 news
newsletter |
news articles submitted The World Bank in Transition It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their
self-love.
- Adam Smith, An
Inquiry into the Nature and Causes of the Wealth of Nations Since the advent of the first bank, institutions of lending have been objects of suspicion. The World Bank is a multilateral development bank, situated in the unique category of global bankers charged with both impact objectives and a profit motive. In its role as banker and United Nations agent for development financing, the World Bank has its critics on both ends of the spectrum. Such is the very nature of governance in an open society that both decisions to act and not to act are subject to question. On the issue of deforestation, for example, razing rain forests to sell timber and allow farming may be counterproductive if the soil cannot sustain long-term agricultural production. As a counterargument, agriculture might be the highest and best use of the land for the poor who live in the rain forests. In this example, the challenge cannot be addressed by the World Bank alone. The Bank is a facilitator, not a one-stop solution for all the world’s problems. Governments, civil society, the International Monetary Fund (IMF) and other multilateral agencies, special interest groups, church and secular relief agencies, and “northern” commercial interests must work in partnership to devise solutions that harmonize the needs of the people with the environment. The Bank provides funding and advisory services with the dual expectations of repayment, possibly in conjunction with controlled debt relief, and the accomplishment of development objectives. It is accountable to its member nations while acknowledging responsibility to its clients: “The citizens of developing countries are impatient to see tangible improvements in their living conditions within a reasonable time frame.” Since its inception after World War II, the Bank’s purpose has evolved
from the focused rebuilding of war-torn industrialized societies to the
broader pursuit of wealth creation in the Third World. Contrary to claims
that the Bank has not accomplished results , the Bank has reported that,
“[O]ver the past generation, more progress has been made in reducing
poverty and 1. Life expectancy has increased from 55 to 65 years The “change agent” or “honest broker” attempts to ameliorate problems he himself did not create. Progress and reforms have been made in a world that has become increasingly complex. This primary source of information for this article is The World Bank Annual Report 2002, encompassing the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Goals and Priorities The World Bank has embraced a master agenda, known as the Millennium Development Goals (MDGs), set forth as follows: 1. Eradicate extreme poverty and hunger The MDG’s together and independently represent very broad targets for reducing poverty throughout middle-income and low-income countries. While the casual observer may believe that the MDG’s are clear and achievable, many barriers exist toward their attainment. Implied conditions necessary to meet MDG’s may be absent from a country, such as: 1. Freedom from a class system where social factors, and not merely the lack of money or access, prevent adequate health care or basic education. 2. Cultural and religious philosophy and practices allow or at least tolerate diversity and gender neutrality. 3. Educational outlets exist to allow young people to learn about health, including disease avoidance and prenatal care. 4. The government, religious institutions, and civil society encourage or tolerate free speech, media communications, and private property ownership, empowering citizens and inviting outside parties to participate in the country’s development. 5. Government regulations provide strict penalties for individuals who
can profit to the The Bank acknowledges that another key condition is necessary: The MDG’s do not specifically mention key areas of infrastructure such as electricity, transportation, and telecommunications, but infrastructure remains central to achieving the goals. The provision of infrastructure is also central to building the climate for investment and to investing in poor people and empowering them to participate in development. The Bank is passionate about empowerment as a condition for an effective strategy to eradicate poverty, as articulated in the following five priority areas: 1. Access to basic services Unlike cash grants from wealthy nations and food and temporary shelter from relief agencies, loans from the Bank are intended to create permanent improvement, whether through greater literacy, a healthier population, or construction of factories. The Bank clearly adheres to an agenda that is unfriendly to totalitarian societies, but it is clearly more interventionist than Adam Smith would have proposed. The 2002 Report cites two pillars of strategic priorities: 1. Building the climate for investment, jobs, and sustainable growth These priorities should address past criticism for funding large projects such as hydroelectric dams when simpler, more cost-effective infrastructure improvements were needed, at least in the short term. They also enable a reward system for borrowers that are most successful in meeting objectives, philosophically different from past lending practices that emphasized need and underwriting volume over accountability. Underwriting Standards and Controls The IBRD follows five principles of lending operations: 1. Loans are made to governments, governmental authorities or private enterprises in the territories of member countries. Loans made to non-members in member territories must be guaranteed. 2. Loans are designed to promote the use of resources for productive purposes in its member countries. Projects financed by IBRD loans must meet IBRD’s standards for soundness. 3. IBRD must act prudently in making loans and pay due regard to the prospects of repayment. 4. IBRD will not compete with private investment sources and must therefore be satisfied that under prevailing market conditions the developing nation could not obtain reasonable financing elsewhere. 5. The use of loan proceeds is supervised. (This principle is consistent with the Bank’s expectations for “transparency,” the willingness of borrowers to be open in reporting macroeconomic and other data with respect to loan objectives.) The Bank acts as an intermediary linking donor countries and public capital markets to the developing nations, but it must hold its loans in portfolio until maturity (or until relief is granted) because it “does not currently sell its loans, nor does it believe there is a comparable market for its loans as there is, for example, with mortgage-backed securities. The World Bank determines its single borrower exposure limit annually when, “the Executive Directors each year … consider IBRD’s reserves adequacy and the allocation of its net income from the preceding fiscal year.” The Bank is engaged in two common types of lending: 1. Investment loans: These loans fund traditional discrete projects or programs of investment. 2. Adjustment loans: Also known as concessionary loans, this form of funding is designed to support economic policy changes and institutional reforms. Procurement rules balance competitive bids from distant suppliers with
attention to local suppliers that may need the experience and/or income
from the project. The Bank’s sourcing 1. “Economy and efficiency in the execution of a project 2. Opportunity for all eligible bidders from borrowing and nonborrowng member countries to compete in providing goods 3. Development of local contractors, manufacturers, and consulting services in borrowing countries 4. Transparency in the procurement process” Although critics may charge that the World Bank is unfairly influenced by multinational engineering companies and other large capitalist concerns, it does appear that competitive sourcing is the norm if not always required. It is by no means guaranteed that a multinational bidding on a contract will receive the award and, if it does, that it will earn an above-market profit. It is important to consider that the concept of comparative advantage must enter into the procurement decision. While native firms could possibly execute a project, perhaps with advisors from industrialized nations, it may be more expedient and cost-effective to hire a non-domestic firm (or consortium) that has the expertise to meet the necessary quality and completion criteria. Various other key controls exist in the oversight of Bank lending operations, from strategy through the evaluation of specific loan compliance: 1. Sector Strategy Papers (SSP’s) Shifts in Lending Priorities Adjustment lending represented over 60% of 2002 lending commitments in contrast to less than 25% in 1996. Although adjustment lending could decline in the future, the Bank is playing an active role not just in building or reforming governmental processes, but also in protecting countries during the ripple effect caused by recessions among the industrialized nations. In this regard, the Bank plays a role not that different from a government providing low-interest loans to farmers to mitigate the effects of a decline in commodity prices. Table 1 compares 2002 lending levels to 1998-99 and 1993-97 annual averages. Note that there has been a precipitous increase in theme lending for Public Sector Governance and in sector lending for Law, Justice and Public Administration. This shift in the portfolio is consistent with the priorities of improving national and local governance. Financial and Private Sector Development is the largest thematic area at slightly more than ¼ of the portfolio, enabling the creation of hospitable environments to encourage multinational corporations to make investments, both through financing and through the development of new operations employing local people. The World Bank is proud of its performance, as can be discerned from the following statement: What matters most is results. Over the past decades, impressive gains have been made in many countries in life expectancy, literacy, and poverty reduction. Because of better policies in developing countries, together with improved performance-based allocation in recent years, aid is more effective today at reducing poverty than ever before. In spite of the controls that the Bank has in place to manage underwriting and collections, as well as proactive attempts to fund development for the long-term good, numerous clients have had difficulty in servicing their outstanding loans. In 2002, the Heavily Indebted Poor Countries (HIPC) Initiative provided accelerated debt relief expected to total $41 billion to 26 of the world’s poorest countries, many of them in Africa. HIPC is positioned not as an overt forgiveness program, but as a means to reduce debt to “sustainable levels”. The Bank and the IMF together face clear challenges in managing indigenous factors, such as the creation of industry for exports, while mitigating the downside from exogenous factors, such as global recession or declining demand for specific commodity exports. As a condition for the HIPC debt cancellation, a new control has been developed beyond the Country Assistance Strategy noted above: [T]he Poverty Reduction Strategy Paper (PRSP) approach, which stresses the centrality of country ownership based on broad participation for success in fighting poverty… A review of the first two years of the PRSP approach was completed in 2002 and the following recommendations were offered: 1. Importance of arriving at realistic growth projections 2. Effectively prioritizing and sequencing key strategic initiatives 3. Institutionalizing participatory processes with respect to strategy implementation and monitoring as well as strategy preparation 4. Ensuring an appropriate role for national parliaments in the PRSP process 5. Ensuring clear and close linkages between PRSP’s and countries’ public expenditure programs and medium-term expenditure frameworks. Essentially, the recommendations say that PRSP’s should consist of orderly, feasible plans for poverty reduction, developed through consensus across the client government and society, not superimposed from outside. Outside Opinion The Bank has had fifty years of experience which have undoubtedly led
to better investments, leading to improvements ranging from better
educated citizens to stronger industrial capacity. Recent research has shown that aid works best when a country’s overall policy and expenditure framework is appropriate, its institutions are strong, its private sector is vibrant, and its government and people together are strongly committed to reform. Third World socioeconomic systems are fragile and highly dynamic. They face numerous problems such as increased urbanization, pollution and other negative externalities caused by population growth and industrialization; political instability caused by civil, ethnic, and regional wars; and combined health concerns caused by disease and poor diet that span the human life cycle from pre-natal through geriatric. Small countries are highly susceptible to fluctuations in global commodity prices, as well as temporary or permanent shifts in supply and demand. Witness, for example, the effect of artificial sweeteners as substitutes for sugar. The Bank understands that there is a dichotomy between countries where aid is effective and countries where it is not: The key criteria guiding the Bank’s selectivity across countries are poverty and performance, focusing its lending on countries where the overall policy environment favors aid effectiveness and where the Bank’s presence will have a high impact. To address the needs of countries with weak institutions and poor policy environments where development assistance is urgently needed but likely to have little impact, the Bank is exploring ways to adapt its assistance instruments to countries’ specific needs. Perhaps in response to criticisms concerning the World Bank’s effectiveness, the Bush Administration has proposed a Millennium Challenge Account (MCA) to bypass multilateral development institutions and provide direct funding in the form of grants to poor countries. In a recent article in Foreign Affairs, Gene Sperling and Tom Hart express concern that “the MCA could turn the recent trend toward increased coordination on its head and move the international community back in the direction of large bilateral aid initiatives.” This assessment is predicated on the assumption that the World Bank is or should be a monopoly and that any competition from member countries would hurt the Bank’s effectiveness. Sperling and Hart are concerned that in its current design, the MCA would deny funding to many poor countries, including most countries in Africa. They propose a two-tier approach for funding, with the MCA providing up to half of its funding to the countries that meet high standards, such as for responsive governance, economic reform, and anti-poverty initiatives. In effect, Tier One could be considered middle-income countries. Tier Two, lower-income countries lacking effective institutions, democratic processes, and progressive leadership, would receive the balance of the MCA funding for very limited purposes, such as for “national policy initiatives in areas such as education, health, clean water, and agriculture.” Much of the tone of the development debate concerns the risk of lending when the client government is corrupt or it is weak and subject to corruption from outside. As we have witnessed in the collapse of the USSR, there is no quick and easy transition from communism to capitalism. Privately owned enterprises can be as corrupt or incompetent as they were under state sponsorship. For an effective transition to a productive society, all parties involved must simultaneously privatize nationalized industries, with fair remuneration to existing outside private investors, while developing regulatory agencies to ensure competition within a reasonable framework of protections for investors, workers, and the environment. A free press with transparent governmental processes and proceedings is required. An equitable system of taxation and user fees is also required so that the national and local governments can provide utilities, public transportation, and social services, including health care and education. Unfortunately, many critics cannot discern how Bank loans can be misused and why accountability is important to discourage corruption. Activist organizations cite real concerns about the World Bank’s strategies and tactics, although most them do not actually propose that the United Nations abolish the Bank. In general, they share concerns about corporate influence (or exploitation), the effectiveness (or negative impact) of projects, and the burden on clients to meet repayment schedules, particularly under the Structural Adjustment Programs (SAP’s). A summary of the positions of four of these organizations is as follows: 1) The 50 Years is Enough Network This organization protests the efforts of the World Bank, IMF and the
World Trade Organization. They criticize the control of the “Group of 7,”
the seven largest members which they claim collectively control 40% of the
votes of the IMF and the World Bank. They list significant impacts to the
poor resulting from SAP’s, including government layoffs, lack of capital
to small business owners, higher interests costs, indifference to labor
and environmental laws, and … exacerbated poverty in most countries where it has been applied, contributing to the suffering of millions and causing widespread environmental degradation. And since the 1980s, adjustment has helped create a net outflow of wealth from the developing world, which has paid out five times as much capital to the industrialized countries of the North as it has received. Another criticism is the emphasis on large development projects requiring U.S. contractors and suppliers, crowding out smaller, more appropriate local projects. A fact sheet has a title with a clear point of view: The IMF and Corporate Welfare, Disempowering Governments and Strengthening the Hand of Multinationals. The 50 Years is Enough web site posts a review of a World Bank book, Voices of the Poor: Can Anyone Hear Us? by Deepa Narayan. The reviewer, Kevin Danaher, of Global Exchange, cites Brazil and Mexico as examples of Bank clients that suffer from severe inequality. Where author and reviewer may agree to disagree is on whether the World Bank cannot help but to channel money inefficiently through “corrupt bureaucratic systems with little flexibility” (Narayan) or if there is “a structural feature of the global political economy in which third world elites are more beholden and accountable to elites in Washington and Wall Street than to their own people” (Danaher). 2) Bretton Woods Project Named after the conference that led to the creation of the World Bank, this organization appears to be an astute watchdog of World Bank activities. Much of this organization’s emphasis seems to be on the dangers of World Bank bureaucracy and donor politics. An interesting August, 2001 quotation from The Guardian (United Kingdom) is posted to the web site: The Bank is struggling with an identity crisis as its historic role of funding infrastructure passes to the private sector. It may be an imperfect institution, but many of its faults lie with the parsimony of the G8 countries which fund it. Many criticisms are levied at James D. Wolfensohn, the current President of the World Bank. Although Wolfensohn has led a major reform agenda, problems noted by the Project include: 1. “[F]ailure to institute a system for monitoring staff contributions
to results in alleviating poverty 2. Failing to balance global goals and national programmes. 3. In a recent survey only 33% of developing country government officials said they thought the Bank was ‘effective’ in helping to reduce poverty.” 4. A white paper posted to the web site, Critical Voices on the World Bank and IMF, raises concerns about the Bank’s posture as “judge and jury of countries’ policies,” focus on volume over quality, insufficient transparency, and lack of independent policy analysis. 3) A U.S. Civil Society Coalition This organization published a report, Responsible Reform of the World Bank, The Role of the United States in Improving the Development Effectiveness of World Bank Operations. In the executive summary, this organization calls for more resources for poor countries, including greater debt cancellation and more grants vs. loans, more accountability, and investments in human development “instead of being used to support policies that harm the environment, workers, and the poor.” Many well-established special interest groups belong to the Coalition and contributed to the report, including: 1. AFL-CIO: “Despite this broad recognition of the importance of core workers’ rights, the World Bank has no systematic way to measure the impacts its programs have on these rights.” The AFL-CIO supports the rights of workers to organize and opposes flexible hiring and firing practices. Among the proposed reforms are, “…a screening mechanism … to ensure that loan conditions do not undermine core worker rights. The Bank should also assess the impacts their loans will have on employment, wages, and income inequality…” 2. The Episcopal Church, USA: “The Enhanced HIPC Initiative does not provide a credible guarantee that these countries will reach or maintain ‘debt sustainability,’ the purported objective of the program.” The Episcopal Church believes that this program makes three assumptions that are unrealiststic: (1) exports will double 1990’s levels; (2) borrowings will decline while grants will double; and (3) there will be no further exogenous shocks. Further, The Church believes (as do others) that the program does not allow countries the resources to continue investing in developmental priorities. Recommended reforms include deepening debt relief. The Church agrees with the continued stipulation that countries that have excessive military spending or support terrorism or drug trafficking should be ineligible for World Bank assistance. 3. Friends of the Earth: “Fossil fuel and mining projects often result in environmental degradation and according to more and more development experts, fail to raise incomes of the poor.” Friends of the Earth cites polluted communities, ecosystem destruction and biodiversity loss, lower economic growth, and lower standards of living as just some of the negative consequences of these investments. Their proposed reforms are for the World Bank to carefully examine project proposals and screen out those with the most harmful potential impact. Further, the Bank should shift its lending portfolio toward renewable energy projects. 4. Oxfam America: “We support a move to 50 percent grants as long as the funding stream for IDA is secured, and as long as grants are used for pro-poor expenditures. Grants should support key basic services, especially for the very poorest countries, HIPCs, and countries emerging from conflict.” Oxfam supports the combination of aid and debt relief to reach the Millennium Goals, with the U.S. and other Organisation for Economic Co-operation and Development (OECD) countries making budget commitments by 2007. 4) World Bank Bonds Boycott This campaign follows the same strategy as the South Africa anti-apartheid investment boycott. Goals of The World Bank Bonds Boycott include: 1. 100% debt cancellation 2. An end to SAP’s and environmentally destructive projects 3. More accountability to smaller member nations 4. An end to the growth of corporate size and power, with the analogy that, “[A]s corporations grow in size and power, democracy in the U.S. is being threatened - just as the World Bank undermines democracy in the global South.” The web site posted the University of New Mexico’s adoption of the boycott, approved on March 10, 2003. It says in part: “WHEREAS, the University of New Mexico (UNM) World Bank Bond Committee was charged with considering the issues concerning investment in World Bank Bonds, as well as socially responsible investment; WHEREAS, UNM does not presently own World Bank Bonds or invest in any mutual fund that owns World Bank Bonds; WHEREAS, it is not necessary for UNM to invest in such World Bank Bonds to achieve any of UNM’s investment objectives of maximizing returns and minimizing risks; WHEREAS, there is a considerable range of informed opinion critical of the World Bank’s present policies; IT IS RESOLVED by the UNM Board of Regents that UNM not purchase or invest directly in World Bank Bonds until such time that the World Bank engages in genuine reform of its substantive policies and decision-making…” While the goals on the surface are noble, what seems contradictory is that UNM acknowledges that it has investment return expectations while it implies agreement with the Boycott’s objective of seeing the World Bank cancel debt, potentially creating a loss which would be borne by bondholders if the Bank could not call on the United States and other members for additional funding. The IBRD’s Return on Assets in 2002 was only 1%, a $2.7B profit against $228B in assets. Boycotters invite the World Bank to write down debt, possibly exceeding the combined resources of the IBRD and IDA, and then have other parties absorb the loss. In a show of fiscal sincerity, the campaign would have more credibility if all institutions in the Boycott purchased bonds and then asked the World Bank to return, say, only 80% of the investment. In other words, if institutions such as UNM would purchase $1,000,000 worth of bonds and pass resolutions that they agree to forgive $200,000 to benefit poor countries, such action would be a true demonstration of charity. Ultimately, the question is about whether one can drive change best as
an outsider (boycotter) or an insider (investor). Conclusion and Recommendations 2. Retaining MDG’s as an appropriate vision, establish a ten-year plan with a limited number of quantifiable regional goals that are both measurable and attainable. Such goals could include growth in real per capita income, jobs creation, and reduced mortality rates. The Bank should maintain flexibility in addressing the millennium development vision. Collaboration and compromise, with broad participation by civil society, are all necessary for customized solutions to local problems. 3. Set up independent regional advisory boards to set regional agendas, allowing each board the freedom to identify the most pressing needs within the context of the ten-year plan. Regional Boards would actively meet to approve Country Assistance Strategies and review Country Portfolio Performance Reviews, with public disclosures of reports and proceedings. 4. Define key performance indicators (KPI’s) on a country level using the regional goals as a baseline. Carefully analyze the results under each loan - investment and adjustment - and roll up the results to an overall scorecard for the country, taking credit only for results where the Bank achieved a direct impact. Public disclosures should include candid, factual analysis of loan performance for healthy internal and external debate. As much as possible, be apolitical, not taking liberal credit for client successes and then disavowing responsibility for failures. 5. Defer to other organizations where fundamental problems demand immediate action that cannot be easily addressed through loan assistance. Among countries outside the Bank’s target market, introduce other development agencies that can provide more effective solutions than IBRD and/or IDA, either independently or on a co-financing basis. As part of this objective, it is incumbent upon the United Nations and its member countries to strengthen other multilateral development banks (e.g. the African Development Bank) as well as relief agencies. 6. Perform standardized impact analysis on each project and provide full disclosure for public comment before loans are approved. Focus on quality and refrain from lending where project economics are too speculative. 7. Provide more funding for the HIPC initiative and reduce the levels of adjustment lending back to the 25% level. 8. Exercise caution and sensitivity in reinventing governments. As a commercial banker in the United States does not run city hall or the state legislature, the World Bank should not be heavy-handed in demanding government reforms too quickly. The Bank should also assess its sectoral and thematic priorities and ensure that there is the appropriate balance between developing the long-term social structure and meeting the short-term needs of the civilian population. 9. Encourage profit motives by foreign contractors and employees, but ensure that multinational corporations and domestic entities compete on a level playing field. To the extent that projects utilize foreign sourcing, requirements for the subcontracting of domestic labor and content should be required, similar to minority and women-owned business enterprise (MWBE) purchasing requirements for government contractors in the United States. 10. Streamline the bureaucracy by reducing layers, simplifying processes, and expediting decision-making. 11. Conduct an objective annual client satisfaction survey (or survey all member countries). Analyze and publish the results with plans for future improvement. Reorganizations and changes in philosophy take courage. The World Bank is effective at incremental improvements but it is time for a radical updating of the Bank’s mission, developmental strategy, and organizational processes. It is time to help where possible - and to do no harm elsewhere. REFERENCES 50 Years Is Enough Network, www.50years.org and www.globalexchange.org Bretton Woods Project, www.brettonwoodsproject.org “Forgive debt, not theft.” The Economist, March 22nd, 2003. “Help in the right places.” The Economist, March 16th, 2002. “The hole gets deeper.” The Economist, Nov 23rd, 2002. “Hug that logger.” The Economist, November 9th, 2002. Raymond, Susan. March/April 2003. “Foreign Assistance in an Aging World.” Foreign Affairs. Sperling, Gene and Thomas Hart. March/April 2003. “A Better Way to Fight Global Poverty.” Foreign Affairs. A U.S. Civil Society Coalition, “Responsible Reform of the World Bank, The Role of the United States in Improving the Development Effectiveness of World Bank Operations,” www.essentialaction.org/imf/worldbank_report/IDA_FINAL_REPORT.pdf The World Bank Annual Report 2002: Volume 1, Year in Review. Washington, D.C.: The International Bank for Reconstruction and Development / THE WORLD BANK, 2002. The World Bank Annual Report 2002: Volume 2, Financial Statements and Appendixes. Washington, D.C.: The International Bank for Reconstruction and Development / THE WORLD BANK, 2002. The World Bank At A Glance, http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:43912~piPK:36602~theSitePK:29708,00.html The World Bank 2002 Debt Securities presentation, www.worldbank.org/debtsecurities World Bank Bonds Boycott, www.econjustice.net. |