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The World Bank and poverty in the 1980s: Has the Bank wavered in its commitment?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1986
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David Beckmann

The World Bank’s original purposes, as spelled out in its Articles of Agreement, included “raising productivity, the standard of living and conditions of labor.” But during the Bank’s early years, lending was mainly confined to power, transport, and industry projects in relatively advanced developing countries. The first innovation to get the Bank more directly involved in the problems of poverty was the setting up of its concessional affiliate, the International Development Association, in 1961. IDA allowed the Bank to play a larger role in India, Pakistan, and other low-income countries. The Bank also increased lending for agriculture and started lending for education during the 1960s.

In the early 1970s the Bank began to concentrate more of its efforts on activities that would benefit poor people directly. It was widely recognized that the benefits of rapid growth in the 1950s and 1960s had resulted in relatively little improvement for many of the world’s poorest people. Even within some countries that had enjoyed rapid growth in average per capita income, few of the benefits had “trickled down” to the poor. The Bank argued that economic growth was essential for the reduction of poverty, but that special efforts were required to raise productivity and income among the poor.

The Bank increased its resource flows to the low-income developing countries through a major expansion in IDA. It also began lending for several types of projects that were designed to expand economic output while simultaneously reducing poverty. Most notably, an expanding program of lending for agriculture and rural development raised productivity and income among tens of millions of small-scale farmers. The Bank’s slum upgrading, low-cost housing, and water supply projects demonstrated financially viable ways of improving living conditions for the urban poor. It also expanded lending for primary education and began lending in the area of population, health, and nutrition.

The global economy became increasingly troubled during the 1970s as successive oil price shocks, recession, and inflation took their toll. A severe recession in the industrial countries in the early 1980s, plus the international debt crisis, broke the momentum of Third World development. Economic growth slowed down in nearly all developing countries; many saw a decline in their per capita income. The proportion and number of the world’s people in absolute poverty (unable to afford a diet with the minimum acceptable number of calories) went up.

The Bank turned its attention, urgently, to helping countries cope with the crisis in development. Progress against poverty is virtually impossible in countries beset by financial crisis and economic decline, so it made sense for the Bank to stress policies that would help restore the momentum of development. But some critics have charged that the Bank retreated from its poverty mandate in the process.

This article reviews the extent to which Bank activities were directed toward poverty during the first half of the 1980s, discusses why the Bank’s approach to poverty is changing, and highlights issues that will determine the Bank’s effectiveness against poverty for the remainder of the decade.

Indicators of poverty work

Various indicators of the Bank’s work suggest that, in some respects, the extraordinary pressures of the early 1980s indeed led to a decline in the share of Bank activity specifically directed toward the reduction of poverty. But efforts to alleviate poverty continued, and there has been increased attention to poverty issues again in the mid-1980s. Just as important, the Bank is finding ways to address poverty that are consistent with the constraints and preoccupations of the 1980s.

Statements of policy. The Board of Executive Directors and management have consistently reaffirmed that the Bank’s fundamental objectives—economic growth and poverty reduction—remain unchanged. But Robert McNamara’s speeches (1968–81) closely identified the Bank with poverty.

A. W. Clausen’s speeches (1981-86) highlighted IDA 7 and the plight of sub-Saharan Africa, but mainly urged broad reforms in trade, capital flows, and economic policy to overcome the general development crisis of the early 1980s.

The Bank’s World Development Reports reveal the same broad pattern. The first three of these annual reports (1978-80) dwelt at length on poverty-related themes. More recent World Development Reports, notably the 1984 report on population, also analyzed poverty-related themes, but, in response to changed circumstances, the reports paid much more attention to policy reforms to revive economic growth.

The Bank has adopted two major policy papers on poverty in the 1980s. Focus on Poverty (presented to the Bank’s Board in 1982) evaluated the Bank’s anti-poverty efforts and concluded that the Bank’s poverty projects had, in general, achieved their objectives (see “World Bank and poverty” by Michael Lipton and Alexander Shakow, June 1982 issue). But Focus on Poverty also suggested ways to improve the Bank’s impact on poverty (attention to poverty in the design of structural adjustment programs, for example) and these recommendations are only now being implemented. Poverty and Hunger (1985) gives special attention to the poorest of the poor—an estimated 340 million people in the world whose diets are so deficient that some children die and many are stunted. This new policy paper maintains the Bank’s traditional emphasis on measures that simultaneously contribute to growth and reduce poverty. It also advocates measures such as well-directed food subsidies for the poorest to reduce hunger (see “Food security and poverty in LDCs” by Shlomo Reutlinger, December 1985 issue).

Allocation of resources by country groups. Over four fifths of the people in absolute poverty live in low-income countries (with average per capita incomes below $400). There are also significant concentrations of absolute poverty in countries with average incomes between $401 and $790 a year (such as Nigeria, Peru, and the Philippines). Table 1 shows the extent to which IDA and regular Bank (i.e., International Bank for Reconstruction and Development) resources have been channeled to these two groups of countries. During the 1970s IDA commitments expanded more rapidly than IBRD commitments. During the early 1980s IBRD commitments continued to grow, but IDA commitments, which also included the sub-Saharan Africa Facility, remained nearly constant, while their real value declined.

In response to reduced IDA resources, the Bank has allocated a larger share of IDA to low-income countries. The share of lowincome African countries in IDA has gone up markedly, with the Bank playing an expanded role in aid coordination, technical assistance, and policy advice. Overall IBRD lending to low-income countries has also gone up, mainly because of the Bank’s rapidly growing program in the People’s Republic of China.

The reallocation of limited IDA funds to the low-income countries has necessarily left unmet needs in the next-to-poorest category of countries, however, while IBRD lending to some countries in this group has been constrained by creditworthiness concerns.

Table 1IBRD and IDA lending to the two poorest groups of countries1

as a proportion of total lending, fiscal years 1969–852

1989-711972-741975-771978-801981 HI1084-85
In percent
Per capita income up to $400
IDA707188839295
IBRD32221461324
Subtotal413831303239
Per capita income of $401-790
IDA201891475
IBRD131526262621
Subtotal141622222217
Total565453525457
Average annual commitments
In billions of US dollars
IDA0.51.21.53.13.23.3
IBRD1.62.45.06.910.111.7
Total2.13.66.510.013.315.0
Source: World BankNote Components may not add up to totals because of rounding

Based on 1984 per capita income.

The Banks fiscal year ends June 30

Source: World BankNote Components may not add up to totals because of rounding

Based on 1984 per capita income.

The Banks fiscal year ends June 30

Sectoral allocation of resources. Another way the Bank focused its attention on poverty in the 1970s was by expanding lending in “poverty-oriented” sectors (that is, sectors in which projects are often designed primarily to benefit the poor). As shown in Table 2, the main change was an increase in lending for rural development; in the Bank’s parlance, rural development projects are agriculture projects in which more than half the benefits are expected to go to poor people. The Bank also expanded lending in other poverty-oriented sectors—primary and nonformal education; population, health, and nutrition; small-scale enterprises; urbanization; and water supply and sewerage.

The division between poverty-oriented sectors and other activities should not be overdrawn; some lending in the poverty-oriented sectors does not benefit the poor, while much of the Bank’s activity in other sectors does benefit the poor (either directly or indirectly).

In the early 1980s, the shares of the Bank’s lending devoted to agriculture and, especially, rural development declined sharply. Governments facing budgetary constraints found it more difficult to provide counterpart funding for rural development projects. Agricultural commodity prices were low, while food supply was no longer as worrisome an issue at the global level. Although the Bank’s agriculture and rural development projects have a high rate of return on average (over 20 percent), they also show a higher-than-average rate of project failure, especially in Africa. Past failures in some countries made the Bank and governments hesitant to launch new projects.

The share of lending for poverty-oriented sectors other than rural development shows no striking trend in the 1980s. But lending in these sectors became less sharply focused on poverty in the early 1980s than it had been in the late 1970s. For instance, the Bank’s urban projects of the 1970s were designed mainly to demonstrate the feasibility of sites-and-services, urban upgrading, and other approaches to helping the urban poor directly. By the start of the 1980s these approaches had been widely demonstrated. Given the acute financial problems in many countries, the Bank’s new urban projects began to be directed more toward making cities efficient and city management less of a drain on public finances. These objectives complement the earlier emphasis on urban poverty but affect the poor only indirectly; if a municipal government is badly managed and unable to keep up with urban growth, low-income neighborhoods usually suffer most.

During 1984 and 1985, the Bank’s management took steps to sharpen the Bank’s focus on poverty. It embarked on an effort to double population lending. In 1985, the share of lending expected to benefit the poor directly went up in most regions and for all the poverty-oriented sectors. The shares of lending for agriculture and rural development increased. For urban projects, nearly two thirds of expenditures were expected to directly benefit the poor, more than doubling the poverty content of urban projects approved in the previous year. Bank staff were also asked (for the first time) to evaluate the likely poverty impact of all new loans, including loans for less poverty-oriented sectors, such as industry and energy, and for structural adjustment.

Increased emphasis on economic policy. Many countries simply must make major reforms to recover the momentum of development, and even countries (such as India) which suffered relatively little from the global recession have become more intent on policies conducive to economic efficiency and growth. The Bank is putting more emphasis on policy issues in determining the size of its lending program in different countries and in the plans for many projects. Its structural adjustment and sectoral adjustment loans are designed to provide maximum support for policy reform.

Changes in policy can, if properly designed, concentrate economic growth among the poor.

Table 2IBRD and IDA lending, by sector, fiscal years 1969-85(In percent)
1969-711972-741975-771978-801981-831984-85
Directly poverty-oriented sectors
Rural development3.18.215.415.814.69.6
Primary and nonformal education0.10.40.60.61.01.3
Population, health, and nutrition0.20.70.61.10.41.5
Small-scale enterprises0.00.21.21.52.64.1
Urban0.11.51.73.43.63.0
Water supply/sewerage4.04.74.06.84.54.8
Total7.515.723.529.326.724.2
Other activities
Other agriculture15.613.614.215.111.914.5
Other education4.05.33.63.73.64.1
Power and energy22.216.013.518.319.423.7
Industry and development finance companies12.616.419.212.914.99.1
Transportation and communications32.825.919.016.413.616.8
Nonproject (including structural adjustment loans)4.76.15.93.69.36.7
Other0.61.11.10.80.60.8
Total92.584.376.570.773.375.8
Source: World Bank.Note: Components may not add up to totals due to rounding.
Source: World Bank.Note: Components may not add up to totals due to rounding.

A powerful way to expand job opportunities, for example, is to reduce price distortions that encourage capital-intensive industry. But when the Bank reoriented itself toward poverty in the 1970s, its analytical work on country- and sector-level policies changed less than its projects. In the 1980s, the Bank’s operational economists have been deeply involved with macro-level problems.

In 1984, the Bank began (for the first time) to monitor systematically its country-economic analysis, and there has been some increase in directly poverty-related studies. In Latin America, for example, the Bank has reviewed the social cost of recession and adjustment in Argentina, Brazil, Chile, Costa Rica, the Dominican Republic, and Mexico.

The Bank’s 1986 report on sub-Saharan Africa argues that the policies that the Bank has been advocating for the sake of efficiency (devaluation, reduced urban bias, and the curtailment of waste in the public sector) also tend to benefit rural areas, where the great majority of Africa’s poorest people live. The report also argues that adjustment programs should include increased government spending on population, basic health and education, forestry, and agricultural research.

Research. Just as the research staff of the Bank did pioneering work on poverty in the 1970s, the Bank’s current research staff is doing major work on the importance of markets and incentives. Research begun in the early 1980s dealt almost entirely with economic adjustment at the international and national levels, but several studies started in the mid-1980s are more directly concerned with poverty. The most important research project in this area is a reevaluation of the relationships among poverty, equity, and growth. This research will review the historical experience of about 20 countries (in some cases covering more than 50 years). The research team is scrutinizing, among other things, the extent to which government interventions have responded to pressures from privileged groups.

Reasons for change

The main reason why the Bank’s approach to poverty has changed is that the needs of the developing countries have changed. The Bank’s operations have been reoriented to help developing countries cope with adverse global conditions. The Bank has emphasized policy change in both the industrial and developing countries to revive growth, partly because growth is a necessary (although not sufficient) condition for renewed progress against poverty.

Policies to restore financial stability and resume growth can benefit the poor if poverty alleviation is an explicit objective, but crisis conditions in some countries have sometimes left little time for officials to concentrate efforts in this direction. The Bank, too, has had to adapt quickly in response to changing needs; for example, 40 percent of the IBRD projects approved in 1984 had not been in the lending program at the beginning of the fiscal year.

The Bank has also been affected by the major shift in political orientation that has taken place in many countries in the 1980s. Its policies are guided by its member governments through their representatives on the Executive Board, and the lending program in each developing country is determined in consultation with the national government. In some respects, the political climate of the 1980s does not favor the poor. During this period of economic difficulty, most governments are under increased pressure from influential, relatively well-off groups to protect their interests, often at the expense of the poor. But the 1980s are also characterized by increased emphasis on economic efficiency and the use of market mechanisms, and this change in economic ideas need not imply a reduction in attention to poverty. After all, many inefficient government interventions benefit privileged groups at the expense of the poor.

Issues for the future

Action in four areas will be crucial to the future effectiveness of the Bank’s efforts against poverty:

Funding for IDA. Negotiations among the donor nations for the eighth replenishment of IDA are under way. These negotiations will determine the extent of the Bank’s activities in the low-income countries of sub-Saharan Africa and Asia. African governments have made substantial policy reforms, but concessional capital flows to low-income Africa were largely stagnant during 1980-84. Such flows need to be substantially expanded if Africa is to recover from its economic crisis. Two thirds of the people in absolute poverty in the world live in South Asia, and there are still serious problems of poverty in parts of China. Bangladesh needs assistance just as desperately as low-income Africa; real rural wages in Bangladesh have fallen by one third over the last 20 years. But some of the largest countries in Asia—India, Pakistan, and China—have been registering impressive and sustained economic progress. Continued development assistance can help them effect major gains against poverty between now and the end of the century.

Poverty and adjustment. A planned program of adjustment to counter adverse conditions, even when it involves painful reductions in imports, expenditure, and employment, is almost always better for the poor than haphazard, forced adjustment. But at the 1985 Bank-Fund Annual meetings in Seoul, the international community reached consensus on the need to strengthen efforts to achieve adjustment with growth. If countries can achieve external balance by expanding output and exports, both the rich and the poor within those countries will benefit. The United States government has proposed measures to provide additional financing to support adjustment with growth in the heavily indebted middle-income countries and in low-income Africa. Because of the Bank’s long experience in advising governments on policies for economic growth, the Bank is now expected to play a more prominent role in reviewing adjustment policy packages. (See “The emerging role of the Bank in heavily indebted countries” by David Bock and Costas Michalopolous on page 22.) This will allow it to keep attention focused on poverty issues.

For many countries, it is difficult enough to chart any course back to external balance and economic growth, and some necessary actions will make life yet harder for many poor people. But even when public expenditures are cut, effective poverty projects can be protected. Brazil, for example, continued priority programs of social investment throughout the worst of the debt crisis, with some assistance from the Bank. Social spending can be redirected from relatively well-off groups toward the poor (from high-cost hospitals, for example, to primary health care). Similarly, when governments are considering price liberalization for the sake of efficiency, they can give priority to price changes that will concentrate economic growth among low-income groups. There is evidence, for example, that structural adjustment in Côte d’lvoire has improved income distribution, mainly because it included higher prices for farmers.

When adjustment policies have adverse effects, there are ways to moderate these effects. Several countries have found this period of economic trauma an opportune time to launch low-cost health programs that affect large numbers of poor people (notably, the national immunization campaigns that UNI-CEF is promoting). Higher rice prices tend to make life harder for many poor families in northeast Thailand, so the government is attempting land reform in that region in conjunction with its program of economic adjustment. Finally, where restraints on imports have led to high unemployment, jobs can be generated in areas of the economy that do not require many imported inputs. The Bank is helping to finance the construction of low-cost housing in Indonesia, partly to help counteract the recessionary impact of lower oil prices on employment.

Poorest of the poor. The Bank’s poverty projects have often aimed at benefiting the poorest 40 percent of the population, but they have seldom attempted to reach the bottom 15-20 percent. Smallholder farmers have been at the center of the Bank’s agricultural development strategy, for example, but few of the Bank’s projects have benefited landless laborers directly.

Other international agencies, governments, and even nongovernmental agencies have also had difficulty reaching the poorest of the poor. Yet these are precisely the people who are, quite literally, hungry. Infant and child mortality is concentrated among the bottom 20 percent.

The Bank’s new food security policy is directed mainly at this group. It proposes that the Bank help governments include measures to improve nutrition among the very poor (particularly children under five and lactating women) in the design of adjustment programs. The new policy also contemplates projects that would increase the supply and reduce the cost of basic staples, strengthen the capacity of governments to respond to food emergencies, and, in other ways, raise incomes and reduce hunger among the poorest of the poor.

Learning from experience. The Bank’s future effectiveness against poverty should also be enhanced by learning from its experience to date. A single Bank project may require nearly a decade to move from concept to completion, so there are still many lessons to be drawn from the Bank’s 10 to 15 years of poverty-oriented lending. One clear lesson, often stressed by the Bank’s independent Operations Evaluation Department, is that the economic policy framework is crucial for project success. Many agriculture projects, for example, have been frustrated by unrealistically low producer prices.

Another lesson of experience is that much more attention needs to be paid to the “people” aspects of development (institutions, grassroots organization, local ecology, and culture). The relatively high rate of failure for projects in Africa has stemmed partly from mistaken assumptions about the likely behavior of the people involved. The Bank is developing methods to make its projects more responsive to the people they serve (see “Can local participation help development?” by Michael Cernea, December 1984 issue).

In conclusion, the Bank’s future effectiveness against poverty depends on continued commitment on its part and by donors, including funding for IDA. In addition, success will depend on fresh approaches to reduce poverty, which are consistent with economic adjustment and improve on the efforts of the past.

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