Odious Debts

It’s time to shut down the World Bank

Globe and Mail
October 4, 1994

Celebrating its 50th anniversary this year along with the International Monetary Fund, the World Bank was part of the postwar reconstruction program John Maynard Keynes helped set up in 1944. Lord knows what Lord Keynes would make of the World Bank today.

As the bank holds its annual meeting this week in Madrid, it can look back over 50 years of dubious accomplishment far removed from Keynes’ objectives. Using bonds guaranteed by developed countries such as Canada and the United States, the World Bank has emerged as a lender to despots and bankrupt megaprojects, financier of corruption and inept governments, home to a bloated bureaucracy of more than 6,000 earning average incomes of $123,000 (U.S.), and – if the bank’s critics are right – loaded with bad debts and teetering on the brink of insolvency.

For years now, the bank has been trying to worm its way out of its past, promising to reform its statist lending policies and become a lean institution focused on private sector development, environmental protection and human resource development. That would indeed be a change of focus for the bank, which has spent much of its history sinking billions into public sector megaprojects while ignoring environmental issues and property rights, and turning a blind eye to the reality that many of its projects have been uneconomic and have done little to improve local economic conditions.

In Madrid this week, therefore, World Bank president Lewis Preston is trying his best to cast a spotlight on the bank’s bright new future and distract everyone from the S160-billion the bank is owed by Third World nations, loans many nations are unable or disinclined to repay. Above all, Mr. Preston will be steering everybody away from the bank’s underlying financial health. Without the government guarantees, which give it a triple-A credit rating, the bank would be bankrupt.

That certainly is the view of Patricia Adams, executive director of Probe International of Toronto. In a study released this week by the Cato Institute in Washington – titled The World Bank’s Finances: An International S&L Crisis – Ms. Adams argues that the bank is technically insolvent and should be shut down. A World Bank liquidation could be costly to developed nations – the United States is on the hook for $30-billion, Canada for about S5-billion – but a major reappraisal of the bank’s operations, leading to a realistic valuation of all its loans, can only be beneficial – particularly to the Third World nations that are now carrying excess World Bank loans on their national accounts.

The World Bank’s lending practices are reason enough to trigger action. Ms. Adams reports that the internal bank studies suggest one-third of its projects are failing and that the bank’s loan portfolio deterioration was “steady and pervasive.” Other practices include lending more money to countries to allow them to appear to be paying off old loans. Closing the operation down is the only way to end the financial decline.

This could be the year the World Bank and the IMF are reformed. At the G7 economic summit in Halifax next year, the leaders of the world’s largest economies are slated to review the 50-year-old institutions and decide whether they need reform or replacement. Everybody agrees reform is in order, although the official political atmosphere of G7 events almost precludes radical transformations. Moderate tinkering seems more likely, which is clearly what the bank and the fund are hoping for. By turning up its public and political relations machinery, tooting 50 years of existence as the world’s largest international welfare agency, the bank in particular is trying to protect its power base.

Opposition to the World Bank is mounting, however, and from all sides of the political spectrum, although some common themes exist. Most common of all is distrust of the bank’s orientation toward governments and its disregard of local economic needs and local private-sector economies. Giant, state-owned electric power projects, involving billion-dollar dams and the forced dislocation of millions of people, have come to symbolize the bank’s operations.

Under its current mandate, which requires the bank to lend money only to sovereign nations, meaningful reform will be difficult to impose. How can an institution legally tied into every nation state on the globe transform itself into anything that resembles a private-sector lender? More importantly, even if it could, who needs it?

As numerous economists and bankers have observed over the past couple of years, private sector lending and savings in the Third World are expanding rapidly. The World Bank’s raison d’etre, dubious from the start, is even less defensible in a global economy. Many countries are also beginning to see the benefits of allowing multinational corporations into local economies. In this context, the World Bank, whatever its past justification, should be at the end of its existence.

Categories: Odious Debts

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