Easing into an Era

By George Russell

It was a deceptively quiet and unassuming start to what looms as a vitally important--and perhaps highly controversial--new era. On his second day in office, Barber Conable, 63, the newly anointed president of the World Bank, strolled onto a dais in Washington last week and inaugurated his term with an apology. He did not know much about his new job, the former Republican Congressman from New York told waiting journalists, and he would therefore require a "period of learning." What Conable already knows, however, is that he will need all the acumen and skills acquired during his 20 years on Capitol Hill to tackle the most challenging task of his public career.

A lawyer and political scientist with no bankerly credentials, Conable has suddenly become a central figure in the Reagan Administration's ambitious . plans to end the dangerous Third World debt crisis. His job is to buttress the lending efforts of the sedate World Bank, an institution well known for funding Third World dams, roads and other good works but never before considered a strategic centerpiece of the effort to maintain international financial stability. Conable's intention is clearly to change that. In his first official interview last week, he told TIME, "The World Bank is going to be a catalyst. The bank's priority has got to be economic growth, which is the only real way in the long run to reduce poverty."

Spurring such growth is apt to be difficult at a time when the U.S., the World Bank's principal shareholder, is fighting a record budget deficit. Moreover, Conable's activist view is a departure from the laissez-faire climate of Ronald Reagan's Administration. It might have been considered downright heretical until last October, when Treasury Secretary James Baker announced a new official line at a World Bank and International Monetary Fund meeting in Seoul, South Korea.

Until then, Washington's position was that the debt burden--some $415 billion owed by 56 African, Latin American and Caribbean countries alone--could be reduced through the adoption of tough austerity measures by the debtors under the supervision of the International Monetary Fund. At Seoul the so-called Baker Plan affirmed that longer-term economic growth among the developing countries also had a role to play. To spark that expansion, the Treasury Secretary proposed that the World Bank and other multilateral agencies loan an additional $9 billion to the most highly indebted Third World countries over the next three years.

The need for increased World Bank lending grows graver every day. U.S. and international aid officials were closeted last week with representatives of the second-largest Third World debtor, Mexico. A major oil producer, Mexico has been badly hurt by the plunge in petroleum prices and is desperately trying to renegotiate the terms of its $98 billion debt.

Taking a larger role in such crises will be a novel experience for both Conable and the World Bank. The bank was founded in 1945 as the chief conduit for aid to war-torn Europe and Japan. It was viewed as a source of 15- to 20- year development loans, while the International Monetary Fund was created simultaneously to provide short-term lending to countries suffering from balance of payments problems. Since World War II, though, the World Bank has * evolved from a long-term lender for Third World public works to a technocratic antipoverty institution with some 6,000 employees.

What makes the World Bank unique is its hard-nosed financing concept. The bank is jointly owned by 150 countries that have contributed $3.2 billion to its capital (including $1.1 billion from the U.S.). But the bulk of the World Bank's $66.8 billion in capital comes from private investors, who buy the institution's bonds in the open market. The World Bank relends these borrowed funds at a maximum rate of .5% over cost.

In the past, the institution has had an ironclad rule against rescheduling loans and an equally tough stricture against lending out more funds at any time than its entire capital plus reserves. By contrast, most commercial banks lend up to 17 times their capitalization. As a consequence of its conservative policies, the World Bank enjoys a triple-A credit rating. Says Treasurer Eugene Rotberg: "We are one of the rare institutions in Washington that have to meet a market test."

The results are visible in 100 countries that have tapped World Bank funds. The bank has loaned some $118 billion since its inception. It has helped finance housing and sewage systems in the Brazilian slums of the city of Recife, irrigation systems in India and the construction of electrical generating plants in Thailand. Occasionally the bank comes a cropper. One dud project: the $110 million Bura irrigation scheme in Kenya, in which the World Bank participated and which the country's President, Daniel arap Moi, last January denounced as "a failure, a disgrace and the height of mismanagement." But usually the bank's efforts lead to solid accomplishments. A dramatic case is a twelve-year, $162 million effort to control the black fly in West Africa. That has saved about 3.5 million children from possible blindness caused by an insect-carried eye disease.

Such funding for specific physical development works is known as project lending. The kind of new bankrolling that the Baker Plan favors, however, is known as policy lending. These loans are offered in exchange for specific changes in tariffs and tax regimes, or other aspects of a country's domestic economic policies that in the view of World Bank experts impede the growth and productivity provided only by free markets. Last month the U.S. Treasury extolled a $500 million World Bank loan to Brazil as an "excellent" example of such lending. In return for the money, Brazil agreed to cut deeply into a variety of agricultural subsidies and to relax government control of the marketing of soy products, corn and cotton.

Under Conable's predecessor, A.W. Clausen, policy lending had started to become a substantial part of World Bank activity. In the past year Clausen, a former BankAmerica chairman, oversaw a 47% increase in the bank's lending to the ten most highly indebted countries in the world. By contrast, overall World Bank loans for the same period rose by only 16%. In Latin America, policy loans accounted for about 40% of the $4.8 billion that the World Bank dispensed in the twelve months ending in June. Says David Knox, the World Bank's vice president for Latin America and the Caribbean: "The debt crisis has led a lot of Latin American governments to do some hard thinking about their policies. We think the tide is running in a sensible direction, so we are trying to swim with it."

One of the main reasons for Conable's selection as president was to allay concerns about the bank's objectives. To U.S. Congressmen wrestling with budget austerity, he is a familiar and reassuring figure. Born in Warsaw, N.Y., and educated at Cornell University, the independent-minded Conable sat in the House of Representatives from 1965 to 1985, earning high marks for his intelligence and integrity. For 18 years he was a member of the powerful House Ways and Means Committee, on which he eventually became ranking Republican. While serving as finance chairman of Vice President George Bush's 1980 presidential campaign, Conable cemented his friendship with Treasury Secretary Baker, then Bush's campaign manager. The respect that Conable commands on Capitol Hill may come in handy this fall, when, in line with the aims of the Baker Plan, the Administration could ask Congress for additional funds for World Bank-related lending.

For all the reassurance that Conable's presence may bestow, the World Bank's new priorities involve undeniable risks. One threat is to the benign image of the bank. By tying loans to policy improvements, the World Bank will almost inevitably be tarred in the domestic debates of debtor nations. In just that fashion, the IMF has now become one of the prime bogeymen of Third World politics because of its program of enforced austerity. Warns James Conrow, a Deputy Assistant Treasury Secretary: "The World Bank is going to get hit with charges of political insensitivity, just like the IMF."

Another potential risk is to the financial reputability of the bank itself. < By definition, policy lending produces fewer physical results than traditional World Bank project lending; it will often seem that the bank has less to show for its new activities. Policy funds are also disbursed more rapidly than project money, meaning that the bank's new aims will appear to eat up more resources more quickly. A much bigger worry, however, is that the institution will fail to come up with enough funds to encourage the kind of policy changes needed for long-term Third World growth. Warns Lawrence Brainard, a senior vice president of Manhattan's Bankers Trust: "Barber Conable will not be able to pull a rabbit out of the hat to solve the debt crisis."

Conable professes a lack of concern about that problem. Said he last week: "The funds will be forthcoming if the case is made." The important thing, as he told his inaugural press conference, is that developed and developing countries "are all on the globe together. That requires both sides to seek a reasonable relationship." How Conable's tenure is remembered will undoubtedly depend on whether that reasonable relationship is achieved.

With reporting by Gisela Bolte/Washington, with other bureaus