The Rich Countries’ Substitute for the NIEO

This is one entry in a roundtable on the NIEO, featuring posts by scholars who contributed to Humanity’s recent special issue on the topic. Be sure to read other posts by Johanna Bockman and Kevin O’Sullivan.

Last October, the Chinese government announced the creation of the Asian Infrastructure Investment Bank (AIIB). The AIIB is intended to rival the International Monetary Fund (IMF), the World Bank, and the Asian Development Bank (ADB), which are dominated by the United States and other developed countries, in providing financial assistance to countries in Asia. In an indication of China’s growing clout, all major nations except for the United States, Canada, and Japan have joined. This has caused considerable handwringing in Washington, which is worried that the AIIB will undermine American influence in the region and beyond.

The creation of the AIIB was driven in part by China’s failure to gain more influence in the IMF. Under pressure from the right, the U.S. Congress has voted against proposals that would give emerging powers like China and India greater control over the institution, which plays an important role in global financial and monetary affairs. The United States’ refusal to afford developing countries a greater say in IMF decision-making has occurred despite—or, given the level of dysfunction in Washington, because of—the Obama administration’s support for the plan.

This is not the first time developing countries have pushed for greater control over such organizations. As part of its effort to, as Nils Gilman puts it, “transform the governance of the global economy to redirect more of the benefits of transnational integration toward ‘the developing nations,’” the New International Economic Order (NIEO) focused on changing the way international financial institutions were run. Thus, the Programme of Action on the Establishment of a NIEO, adopted by the UN General Assembly on May 1, 1974, demanded “[m]ore effective participation by developing countries, whether recipients or contributors, in the decision-making process” of the World Bank.

Developing countries wanted a greater say in the World Bank because they understood how vital the organization was to their economic fortunes. By 1974, the World Bank had become the dominant player in the development industry, a loosely-organized network of international, national, and local governmental and nongovernmental actors working to promote economic growth and poverty alleviation in the global South. The Bank grew into this role slowly. Founded alongside the IMF in 1944 to aid the war-torn countries of Europe and Asia, the Bank started doing development after the Marshall Plan displaced its role in postwar reconstruction. The fact that the Bank raised much its money by issuing bonds on the private market combined with concerns about developing country creditworthiness to limit the organization’s operations in these early years. In the 1950s, the Bank concentrated on providing low-interest financing for large, physical infrastructure projects in better off developing countries. The Bank only began lending to sub-Saharan Africa in the 1960s and, despite growing concerns about the efficacy of “top-down” development strategies, remained relatively uninterested in supporting education, health care, and other “bottom-up” interventions.

This changed in 1968 when Robert McNamara became the Bank’s president. As I detail in my book, Robert McNamara’s Other War: The World Bank and the Remaking of Development in the 1970s (University of Pennsylvania Press, forthcoming), the former U.S. secretary of defense transformed the organization in the years after Lyndon Johnson—looking for a way to ease a disgruntled cabinet member out of his administration—appointed him to lead it. Chastened by his experience in Vietnam yet convinced that global poverty posed a threat to international security, McNamara sought to turn the Bank into a vehicle that would promote development around the world, redeeming himself personally and professionally in the process. In the late 1960s and early 1970s, McNamara transformed the Bank’s organization, finances, and development strategy. Breaking with the conservative approach that had long characterized the institution, he declared that the Bank’s primary goal should be nothing less than the complete elimination of global poverty. To this end, McNamara oversaw a dramatic expansion of the organization’s borrowings and used these funds to lend more money to more countries for more types of projects.

The NIEO burst onto the agenda just as McNamara was turning the Bank into the world’s dominant development institution. From the perspective of the Bank’s management, the NIEO could not have come at a worse time. The U.S. foreign aid budget was shrinking, and its support for the Bank had become increasingly tenuous. The 1973-74 oil crisis promised to strain the Bank’s finances still further, since many of the world’s poorest countries were oil-importers who required injections of cash to avoid economic disaster.

Both the NIEO’s specific demands and the fact that Southern countries had mobilized presented a challenge for the Bank’s management: how to respond constructively to the proposals without alienating the financiers and Northern governments that remained vital to the organization’s survival. In addition to governance reforms at the Bank, the NIEO included measures that ran counter to the organization’s agenda, such as sovereign debt relief. Squarely addressing these issues might reveal the organization’s continued subservience to Wall Street and Washington.

The Bank’s management sought to sidestep the NIEO by arguing that it was a political issue and, as such, outside the organization’s purview. McNamara told his aides that he doubted “the appropriateness of the Bank openly taking policy positions on most items on the international agenda,” and Bank officials and the institution as a whole avoided addressing the NIEO throughout the 1970s.

Developing countries quickly grew frustrated. Specifically, they viewed the Bank’s new emphasis on poverty alleviation as a means of distracting attention from political and economic inequality between rich and poor countries. One Bank official noted that developing country leaders had come to see the Bank’s antipoverty focus as “a cop-out” from addressing Southern demands for greater control over the global economy. As McNamara noted privately, there was a consensus among leaders in the global South that World Bank lending “was the rich countries’ substitute for the NIEO.”

The Bank’s management dealt with this challenge by pursuing a strategy common to organizations facing external critique: promote further study of the issues. This strategy included encouraging the creation of the Independent Commission on International Development Issues, which would produce the widely-read Brandt Report in 1980, as well as initiating an annual series of World Bank studies on critical development issues. This resulted in the creation of the World Development Report in 1978.

Today, the World Development Report is one of the most prominent documents in the development industry. However, the most significant part of the Bank’s NIEO-avoidance strategy was its behind-the-scenes efforts to expand the organization’s economic policy operations. In order to assuage Southern concerns that it was not doing enough to meet their demands, in the late 1970s the Bank stepped up its outreach to developing country policymakers though both formal and informal “country dialogues.” By “adopt[ing] a more aggressive approach of educating” Southern governments, a senior Bank official told his colleagues, the Bank might be able to reduce support for the NIEO and increase the organization’s own influence in the process.

These moves led directly to the Bank’s creation of structural adjustment lending (SAL) in 1979. With SAL, the Bank began issuing loans that were conditioned on borrowing governments instituting Bank-prescribed economic policy reforms. SAL represented a thoroughgoing repudiation of the NIEO. Whereas the Bank had historically supported a role for developing country states in managing their economies, by the end of the 1970s the organization’s macroeconomic vision had congealed around a belief that the surest route to growth was full-scale economic liberalization. The Bank’s policy and research documents increasingly stressed the need for developing countries to eliminate trade and price controls, reduce public spending, and privatize state-owned enterprises.

SAL took off as a result of the 1979 oil shock and the debt crises of the 1980s. In this context, developing countries had little choice but to take the Bank’s bitter medicine. In fact, by this point many Southern officials had come to agree with the organization’s prescriptions and welcomed the conditions that came with these loans. Yet the combination of economic slowdown in the North and austerity policies in the South led to a period of significant hardship for those the Bank claimed to be helping. During the 1980s, poverty and inequality increased in most parts of the developing world. Slow growth also ensured that these countries continued to be saddled with significant external debts.

Economic progress was not the only thing lost during the “Lost Decade.” World Bank adjustment lending, which often proceeded in combination with similar IMF programs, marked a repudiation of a vision of development in which government served as a guarantor of broad-based social welfare. In this way, the Bank became a key driver of what Mark Mazower has termed the “real new international economic order” in which development was left to the whims of the market, rather than being guided by the state.

Despite significant changes in the World Bank’s approach, developed countries continue to dominate the organization. The gentlemen’s agreement by which the U.S. president appoints the Bank’s president and European countries select the IMF’s head remains intact, and lower-level governance reforms remain elusive. The creation of the AIIB, as well as the recent launch of the New Development Bank by the “BRICS” countries signal that some countries have had enough. What effect this has on the Bank and the other institutions that have long dominated global economic governance remains to be seen.

Read more about about the World Bank’s response to the NIEO here.

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About Patrick Sharma

is a J.D. candidate at Harvard Law School and holds a doctorate in history from the University of California, Los Angeles.​ ​His first book,​ Robert McNamara's Other War: The World Bank and the Remaking of Development in the 1970s (​University of Pennsylvania Press​, ​forthcoming), ​examines the transformation of the World Bank during the presidency of former U.S. secretary of defense Robert McNamara.​ His articles have appeared in Diplomatic History and ​Review of International Political Economy.