As explained previously, the Bank's assistance focus has evolved in several stages, starting from the IBRD's initial role essentially as an investment banker financing infrastructure and then, with the IDA, moving into macroeconomic reform and increasingly into projects to develop skills, capacity, and institutional development, and in the process focus on advisory services and ‘knowledge products’ that are not necessarily combined with financing. This was an evolution that could also be described as a shift from hard to soft development products. The Strategic Compact aimed to both strengthen the Bank as a ‘soft’ knowledge provider and to improve the responsiveness and relevance of the Bank in both its hard and its soft offerings.

In addition to diversifying into new products that were more relevant to the needs of client countries, one of the principle undertakings of the Strategic Compact was to improve the quality and effectiveness of the Bank's products. The changes in these products during the reorganization period were ambitious, and, as we have seen, the shift has exposed numerous corporate strategic issues. Thus it is by no means clear yet that the Bank has established what new products are worthwhile or its comparative advantage in delivering them. Nevertheless, the Bank had to show improved quality and performance to justify the cost of its reorganization.

Regular and numerous claims were made of quality improvements. All the internal reviews made these claims with little qualification, and there were specific public statements that echoed these findings.

Closely parallel to the organizational re-engineering efforts was the attempt to restructure human resources. The restructuring exercise had two goals. First, it was intended to renew the organization's skills, and, second, it was intended to assist in changing the organization's culture.

The Strategic Compact spoke of a lack of systematic knowledge building and decline in knowledge generation, a lack of expertise, and an under-investment in training. The board of directors provided a restructuring fund that was supposed to allow redundancies to be phased in order to ‘allow the Bank to move away from large, one-time redundancy exercises, which had caused serious disruption in the past’, and to ‘adjust its staffing smoothly, equitably and cost effectively’. With regard to culture, it was supposed to change the attitudes and approach of the workforce, make them more participatory and less insular and elitist. How far were these twin aims of re-skilling and cultural change achieved?

‘CULTURAL CHANGE’

One of the keys to increasing the effectiveness of the Bank in the 1990s, like many other organizations both private and public, was supposedly to create a more effective culture. Members of the U.S. Congress and other outside observers thought this, and were loud in their belief in the need to change what they considered was the arrogant, insular, and elitist character of the Bank's staff, the ‘culture of pin-striped bureaucrats’, which, apart from offending the sensitivities of Congress, was regarded as dysfunctional for the Bank's work in reducing world poverty.

THE LEADER AND HIS LIEUTENANTS

The Strategic Compact was an agreement between the executive directors and the president. The president was not only the key figure during the reorganization but also, of course, as chief executive, important to the institution in the longer run. The president's character, style, and capacities would normally be critical to the direction and effectiveness of an institution even if the institutional persona changed only slowly. However, since the chief executive was signatory to the Strategic Compact, the characteristics of the chief executive's position – its style, qualifications, responsibilities, fiduciary duties, reporting, performance, and selection – were, unsurprisingly, not part of the Compact or the subsequent reform process. Yet one particular aspect of leadership, the selection process, was increasingly in question.

Whereas in performing their role several of the past presidents, such as Clausen and Preston, had been relatively distant figures, and had shaped the culture and functioning of the Bank rather by default, Wolfensohn took an aggressive and proactive stance. His demeanor reflected an unusual background. While he had strong Wall Street connections, he also regarded himself as having capacities beyond Wall Street. He was a lawyer and Harvard MBA and had excelled in the corporate finance world, where he led the first Chrysler rescue, and latterly he set up his own boutique investment firm that had attracted the participation of world-class individuals such as Paul Volcker.

In much of the developing world, the 1980s and 1990s were decades of radical economic change. Whereas in the 1960s and 1970s, the prevailing model of development was based on state intervention and inward-looking policies, the 1980s and 1990s were characterized by the advocacy of market-oriented reforms. These reforms, packaged under the so-called Washington Consensus, aimed at opening up national economies and at reducing the role of the state in the economy. The consensus became so broad that some described the new state of the debate on development as one of “universal convergence” (Williamson 1990, 1994; Biersteker 1995; Rodrik 1996: 9).

The story of the “universal convergence” can be told along the following lines. The model of inward-oriented industrialization, epitomized by the experience of many Latin American countries in the 1960s and 1970s, was a resounding failure. The bias against exports caused enormous balance-of-payment crises. Devaluations, inflation, and fiscal indiscipline became common. Governments borrowed massively from abroad to close the external and fiscal gaps. At the beginning of the 1980s, Mexico's debt moratorium alarmed foreign creditors, who cut off their lending. Without credit to finance chronic fiscal deficits, governments resorted to the printing press, which eventually resulted in hyperinflation and economic stagnation.

SHOULD GOVERNANCE HAVE BEEN A PART OF THE REORGANIZATION?

The extent of the deficiencies of the reorganization raises questions about the stewardship of the Bank. Should the governors and the directors have exercised greater control over events? To what extent were they responsible for the missteps? To what extent were their actions consistent with their fiduciary obligations? What are the implications of the style of governance for getting the organization on to a satisfactory path toward effectiveness?

The Strategic Compact was drawn up between the president and the board of executive directors. As we have seen, it was not a carefully planned initiative, but originated as a way of getting the board to increase the budget and was then broadened out into a reform program. Within this reform program, the critical dimension that was not ‘on the table’ was governance itself. Understandably, the Compact did not require its signatories to subject themselves to its discipline. Neither the board of directors nor its secretariat was expected to change processes or to reduce expenditure. In fact, the life of the board seemed to remain unaffected by the churning that was taking place in the organization over which it had oversight, despite the fact that the board members worked every day in the same building as the people over whom they had responsibility.

The fact that the Strategic Compact did not address the Bank's own governance meant that it was, rather, looking down inside the organization to identify the problems and find the solutions, that is, looking to the organization's management and employees – structure, capacities, and attitudes.

EARLY CHANGES

While the 1990s reforms are the major interest here, they were not the first. The Bank has gone through a number of reorganizations, from top management reshuffles and shifts in organizational emphasis to root-and-branch restructuring and re-engineering.

The first reorganization, of the IBRD, was in 1952. As the institution expanded, President Eugene Black found it necessary to regionalize operations, supported by a central projects department. In 1972 there was a more thoroughgoing reorganization. Using his experience at the Ford Motor Company, Robert McNamara introduced planning and financial control, an audit committee of the directors and an internal auditor. He set up an operational evaluation unit that was later, in 1973, renamed the Operations Evaluation Department (OED) reporting directly to the board of directors. He decentralized further to the regions, and country program plans were introduced as a focus for lending. The purpose of decentralization in McNamara's conception was to develop a ‘creative tension’ between country programs (oriented toward country monitoring and macroeconomic support) and country projects (oriented toward specific operations on the ground). This was an idea that foreshadowed much more complicated later initiatives. McNamara aggressively expanded the institution's role and capacity within this framework, and the subsequent history of the Bank has in some sense been a reaction to his initiatives.

After McNamara left the post the Bank entered a period starting with President Tom Clausen (1981–1986) during which it was less closely managed and became increasingly vulnerable to outside criticism and increasingly subject to a confrontational economic orthodoxy, discussed later.

Why write another book about the World Bank?

Many studies have been conducted and books have been written over the past few decades about the World Bank, which I refer to from here on as ‘the Bank’. But what has been written about up to now has largely missed a critical issue. Writers have been concerned mainly, and justifiably, with the Bank's external role within world development, that is, its political economy, its place within the process of globalization, the character of its lending, to whom it lends, what conditions it imposes, how far it accounts for socioeconomic concerns such as the natural environment, the kind of advice it gives, and, most recently, who should own it. This study, without ignoring the wealth of wider issues, looks at the Bank as an organization. That is, is it configured organizationally to do the job it is supposed to do and, if not, what should be done about it? In particular, the question is whether the reorganizations that have taken place over about the past twenty years have made the Bank more capable of doing the job it is supposed to do, as they have each laid claim. This book is thus about the problems of organization and reorganization as much as it is about the problems of assisting third-world development, and perhaps it would serve as a case study in organizational reform as much as a critique of the way development assistance is conceived and managed.

In this chapter, I explore the question of whether governments adopted an EO development strategy as a result of learning.

During the 1980s, a growing consensus emerged about the failure of ISI to promote growth. Poor economic performance in countries pursuing ISI contrasted with outstanding growth figures in the East Asian newly industrialized countries (NICs). In turn, the good performance of the East Asian NICs was associated with the adoption of a radically different strategy based on export promotion. Failure of ISI coupled with the success of EO triggered a process of learning in theory and practice. As a result, trade policy stances converged. This story is obviously sketchy. Yet, it is an accurate summary of a well-established argument: Governments adopted EO because they learned from experience (Haggard 1990; Iglesias 1992; Edwards 1995, chapter 3; Krueger 1997). I test this argument here.

The debate about development strategies had profound normative implications. Initially, the triumph of EO over ISI was interpreted as a triumph of markets over the state. Policy recommendations of less state involvement in development became the rule. However, a closer look at country stories and other empirical research showed that the reality was far more complicated.

Introduction

What could cause state firms in a still nominally socialist economy to lay off large portions of the workforce? At least three processes have been suggested: privatization, liberalization, and changing of norms. Privatization entails the definition and enforcement of some type of property rights over SOEs that impose costs on individuals or entities that come to own them. These costs, which had been masked under the plan, force new market owners to take action – such as laying off workers – to stem losses.

Liberalization as defined here consists of allowing the market to set relative prices. One common facet of liberalization is the opening of competition in a market arena. Even though SOEs might remain under bureaucratic control, if they are forced to compete with market firms they must take on various attributes of these competitors, including in the field of labor relations. Finally, shifting norms among governing elites can push firms to behave differently even if formal institutions with direct bearing on management decisions remain largely in place.

All of these usually point in some way to a hardening of SOE budget constraints. No longer confident in subsidies from above, state firms cut workers as a way of trimming excessive costs that were hurting their bottom lines. I suggest that two aspects of regional political economy are likely behind most lay-offs. As business environments worsened, firms were less and less able to retain workers.

BEIJING INTERVIEWEES (2000 TO 2006)

1. State Council ministry official (October 2000)

2. State Council ministry official (November 2000)

3. State Council ministry official (November 2000)

4. State Council ministry official (October 2001)

5. State Council ministry official (December 2001)

6. State Council ministry official (February 2002)

7. State Council ministry official (January 2003)

8. State Council ministry official (February 2002)

9. State Council ministry official (April 2002)

10. State Council ministry official (April 2002)

11. State Council ministry official (April 2002)

12. National mass organization cadre (April 2002)

13. 51-year-old, male, laid-off chemical worker (July 2002)

14. Academic researcher (July 2000)

BENXI INTERVIEWEES (NOVEMBER 2000 AND NOVEMBER/DECEMBER 2001)

1. 21-year-old, female, laid-off clerk (2001)

2. 22-year-old, male, laid-off steel worker (2001)

3. 24-year-old, male, laid-off coal-miner (2001)

4. 27-year-old, female, laid-off electrician (2000)

5. 27-year-old, male, electrician (2000)

6. 28-year-old, male, laid-off coal-miner (2001)

7. 29-year-old, male, laid-off steel worker (2001)

8. 34-year-old, female, laid-off manager (2000)

9. 34-year-old, female, laid-off steel worker (2001)

10. 36-year-old, male, laid-off ore-miner (2001)

11. 37-year-old, male, laid-off road worker (2001)

12. 38-year-old, female, laid-off steel worker (2001)

13. 38-year-old, male, laid-off coal-miner (2000)

14. 39-year-old, female, “vacationing” cadre (2000)

15. 42-year-old, male, laid-off coal miner (2000)

16. 42-year-old, male, laid-off construction foreman (2000)

17. 42-year-old, male, laid-off machine tool plant worker (2000)

18. 43-year-old, male, laid-off coal-miner (2000)

19. 44-year-old, female, laid-off manager (2000)

20. 44-year-old, male, laid-off coal-miner (2001)

Introduction

State responses to laid-off workers' problems were uneven across space and time. Across almost all Chinese cities, however, self-employment and entrepreneurship emerged as important avenues for re-employment, just as Chin Kwan Lee found in her study of Liaoning. Political status within the old planned system, as well as workers' personal particularistic connections (known in China as guanxi, but similar to what many political scientists and sociologists refer to as certain types of “social capital,” or what many scholars of Russian politics and society call blat), affected opportunities for entering the growing ranks of the self-employed. The structure and range of workers' social ties were instrumental in shaping their job opportunities, even in comparison with job-seekers elsewhere who rely on similar webs of connections.

The effects of these aspects of working class society were mediated by regional disparities of market opportunity in the entrepreneurial sector. Local governments with sufficient capacity actively promoted and protected all types of market opportunity in ways that cities with fewer resources could not afford. This chapter explains why laid-off workers in most regions rarely succeeded in finding new jobs in the non-state sector. It discusses why workers in regions with more market opportunity relied less on particularistic connections or political status, while entrepreneurial employment depended more on connections and status the less market opportunity was available.

Central Coast cities with strong capacity managed to block the entry of rural-to-urban migrants into lower strata of the labor market, preserving these opportunities for laid-off SOE workers.

After three decades of reform, China acquired a commanding presence on the world stage. Growth was astounding, as China became the workshop to the world, an important player in world financial and industrial markets, and a recipient of jobs outsourced from advanced industrial countries. China in 2008 bore little resemblance to the poor and unstable bastion of autarky and charismatic revolution that took its first cautious steps toward reform and opening in 1978. But there was another side to this great transformation.

China's impressive gains brought significant social dislocation, in particular for groups that had been winners under socialism, but found themselves losers in the new post-socialist order. Such groups were “victims in a social system that still insists that they are the true rulers.” This book explains how one such group – laid-off state-owned enterprise (SOE) workers – became dislocated, the social and political effects this had, and patterns of workers' contention and resistance.

The scale of social disruption was unprecedented even in China. Between 1993 and 2006, more than 60 million jobs (a total nearly equal to the entire population of France) were lost in Chinese SOEs and urban collective sector enterprises. This represented a net downsizing of more than 40 percent of formal sector urban jobs over less than 15 years. Despite efforts of the Chinese central state and its local agents, re-employment for these displaced masses was difficult to achieve, leading many dejected workers to wonder, “with nothing to eat, can this still be called socialism?”

Introduction

The preceding chapters have examined the causes of lay-offs, state responses, workers' coping strategies, and patterns of contention. The basis for all of this has been a subnational comparative analysis of Chinese regions. This has enabled more nuanced explanations and the formulation of a number of hypotheses, to explain not just the outcomes of interest but also the antecedent conditions required for these explanations to operate.

Specifically, though business environments and central–local relations produced lay-offs across all four regions, the timing and the manner of change were different. Northeastern SOEs found themselves structurally disadvantaged in the market and virtually abandoned by the central state, and laid off large numbers of workers beginning in the 1980s. Central Coast firms dealt with voluntary departures of workers entering the non-state sector and also with higher-level directives to lead the way along the national path toward capitalist reform and development. This meant sharp declines pre-1997 that had more to do with the pull of market opportunity than anything else, followed by later decreases in Central Coast workforces driven by a desire to become market leaders. Sector-specific pressures produced lay-offs in North-Central and Upper Changjiang firms before 1997, followed by sharper cuts, in the immediate aftermath of the fifteenth Party Congress, that continued in the Upper Changjiang but largely tailed off in the resource-extractive firms of the North-Central region.

Also, though the central state undertook several overarching initiatives under the re-employment project, regional variation in implementation and policy innovation was often more important.