Odious Debts

How to Kill World Bank

December 9, 1994

When the World Bank celebrated its golden anniversary in Madrid in early October, it promised a new and revitalized “vision” to alleviate Third World poverty. But the bank’s critics-from left-wing development agencies and radical environmentalists to right-wing think tanks-don’t trust that vision.

For 50 years, they say, World Bank investments have destroyed environments, distorted economies and broken the lives of Third World citizens. Planned projects will repeat-not reverse-that pattern.

For example its estimated 10 million people have been forcibly displaced from their homes by World Bank projects, and projects soon to be approved will create another two million “development refugees.” Planned projects will only accelerate the demise of the world’s last great ecological systems-a process the bank began when it financed roads into the Amazonian and Asian rainforests, hydro dams on the world’s great rivers, and schemes for monocultural agriculture.

Not only is the World Bank destroying lives and land in the Third World, it is exposing taxpayers in developed countries to serious financial risk. The bank’s own internal studies show that over one-third of its projects are failing and that almost half of the bank’s new loans are to “high-risk countries” that, in a global Ponzi scheme, need new loans to pay back their old ones, sinking them ever deeper in debt.

If Third World borrowers-among them Third World despots and unelected governments-default on their World Bank debts as they did on their commercial bank debts in the 1980s, U.S. taxpayers will be liable to the bank’s bondholders for $30 billion, the G-1 countries for $77 billion, and industrialized countries for $102 billion.

Fifty years, the bank’s critics conclude, is enough. On its 50th anniversary and in preparation for the next G-7 summit at which the future of the World Rank will be discussed, many argue that the bank’s shareholders-the governments of 177 countries-should take stock, assume responsibility and end the bank’s operations.

There are several ways to do that:

Dissolve the World Bank: According to the bank’s articles of agreement-the bank’s constitution-a majority of the governors, exercising a majority of the total voting power, can shut down the bank’s operations. But it would be nearly impossible to convince a majority of the member countries to shut down the bank because borrowers, each with one vote, outnumber lenders six to one.

Borrowing countries will resist dismantling the bank as long as they can refinance and service old bank loans with new ones at the financial risk of taxpayers in the rich countries. Rich-country governments, meanwhile, have an incentive to prop up the bank to avoid taxing (their citizens an additional $100 billion to cover the liabilities incurred in their names.

Privatize the Institution: Before the World Bank could be privatized, its assets-the portfolio of often worthless loans carried on its books at full value–would need to be written down to market value. Its payroll – at an average of $123,000 tax-free per employee-would need to be slashed to put the bank on a commercial footing.

The slimmed-down bank would then need to find a market niche-a needed service that commercial banks have somehow missed. Most likely, without its political agenda, the World Bank would have no raison d’etre.

Shut It Down: The World Bank’s shareholders could shut down the bank by selling its assets on the secondary market for sovereign Third World loans and paying off some of its bondholders with the proceeds. The balance of its liabilities would have to be met by calling in the capital, or guarantees, of shareholder governments.

All of those methods of suspending the World Bank’s operations, while theoretically possible, would be practically impossible because a majority of the bank’s members, exercising a majority of the total voting power, would have to agree.

Withdraw Unilaterally: The most plausible scenario for the World Bank’s demise would involve the unilateral withdrawal of a major country. Should the United States, for example, tire of endlessly pledging more money to the bank’s Third World debtors to induce them to honour old debts (accelerating borrowers’ economic and environmental demise in the process), it could cap its liability by withdrawing its membership.

One country’s withdrawal could start a stampede. Other countries might decide to bail out too; otherwise, they would be forced to assume a greater share of the liability for the bank’s ongoing operations.

A U.S. withdrawal might well cause the remaining shareholders to demand a realistic asset valuation and write-downs to determine the value at which to redeem U.S. shares, instead of trying to maintain a financial fiction at their taxpayers’ expense.

Ms. Adams, executive director of Probe International (a Canadian environmental group) and author of Odious Debts: Loose Lending. Corruption and the Third World’s Environmental Legacy (London and Toronto: Earthscan, 1991), authored a study for the Cato Institute on the World Bank’s shaky finances from which this article is adapted.

Categories: Odious Debts

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