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 The case of the Brazilian ‘green’ oil
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 The Concrete Consequences of Our Goals
Do the goals and values, even the unconscious ones, of an individual, influence his or her acts? Some accept this as a simple fact of life, while others reject it as an inappropriate and inadmissible incursion of the subjective interior world on the objective external one. An example will let us put our finger on the matter.
An exercise we have carried out dozens of times with highly diverse groups of people (from corporate leaders to MBA students) has verified for us the following assertions. The exercise concerns a case based on real-life experience in the years 1985-86 involving the presentation of several projects to the loan committee of the World Bank.
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The Functioning of the World Bank
Participants are given a minimum understanding of the World Bank’s functioning. The aim was not to assess the performance of the Bank, but to provide participants with a very schematic description of how the Bank works. These basics are as follows:
• The World Bank is not actually a bank but a development institution, an offspring of many world governments, and twin sister to the International Monetary Fund (IMF). It is dedicated to economic and human development (using ‘human’ in the somewhat enlarged version of Homo economicus, taking into account a certain basic quality of life). It borrows from financial markets in order to make long-term loans at a rate that will cover its interest charges, exchange risks, and its own costs. The borrowing countries do not generally have access to the same markets, nor can they always benefit from the same conditions regarding interest rates and length of the loans. The World Bank’s advantage for these countries is, then, very real and very important.
• The Bank lends to States or to institutions with the State’s guaranty. During the years 1970-1980, it became an important driver of public-sector development in many developing countries. In the face of many systemic inefficiencies, the Bank has become an agent of restructuring state-controlled economies and even of privatization in some countries. (This has been a sort of applied politics in Latin America as early as in 1986 and more recently, with ambiguities in Mainland China, which has become, with India, the Bank’s largest client.)
• Each government seeks to cover its needs in terms of foreign currencies by exports, and by borrowing from friendly governments, or from the private banking sector, or from multilateral institutions such as the World Bank. The governments seek out access to long-term loans with conditions as favorable as possible. On its side, the World Bank seeks as part of its mission to include conditions in its lending, while lending as much as reasonably possible. Governments are thus encouraged, or forced, to reform their economic and budgetary policies (for example, by diminishing their protections against imports, saving on energy, redressing the balance of political pressures coming from suburbs of cities with large populations, and those coming from the farmers who, when underpaid for their production, are destroyed along with the countryside).
• The Bank is vigorous, and also hierarchical and bureaucratic. Bank loan officers were (in 1983-86) subjected to numerous strict instructions, leaving nonetheless real liberty to those who knew the system well and, not themselves ambitious, could find some leeway in their work. The more ambitious cannot, because those who raise their profile are noticed—and when one is noticed, one is much less free. The loan officer is judged in part on how he or she leads each project through to the end, and in part on the cost (which is assessed mostly in the time incurred in assessing the proposed loan) he or she incurs for the Bank to make the loan. The Bank’s budgetary control system is very precise, and the loan officer is closely tracked regarding both time spent and expenses.
• The Bank’s managers and loan officers usually like their personal situation. Except within the financial sector of the Bank, they find it somewhat difficult to move out into private practice, because the Bank’s work is highly specific. Many among them come originally from countries where they could not obtain a similar position without rising to the top levels of government, which would carry with it important personal and political risks. And finally, family life in Washington—at least at this salary level—is quite comfortable.
• The Bank is in general highly sensitive to the opinion of its governmental shareholders and also of the public. The total of loans granted each year is on the level of 20 billion dollars. A drop in the aggregate new lending commitments in the fiscal year is considered by governments to indicate that the Bank is not functioning properly. This means that the statistics have a very great importance for management and staff.
• Many Bank managers and loan officers are strongly motivated by economic development. The definition of the quality of development to which the Bank contributes depends very much on the idea each has of the human person, of his or her needs and happiness. For a Bank manager or loan officer, the interest and the challenge of the job lies in the desire to wed the Bank’s actions with his or her human ideal.
• Most loan officers are recruited young, before they have had the chance to have much ground-level experience in the choice areas of activity, which are industry, business, politics, and finance. Their conceptions of development are therefore those of intellectually gifted and carefully selected young economists, who are inclined to use models without always realizing the models’ intrinsic limitations. As in other fields, some compensate better than others do for their handicap, thanks to their ability to integrate the experience of the people they encounter.
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The case of the Brazilian ‘green’ oil
After reading this presentation of the Bank’s work processes, and of the eight possible goals and their influence, the participants in our sessions turn to several cases based on real-world events, and they are broken out into small groups. Each group is asked to make three parallel proposals for the same loan operation, the group members placing themselves successively as motivated principally by 1) their personal situation, 2) the Bank, its reputation, and the risks it runs, and 3) the men and women of the borrowing country—in other words, using in succession priorities 1, 4, and 7 from the welcoming speech.
Among the cases discussed is the following one, closely based on real events. Brazil was in 1983 among those countries most shaken by the debt crisis, and it greatly needed foreign currency in the long term. Around 1980, the Bank had financed (via a $500 million loan) the conversion of agricultural lands equivalent in size to half of France. These lands were converted from traditional agriculture to modern cane sugar plantations, with distilleries for extracting alcohol produced from sugar. The alcohol production was bought by the State petroleum firm (Petrobras), to serve as the base for automobile fuel. Brazilian cars have modified carburetors, and the alcohol produced was a substitute for imported oil, at a cost of around $26 per barrel. It saved foreign currency since producing alcohol required only local goods and services.
The operation was a success technologically, but a difficult social problem arose.
The displaced farm workers had received significant compensation (on the order of $5000 per family in local money). After the happy surprise of receiving more money than they had ever seen at once in their lives, the farm workers found out that this did not enable them to purchase lands to cultivate and to find a new place to live. Many of them started drifting throughout the country, along with other uprooted people. This was a grave situation, and it led to a special government project, supported by the Bank, to settle drifting people and families in a distant region at the feet of the Andes, some 5000 km from the ocean, until now an abandoned region called Rondonia, a region that was uninhabited because of its local conditions.
Now a new loan was considered, on the same order as the original one (about $500 million), which, it was hoped, would be better engineered than the earlier one. At the same time, the international price of oil (then about $42 per barrel), was in danger of falling sharply. How long the price would stay low was unknown, as it was likely to reverse itself eventually over the long term, even if it should fall dramatically in the short term. The loan was tempting for the Bank, for the amount was very large, the internal costs to the Bank would be reduced since all the studies had been made for the first loan, making a quick update possible. On the other hand, the Bank’s reputation could suffer as a result of the displaced farmers.
The reader can now follow through with the exercise, as did the participants in our discussions.
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The loan officer has three alternative approaches
The loan officer in charge of the dossier is an experienced economist who will successively examine these three questions:
• The country’s plan for economic recovery and development.
• The specific evaluation of the project.
• The more delicate issues that arise from the project.
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The country’s plan for economic recovery
The second loan for the ‘green’ oil project is only one of the components in a general plan for the country’s recovery toward macroeconomic balance. What is the whole effort the government is asking of the nation at the present time? And is this effort equitably divided? Is the State working toward what ought to be its goals—that is, to be the prime servant of the nation, charged with unleashing its economic potential, with reducing the internal rigidities and other sources of hardship and injustice?
This recovery is also tied to other improvements in policies and practices that affect national solidarity: is the country’s lack of performance due to other causes, resulting from bad practices on a grand scale (Level 3 of our reading key, a lack of mutual trust), or of paralyzing structures (Level 2)?
Among the possible causes for lack of performance are the following:
• Is the exchange rate unique, freely fixed by supply and demand, not allowing certain well-placed persons the opportunity to obtain currency on a favorable level and greatly enrich themselves? (This had been the case with a number of countries that borrowed from the World Bank, but not Brazil. The IMF treats exchange rate problems with legitimate rigor.)
• Has the government incurred superfluous military expenses beyond the State’s means? (In 1985, a new civilian government came to power in Peru, and asked the Bank to intercede with France to nullify a recent order for 30 Mirage fighters. The attempt by the Bank did not meet with success. In the same year, the new civilian government in Argentina notified all the weapons suppliers in the world that it would not honor any of the orders placed by its predecessor. There was no real opposition.)
• Is internal corruption stifling most of grass-roots economic initiatives? Are there cases where small businesses have been confiscated by some representative of the party in power, who act in effect like a local Mafia? (This has been and perhaps still is a not uncommon occurrence in certain African countries where the State is in the hands of a single party whose representatives, under the cover of being public servants, confiscate local businesses that look promising.)
• Are there in the country monopolistic practices (in either the public or the private sector), costly to the nation, justified in theory by better serving the public, but in fact mainly protecting monopolies’ rights, privileges, and political power?
The Bank officer in charge of the project must thus examine the possibility of linking the granting of the second ‘green oil’ loan to deeper macro-economic reforms in the country. But this will demand much courage and ability on the part of the government. The officer may become afraid of asking too much: “The government won’t be able to pull it off; their room for maneuvering is too narrow,” and moreover, “the relations between the government and the Bank may suffer.” The officer can also say, “In any case, if I raise all these questions, the loan won’t be made in time to be included with this year’s numbers.” So the officer concludes that he has reached the limit of what the Bank can ask of Brazil’s government in matters of politics, economics, and finance.
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The Specific Evaluation of the Project
Under this heading, the officer needs to examine several points:
• Will the investment, and the execution of the project that follows, be well managed? Since this is a second loan, and the first was rather well implemented, there are no particular issues to worry about, only the appropriate verifications to undertake.
• In the absence of the loan, Brazil will have to import a certain amount of oil. What are the best estimates of the price of this oil?
The first project showed that the ‘green’ oil would be produced at a cost equivalent to $26 per barrel of oil saved. At the time of application for the second loan, oil cost $42 per barrel. The estimates were currently that the price of oil would fall, perhaps to the neighborhood of $20 per barrel, but there was considerable doubt about the price level after the fall as well as how long the price would remain low. Lack of precision regarding the price is acceptable, as even if the ‘green’ oil cost more than imported oil, some difference in price could be acceptable because the Brazilian ‘green’ oil would contribute to the local economy without impairing the country’s exporting abilities.
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Delicate points in the dossier
Is there an acceptable solution to the social problem posed by the eviction of the farmers? The experience of the first ‘green’ loan made two questions emerge, one local and the other general:
• It is a fact that in Brazil, a displaced farmer has great difficulty in finding a new location to establish himself, even with an exchange of money that seemed adequate. A serious land problem exists, the source of continuous violence between landless families and landed proprietors. The registry of land is not always clear, and customs are brutal, often involving killing. Thus putting a price on family lands, a price that would allow the owner to find an equivalent space, is not a real solution. Therefore adjusting the compensation amount upwards within the second loan is not a practical solution. Here, one stumbles over a weakness peculiar to Brazil.
• More generally speaking, is the principle of a massive displacement of traditional agricultural workers an acceptable one? Where exactly is the threshold of the intolerable: at what number of families, at what quantity of territory, at what density of transplantation? Are we not at this point embarking on a structural and human transformation of the country, one whose cost is measured not in numbers but in a qualitative ‘cost’ that is prohibitive?
In other terms, for the Brazilian nation as well as each displaced family, can money really compensate for the losses involved in the project? The seventh motivation (to work for the men and women of the country) seems to be a different thing here than the sixth (to work to improve the country’s statistics).
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Facing the decision
There is a significant amount of uncertainty on these key points in the dossier. Technical and economic considerations (Level 1 in our reading key) do not provide sufficiently clear indications by themselves on the price of the ‘green’ fuel, and the problems of the farmers cannot find solutions only by employing Levels 1 (indemnification) and 2 (improving structures). The decision-maker will find this a difficult matter, and the decisions will depend on that person’s attitude regarding two points:
• His or her desire to look good in the eyes of the Bank’s hierarchy, and even more not to be judged negatively if he or she proposes to abandon the project. The loan officer’s reputation will suffer from a dossier that leads nowhere - especially after having devoted precious Bank time to the project.
• The interest of the Bank itself, which is judged on the total amount of lending and also on the quality of its operations - judged positively, that is, if the amount is high, and negatively if the media focus on one operation that turns out badly.
The decision-maker thus has to take a side. He or she will opt, as would any of us, for one or another of the following three strategies.
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