RECENT THOUGHTS ON REORGANIZATION

In the 1980s and 1990s, corporate re-engineering was a significant factor in corporate America, but many of its advocates revised their ideas. Michael Hammer, perhaps the tsar of all organizational reformers, in the second edition of Reengineering the Corporation wrote: ‘[P]erhaps predictably, reengineering quickly became a bandwagon that everyone tried to jump on; but, problematically not everyone knew precisely what it was he or she was getting involved in’. ‘Give me re-engineering and give it to me fast’ was the command from many uninformed chief executives. This was a situation ripe for disaster. Re-engineering came to be viewed as an easy panacea that the CEO can simply delegate. John Kotter said, later on: ‘[T]he perception that large organizations are filled with recalcitrant middle managers who resist all change is not only unfair but untrue’.

Second thoughts were already abroad as the Bank launched its own re-engineering revolution, but public organizations and their overseers tend to follow rather than lead with regard to ideas about corporate efficiency, effectiveness, and change, and the Bank was a follower.

WHAT WENT WRONG?

There were serious problems in nearly all the dimensions of the Bank's reorganization program. The re-engineering of the organization was semi-chaotic, poorly designed and managed, and had to be partially reversed, largely failing to meet its objectives of increasing the efficiency of skill usage and only partly increasing focus at the country level.

Imagine the following situation. A new government headed by Alberto Monge Alvárez of the National Liberation Party (Partido de Liberación Nacional, PLN) is elected in Costa Rica in mid-1982. The government considers reducing quotas and tariffs, and eliminating subsidies that encourage import substitution. The economic team, however, is concerned about the impact that liberalizing the trade regime will have on Costa Rican rates of growth. It is very likely that the team, led by the central bank governor Carlos Manuel Castillo, has some established beliefs about the consequences of liberalizing based on either economic theory or previous experience. Despite these “informed hunches,” there is some uncertainty about the economic consequences of liberalizing.

One simple way to reduce the uncertainty is to compare the experience of countries that chose to liberalize their trade regime in the past with that of those that opted to continue under a protectionist development model. Which of the two models performed better? To answer this question, the dedicated economic team gathers the relevant information. Again, imagine that the evidence is overwhelming: Not only did the countries that opened up their trade regimes grow more on average, but all of them grew more. By contrast, the data on the countries that opted for a protectionist trade regime was “confusing”: On average, they grew less than those that opened up their trade regimes.

EMERGING ISSUES

A complex financial institution emerged over sixty years, which has continued to operate throughout without any major threats to its survival, providing a model to other international financial institutions. The IBRD has had a continuous, apparently successful, record of evolving lending and knowledge services, delivered with a reasonable profit that has enabled it to provide subsidies to other agencies while expanding its expertise and maintaining a position as the world's premier development institution.

But the Bank's successes have also been built behind a protective wall and its low funding costs have allowed it to remain profitable even with large overheads and an annual payroll that would be enough to lift a small country out of the worst poverty. The layers of protection and a resulting perception of inadequate transparency have also tended to attract extra scrutiny of the Bank's work, and the level of success it has achieved with the resources it has at its disposal has been widely debated. For example, in June 2003, at the end of a period of major reform involving unprecedented outreach to its member countries, a poll of 2,600 ‘opinion leaders’ from around the world by Princeton Survey Research Associates found that large numbers of those surveyed had quite a dim view of the institution. Less than half of Africa's opinion leaders were happy with its work, and about 60% of South Asians and Middle Easterners. Somewhat better, over 70% of East Asians including Chinese thought it was doing well.

There were many flaws in the processes of reform of the 1990s. But even if the processes were per se flawed, this does not necessarily mean that the product was also flawed. The new organizational structures and processes were the immediate outcomes of the reforms, but the actual products delivered, in terms of both type and quality, would reflect the ultimate impact of the reforms, and it is in the final analysis the impact that is important.

The Strategic Compact called for change in the quality and types of products, within the overall objective of poverty reduction. The aim was both a process one, to make the Bank's products more responsive to the needs of clients, and one of content. Stemming from Wolfensohn's 1996 ‘knowledge bank’ announcement, the principal content change was to accelerate the diversification from lending projects to knowledge and information projects and services. Following the Strategic Compact, another key process change was the emphasis on projects that used a participatory development approach. How far in fact did the reforms put in place under the Strategic Compact improve or worsen the product menu?

THE BANK'S PRODUCTS – A RECAP

As discussed inChapter 1, the Bank's rationale for assistance can be conceived as having evolved essentially through three stages: a) capital deficiency; b) capital deficiency and related skill/know-how deficiency; and c) capacity, know-how, and ‘information’ deficiency. In accordance with this evolution the Bank has shifted from its initial role as a financier of infrastructure and industry.

In recent decades, the internationalization of capital has been the hallmark of globalization. Starting in the late 1950s, the growth of the Euromarket boosted the opportunities for moving money across borders. The emergence of this mostly unregulated pool of capital paralleled, and is strongly related to, another important phenomenon: The increasing mobility of production and the rise of multinational corporations (MNCs) as crucial economic and political actors. With more and more opportunities to evade domestic controls, owners of capital and MNCs became empowered. Local politicians were bound to choose economic policies in accordance with capitalists' preferences to discourage capital and production from moving to more friendly environments. This is the famous “exit option” (Goodman and Pauly 1993).

The political consequences of this remarkable shift have been thoroughly discussed but continue to be controversial: In a context of the free movement of capital, can governments still pursue their preferred policies? The general answer, anticipated by Mundell and Fleming's model of open economy macroeconomics, is “no, they cannot.” According to the so-called impossible trilogy, in a context in which capital is allowed to flow freely across borders, governments have to choose between two objectives: Exchange rate stability and an autonomous monetary policy.

In this final empirical chapter, I explore whether governments entered into agreements with the International Monetary Fund as a result of learning from the performance of these agreements.

The standard view of IMF activities is as follows. Countries confronting balance-of-payment (BoP) problems can weather them by resorting to IMF loans. Because the existence of a lender of last resort may create moral hazard problems, the IMF exchanges loans for conditions. Conditionality entails several austerity measures aimed at removing basic macroeconomic imbalances (stabilization) and creating the conditions for sustainable growth (adjustment). Typically, these measures involve fiscal austerity (cutting government spending and increasing taxes), a tight monetary policy (raising interest rates and reducing credit creation), and currency devaluation (Taylor 1993: 41–42; Bird 1996a; Bordo and James 2000; Dreher 2002; Lee 2002; Vreeland 2003). As Guitián (1995) pointed out, there is a high degree of coincidence between IMF policy prescriptions and the package of policies envisaged in the Washington Consensus.

Because these measures are unpopular, it is assumed that governments turn to the IMF only when they need a loan – that is, only when they face an acute BoP crisis or when they run out of foreign reserves. Yet, a closer look shows that governments may turn to the IMF even if, on those criteria, they do not need loans.

INTRODUCTION

This and the following chapters deal in more detail with the reform initiatives of the 1990s. Here we deal with the range of initiatives that were core elements of the reforms, that is, related to organizational restructuring. First the matrix management system is considered because that was the central element, and then it is combined with the next key element, known as the internal market. Associated with these two initiatives was reform of the structure of management. Closely intertwined were the new knowledge networks and the information systems, and related to all these organizational initiatives was the aim of moving to the front line. A specific organizational change, the merger of parts of the Bank and the IFC, is considered, and then finally we look at what the employees thought about it. The order of events is as follows:

• the matrix

• the internal market

• management structure

• knowledge and networks

• the front line and backline

• Bank/IFC corporate merger

• the verdict of the employees

THE MANAGEMENT MATRIX

In accordance with the proposals of the Strategic Compact, set out in Chapter 2, at the core of the 1990s reforms was a reorganization of the operational areas of the Bank, the purpose of which was to address the issues of excess bureaucracy – that is, the excessive cost of doing business with the Bank, and the slowness and lack of response of the organization, while at the same time increasing its focus on the country clients of the Bank and increasing the chances of country buy-in.

In the 1980s and especially in the 1990s, privatization swept the world. This chapter seeks to explain why. In particular, it asks whether governments in advanced and in Latin American countries engaged in privatization as a result of learning.

From the late 1970s, and especially after 1983, privatization was pioneered by Prime Minister Margaret Thatcher in Britain. During the 1980s, this policy innovation was embraced hesitantly elsewhere. However, during the 1990s, privatization became an established policy in developed and developing countries. It was also a central issue in post-Communist societies (Stark and Brustz 1998).

Although this secular trend toward privatization exhibited important regional variations, there is no doubt that privatization has been a major phenomenon. Moreover, it has cut across the ideological divide: Socialist governments in Europe as well as populists in Latin America climbed aboard the privatization bandwagon.

Explanations of this wave of divestments have been widely canvassed but rarely tested. They range from pure efficiency considerations to more complex political rationales, with both domestic and international political factors playing some role. However, Kogut and McPherson (2008) correctly claim that some countries were heavily indebted and were governed by right-wing parties – two typical domestic explanations of privatization – but were not motivated to streamline their public sectors. Accordingly, I argue that international forces better explain why so many countries adopted privatization.

GAINS, QUALIFIED GAINS, AND LOSSES

Over twenty years of reorganization the Bank has struggled to find a formula for organizational effectiveness. Despite continual claims of progress, it has not found it. At the beginning of this study the question was asked: Who, or what, was responsible for the debacle of the Bank reorganization? Was it poor leadership? Was it inappropriate governance? Was it the incompetence of managers and employees? Was it external pressures? Perhaps lack of skills? Did it mean that the Bank is inherently unmanageable, or did it mean that it was simply badly led? The hope is that this critique is one that will help to answer these questions and highlight the urgency of maintaining the legitimacy of a global economic development leader.

This look at twenty years of reform has mainly been about the latter half, the late 1990s and beyond, because that is when the major effort was made. The problems that James Wolfensohn undertook to solve were numerous. According to his understanding, the Bank's projects were often of doubtful quality; their impact on development was ambiguous; it was very expensive to do business with; it was increasingly bureaucratic and complex; it failed to innovate; it was too fragmented internally, too arrogant and distant from its clients; and it needed re-skilling. He had ten years in which to do something about these problems.