Export Credit

It’s time for the World Bank to close its doors

Development Today
October 22, 1996

For more than a decade, citizens’ groups from around the world have been trying to stop the World Bank from wreaking environmental havoc, financial ruin, and social harm throughout the Third World. The Bank’s charismatic president, James Wolfensohn, has pledged to change the “culture” of the Bank and to increase “openness, partnership, accountability, and effectiveness of the Bank.” But the Bank’s attempts at reform have been half-hearted. Its loans continue to finance disastrous projects and sink its Third World borrowers deeper and deeper into debt. It’s time for Western countries to acknowledge that the Bank is an unaccountable institution, incapable of reform, and should be shut down.

Since its formation 52 years ago, the World Bank has built up a disastrous record. It has financed dozens of massive hydropower projects, like the infamous Sardar Sarovar dam complex in India, and the Pak Mun dam in Thailand; it has supported road-building projects through the heart of the Amazon, leading to massive deforestation; and it has helped support toxic mining operations in India, Guyana, and elsewhere. And throughout its history, the Bank has shown a blatant disregard for the rights of the people and communities most affected by its projects.

Evidence of the Bank’s shoddy record is abundant and continues to grow, whether collected by outside critics or internal investigators. In 1992, two particularly damaging reports sponsored by the Bank revealed an institution out of control. The first was an independent review of the Bank’s 10-year involvement in the controversial Sardar Sarovar dam, which documented how tens of thousands of people were being moved from their homes and into abject poverty and accused the World Bank of “gross delinquency in the handling of environmental matters.” Most damning, however, was the investigator’s conclusion that the problems of the Sardar Sarovar project were not an exception, but were indicative of “chronic failings” in the World Bank. Meanwhile, another internal report found that over one-third of the World Bank’s projects were failing, and that deterioration of the Bank’s loan portfolio was “steady and pervasive.”

More recently, a review of the Bank’s portfolio by the Bank’s Operations Evaluation Department revealed that “one in three [projects] is judged not . . . to have made an acceptable contribution to development.” The report also concluded that the number of projects with “satisfactory outcomes” is “still far too low to be acceptable.”

This unprecedented criticism from within the Bank itself, as well as from citizens’ groups worldwide, has led the World Bank to undertake a massive campaign to improve its image. The Bank introduced environmental impact assessment procedures, an inspection panel to investigate complaints against its projects and an information disclosure policy designed to give NGOs and citizens affected by Bank projects easier access to Bank documents. Since assuming the presidency in June, 1995, James Wolfensohn has vowed to bring a “results-oriented” ethos to the institution. He has chastised senior management about the “lack of trust” and “cynicism” that pervades the Bank and he is trying to increase “participation” by working more closely with NGOs.

But these measures have had little, if any, effect in practice. A 1996 Operations Evaluation Department study, for instance, revealed that despite the Bank’s insistence that its borrowers perform environmental assessments (EAs) for certain projects, “when EAs are finally completed, the project design is often already finalized, thus precluding meaningful consideration of alternatives.” The inspection panel has been toothless, the information policy more effective at withholding documents than releasing them, and the public participation process is a futile exercise for Third World people who still have no means to stop Bank projects that threaten their communities.

Perhaps the best illustration of the failure of on-going “reform” within the World Bank is its record on involuntary resettlement. Since 1980, Bank policy has required that people displaced by a project “improve or restore their former living standards.” However, in one internal review after another (there have been six since 1984), the World Bank’s own experts have concluded that the Bank has failed miserably to enforce its own policy.

Despite its consistent record of failure, the World Bank basks as a blue-chip institution, having no difficulty borrowing from pension funds, insurance companies, corporations and individuals — all are happy to buy World Bank bonds, yet few would lend money directly to the Third World countries that are the ultimate borrowers.

The Bank takes its blue-chip status as a vote of confidence in its banking prowess, but this status has nothing to do with wise investments: backing all the World Bank loans are rich governments who have pledged to repay bondholders should the Third World governments default. In fact, the World Bank would be insolvent without continuing bailouts from its rich member countries which come in the form of regular cash infusions, government guarantees, and disguised write-offs of its bad loans.

The Bank itself has admitted that many of its debtors are unable to pay back their loans. At the World Bank’s annual meetings in October, the Bank endorsed a debt relief plan, ostensibly to relieve the world’s poorest countries’ of their unpayable multilateral debts. The bailout mechanism, called the Heavily Indebted Poor Countries’ Initiative (HIPC), will be financed by industrialized countries, multilateral institutions, and an initial US$500 million contribution from the World Bank itself. The lion’s share of the funds will return to World Bank coffers in the form of debt repayment for its most vulnerable debtors.

But the World Bank, whose triple-A credit rating depends in part on its refusal to write off bad loans, fears that financial markets and credit agencies might construe the debt facility as the Bank paying itself instead of writing off bad loans. In a document leaked in 1995 proposing the plan, the World Bank warned that to avoid such “self-entanglement,” the debt facility must operate as “a separate, arms’ length mechanism.” The report added that the financial markets will “need to be convinced that this approach signals no departure from the prudent financial management policies expected of the multilateral institutions, and therefore has no bearing on their preferred creditor status.”

No amount of clever engineering, however, can disguise the fact that the HIPC Initiative is a new mechanism for taxpayer bailouts of the World Bank and its Third World clients which it has served so badly. It is simply another attempt by the World Bank to deny the obvious: that, despite its claims of prudent investing and hard-nosed management, it has earned its triple-A credit rating based entirely on political commitments from the rich countries.

Neither the World Bank’s precarious financial situation, nor its record of failed loans can be fixed by rhetoric or policy changes. It is time to recognize that the World Bank was set up by politicians to lend to other politicians and that its constitution ensures it immunity from both public sector oversight and private sector discipline. As such, it is inherently unaccountable and unreformable. The World Bank should do the Third World a favour and close its doors for good.

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