# 3.1 The Early Years<sup>7</sup>

In the early days, the Economics or Research Department was responsible for conducting financial feasibility studies of proposed projects. It was an operational department, co-equal with the Loan Department, which negotiated directly with borrowing governments. Soon the Loan Department was conducting its own feasibility studies. This left the economists out of operations altogether, particularly since the President is said to have paid little attention to their economic reports.<sup>8</sup> Conflicts within the Bank between operations and research arose almost as soon as the institution was created. Top management was concerned about establishing the Bank’s reputation on Wall Street and the rating of its bonds, and followed conservative financial policies. For instance it rejected the idea of housing loans and other “social’ loans”9, in spite of the thinking emerging intellectual circles regarding causal relationships between developmental and social change and equity. It maintained this position until the second half of the 1960s but it was faced with a growing disappointment within the development community with the dominant model of development that the Bank had embraced. In 1952, a major reorganization created three area departments and a new technical Operations or Project Department responsible for conducting feasibility studies. The Economics Department as such disappeared, although a small staff of economists continued to do general research, among other things, about creditworthiness.

The Economics Department was recreated during the presidency of George Woods (1963-68) and substantially increased in size and importance. Irving Friedman was brought to the Bank from the International Monetary Fund as Economic Advisor to the President with the rank of Vice President, and Andrew Kamarck became Director of the Economics Department. Friedman and Kamarck had worked on the Bretton Woods proposals at one time or another within the United States government, and had expertise in both theoretical and applied economics.10 7 Research at the World Bank before 1971 is analyzed in Michele Alacevich 2009; Louis Galambos and David Milobsky 1995; and Edward S. Mason and Robert E. Asher 1973.

8 This account follows Oliver 1975 which tells the story of Paul Rosenstein-Rodan, Assistant Director of the Economics Department at that time (Leonard Rist was Director). One of the “founding fathers” of development economics, he enunciated the theory of the Big Push: no single project in a low-income country is likely to be profitable by itself, for the domestic market is too small, the suppliers too backward, the transportation and communication facilities too costly. Only if many projects are put in place more or less simultaneously can an economy leap from underdeveloped to developing. Rosenstein-Rodan argued that it is useless for the Bank to be preoccupied with creditworthiness and individual projects. It should calculate the aid necessary to sustain a desired growth rate calculated from an assumed capital-output ratio and make massive loans on a continuing basis. This advice seemed like nonsense to bankers and lawyers in the Bank. Rosenstein-Rodan lost the battle and retreated to the Massachusetts Institute of Technology, where his influence expanded greatly: he became an adviser to the Alliance for Progress, to the governments of India, Italy, Chile, and the United States and to various Presidents of the World Bank since that time. Many of his ideas came eventually to be accepted in the Bank, but not for some time.

9 See Alacevich 2009.

10 According to Oliver (1975), Woods was eager to transform the Bank from a bank to a development finance agency and felt that he needed the assistance of an economics staff in order to do that. He is reported to have 14