June 15, 2009
As the economic crisis continues to work its way through the global economic system, the World Bank is using the slowdown as an opportunity to increase lending to the developing world. According to the bank’s president, Robert Zoellick, the bank will increase its lending by $100 billion over the next three years [PDF] . In 2009 alone, the bank plans to triple its lending from $13.5-billion to $35-billion.
But more importantly, the economic crisis is being used by multilateral institutions such as the World Bank and the IMF as a way to strengthen their role in the developing world. In recent years, a number of countries in places like the Sub-Saharan African have turned their attention to establishing trade and economic partnerships with China and other fast-growing economies [PDF] , rather than having to rely heavily on aid.
This has pushed institutions such as the World Bank and the IMF to the sidelines. According to a Congressional report [PDF] , Chinese aid activities to Southeast Asia, Africa and Latin America grew from $1.5 billion in 2003 to $27.5 billion in 2006 and $25 billion in 2007—with almost half of those loans going to Africa. Even aid-enthusiast Jeffery Sachs said [PDF] , in response to an Africa Development Bank board meeting in Shanghai, “the advice that the African leaders received from their Chinese counterparts was sound, and much more practical than what they typically get from the World Bank.”
And according to a 2006 report by Adam Lerrick, the ten major borrowers from the International Bank for Reconstruction and Development (IBRD) received $2-billion from the bank over the previous five years—a measly 0.4 percent of the $580-billion from the private sector in debt, portfolio equity and direct investment.
Now, the economic crisis is providing the World Bank with the opportunity to restore its prominence in the developing world. According to the International Bank for Reconstruction and Development, “the IBRD remains well-capitalized with adequate liquidity levels to allow it to not only continue to lend to its members at current levels, but also to substantially increase those levels.” The bank is now predicting that it will raise more money this year than it has in over a decade—or since the financial crisis in Asia in the late 90s.
The World Bank is raising money in two ways. First, World Bank President Robert Zoellick is turning to governments across the developed world to continue to pledge money.
Second, it is using the risk-aversion that has taken root amongst investors over the past year and issued close to $10 billion in bonds in the first five months of 2009 alone on global markets. Because the World Bank’s bonds are backed by governments (allowing it to maintain a AAA-rating, regardless of who it loans money to) investors have been more than willing to support the bank and enjoy a risk-free investment.
The bank is also using fears that millions of citizens in the developing world are on the brink of slipping into extreme poverty as a result of the economic crisis, to fast-track loans to poor nations. According to Zoellick, more than 90,000,000 people in the developing world could be pushed into extreme poverty over the next three years [PDF] .
To help prevent this from happening, says the bank, it has launched a number of programs – a $2-billion fast-track facility [PDF] to help countries deal with the financial crisis, a $1.2 billion rapid financing facility [PDF] to deal with the food crisis and a $500-million facility [PDF] to confront the flu crisis. Zoellick also wants developed countries to dedicate as much as 0.7 percent of their proposed economic stimulus packages to a “Vulnerability Fund” [PDF] to help developing countries deal with the global economic downturn.
Much of the Bank’s additional lending in response to the economic crisis will be disbursed through Development Policy Loans [PDF] which typically run from one to three years, and provide quick-disbursing cash to support government policy.
That worries Patricia Adams, economist and Executive Director at Probe International: “To move this money, all signs indicate that procurement rules, environmental standards, and other safeguards that would delay their disbursements will be relaxed.”
Other critics, like the Jubilee Debt Campaign say more Bank funding may make the situation worse. According to their recent report, “the IMF and World Bank, which are being called on to help solve the crisis through greater lending, have themselves often been central to the problem of debt.” Using the economic crisis as a means to increase the debt burden on struggling companies is not the solution.
The developing countries’ debt stocks currently stand at $3.5 trillion and, according to the report by Jubilee, “every day the poorest countries pay the rich world almost $100 million in debt repayments.” Contributing to this massive pile of debt will not eradicate poverty in the developing world, says Jubilee.
What’s more likely to happen is that governments in the developing world will use the relaxed lending standards by the World Bank to line their pockets, while adding to the mountain of odious debts already crippling many countries. Creating new lending facilities to increase loans to corrupt governments only makes matters worse, Patricia Adams, of Probe International argues.
And according to Steve Berkman, a former World Bank official and author of The World Bank and the Gods of Lending [PDF] , “the risk of losses due to corruption is as great as it has ever been and continues to increase bit by bit each year as new lending instruments are periodically created that make it easier to commit fraud.”
As the commodity boom over the last decade helped release millions of citizens and governments from the grip of poverty, the economic crisis and subsequent crash in commodity crisis threatens to pull them right back down. But just as the commodity boom allowed governments and citizens in the developing world to rely more on international markets, and less on the World Bank and IMF, the current crisis threatens to derail this progress and institute another round of odious debts and government corruption.
Update (August 6th, 2009):
World Bank lending was up from $38.2 bn in the 2008 financial year to $58.8 billion in 2009 financial year. The lion’s share came in the form of interest-bearing loans from the International Bank for Reconstruction and Development to middle-income and emerging economies, with the International Development Association providing 14 billion to low-income countries, up from $11.2 billion. $20.7 bn was for infrastructure lending.
The increase has put a strain on the institution’s resources “which could be addressed by a special capital increase (that would also increase the share and voice of developing countries), by raising money on global credit markets or an early replenishment of IDA’s resources.”