Habitat International 25 (2001) 513–533

The evolution of the World Bank’s urban lending

in Latin America: from sites and services to municipal
reform and beyond
Cecilia Zanetta*
Department of Urban and Regional Planning, University of Tennessee, Hoskins Hall 108 F,
Knoxville, TN 37996-14015, USA
Received 6 June 2000; received in revised form 3 April 2001; accepted 5 April 2001

Abstract

This paper traces the evolution of urban policies promoted by the World Bank in Latin America over the
past three decades. The retrospective starts with an overview of the changing perspectives on development
during the 1950s and 1960s, which eventually led to the onset of urban lending programs in the 1970s. It
then analyzes the policies toward the urban sector promoted by the World Bank during the 1980s and 1990s
in the context of the overall development paradigm that prevailed in the institution at the time. It concludes
by outlining the generation of urban policies that is currently emerging. The analysis indicates that the
evolution of the World Bank’s policies has not been the result of a carefully master-minded strategy but,
instead, of a myriad of factors, including conceptual shifts in the prevailing economic models, learning by
doing, the influence of individuals such as McNamara, and internal and external criticisms. r 2001 Elsevier
Science Ltd. All rights reserved.

Keywords: World Bank/IMF policies; Latin America; Urban; Reform

1. Introduction

It is estimated that more than 50 percent of the population in developing countries will be
concentrated in cities and towns by the year 2020 (World Bank, 1995a). However, while
urbanization proceeds at a steady pace, poor living conditions in urban areas continue to pose a
serious challenge to most governments, with millions of urban residents still lacking water, basic
sanitation, and access to health services and education. Moreover, cities are becoming increasingly

*Tel.: +1-865-974-2055.
E-mail address: czanetta@utk.edu (C. Zanetta).

0197-3975/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved.
PII: S 0 1 9 7 - 3 9 7 5 ( 0 1 ) 0 0 0 2 2 - 4
514 C. Zanetta / Habitat International 25 (2001) 513–533

important determinants of economic growth, as inefficiencies in the provision of services can

seriously hamper a country’s competitiveness in the global economy. Within this framework, it is
appropriate to re-examine the policies of International Financial Institutions (IFIs) toward the
urban sector, as they constitute the single most important determinant of urban policies
worldwide.
This paper traces the evolution of urban policies promoted by the World Bank in
Latin America over the past five decades. The World Bank is probably the foremost
international development agency. As noted by Payer (1982) ‘‘Some call it the best, some call it
the worst, but no one escapes its influence.’’ As the flagship of all the development banks in
the world, the policy course set by the World Bank is followed by other development
banksFregional, bilateral, and national development banksFas well as non-bank development
institutions (Yunus, 1994). The influence of the World Bank and other IFIs goes beyond the
project level. They also influence the policies within individual sectors as well as the relative
priorities assigned to the different sectors at the national level (Payer, 1982). As a result,
the specific roles and relative importance that have been assigned to Latin American cities over
the past decades have been largely determined by the policies promoted by the World Bank within
the region.
The paper analyzes the dominating policies toward the urban sector during each decade in
the context of the overall development paradigm that prevailed in the World Bank at the
time. For this purpose, the analysis draws on two distinctive sets of sources. First, it relies on the
World Bank’s own literature to examine the conceptual framework prevailing at the institution
during each period. Second, it relies on the different critiques of theories and practices applied by
the international development community to identify the limitations of the policies being
promoted during each period. The analysis starts its retrospective with the Bretton Woods
Conference in 1944, where the foundations of the international economic policy of the post-war
were laid down along with the creation of the World Bank and the International Monetary Fund.
The paper then presents an overview of the changing perspectives on development during the
1950s and 1960s, which eventually led to the onset of urban lending programs in the 1970s. It then
analyzes the policy shifts that guided urban lending during the 1980s and the 1990s. Finally, it
describes some of the accomplishments of the past decade and points out some of the challenges
still pending.

2. The origin of the World Bank: lending for reconstruction and development in the 1940s and 1950s

In July 1944, 44 nations assembled in Bretton Woods, New Hampshire, and drafted the Articles
of Agreement for both the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD, also commonly known as the World Bank). The stated
objective behind these two institutions was to satisfy the needs of less-developed countries seeking
financing to assist their economic growth. The specific roles of the two institutions were designed
to complement each other. While the IMF was to promote international currency stability in the
short and medium terms by helping finance temporary balance of payment deficits, the World
Bank was to provide long-term financing for the reconstruction and development of its member
countries (World Bank, 1962a).
 C. Zanetta / Habitat International 25 (2001) 513–533 515

The World Bank was conceived as a tool to promote worldwide prosperity through
economic development, which in turn was going to lay the foundations for sustainable
peace and democratic forms of government worldwide. As early as 1941, the notion had
emerged among the economic and financial experts of the Allied Nations that for long-term
sustainable peace to be attained, immediate relief and physical reconstruction of the economies
disrupted by the war had to be coupled with ‘‘the expansion y of production, employment, and
the exchange and consumption of goods which are the material foundations of the liberty
and welfare of all peoplesy’’1 (World Bank, 1962a). Shortage of capital was perceived as
the main obstacle to more rapid economic progress. The innovative mechanism
embedded in the design of the World Bank, which allowed for risk-sharing on an international
basis, made it possible to mobilize the capital needed for reconstruction and development
purposes.
When the Bank opened for business in June 1945, its primary focus was on financing countries’
economic infrastructure. It was soon obvious that the capital required for the reconstruction of
the European countries had been greatly underestimated. The World Bank did not command
enough resources to meet the capital requirements, nor could the European countries afford to
borrow them. These demands were finally satisfied under the Marshall Plan and the European
Recovery Program, which freed the Bank to focus its attention on development lending in 1948
(World Bank, 1962a).
The first development loans took place in Latin America, which portfolio accounted for
almost a fourth of all IBRD lending between 1948 and 1959. The objective that guided the
first decade of development lending was ‘‘to provide the necessary stimulus to commerce,
raise industrial and agricultural production, and open up new markets and new areas of
development’’ (World Bank, 1962b). This was done primarily through investment projects
aimed at improving the countries’ economic infrastructure. Projects in the traditional sectors
dominated the portfolio, with 90 percent of all lending concentrated on energy and transport
projects. The impact of these projects was considerable, more than doubling the electric
power capacity in Latin American and financing the construction of many highways, ports
and railroads during the 1950s. Agriculture projects that financed mainly the purchase of
machinery to modernize production and irrigation works, ranked third in the overall portfolio
(World Bank, 1960b).
The Bank’s early strategy toward development reflected the neoclassical economic model
predominant at the time and, consequently, shared most of the same underlying assumptions. One
dominant assumption was that economic development was a ‘‘supply-led’’ phenomenon,
presupposing that economic growth could be fueled simply by supplying the proper economic
infrastructure. Another assumption was that overall economic growth would ultimately ‘‘trickle
down’’ to all layers of society, eventually resulting in a more widespread distribution of wealth.
Finally, there was also the assumption that economic development would lead to political stability
and the flourishing of democracies around the world (Packenham, 1973; David, 1986). In short,
the Bank’s strategy during this period reflected the na.ıve and deterministic conceptions of
development predominant in the post-war era and severely underestimated the difficulties of the
task ahead.
1
Article VII, Mutual Aid Agreement between the United States and Great Britain, 1944.
516 C. Zanetta / Habitat International 25 (2001) 513–533

3. Getting a closer perspective of development: coming face to face with poverty in the agriculture
sector during the 1960s

Lending in agriculture increased substantially during the 1960s. The stated justification for this
increase was the large numbers of people who depended on agriculture for their livelihood. This
new emphasis on agriculture-related investments was also undoubtedly influenced by the
competitive advantage thesis that stressed the central role of agriculture exports for developing
countries under the neoclassical development paradigm. As a result, agriculture-related projects
substantially increased their relative share of the overall portfolio during the 1960s, while projects
in the more traditional sectorsFi.e., transport, energy, industry, etc.Fexperienced a decline
relative to the levels of the previous decade (World Bank, 1977).
The Bank’s lending in the agriculture sector seems to have triggered the rethinking of its initial
development strategy. Because of the nature of the agriculture sector in many developing
countriesFlabor intensive, small land holdings, etc.Firrigation and rural water projects required
a much more direct involvement on the part of the Bank than the construction of power plants or
highways. This direct involvement in agriculture brought the Bank in touch with a wider spectrum
of interlocutors to include not just the countries’ political and technical elites but also poor rural
communities. It also set in motion a ‘‘hands-on’’ learning process that, in turn, started to change
the Bank’s initial philosophy toward development. From this closer perspective, the complexities
of development became more apparent and it was soon recognized that promoting development
was far more complex than financing large investments in the countries’ economic infrastructure.
Perhaps the most important outcome of the Bank’s involvement in agriculture projects was its
increasing awareness of the differences between the generation and distribution of wealth. Faced
with the realities of widespread poverty in developing countries, the Bank slowly started to
reassess the validity of the ‘‘trickle down’’ assumption. The Bank’s first attempts to explicitly
target the poor took place, as could be expected, in agriculture projects. But, the concerns with
poverty alleviation and targeting of the poor soon extended to the traditional sectors in the form
of tariff structures for water and electricity that took equity issues into consideration.
Learning about development was occurring not only within the Bank and other IFIs but
elsewhere as well. Economists and social scientists, in general, started to recognize that the
development path taken by developed countries might not be suitable for all countries. Moreover,
the World Bank’s initial development strategy came under attack, mainly because of its reliance
on economic infrastructure and production projects that demanded a high capital goods import
component and its related negative impacts in terms of trade, balance of payment deficit, and the
cost of debt service (DeWitt a Peter, 1977). Challenges to the traditional development model
were particularly strong in Latin America. In the mid-1950s, a group of social scientists grouped
around the Economic Commission for Latin America (ECLA) had already started questioning
the principle of comparative advantage and the soundness of a development strategy that focused
on the production of primary products. To overcome inherent inequalities in the terms of trade
between exporters of raw materials in developing countries and exporters of manufactured goods
in developed countries, Prebisch and others in the ECLA group proposed the ‘‘infant industries’’
thesis, an alternative development model that advocated import substitution and state-led
development (DeWitt a Peter, 1987; Packenham, 1992). In the mid-1960s, traditional definitions
of development were being further challenged under the broad heading of dependency theory.
 C. Zanetta / Habitat International 25 (2001) 513–533 517

Expressed in the language of political economy and drawing on a variety of combinations of

Marxism and structuralist economics, the proponents of the dependency thesis questioned the
suitability of conventional economic development strategies for the Third World, in general, and
Latin America, in particular, as well as the natural compatibility of growth and equity (Hunter,
1999; Lehmann, 1997; Packenham, 1992).
Despite the many criticisms that were being articulated from different fronts, it took time to
change the Bank’s institutional views. Although there was probably much awareness within the
ranks of the Bank, especially among agriculture teams and task managers, it required almost a
decade to change the institutional knowledge and ideology. It was not until the 1970s, with the
advent of Robert McNamara’s tenure, that the lessons learned about poverty were reflected in
the IBRD policies.

4. The poverty alleviation paradigm: the McNamara era during the 1970s

By the early 1970s, direct exposure to the realities of widespread poverty through the Bank’s
operations in the agriculture sector and criticisms against the traditional development model were
coupled with mounting evidence suggesting an increasing gap between developed and developing
countries. There was increasing recognition that ‘‘extreme poverty in the developing countries is
the most pressing problem of development’’ (World Bank, 1979). Although developing countries
had experienced sustained rates of economic growth in the post-war period, the levels of growth
that had been attained ‘‘were insufficient to make a dent in alleviating [poverty], much less
eradicating it’’ (World Bank, 1977). In the face of the failure of the ‘‘trickle down’’ theory and
other tenets of the neoclassical development paradigm, economists within the World Bank and
other IFIs started to rethink the traditional approach toward development.
It was during Robert McNamara’s tenure as president of the World Bank (1968–79) that the
Bank experienced a significant shift in policy, expanding its focus to include not only aggregate
growth rates but also the impact on the relative distribution of income. It was then recognized that
‘‘the benefits of growth cannot be assumed to ‘trickle down’ automatically; to ensure that
development benefits the poorest, it must deliberately be directed to the poorest’’ (World Bank,
1977). McNamara was the galvanizing force behind the reorientation of World Bank policies
toward poverty alleviation and the ‘‘basic needs’’ approach, institutionalizing the concern about
poverty and making it an intrinsic element in the basic definition of development (Finnemore,
1997).
Although the shortcomings of the strategy followed during the previous two decades were not
recognized explicitly, the definition of development and its objectives were revised accordingly.
The 1977 Annual Report went so far as implicitly extending the current views to its policies during
the previous decades when stating that ‘‘growth per se has never been the sole objective of
development.’’2 The newly adopted objective was now ‘‘to combine growth with equity so as to
accelerate and mutually reinforce the gains from both’’ (World Bank, 1977). After almost three
decades of lending, there was finally an explicit recognition of the need to systematically reassess
the old paradigm. To that effect, the Bank ‘‘decided to undertake immediately an analysis of
2
Emphasis by the author.
518 C. Zanetta / Habitat International 25 (2001) 513–533

major development issues in order to promote their better understanding in both the
industrialized and developing countries’’ (World Bank, 1977).

5. The origins of urban lending

During the early 1970s, the Bank was very preoccupied with the fast population growth trends
exhibited by developing countries (World Bank, 1977). In his 1979 address to the Board of
Governors, McNamara identified excessive population growth as ‘‘the greatest single obstacle to
economic and social advancement of most of the societies in the development world’’ (Payer,
1982). Although some critics argue that the Malthusian argument of staggering population
growth was used by the Bank and dominant elites as an external justification for their failures
(Payer, 1982), it had a significant impact on the World Bank’s medium- and long-term strategies.
The preoccupation with population growth led the institution into new directions for lending,
including health and education, micro enterprises, and urban development. On the one hand, the
Bank attempted to ‘‘influence fertility demand’’ through community-based health and education
programs, which were the embryo for future lending in health and education. On the other hand,
population studies brought the realization that agriculture production was not going to be
sufficient to generate the required growth in employment to absorb population growth. Two
additional areas of intervention were articulated to respond to this challenge. One was the
generation of employment programs for the poor, mainly through small-scale enterprises. The
second was the emergence of urban projects aimed at helping cities to cope with staggering
urbanization rates resulting from the flux of rural migrants into the cities.
In this way, cities soon started to receive increasing attention within the framework of poverty
alleviation strategies, giving rise to the Bank’s urban sector portfolio. However, the emerging
attention on urban problems did not arise from the recognition of the intrinsic importance of
the role of urban areas in the development process. Rather, cities were viewed as receptors of
the unprecedented flow of rural migrants. The Bank’s close involvement in agriculture during the
previous decade may have contributed to its initial blindness to recognizing the important role
that urban areas play in economic development. As pointed out by the 1979 Annual Report,
agriculture was still considered the central element in the development strategy, as ‘‘the key to
improving the living standards of the bulk of the poor in the developing world.’’ Conversely,
urbanization was seen as an undesirable phenomenon (Lee, 1994) and cities were perceived as a
drain on resources, as receptors of investments and subsidies instead of producers (Jones a
Ward, 1994).
Four sector papers were issued during the first half of the 1970s, focusing on urbanization
trends, sites and services, housing, and transport issues (World Bank, 1972, 1974, 1975a, b).3
Perhaps as a result of looking at cities as receptors of rural migration rather than as centers of
production, as they were later conceptualized, the Bank’s initial approach toward the urban sector
was more reactive than proactive. The emphasis was on projects that helped cities face the
demand for services, primarily in the same sectors that had been addressed at the national level,
3
The specific sector papers were Urbanization Sector Policy Paper (1972), Sites and Services (1974), Housing (1975),
and Transport (1975).
 C. Zanetta / Habitat International 25 (2001) 513–533 519

but now at the city level (i.e., transport, energy) as well as the provision of housing, water and
sewerage. The public sector was deemed directly responsible for the delivery of both shelter and
services (World Bank, 1994a). Although there was a dim recognition of the potential contribution
that poor urban dwellers could bring to economic development in the framework of small
enterprises, the economic development potential of urban programs per se was generally lacking.
In view of the high concentration of poverty in urban areas and the Bank’s new concern about
poverty, the first generation of urban projects was structured around poverty alleviation
objectives. One of the significant contributions of the Bank’s early urban policy work was to bring
attention to the unrealistic urban policies popular in developing countries at the time, which
replicated those of industrialized countries without much adaptation to the local contexts (Pugh,
1994b). Such policies included the demolition of squatter settlements with the hope of replacing
them with high-standard public housing, a strategy of very limited scope given the scarcity of
public sector resources (World Bank, 1994a; Pugh, 1994b). Slum clearance was so widespread
that, according to United Nation’s estimates, governments were destroying annually more low-
income housing than they were building (Werlin, 1999). In its 1972 ‘‘Urbanization Sector Policy
Paper,’’ the World Bank argued for a drastic shift in urban policies (World Bank, 1972). The
paper lucidly described the staggering problems of urban areas in Third World countries and
proposed to replace the bulldozer with broadly supportive housing and land policies (Jones a
Ward, 1994) (see Table 1).
The focus of the World Bank’s strategy was on developing effective low-cost solutions that
could solve the low-income housing shortages of rapidly urbanizing cities, drawing on Turner’s
model of self-help (Werlin, 1999; Pugh, 1994b, 1995). While Turner’s advocacy for self-help
housing was based on its potential to replace public housing policies that were excessively
bureaucratic and technological while providing opportunities for individual and community
development, the Bank emphasized the economic aspects of the model (Choguill, 1999; Pugh,
1994b). The concepts of ‘‘affordability’’ and ‘‘replicability’’ became central tenets in the urban
agenda, calling for reduced standards and the use of cost recovery mechanisms as a way of
maximizing the impact of scarce public resources (Jones a Ward, 1994). More than 116 sites-
and-services and slum upgrading demonstration projects have implemented around these two
concepts since 1972 (Pugh, 1994b).
While the first generation of urban projects was considered successful in terms of the
physical targets of housing and infrastructure production, it was difficult to ensure
adequate maintenance and operation after completion of the projects, mainly as a result
of poor technical and financial capacity on the part of municipal governments (World Bank,
1995a). In short, they constituted successful isolated efforts that failed to be replicated in a
systematic way on a larger scale or affect policy changes (Cohen a Leitmann, 1994).
Given this realization, the Bank began to draw away from a project-by-project approach
(Jones a Ward, 1994; Morin a Seguin, 1997; Pugh, 1995, 1997a, b) and a second wave of
projects emerged aimed at improving the performance of municipal governments. The
focus was mainly on internal municipal administration, including improving the efficiency of
local taxation, accounting, and capital budgeting mechanisms (World Bank, 1995a). Despite
the success of some of these interventions, the impact on improving local resource
mobilization and accounting practices was limited. The low degree of autonomy of
most municipal governments was one of the major impediments to implementing the technical
520 C. Zanetta / Habitat International 25 (2001) 513–533

Table 1
Successive stages of World Bank urban policies
Stage The role of cities The role of the public The role of the Bank Approach to poverty
sector
1st Stage: Urban Cities as receptacles Responsible for the Focus on a ‘‘project-to- Direct targeting:
Projects (1970s) of rural migration; direct provision of project’’ approach, Poverty is central to
drain of investments housing and urban including sites-and- the Bank’s agenda
and subsidies. services. services and slum under McNamara;
upgrading. thus, urban projects
are directly targeted
to the poor, as in
sites-and-services and
slum-upgrading
projects.
Important from Demonstration of
a poverty alleviation affordable and
perspective, given the replicable solutions.
large number
of poor urban
residents.
2nd Stage: An increasing Public institutions as Broad urban programs Poverty alleviation is
Institutional recognition of the playing a central role in aimed at addressing the one among various
Strengthening complexity of the ensuring the complexities of the objectives of World
(1980s) urban sector with a sustainability of urban urban sector. Bank policies.
myriad of interrelated development.
componentsFi.e.,
housing, land and
transportation.
Emphasis on improv-
ing urban manage-
ment.
Development of finan-
cial intermediaries.
3rd Stage: Urban Recognition of the The role of the public Emphasis on policies Indirect targeting
Productivity (1990s) role of cities as centers sector is to ‘‘enable’’ and systems of (if any). The rationale
of production with markets to work. incentives conducive to is that the poor
important macro- sound fiscal behavior depend more on
economic linkages. (important for publicly provided
macroeconomic services; thus,
stability) and improved improvements from
efficiency in the increased efficiency
provision of public are expected to
services (important for benefit them most.
productivity).
Politicians and Increased private Added growth from
bureaucrats are seen sector participation well-functioning
as narrowly pursuing in urban financing economies and
their self-interest. and in the delivery savings from more
Alternatively, market of services (i.e., efficient public sectors
 C. Zanetta / Habitat International 25 (2001) 513–533 521

Table 1 (continued)
Stage The role of cities The role of the public The role of the Bank Approach to poverty
sector
mechanisms are now privatizations and is expected to
paramount. concessions). eventually benefit
the poor.
4th Stage: Cities at the forefront Market imperfections Emphasis on policies It is recognized that
The Emerging of the new are pointed out, that are at the same the poor have
Paradigm (2000s?) development strategy together with oppor- time consistent with suffered the most
aimed at addressing tunities for government macroeconomic from cuts in public
economic and social interventions. stability and equity and spending and they
objectives. poverty alleviation. have not participated
on the economic
gains.
Holistic view of cities A more positive view The challenge will be to The poor are targeted
in which sustainability, of the public sector translate this broad directly in a frame-
livableness and govern- with recognition of conceptual model into work of fiscal
ance coexist on redistribution effective lending responsibility in an
seemingly equal basis functions. operations. attempt to alleviate
with competitiveness, long-term poverty.
sound management Continued emphasis
and fiscal on safety nets to
responsibility. address short-term
poverty.

solutions that were being proposed. Another impediment was the lack of adequate institutional
incentives, it being generally more rewarding to resort to discretionary grants from the central
administration than to increase local taxes, although this was not recognized as such at the time
(World Bank, 1995a). Finally, the failure of many interventions was due to global economic crises
and the inability of cities to respond, as the initial World Bank urban policies failed to underscore
link between urban and national economies (Jones a Ward, 1994).
The learning that took place during the second half of the 1970s was mainly acquired
through actual project implementation, without resulting in any significant conceptual
breakthrough. Another policy paper on shelter was published in 1980, but it mainly translated
the ‘‘basic needs’’ approach to alleviating poverty to the problems of the urban
sector. Recognition of the macroeconomic relevance of urban centers was still missing
(World Bank, 1994a). Despite the limited success of the first urban projects to provide
systematic answers to the numerous challenges posed by the urban sector, the 1970s was a key
decade for the urban sector. Not only did it mark the beginning of the Bank’s urban agenda,
but it also laid the groundwork for future policies. As it had done with agriculture projects during
the previous decade, the Bank took an enthusiastic, direct approach toward urban projects.
Although these early projects did not yield systematic solutions to the urban problems, they
allowed the Bank to do the necessary hands-on learning necessary to grasp the complexities of the
urban sector.
522 C. Zanetta / Habitat International 25 (2001) 513–533

6. The institutional urban agenda of the 1980s

The lessons learned from the direct involvement of the previous decade were crystallized in
‘‘Learning by Doing,’’ a milestone policy paper issued in 1983. Looking back at the successes and
failures of the 1970s, the paper concluded that, despite the continuing need to provide shelter and
infrastructure, demonstration projects provided a narrow approach to the complexities of the
urban sector. It also drew attention to the weak institutional capacity of most urban institutions
and the need to strengthen them as a prerequisite to achieve more systematic solutions. Most
important, the paper stressed the economic significance of urban centers and the importance of
raising urban efficiency and the productivity of economic activities (World Bank, 1994a).
After almost a decade of involvement in the urban sector, the Bank had reached a more mature
understanding of the sector’s intrinsic challenges and potentials. Urban development was now
perceived in all its complexity, which was reflected in a more diverse urban portfolio. Shelter and
infrastructure projects began to decline at the same time urban operations on city-wide policy
reform, institutional development, and high-priority investments started to emerge in an attempt
to tackle the complexities of the sector (Jones a Ward, 1994). The typical projects of the first half
of the 1980s were large integrated urban projects that incorporated numerous components, such
as shelter, infrastructure, transport, solid waste, business support, health, nutrition, education,
etc. (see Table 1). Because they cut across multiple sectors, they required the involvement of
several government agencies, sometimes located in different ministries (World Bank, 1994a).
These projects, also dubbed as ‘‘Christmas-tree projects,’’ ultimately lacked focus and were very
difficult to implement.
A major accomplishment during this decade was the shift from the Bank’s previous role as
financial retailer to that of wholesaler of urban development finance, focusing increasingly on
mechanisms for financial intermediation. Drawing on an innovative model adopted by the United
States Agency for International Development (USAID) in which the finance capital was raised
under US government ‘‘housing guarantee,’’ the Bank used its leverage as a source of external
capital financing to ensure the implementation of sound operating procedures and to promote
reform in the criteria used to allocate capital financing domestically (Pugh, 1994b; World Bank,
1995a). This scheme was applied to both housing and municipal finance projects and continues
today as an important line of work (Buckley a Heller, 1992).
The role of municipal governments also remained under scrutiny, particularly given the
financial limitations resulting from the highly discretionary systems of intra-government transfers
and the municipalities’ inability to mobilize local resources. It became increasingly apparent that
municipal governments depended heavily on a complex web of institutional and financial
relationships that tied them to state and national levels of governments (World Bank, 1995a). In
most cases, those relationships were highly distorted and created a perverse system of incentives
that promoted fiscal irresponsibility and a general lack of accountability. The importance of
sound national policies and political ‘‘commitment’’ also became apparent during this decade.
The lessons learned in this area through individual projects and country sector papers provided
the foundations of much of the municipal reform agenda pursued during the 1990s.
During the 1980s World Bank urban lending gained greater self-confidence and was
characterized by more ambitious policy reform objectives that were implemented through a
larger, more diverse portfolio. The average loan amount was US$69.2 million, more than twice
 C. Zanetta / Habitat International 25 (2001) 513–533 523

the average for the previous decade (World Bank, 1994a). However, the increase in the scope of
urban projects was attained at the expense of a general loss in focus and direction. Also, progress
in the development of urban policy per se was rather fragmented during this decade, and no major
institutional policy statements were issued until 1991. The successive internal reorganizations of
the urban sector that occurred during this period appear to have been a contributing factor to the
interruption in sector policy development (World Bank, 1994a).
The critique of development practices during the 1980s was heavily influenced by the
proliferation of non-government organizations (NGOs) and the growth of resources under their
control (Lehmann, 1997). Less economic in its expression, it focused on women and the
environment and called for an end to the destruction of cultures and livelihoods through
grassroots mobilization (Lehmann, 1997). The United Nations had already brought attention to
both gender and environmental issues during the 1970s,4 calling for the need to plan for the needs
of women in their own right as well as for the protection of the environment. The unintended
effects that urban projects had on women in terms of tenure rights, zoning legislations, and
housing design were being amply documented (Moser, 1987; Moser a Peake, 1987). Similarly,
the Bank’s interventions in other sectors, such as the financing of dams and electric plants with
disastrous environmental impacts, were bringing attention to environmental issues in general
(Rich, 1994; Le Prestre, 1989). Most urban projects, such as the upgrading of squatter settlements
and water and sanitation projects, had positive environmental effects. For instance, waterborne
diseases in Calcutta were reduced by nearly half during the 1970s as a result of a slum-upgrading
project in Calcutta (Werlin, 1999). However, environmental aspects were not identified as specific
project objectives (World Bank, 1994a).
Unlike critiques of the 1960s and 1970s, the criticisms of environmental, grass-roots, and
women’s organizations did not necessarily imply irreconciliable differences with the ideological
model of the World Bank. As a result, the criticisms were effective in affecting the IBRD policies.
Women’s poverty was attributed to underdevelopment rather than to subordination or structural
inequities (Moser, 1993) and subsequently adopted as an institutional concern. Similarly, the
World Bank and other IFIs stressed that it was possible to conciliate economic efficiency and the
creation of wealth with the protection of the environment (World Bank, 1992). In this way,
environment and gender issues became components of the Bank’s policies in general and of the
urban agenda (Murphy, 1995, 1997; World Bank, 1994a). Many have argued that hunger, women,
health, and environmental concerns have been added to the World Bank’s agenda as long as they
are not in conflict with the ultimate objective of unrestrained economic growth (Yunus, 1994). In
any case, the mainstreaming of gender and environmental aspects into World Bank operations is
still pending. A recent World Bank self-evaluation study recognizes that the Bank still lacks an
institution-wide rationale, common language, and clearly defined policy approach to gender and
development, and that gender concerns still need to be mainstreamed into operational procedures
(Moser, Tomqvist, a van Bronkhorst, 1998). Similarly, two highly critical self-evaluation reports
from the early 1990sFthe Wapenhans and the Morse ReportsFbrought attention to the high
rate of failure in the implementation of World Bank projects in general and the negative
environmental impacts of specific projects in Brazil, Egypt, India, and China (Chatterjee, 1994;

4
The United Nations sponsored a conference on the environment in 1972 and another on women in 1975.
524 C. Zanetta / Habitat International 25 (2001) 513–533

Gerster, 1994). Concerns about the negative impact of the Bank’s policies on the environment
have also been at the center of demonstrations recently held in Washington.5

7. Enabling markets to work: the neo-liberal urban strategy of the 1990s

Toward the end of the 1980s, another drastic shift began to occur in the overall development
paradigm. Most Latin American countries had pursued strong inward-looking development
strategies during the previous four decades, partly as an inheritance of Prebisch’s import-
substitution model and partly as a result of having a political structure conducive to ‘‘clientelistic’’
behavior in favor of the dominant economic interests within each country (Kurer, 1996). Now
struggling with mounting inflation, large public sector deficits, and considerable debt-servicing
obligations, there was increasing dissolution among most Latin American nations with
protectionist policies. In this way, the conceptual model for development predominant in Latin
America started to shift from one of heavy state interventionism to one of neo-liberal economic
reform that emphasized a reduced role of the state, fiscal discipline, and financial and trade
liberalization (Williamson, 1990, 1997; Krugman, 1997).
The economic crisis of the 1980s and 1990s forced many Latin American countries to undertake
economic reform along the lines defined by the IMF and the World Bank, implementing
structural adjustment programs that emphasized macroeconomic stability (Pugh, 1994b, 1995).
Similarly, the formulation and operation of urban policies became significantly internationalized,
favoring the approaches of the World Bank, UNCHS (Habitat) and the UN Development
Programme (UNDP), sometimes working jointly, as in the post-1986 Urban Management
Programme (Pugh, 1997a). Against the backdrop of the neo-liberal reforms that were now being
successfully implemented in most Latin American countries, the World Bank’s urban agenda of
the 1990s was formulated in the context of the broader objectives of economic development
and macroeconomic performance (Jones a Ward, 1994). Articulating a positive economic
vision of Third World cities, the goal of the new urban agenda was ultimately to maximize
positive ‘‘macroeconomic linkages,’’ or the potential of urban economies to contribute to a
country’s macroeconomic performance through financial, fiscal, and economic links (Cohen a
Leitmann, 1994; Jones a Ward, 1994; Lee, 1994; Pugh, 1995). These concepts were clearly
articulated in ‘‘Urban Policy and Economic Development: An Agenda for the 1990s’’ (World
Bank, 1991a, b), a landmark sector paper that broke eight years of institutional silence on urban
policy (see Table 1). With a central focus on the revalorization of market mechanisms, sound
urban policies were now defined as those aimed at eliminating barriers that restricted the
productivity of urban economic agents, both formal and informal, so as to maximize
their contribution to the national economy (Jones a Ward, 1994; Pugh, 1995). The role of the
public sector was defined in terms of ‘‘enabling’’ markets to work by providing the
legislative, institutional and financial frameworks in which firms and households could
5
For a series of articles describing some of the criticisms against the World Bank and its negative environmental
impacts, see: Dan Eggen’s ‘‘From All Walks of Life’’ in The Washington Post, 04/08/2000, p. A01; David Montgomery’s
‘‘Demonstrators Are United by Zeal for Social Justice’’ in The Washington Post, 04/16/2000, p. A01; Chris DeCardy’s
‘‘Policies Exploit the Poor’’ in USA Today, 04/14/2000, p. 14A; ‘‘IMF, World Bank vs. Protesters’’ in The Houston
Chronicle, 04/14/2000, p. 1.
 C. Zanetta / Habitat International 25 (2001) 513–533 525

prosper (Pugh, 1995). Urban services, including water and sewer, electricity, roads, transport, and
social services were now conceptualized as factors promoting urban productivity (World Bank,
1993). Even the potential productivity of the urban poor through the informal sector came to be
recognized as an asset, which could contribute to the urban and national economies (World Bank,
1993).
The objective of much of the neo-liberal ‘‘municipal reform agenda’’ was to rebuild local
governments’ technical and financial capacity and to reintroduce sound economic and financing
criteria for the evaluation of physical investments, modern management practices and tools, and
sustainable mechanisms of financing for municipal infrastructure (World Bank, 1995a). These
reforms were badly needed, since after a decade of high inflation and unstable macroeconomic
conditions, municipal governments had lost their ability to mobilize resources, which in turn had
led to the deterioration of municipal infrastructure. The reform agenda was translated in a
number of municipal development programs that were implemented in several Latin American
countries. These programs followed a ‘‘demand-driven’’ approach, in which the municipalities
themselves were responsible for identifying the specific projects they wanted to implement. The
emphasis was not only on the provision of infrastructure per se, but also as an incentive to
forward the agenda of municipal reform. To access financing for physical infrastructure,
municipalities had to meet strict creditworthiness criteria. Otherwise, they were still eligible for
technical assistance aimed at improving their institutional and fiscal capacity (World Bank, 1988,
1994b, 1995b). These projects were successful in improving the technical and institutional capacity
of municipal governments, as well as re-introducing more sound financial practices. Another
important contribution of the neo-liberal agenda of the 1990s has been to bring recognition to the
importance of having an adequate system of incentives at the national and sub-national levels,
which in turn resulted in substantial sector work on decentralization and systems of intra-
governmental transfers (World Bank, 1995a; Burki a Perry, 1997; Burki, Perry, a Dillinger,
1999).
Increasing municipal governments’ access to private financial markets was seen as the solution
to satisfy financing requirements for infrastructure. Similarly, increased private participation was
sought to improve the efficiency in the delivery of services and levels of investments in
infrastructure. In this way, the Bank’s policy provided both financial and technical support and
imposed loan conditionality that supported the privatization or concessioning of urban services,
as well as the development of supporting regulatory frameworks. Water concessions are a good
illustration of the mixed results from concessions and privatizations in general. While in some
cases, such as Buenos Aires, concessions have led to an improved level of services without
significant price increases (Crampes a Estache, 1997), in other cases, such as Tucum!an in
Argentina and Cochabamba in Bolivia, they have resulted in social unrest as a result of high tariff
hikes.6 In general, the neo-liberal perspective has dominated World Bank’s policies in relation to
concessions and privatizations, as reflected by the content of most World Bank reports. The focus

6
For a series of articles exploring water concessions, in general, and the protests in Bolivia, in particular, from
various perspectives see: Didier Quint’s ‘‘Protests over Bolivian water deal led by the wealthy’’ in The Toronto Star, 05/
02/2000; Gregory Palast’s ‘‘Bolivia: The hijacking of a water system’’ in The Toronto Star, 05/03/2000; Maude Barlow’s
‘‘Water, water y’’ in The Globe and Mail Metro 05/09/2000; Shawn Tully’s ‘‘Water, water everywhere y’’ in Fortune
Magazine 05/15/2000.
526 C. Zanetta / Habitat International 25 (2001) 513–533

has been far more on formulating supportive regulatory frameworks, reducing transaction costs,
and optimizing the allocation of risks than on protecting consumers, developing equitable tariff
structures, and guaranteeing access by the poor (World Bank, 1997b, 1999; Brook Cowen a
Tynan, 1999).
Some of the neo-liberal reforms advocated during the 1990s were beneficial from a social justice
perspective, particularly those aimed at improving efficiency in the provision of services and
promoting sounder municipal practices. The low quality of public services often has a
disproportionately negative effect on the poor, who are more dependent on public services both
for consumption and as inputs into their productivity (Moser, 1996). Improving municipal fiscal
practices was a prerequisite for better health and basic education, access to safe water, and basic
physical infrastructure that, in many cases, have effectively raised poor people’s well-being and
their productivity and incomes (Van de Walle, 1998; Moser, 1996). However, poverty alleviation
objectives were generally dissociated from the mainstream neo-liberal agenda and consequently
failed to make a dent in reducing poverty. In Latin America, the share of the population living on
less than $1 a day remained mostly unchanged at around 15 percent between 1987 and 1998
(Lustig a Stern, 2000). Improving the efficiency in provision of services did not necessarily make
them more affordable (Jones a Ward, 1995). Moreover, it was the poor who suffered the most
from the cuts in public spending associated with the austerity programs implemented in most
Latin American countries, as the importance of preserving spending in the social sectors and
setting in place safety nets was not officially recognized until later (Pugh, 1994a, b). As critics put
it, poverty alleviation and social programs had been mainly ‘‘add-ons’’ subordinated to the
ultimate objective of unrestrained economic growth (Yunus, 1994). While the neo-liberal urban
agenda was successful in addressing the economic role of cities, it failed to address the many
noneconomic issues affecting cities and their residents (Jones a Ward, 1995).
Some of the critique of World Bank policies during the 1990s resembles the critiques of the
1960s and 1970s, harshly slashing at the development-policy establishment for its inability to
produce effective responses to persistent poverty and accusing it of being an instrument of geo-
political domination (Escobar, 1995). This time, however, the criticisms go beyond the current
development model and call for the questioning of the concept of development itself (Lehmann,
1997). Previously accepted notions, such as the cause–effect relationship between policy measures
and outcomes, the progression of the development process from one stage to the next, as well as
the indissoluble link between development and progress, are now being called into question or
‘‘deconstructed’’ (Lehmann, 1997). The role of the state is also being questioned, not so much
from an ideological perspective but based on the inability of governments elsewhere to deliver on
the promises made and questionable identification of the needs of the state with those of the
people (Lehmann, 1997).
Another set of criticisms has come from inside IFIs themselves, calling for a reassessment of the
macroeconomic policies being imposed by the IMF and a more reflective approach toward the
role, policies, and practices of IFIs in general (Stiglitz, 2000; Irwin, 1994; Sacks7). The
demonstrations against the IMF and the World Bank recently held in Washington, DC echoed
those general feelings. Although they do not offer any specific remedies except for the

7
Jeffrey Sacks, 1998, in The American Prospect, as quoted by Jerry Useem in ‘‘There Is Something Happening Here
y’’ in Fortune Magazine, May 15, 2000, p. 232.
 C. Zanetta / Habitat International 25 (2001) 513–533 527

revalorization of the importance of social movements in general and of the international NGO
network, in particular, they constitute a challenge to the so-called ‘‘Washington consensus,’’
based on the tenets of free markets and globalization that go hand-in-hand with the neo-liberal
agenda of the 1990s.8

8. The emerging paradigm

As structural adjustment reforms were being consolidated in several Latin American

countries during the late 1980s and early 1990s, there was growing awareness that the
structural adjustment programs being implemented were not sufficient for improving the
welfare of the people (Pugh, 1994b). While the evidence that was becoming available from
both World Bank studies and independent researchers generally confirmed that macro-
economic stability, openness, and sound public management did indeed lead to economic
growth (World Bank, 1998), it also pointed to the adverse effects that structural adjustment
programs were having upon the poor (Pugh, 1994b, 1995). Contrary to the expectations of
policy makers in the World Bank and other IFIs, the added growth and the savings from
more efficient spending had not been sufficient to generate the investments needed for
poverty alleviation, particularly in the context of raising unemployment. As a result, a new
conceptual shift began to take place in World Bank’s thinking, increasingly recognizing the
need to promote public sector reform hand-in-hand with policies promoting a more equitable
distribution of wealth. The ‘‘Washington consensus’’ has been increasingly questioned, pointing
to the prevalence of market imperfections and the need for state intervention to rectify them
(Fine, 1999).
In its 1999/2000 World Development Report, the World Bank outlined what seems to be the
emerging paradigm, pointing out the need to develop workable connections between
macroeconomic stability and long-term poverty alleviation strategies (World Bank, 2000a). As
part of this new paradigm, there is an increasing recognition that market forces alone cannot
produce a socially optimum output benefiting all (Fishlow, 1996). Consequently, there is a shift
toward a more positive view of government, in which an effective state is seen as vital to establish
the rules and institutions that allow not only markets to flourish but also people to live healthier,
happier lives (World Bank, 1997a). The state is assigned an important role not only in the
framework of ‘‘enablement’’ such as establishing effective regulatory frameworks and in the
provision of public goods, but also in its redistribution functions, as in poverty reduction
programs (Pugh, 1995). Thus, the emphasis is shifting toward improving the performance of both
markets and state institutions, recognizing their respective strengths and limitations in relation to
attaining economic and social objectives (World Bank, 1998).
The shift toward a conception of government with an important role in alleviating poverty has
been evident mainly in the health and education sectors, with the latest generation of lending
8
These demonstrations took place during April 14–17, 2000 and were widely covered by the media, including The
New York Times, The Washington Post and The Wall Street Journal. For some editorial articles featuring contrasting
perspectives see: ‘‘March Madness’’ in The New Republic, May 1, 2000, p. 9; ‘‘Protest Too Much’’ in The New Republic,
May 1, 2000, p. 21; ‘‘What Developing Countries Want’’ in Business Week, May 1, 2000, p. 220; Jerry Useem’s ‘‘Anti-
Globalists: There’s Something Happening Here y’’ in Fortune Magazine, May 15, 2000, p. 232.
528 C. Zanetta / Habitat International 25 (2001) 513–533

operations focusing on ‘‘second-generation’’ reforms aimed at attending the needs of the

structurally or chronically poor in a manner consistent with macroeconomic stability. In the case
of the urban and the housing sectors, however, the conception and implementation of ‘‘second-
generation’’ reforms seem to be lagging behind. This may be partly a consequence of the
reorganization that took place in 1987, which dispersed the core of urban specialists and left a
vacuum in urban expertise (World Bank, 2000b). As a result, little analytical work was initiated
after the early 1990s and the substantial body of institutional knowledge on urban issues had little
bearing on subsequent lending operations and country assistance strategies (World Bank, 2000b).
The urban agenda has the potential of becoming a central element within the emerging
paradigm, as it can naturally bring together economic and social objectives. Shelter and
infrastructure investments are productive investments in themselves that yield a flow of services
over time. As pointed out within the neo-liberal framework, these services are also important
inputs in the productive functions of other economic agents, both formal and informal,
determining the economic competitiveness of national economies. Moreover, housing and
infrastructure are also social goods, which warrant a whole array of government interventions.
Much can be done to improve living conditions of the poor in a manner consistent with economic
stability, including not just more public sector expenditure but also other types of public action
such as targeting subsidies, developing affordable standards for low-income households and social
provisions in infrastructure programs, and the regularization of tenure in squatter settlements
(see, Choguill, 1994, 1996, 1999).
The importance of urban issues in relation to national and global issues of sustainable
development has been restated recently as part the World Bank’s emerging strategy and is
outlined in the latest urban policy paper Cities in Transition: World Bank Urban and Local
Government Strategy (World Bank, 2000b). Cities and towns are identified as the frontline in the
new World Bank strategy aimed at addressing issues of poverty and development opportunity (see
Table 1). Under this emerging paradigm, the objectives of the urban agenda have broadened
significantly. Guided by a holistic view of cities, sustainability, livableness and good government
seem to coexist on an equal basis with competitiveness, sound management and fiscal
responsibility (World Bank, 2000b). Thus, the World Bank seems to be redirecting its policies
and developing innovative connections between urban programs, macroeconomic stability and
poverty alleviation strategies. Ultimately, the true challenge will be to translate these broadly
defined policy objectives into effective lending operations.

9. Conclusions

As Harvey (1985) puts it, the concepts, categories, and images through which individuals
interpret the world can be considered as the fixed capital of their intellectual world and are not
easily transformed. This appears to be even more true in the case of institutions. The retrospective
analysis of the World Bank policies over the past 50 years presented in this paper shows that the
evolution of the World Bank’s views on development, including the necessary technical
knowledge for appropriate interventions, has been slow and uneven. The analysis also indicates
that the evolution of the World Bank’s policies was not at all a carefully master-minded strategy.
Instead, this evolution has been the result of a myriad of factors, including conceptual shifts in the
 C. Zanetta / Habitat International 25 (2001) 513–533 529

prevailing economic models, learning by doing, the influence of individuals such as McNamara,
and internal and external criticisms of its policies. It is also clear from the analysis that, despite the
flaws, biases, and failures in the World Bank’s policies to promote development, the institution
has maintained a self-critical tradition and has consistently expanded its conceptual constructs
and interventions to address the array of factors affecting development that, as it turned out, was
far more complex than ever anticipated. The surge of the urban agenda in the 1970s is one
example of the Bank’s willingness to expand its scope of action. Over the past 20 years, the Bank’s
efforts to promote urban development have revolved around changing paradigms, contributing
considerably to the understanding of urban systems from multiple perspectives and to the
development of a sound technical base of knowledge on urban issues.
In delineating the next urban agenda, the World Bank can learn much from past experience. At
least two sets of issues appear to be highly relevant. The first one relates to technical issues, of how
the lessons learned in the past can be integrated into the current urban agenda. In general, once
the limits of a particular paradigmFpoverty alleviation, institutionalization, etc.Fwere
envisioned, the Bank’s sphere of action was shifted rather drastically to the next paradigm
before exhausting the full potential of the previous one. For instance, there are still many
countries pursuing housing policies characterized by the high standards and low replicability that
the Bank was trying to discourage during the 1970s.9 Much could be done to improve the living
conditions of the poor relying on the successful interventions implemented during the 1970s, such
as slum-upgrading programs, implementing alternative public housing programs using voucher
and self-help mechanisms, and improving urban services for the poor. There is also much yet to be
done in establishing adequate institutional frameworks and fine-tuning of agencies responsible for
the delivery of urban services, urban management, land markets, etc., along the same lines that
were delineated during the 1980s. Finally, the potential gains from the municipal reforms
promoted during the 1990s are far from exhausted, as municipalities without the fiscal or technical
ability to provide adequate levels of services are still the norm rather than the exception. Thus,
there are still benefits to be accrued from applying the lessons learned in the past.
A second set of issues refers to the tension between equity and economic growth that has
permeated the development debate over the past 50 years. Despite the claims of many that
economic growth does not inherently oppose social objectives, such as equality and poverty
alleviation (see, for instance, World Bank, 1990; Cohen a Leitmann, 1994), the post-war
development policies have failed to deliver on the Bretton Wood’s promise of widespread material
wealth. The retrospective analysis of World Bank policies over the past five decades indicates that
policies have been alternatively dominated by economic growth or poverty alleviation objectives
at different periods. In this way, the urban agenda was initially dominated by the focus on poverty
alleviation that characterized the McNamara era. During the 1990s, urban lending was subjected
to the overall objectives of economic growth and macroeconomic stability. During each of these
periods, substantial gains were made toward the dominant objective, be that poverty alleviation or
economic growth, but at the expense of the other. Alternatively, during the 1980s the Bank
adopted a more holistic view of the urban sector in an attempt to address its complexities. This
approach proved difficult to translate into efficient lending operations, as the resulting urban

9
See, for instance, the characterization of Argentina’s public housing program, FONAVI, in the latest World Bank’s
Country Assistance Strategy for Argentina (World Bank, 2000c).
530 C. Zanetta / Habitat International 25 (2001) 513–533

portfolio generally lacked focus and failed to make a significant mark. Thus, the challenge of
successfully integrating economic growth and poverty alleviation objectives is still pending.
The integration of economic and social objectives without loosing focus will be, once again, the
main challenge of the new generation of World Bank’s policies. The new millennium is emerging
amidst increasing globalization and unprecedented technological advances, which are likely to
exacerbate inequitable distributions of wealth both within and across nations. The dispropor-
tionate depletion of environmental systems by industrialized nations, as evidenced by global
warming, also raises important equity issues. Also, Latin America’s poor are still to see any
material gains after more than a decade of adjustment and austerity policies. The World Bank, the
international community in general, and individual countries will have to face core equity
questions that have been avoided during the past decade and demonstrate that the main objective
of economic growth articulated in Bretton Woods can be made compatible with objectives of
social justice, poverty alleviation, women’s needs, and environmental quality.

Acknowledgements

I would like to thank Persides Zambrano for her valuable research assistance as well as Charles
Choguill, C.W. Minkel, Kirsten Benson, Robert Buckley, Hemalata Dandekar and two
anonymous reviewers for their insightful comments and suggestions. All the views expressed in
this paper remain the responsibility of the author.

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