développement Economique et Social, Food for Peace, Franc Zone, France, French Empire, French Franc, Germany, Goa, Guam, Guatemala, Guinea-Bissau, Haiti, Hawaii, IADB, IBRD, ICA, IMF, India, Indonesia, Inter-American Development Bank, International Bank for Reconstruction and Development, International Cooperation Agency, International Monetary Fund, Investment Fund for Economic and Social Development, Iraq, Irish Free State, Israel, Italy, Japan, Kenya, Korea, Laos, League of Nations, Liberia, Macau, Marshall Islands, Marshall Plan, Mexico, Middle East, Ministry of Cooperation, Ministry of External Affairs, Ministry of Overseas Development, Mozambique, MSA, Mutual Security Agency, Netherlands, New Guinea, New Zealand, Nigeria, Norway, ODA, ODM, OECD, official development assistance, Organisation for Economic Co-operation and Development, Overseas Development and Service Act, Pakistan, Palau, Panama, Papua New Guinea, Papua, Papuaniugini, Persian Gulf, Philippines, PNG, Portugal, protectorates, Puerto Rico, Queensland, Responsible Asia Forestry and Trade (RAFT) program, Rwanda, Sao Tome and Principe, Scandinavian countries, Second World War, Somalia, South Africa, Southeast Asia, sovereign-states, Spain, Statute of Westminster, Suriname, Sweden, Switzerland, TCA, Technical Cooperation Administration, Timor-Leste, UNDP, United Kingdom Department for International Development, United Kingdom, United Kingdom, Competition Commission, United Nations Development Programme, United Nations Special Fund, United Nations, United Nations’ Expanded Program of Technical Assistance, United States Agency for International Development, United States, USAID, Viet Nam, Virgin Islands, WAEMU, West African Economic and Monetary Union, Western New Guinea, World Bank, World War I, World War II, Yemen, Zaire.


THE COLD WAR: SUPPORTING AUTHORITARIAN REGIMES #2

February 8, 2011

This land is your land and this land is my land – sure – but the world is run by those who don’t listen to music anyway.                                  Bob Dylan (born 1941)

As implied in Part #1 of this topic (posted January 23, 2011), current events in Egypt are partially the fruit of political and military decisions made by the United States and its allies during the Cold War. That motivation was subsequently replaced by the new “terrorist” threat following the American Embassy bombings in Nairobi and Dar Es Salaam on August 7, 1998. Nonetheless, the desire to build anti-communist coalitions during the Cold War also dovetailed nicely with the perceived theoretical requirements for economic development current at that time.

Economists’ Rule

During the two decades of the 1960s and 1970s that bound the period under review in this blog post, thinking about the most effective road to “modernity” reflected the two mutually reinforcing economic theories of “linear growth1 and “dual economies.”2 Although there are different versions of those theories,3 most presented both good and bad news for “underdeveloped” countries. The bad news was that economic development must follow the same path experienced by western industrialized countries;4 a path that meandered through European history over a period of more than 200 years.5 The good news was that a correct understanding of that long history provided the opportunity to substantially accelerate the trip along that path.

Despite the Cold War competition between the “Communist” and “Free” worlds, both Marxist and non-Marxist theories shared the view that the rapid growth of European economies during the eighteenth century was the result of an “industrial revolution.” Indeed, the basic premise of those theories is generally credited to both David Ricardo (1772-1823) and Karl Marx (1818-1883). That shared premise was that economic growth depended on a shift from supposedly “traditionally static” agricultural economies to more dynamic and highly organized forms of industrial production. And that transition began when improved agricultural and animal husbandry techniques were incrementally introduced into increasingly integrated agricultural economies over many decades. Those innovations eventually led to investment in export-oriented cash crops, increased agricultural profits, and ultimately reinvestment of those profits in an exponentially expanding industrial sector. Eventually, an expanding industrial sector displaced agriculture as the primary employer within European and North American economies.

Nonetheless, there were also differences between Marxist and non-Marxist approaches. First, Marxist theory posited a linear progression from feudalism through capitalism and socialism to communism while non-Marxist economic development theory posited a linear progression from subsistence agriculture to surplus agricultural production to industrialization. Indeed, equating “modernity” with industrialization and consequent urbanization is taken for granted by many people today. 

Second, the projected beneficiaries of Marxist theory would be industrial workers (the “proletariat”) worldwide without respect to state borders or national identities while for the non-Marxist theoretical descendents of Ricardo the beneficiaries would be “underdeveloped” sovereign-states. Third, the ideal Marxist society was a universal classless society without differentiated state borders to be achieved sometime in the indefinite future while for non-Marxists the ideal state was simply a replication in “underdeveloped” countries of the socio-political economy already achieved by “modern industrialized” sovereign-states within a single generation. 

“The People:” Means or Ends?

Unfortunately, both Marxist and non-Marxist theories were transformed into an ideologically-rooted policy prescription for the rapid “development” of non-European people. And the stereotypically undifferentiated view held by many foreign and indigenous elites was that most of them were illiterate “peasants,” bound by counter-productive traditional beliefs and traditions, and living in parochial and inward looking rural villages. Ordinary people were perceived as simply too ignorant or selfish to voluntarily behave in the sacrificial ways posited by either of the two economic development theories dominant at the time. It is not surprising that both theorists and policy-makers identified the “people” as the primary obstacle to development – another demonstration of the notion that the “people are the problem” (see post dated January 3, 2011 and this blog’s Mission statement). And that view led inexorably to viewing “the people” merely as factors of production and consumption. 

Authoritarian Imperative?

It was only a short logical leap from the notion that the “people” were an obstacle to achievement of their own “best interests” to the view that they would need to be forced to behave “correctly” to achieve a greater economic good in future.6 Thus, within only a few years after gaining independence, the overwhelming majority of underdeveloped countries were officially governed by single political parties or military regimes; many of whose organizational structures mirrored those of the Soviet Union’s Communist Party even as they were not necessarily Marxist in the ideological sense.7   

Another important difference between the authoritarian regimes of Stalin’s Soviet Union and those emerging within newly independent underdeveloped countries was that the former implemented forced industrialization by using that country’s own domestic resources8 while the rulers of most newly independent underdeveloped countries viewed foreign finance as crucial.9 But attendant with foreign finance was the view that neither the first generation of political leaders or the extremely limited number of educated persons available to staff their governments had the requisite understanding of the development process or skills required to implement it. Therefore, if the pre-requisites for the success of the Marshall Plan did not already exist in newly independent African and Asian countries, then they would need to be created from scratch. And that would, in turn, require reliance on scientifically-trained “experts” who had proved their worth during the process of reconstructing Europe after World War II10 (see my next blog post, “From Colonial Administration to Technical Assistance,” forthcoming). And reliance on the limited pool of foreign-experts resulted almost inexorably in a centralized approach to planning development projects and programs; characterized in many case by the initiation of five-year planning cycles.11 In that way, a belief in efficiencies of central planning was not the exclusive mantra of “evil communists” or “misguided socialists.”12 And although the rationale for authoritarianism was clearly circular, it nonetheless influenced many international decision-makers and “free world” aid agencies continued to be strong advocates of central planning well into the 1970s.

Expansive Role of the State

Planning is to Implementation as Alchemy is to Wealth.

                              Jerry Silverman (born 1942) and George Honadle (born 1944)

Clearly, comprehensive planning, however “scientific” it might be, was not enough. It was also necessary to “control” implementation of plans while also ensuring political stability. Thus, to ensure that projected profits were re-invested in the industrial sector, many governments resorted to direct ownership of all domestic “strategic” industries and establishment of state-owned monopoly “marketing boards” tasked with squeezing largely non-existent agricultural surpluses from farmers while capturing profits from higher agricultural export prices. But to ensure political stability, many governments also: (1) established controls on consumer prices in an attempt to avoid inflation; (2) provided food to urban populations at artificially low prices essentially subsidized by the equally low prices paid to farmers by “marketing boards;” (3) promised to provide an expansive array of social services that, in the event, they failed to produce; (4) tried to control rural to urban migration by requiring permits to reside in cities (resulting in “illegal” slums without public services); (5) ultimately looked to the military and/or police to protect them against their still potentially volatile population; and, particularly in Africa, (6) employed large numbers of unskilled people without qualifications in largely non-productive jobs through “social employment” programs.

Consequences

The rationale for relying on authoritarian regimes and their expert advisors required at least two things: (1) correct theoretical assumptions and (2) policies likely to achieve the objectives posited by those assumptions. Neither of those conditions were met, as illustrated by declining agricultural incomes and the vicious cycle of borrowing and ever increasing debt.

Declining Agricultural Income

The decision by farmers not to produce above subsistence requirements or to favor consumption over reinvestment were clearly rational responses to both: (1) the counter-productive domestic policies adopted by their own interventionist governments and (2) the practice by many European and North American industrialized countries to subsidize their own farmers and dump resulting agricultural surpluses (often in the form of food “aid”). As rural land became less valuable for agricultural purposes, people began to migrate in droves from rural villages to rapidly expanding urban slums drawn by the possibility of securing higher income urban jobs rather than the actual availability of such jobs; creating increasing levels of unemployment.13

Doubling-Down

Reliance on an expansive role by artificial states in equally artificial economies did not achieve either political stabilization or economic development objectives. External financing did provide the opportunity to invest in both agricultural and industrial sectors at the same time rather than sequentially. However, non-mechanized small-scale agriculture continued to employ a majority of the population throughout most of Sub-Saharan Africa and much of Asia well into the 1980s.14 New industries failed to produce predicted rates of economic return and were unable to employ the burgeoning urban population.  Nonetheless, countries on whose behalf governments had borrowed money for economic development were required to repay the loans and credits they had received. 15

That, in turn, led to a vicious cycle of more borrowing to both repay past loans and further increase investment in the hope that sufficient profits would eventually be produced. That problem was compounded by the knowledge among many government officials that repayment of monies borrowed in the immediate-term would not need to be paid back until a future time well beyond their own tenure. Repetitive cycles of disappointing economic growth combined with recurrent borrowing finally culminated in the partially successful movement to “forgive debt” (HIPC) to the most heavily indebted countries beginning in 1996.

Formal Democracy or Participatory Involvement

It is clear in retrospect that “winners” and “losers” would inevitably result from decisions about who would and who would not receive development assistance and, therefore, that such decisions were inherently political. And although it is not always clear who those winners and losers would be, experience suggests that smallholder farmers, tenants, agricultural laborers, and residents of urban slums were among the biggest losers.

I will argue in a future blog post (“A World Without Poverty”) that local community-based “participatory” approaches to poverty reduction16 are more effective than either expert-driven development or attempts to aggregate diverse demands within centralized formal structures of electoral democracy. An incipient movement toward grassroots participatory approaches began to take hold within DFID, USAID, and the World Bank during the late 1980s and early 1990s.17 Nonetheless, those initiatives have remained at the margins of development assistance while the primary ethos of the World Bank and most other “donors” continues to be expert-driven. That ethos is perhaps best illustrated by remarks by Lawrence Summers at the World Bank’s Country Director’s Retreat on May 2, 2001.18

The suggestion that there would be a generalized improvement in decision making processes by giving more weight to local community is a proposition for which there is very little evidence…. there is little to be found in [the] success of [Asian countries] that points to the wisdom of much of what is said today in the name of empowerment or in the name of enfranchising those who have not been enfranchised…. I am concerned that the move toward empowerment rather than an economic approach is standing in some ways for a reduced emphasis on the analytic element in the Bank’s work…. [Thus,] I am deeply troubled by the distance that the Bank has gone in democratic countries toward engagement with groups other than governments in designing projects.

Summers was arguing primarily against the World Bank’s attempts to empower non-government stakeholders within countries with ostensibly “democratically” elected governments because he believed that “there is a real possibility…of significantly weakening [those] governments.” Nonetheless, he also clearly implied opposition to World Bank support of demand-driven participatory approaches in countries with authoritarian regimes as well. Thus, Summers continued – 

It has to be recognized that in many cases governments are not allied with many of the forces professing to represent civil society within countries…. I think the issue is a much more difficult one where the quality of democracy is questioned, where governments less legitimately speak for their people. But here, too, there is a basic tension between the notion of being closer to governments and having better partnerships and more effective engagement with civil society…. But I rather think that on those occasions when the Bank is encouraging and pushing greater involvement with civil society — which I suspect is on a large number of occasions — the issues are perhaps a bit more complex than has been faced…. [But] I think it would be a great tragedy in terms of the Bank’s potential contribution to reducing global poverty if, in the name of demonstrating its compassion and moral energy, it were to lose sight of the rigorous analytic basis and emphasis on supporting genuine market forces that have allowed the Bank to make such a great contribution to the global poverty reduction efforts over these last 50 years.19

It would be difficult to find any better illustration of the intellectual triumph of scientific theory and expertise over the socio-political rights of ordinary people.

Summary Conclusion

Scientists have odious manners, except when you prop up their theory; then you can borrow money of them.                                                          Mark Twain (1835-1910)

Authoritarianism, not democracy, was the historical norm well before the beginning of the Cold War (Part #1) or the introduction of international development assistance. Therefore, the argument presented here is not that either of those phenomena caused authoritarian regimes. Nonetheless, foreign policy and economic theory did combine to justify support of authoritarian regimes in many developing countries. And that no doubt contributed to the sub-optimal performance of “development aid” since the 1960s.

The Spotlight currently shining on Egypt presents an opportunity to shift from an expert-led to a demand-driven approach to development. But as protesters continue to occupy Tahrir Square in Cairo, are we listening to what they are actually saying and do we have any better idea about how to effectively meet their demands than authoritarian rulers like Hosni Mubarak? Is it likely that local community or occupationally-based institutions capable of aggregating public preferences about priorities and influencing decision-makers will be established following Mubarak’s departure from the Presidency? An affirmative answer to those questions is unlikely precisely because that would require a fundamental change away from the stereotypical view of people in developing countries as lacking the capacity to make the “correct” choices. That stereotypical view was not true in the past and it is clearly not true today.

When I served as a technical assistance advisor in Egypt during 1975, 1976, and again in 1981, I worked with many Egyptians whose graduate education and professional experience mirrored my own. But looking back, that itself was a fundamental problem because indigenous “experts” continue to design and implement top-down supply-driven development assistance programs in much the same way that foreigners urged their governments to do in the past.

We do not, of course, know what the outcomes might have been if “the people” had had the opportunity to make their preferences known and if from the beginning a demand-driven approach had been supported instead of the commitment to ideologically determined policies that actually occurred. But it is hard to believe that it would have been any worse than the actual outcomes achieved after the investment of trillions of dollars in so-called “development.” Thus, achieving political reforms without commensurate changes in the way we do development or, more specifically, poverty reduction will, I predict, find the Egyptian poor in much the same place twenty years from now as they find themselves today. And that will be the case no matter how well-intentioned a democratically elected successor to Mubarak might be.

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NOTES:

  [1]    During the 1960s, perhaps the most generally known linear growth theorist was Walt Rostow (see The Stages of Economic Growth: A Non-Communist Manifesto [Cambridge: Cambridge University Press, 1960]). The strong influence of the Cold War in this context is suggested by the sub-title.

  [2]   The initial version of dual economy theories emerged during the eighteenth century to explain the causes of a series of economic crises in France. However, that initial theory was substantially changed by the classical dualism of David Ricardo and Karl Marx. It is important to note that “dual economy” theories are not the same as “parallel economy” theories. Indeed, as we will illustrate below, while “dual economy” theories of the 1950s through the early 1970s provided a foundation for centrally planned “controlled” economies, “parallel economy” theories provide an analytical foundation for the dismantling of “controlled” economies in favor of open markets.

  [3]    Although a substantial variety of modern dual economy models are presented in the academic literature, most are categorized as being either “classical” or “neo-classical.”

  [4]    For the history of the transition from reliance on agricultural to industrial production in Europe, see Paul Bairoch, Economics and World History (London: Harvester-Wheatsheaf, 1993); Walt Rostow, How It All Began: Origins of the Modern Economy (New York: McGraw-Hill Book Company, 1975); and Heinz Arndt, Economic Development: The History of an Idea (Chicago: University of Chicago Press, 1987).

  [5]    In Great Britain around 1810, agricultural employment exceeded industrial employment by about 70% but that ratio was reversed as industrial sector employment rose to more than 60% by 1840; see Paul Bairoch cited in endnote 4.

  [6]   The need to “force people to be free” is a theme woven through “western” political philosophy since Jean-Jacques Rousseau’s discussion of the “Social Contract;” even though his own interpretation of that phrase is often misunderstood (see On the Social Contract first published in 1762). A common, and simplistic, interpretation of that notion is that independent “states” once legitimately established in history have the “sovereign” right to force their citizens to behave in ways the government of such states believe are required for the greater collective good. Although the focus is on the greater good in Rousseau, the practical application of that principle is that the ‘greater good” is almost always defined by governments to conform to their own particular interests.

  [7]   An important contribution of Vladimir Lenin to Marxist theory was the assertion of the need for a vanguard party of the proletariat prior to the Bolsheviks successful 1917 coup in Russia. The focus of that approach, articulated in his 1902 pamphlet What is to be Done? was further refined by Joseph Stalin’s subsequent focus on enforced introduction of accelerated industrialization within the Soviet Union. See Vladimir Lenin, What is to be Done? Burning Questions of Our Movement, published in 1902 and republished in English by International Publishers (New York, 1929) and in Lenin’s Collected Works (Moscow, Russia: Foreign Languages Publishing House, 1961) as well as on-line by Paul Halsall, Fordham University during August 1997 at www.fordham.edu/halsall/mod/1902lenin.html).

  [8]   During the 1920s, Russian economists were also engaged in an important discussion over the best way to progress from a predominantly agrarian society to a modern industrialized economy; a debate very similar to modern classical dual economy theory. See, for example, Evgenii Preobrazhenskii, The New Economics (1924), English language reprinted edition (Oxford: Clarendon Press, 1965).

  [9]   Very few states have voluntarily attempt to pursue explicitly “autarkic” policies of complete economic self-sufficiency; the most notable are the Democratic People’s Republic of Korea (North) and Myanmar (Burma).

[10]    For a seminal formulation of “scientific public administration,” Max Weber, Economy and Society, edited by Guenther Roth and Claus Wittich (Berkeley: University of Califonia Press, 1978).  See also, Max Weber’s Construction of Social Theory (New York: St. Martin’s Press, 1990); Gunnar Myrdal, Asian Drama: An Inquiry Into the Poverty of Nations, 3 Volumes (New York: Twentieth Century Fund, 1968).

[11]   At least three precedents presented themselves as central planning prototypes prior to the period of accelerated decolonization beginning in the late 1950s: (1)  the Soviet’s preparation of multi-year plans and state ownership of both agricultural production and industrial enterprises; (2) the subsequent requirement for comprehensive multi-year plans imposed by the United States on European recipients of post-World War II Marshall Plan aid and the provision of American “experts” to assist recipients to prepare those plans; and (3) the early adoption by the World Bank of requirements for comprehensive planning and provision of technical assistance similar to those of the Marshall Plan, including a Ten-Year Development Plan for the Belgian Congo during 1951, India’s first five-year development plan in 1956, and comprehensive “economic survey missions” to eighteen different countries or colonial territories by 1959.

[12]   That outlook was also reinforced by the election of majority democratic socialist governments or coalition governments in least six Western European states by the beginning of the 1960s de-colonization era that were also committed to the principles of an expansive role for Government in centrally planned economies.

[13]    More recent theories of economic development have assumed some level of unemployment will exist within the formal urban sector even in a relatively efficient economy. As an early example, see Michael Todaro, A Model of Labor Migration and Urban Unemployment in Less Developed Countries, American Economic Review 59 (1969), p. 138 – 148.

[14]   Of the 142 countries currently on the OECD’s DAC List of ODA Recipients, sufficient same-source agricultural employment data is available for only 89 (62.7%). Of those 89 countries, a full 69 percent (61) still employed more than 50% of their active labor force in agriculture as late as the period under discussion here (1980); including the entire Sub-Saharan Africa region (67.1%) and South Asia and East and Southeast Asian sub-regions (82.5% and 56.3% respectively). See the Organization for Economic Cooperation and Development, DAC List of ODA Recipients used for 2008, 2009 and 2010 available at www.oecd.org/dac/stats/daclist as revised in DAC List of ODA Recipients: Effective for Reporting on 2009 and 2010 flows available at http://www.oecd.org/dataoecd/32/40/43540882.pdf. All of the statistics presented here were calculated by Jerry Mark Silverman from data provided by the United Nations’ Food and Agriculture Organization (FAO), FAOSTAT data available at http://faostat.fao.org/default.aspx and International Labour Organization (ILO), LABORSTA Internet available at http://laborsta.ilo.org/data_topic_E.html. NOTE: China is the most significant country on the DAC List for which insufficient same-source data is available. 

[15]   Distinctions are normally made between “grants,” “credits” and “loans.” A “grant” is finance that does not require repayment of any kind and is usually provided as bilateral aid by one country to another. A “credit,” often referred to as “concessional finance,” requires repayment of the original principal amount in the constant value of currencies determined by the lender but at a lower rate of interest than normal market rates – or without any interest at all. In the case of credits, repayment normally does not begin until an extended grace period has elapsed.  Development “loans” are extended to lower and upper middle income countries at or very near international market rates with both principal and interest repaid over an extended period of time.

[16]    The definition of “Participation” adopted here conforms to the World Bank’s Participation Sourcebook: “a process through which stakeholders influence and share control over development initiatives and the decisions and resources which affect them;” see The World Bank Participation Sourcebook (Washington, DC: The World Bank, 1996) available at http://go.worldbank.org/R3WF0ID3N0.

[17]    It was during that time that a “participation working group” was established within the World Bank that eventually produced the “Participation Sourcebook” referenced above as well as the multi-million dollar “Voices of the Poor” trilogy: Deepa Narayan et al, Can Anyone Hear Us? (New York: published for The World Bank by Oxford University Press, 2000, available at http://go.worldbank.org/6Z9P1DKL51); Crying Out for Change (New York: published for The World Bank by Oxford University Press, 2000, available at http://go.worldbank.org/XMWSK7EMS0); and  Voices of the Poor: From Many Lands (New York: published for The World Bank by Oxford University Press, 2000, available at http://go.worldbank.org/JYUSMEJ0M0).

[18]   Lawrence Summers has had long-term influence on the way development assistance programs are formulated and assessed by virtue of his service as the World Bank’s Chief Economist and Senior Vice-President for Development Economics (1991-1993) and, within the United States’ Treasury, Undersecretary for International Affairs (1993-1995) and Deputy Secretary (1995-1999) prior to his ultimate appointment as Secretary of the Treasury from 1999 to 2000 and, most recently, President Obama’s Chief Economic Advisor from January 2009 to January 2011.

 [19]    Cited in Stephen Fidler, Who’s Minding the Bank?, Foreign Policy 126 (September-October 2001), p. 40-50.

Keywords: authoritarian regimes, central planning, Cold War, DAC, decolonization, Department for International Development, dependent territories, development, development assistance, Development Assistance Committee, DFID, Egypt, Food for Peace, IBRD, IDA, IMF, India, Indonesia, industrialization, International Bank for Reconstruction and Development, international development, International Development Association, International Monetary Fund, international organizations, international relations, Marshall Plan, modernizing elites, ODA, OECD, official development assistance, Organization for Economic Cooperation and Development, China, poor people, sovereign-states, Soviet Union, states, United States Agency for International Development, USAID, USSR, World Bank.


Interview Internatl. Scholar Cairo Today (Sun. Feb. 6)

February 6, 2011

A good friend of mine, Ja Jahannes, has just published a very interesting interview with a renowned international scholar living in Cairo for the past almost fifteen years and who remains there today. The interview was conducted by Email in real time today Sunday, February 6th. For reasons of personal security, the interviewee is identified only as Middle East Scholar (MES). If interested, just click on
http://www.inmotionmagazine.com/global/jj_cairo.html to read it.

I made a minor contribution to the interview by suggesting four of the questions used. 

Cheers, Jerry


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