In mid-1993, Professor George C. Lodge of Harvard Business School published the revision of his respected case study relating to Third World policy decisions of the World Bank. This, in itself, is not surprising, since the World Bank has served as the subject of countless analyses, reviews and documented studies since it emerged from the drawing board in Bretton Woods, New Hampshire in 1944. What distinguishes Professor Lodge's report from others is the focus or emphasis which he has chosen to adopt. It had been generally acknowledged in the period extending from 1944 through the late 1980s that development funds, whether channeled through the World Bank, or through other international financial organizations, were destined to improve socio-economic conditions in recipient nations and, ultimately, had positive effects on donor-nations. Little or no thought was given to environmental-impact factors or to the ecological lobby which, in the decades prior to the 1980s, was considerably less vociferous.

Professor Lodge reverses thinking in this area by pointing out the recent change in previously static dynamics both within the World Bank and in industrialized societies as a whole, with respect to the environmental issues confronting the global ecosystem. The present analysis, therefore, will concentrate on the salient points raised by Professor Lodge in his referenced case study. It will discuss the major dilemmas and debates raging within the World Bank at the present time, and the relative weight assigned to each "camp" struggling to shore up its position with regard to what may prove to be, as most economists feel, a "false dichotomy." The dichotomy referred to in Lodge's case study is that of, on the one hand, investing freely in developing nations in the hope that projects and industries created with World Bank funds will produce an improvement in the quality of life for all and, on the other hand, restricting investment in developing nations out of fear that ecosystems will be irreversibly damaged, by Bank financed industrial growth, for generations to come.

Lodge presents a compelling overview of the impasse at hand. He (1) traces the types of ecological and environmental damage which have been occurring throughout the world, (2) depicts a paradigmatic schema indicating the relationship of loan activity to poverty, and (3) quotes Herman Daly, a World Bank economist, as stating that "sustainable growth", with limited damage to the environment, is the preferred objective. Encapsulated within his opening remarks, therefore, is a possible solution to the dilemma under analysis. Development funds should be tied, he implies, to projects which provide economic growth, but which are sustainable over time by virtue of minimizing damage to the environment. Nothing, however, is as simple as that, Lodge states, and continues to present a synopsis of the Economists' viewpoint, counter-balanced by an in-depth presentation of the Ecologists' position.

World Bank Economists are not lacking in humanitarian concerns. They find it necessary to spread the wealth of Western Nations throughout the Third World, increasing life expectancy and quality of life indicators wherever Bank funds are disseminated. They see economic growth as an engine fueling progress and well-being for all parties.

Ecologists, also within the World Bank, take the position of Environmental Economist Ernst Lutz who prefers to see funding linked to projects which do minimal damage to the ecology. Working from a base in Mexico, he was among the first professionals on the World Bank staff to suggest that a mechanism be perfected whereby damage to the environment in Mexico could be reflected in the Gross Domestic Product of that nation. This type of thinking breaks new ground in the field of econometrics and could be used at decision-making levels within the World Bank and its primary subsidiary agencies, the IBRD and the IDA. By linking the environment into economic calculations, criteria for assessment of a prospective World Bank project's merits would change discernibly.

Professor Lodge offers an extensive History of the World Bank in this case study. The creation of the Bank, its objectives, its internal structure and its present composition are all discussed in depth. This historical overview reveals the dynamic forces at play within the World Bank and outlines basic trends and priorities for each decade since inception of the Bank. By tracing the development of various Departments and then explaining the upper echelon decision making process, Lodge exposes, perhaps for the first time, the delicate nature of this dichotomous debate over "development versus environment" which continues to echo in the Bank's corridors and Board Rooms.

There were several well-known cases, disseminated freely on the world's news-wires, which struck Professor Lodge as worthy of inclusion in his Case Study. He cites four projects which fell into the category of controversial and were stalled either internally or externally by environmental forces and/or political pressure. Two cases involved India and two involved Brazil. In both countries, major ecological disruption was forecast by environmentalists. What was learned by ultimate resolution of these four cases is carefully analyzed by Lodge who hopes to highlight the types of decisions which must be made by the next generation of economists to inherit the responsibilities of world development, whether at the World Bank or from within other major financial institutions. Figure I, below, displays a summary of these four projects, the nature of the opposition or delays incurred, and the salient feature of each case which led to an ultimate policy change or cancellation of project:

Project Description         Extent of Opposition      Salient Feature 

-----------------------------------------------------------------------------           



Sadar Sarovar - Narmada    Protest from Int'l Groups  Japanese Gov't  suspended  

Dam Projects, Gujarat,     delayed World Bank         funding; major NGO         

India                      flow-diversion project.    opposition.                



Singrauli Coal Project,    Intense opposition to      Fully integrated           

 Northern India            World Bank funding.        planning, in future, is    

                           Major ecological damage    essential.                 



Carajas Iron Ore, Brazil   World Bank financed 17     World Bank Environmental   

                           smelters without initial   Dept.  denouced adverse    

                           thought of damage          effects                    



Rondonia.Mato Grosso,      No initial World Bank or   Eco-system damage led to   

Brazil                     Gov't opposition to        rethinking of project      

                           Amazon highway             strategies.                

Source: Adapted from Lodge, G., Case Study 792-100, 7-8.

FIGURE I

On the basis of these, and other, preliminary observations, Professor Lodge analyzes several factors which have occupied the thinking recently of key Economists and Ecologists serving on the Bank's many subordinate advisory committees. Whereas each prospective loan is subject to the vote of 22 senior Board Members, each representing a donor nation, much of the background data needed for the ultimate decision is generated by subordinate committees and heavily influences decisions made at higher echelons.

The Lodge case study pursues analysis of, not only the decision-making process, but also describes the mechanisms of change within the World Bank. By careful sifting of data and methodic analysis of statistical results, teams of economists, in all three "ideological categories" (pro-development, pro-environment and sustained growth), make recommendations to high bodies and await approval or disapproval. The external political process also places pressure on World Bank officials. As major donor nations withdraw support for a given project, such as Japan's removal of financing for the Indian Dam project, the equilibrium and dynamics change within the Bank, as well. The more demanding LDCs, such as Brazil, Mexico and India, command a relatively high percentage of attention from World Bank officials, whereas IDA clients such as Benin, Bangladesh or Somalia receive attention within the IDA, of course, but the intensity of negotiations is comparatively minor. Environmental impact studies on major Amazonian or Gujarati projects, reviewed by IBRD officials and by World Bank decision-makers, are understandably granted careful, even fastidious attention.

Professor Lodge traces the evolution of change within the World Bank in a subjective manner, mentioning major decisions and policy shifts over the last two decades. He relies, in the body of his Case, surprisingly little on formal data, which he appends without detailed comment. In fact, it is fair to state that the Lodge Case Study was not so much designed as an intricate exercise in analysis of the effect that World Bank investment is or is not having on the ecosystem, but is rather a document prepared for didactic purposes. The Harvard Professor of Business was primarily interested in stimulating discussion among his students of scenarios which were occurring within the World Bank. By pointing out the primary parameters of the issues under consideration among economists of all persuasions, Lodge felt confident that innovative solutions might be forthcoming from among the ranks of his colleagues and students. His presentation of the Case, in this sense, is cogent and well-intentioned. However, although he elaborates on many sub-themes dealing with the effects of investment throughout the Third World, the reader comes away with the impression that the solution, if indeed there is an easy one, was stated in the introductory passages of his article where he speaks of sustained growth in favorable terms. By intensifying the emotional side of this perhaps misperceived dichotomy, Professor Lodge leads his students "down the garden path" toward a recognition that divisive political forces are operative within the Bank and that resolution of this issue is not realistically possible.

Lodge is at his best when he quotes economists and comments on their suggestions, unraveling the threads of other specialists' thoughts. His reliance on Lutz to bolster the ecological argument is noteworthy in this respect. Additionally, his citing of Daly's sustainable growth model is also commendable. The hard-line, pre-environmental position, seems less well delineated in Lodge's article, to the detriment of his students. He points out that pure economists find merit in extending loans to LDCs on the basis of a perhaps naive supposition that money fosters " progress." This may well be true and such thinking, precisely because it has served as the model for World Bank loans for decades, deserves close analysis.

Certain statements leap before the eyes in the Lodge Case Study and provide food for thought among his readers. If, for example, the Industrialized West were to cease all commercial and manufacturing activity throughout the entire world tomorrow, the ozone depletion phenomenon would not reach its peak for another ten years, and would then require 150 to 200 years -- assuming all industrial activity on earth ceased for these two centuries -- to return to its original level of life-sustaining protection. Whether the World Bank continues to fund projects in the Third World or not, or even to what extent, does not seem, under these disastrous ecological circumstances to be the operative question. All that seems feasible at this stage is to embrace the Daly Model of Sustainable Growth, adopt what changes Lutz recommends in terms of econometric measurement of ecosystemic damage, cross our fingers and hope that wisdom will prevail among the next generation of economists and financiers.

The thrust of Professor Lodge's thinking leads in this direction and his appended data point to the possibility of attenuating destructive trends, even as the world's developing nations continue their growth at sustainable rates.

John, R. Global Business Strategy, International Thomson Business Press, London, 1997.

Lodge, G., The World Bank: Mission Uncertain, Harvard Business School Rev. May 17, 1993, 9-792-100.

Madsen, A., Corporate Diplomacy in the Third World, Transnational Research Associates, Boston, 1996.

"World Bank: Mission Uncertain"

1. The World Bank appears to have come to the conclusion that economic development need not be made at the expense of the environment. Could the economic development brought to Mexico by the maquiladora industry have been accomplished without environmental degradation? What regulations could have been put in place to prevent environmental degradation? (Take care that your regulations do not have the effect of overly discouraging firms from locating in Mexico).

Answer:

The underlying problem in attempting to decrease the negative environmental impact of industries such as the maquillas of Matamoros, Juarez, Nogales or Tijuana resides inthe costs which anti-pollution measures would involve. The maquillas exist precisely because they are low-cost, low-wage, and often sub-standard operations. They contaminate ecosystems in areas where they are located with chemical effluent, human waste, industrial toxins and refuse.

Eliminating this reality would cost enormous sums of money, cutting heavily into the owners' profits. As the questions implies, any attempt to regulate these industries so as to meaningfully reduce environmental damage would, or could, discourage their very existence in the Borderlands.

However, there may be some steps which could be taken to alleviate the most serious forms of pollution. Indeed, bi-national legislation already exists requiring the United States to remove industrial and chemical waste from its American-Owned Maquillas along the border. These types of regulations could be expanded to include gradual upgrading of on-site sanitatin facilities, for example. The cost of this up-grading, which would entail medium-volume sewage treatment facilities, new piping and toilet facilities, could be borne by the maquillas under a financing agreement arranged with transnational bankers. Perhaps the World Bank itself could become involved in the financing required for improvement of sanitation facilities in the four major border towns mentioned above.

Other regulations, which would not be unduly costly, might include (1) allotting a larger surface area (measured in square feet) per employee within the industrial setting decreasing employee density without affecting productivity, (2) improving air-borne effluent-processing systems (smokestack filters) used on-site and (3) requiring car pooling to minimize excessive exhaust emissions during employee-shift changes. In fct, some maquillas have adopted such measures. Regulations should be extended along the full length of the frontier and standardized by law.

These regulations would not discourage the growth of maquilla industries and would result in actual improvement of environmental conditions. Careful consideration to where plants are located could also be required by law, so as to avoid damaging high-priority recreational or wildlife areas.

Such an approach would be compatible with the World Bank's sustainable growth policies and would reflect the wisest solution to a difficult problem. Factory owners and operators need to feel that their profits will not be jeopardized, in the short or medium term; and, yet, it is equally important to preserve the Borderlands for future generations.

2. The most recent environmental crisis that we have seen close by is the smoke from fires in southern Mexico that covered much of Texas in May 1998. Should the world bank have a role in educating poor people around the world regarding practices that have negative environmental consequences. For example, could they have projects that show poor farmers alternative methods of clearing their fields, other than burning? How would this "fit" with the mission of the World Bank? Or should it be other international agencies (which ones, and why) who take on such project. or should each nation be responsible for its own practices and problems?

Answer:

The dilemmas confronting the Industrial West with respect to its relationship with Third World Nations are both numerous and increasingly critical. It is extremely difficult to impose solutins on the Governments of other nations. Most of these arrangements are officially formalized by Treaties and Accords after lengthy periods of negotiation. All problems are not resolved by such diplomatic means, however, and enforcement is a perennial problem.

Industrialized nations, such as the United States, located in proximity to Third World countries, in this instance Mexico, have a special responsibility to urge neighboring countries to adhere to standard international practice. When this is not possible, for reasons of cultural conflict, income disparities or social conditions over which the Third World nation has limited control, other steps must be taken.

Obviously, the World Bank is not in the business of policing and enforcing pollution control treaties and agreements. The Bank may be able to exert some pressure in the pre-financing stage on host governments, but such leverage often evaporates as funds are transferred and the project is constructed. For this reason, other agencies are required to intervene. Many subordinate agencies of the United Nations are in a position to act as intermediaries and channels of communication in such circumstances as the Question describes (smoke pollution in Texas emanating from Southern Mexico). The World Health Organization might become legitimately involved in sending a team of investigators into t he area for purposes of infomring peasants of alternate solutions. The Food and Agriculture Organization (FAO) has also historically intervened in such situations. There are precedents in Africa for US-Based Agencies, with host government approval, setting up pilot programs and monitoring stations in critical areas where pollutants are likely to harm neighboring countries or local populations. The Bureau of Reclamation (BUREC) has become involved overseas in providing training and monitoring programs in the Third World.

By carefully working with local populations and my educating those who are causing the most threatening situations to develop, Industrialized Nations can ensure that the Third World does not contribute unduly to environmental risks. However, it seems ironic that, although the Industrialized West is responsible for the vast majority of the world's pollution, they would be interested in ensuring that their underdeveloped neighbors refrain from doing even 10% of the damage that they, themselves, inflict on the planet.

3. Discuss your views regarding the arguments put forth in the Appendix to this case.

Professor Lodge alludes to the material appended to his Case Study. In fact, he builds a significant portion of his own Case on the foundation laid in statistical findings and World Bank decisions concerning the environmental impact of various projects. Further, Lodge mentions the "false dichotomy" theme in the body of his Case and seems to rely on his Appended material to validate some of his sub-themes, such as the Lutz position and the Sustained Growth model.

The environmental movement within World Bank and financial circles seems to be gathering momentum. Conscientious bankers are beginning to turn to some of these findings to evaluate the appropriateness of proposed loans and projects. On balance, the appended material supports many of the comments and remarks which Lodge puts forward in his Case, and this material could be useful for those in positions of authority at the higher echelons of the World Bank and other major lending institutions.