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The World Bank: Development agency, credit union, or institutional dinosaur?

Chan Chee Khoon1
Contact:

Universiti Sains Malaysia

20 September 2007

SARPN acknowledges IFIwatchnet as a source of this document: www.ifiwatchnet.org
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As an agent of global social reproduction, the World Bank itself is also subject to forces pushing for privatization (in this case, divestment of its development lending role to private capital markets), much in the way that welfarist states are urged to selectively offload their more profitable (or commercially viable) social services to the private sector. Jessica Einhorn’s call to wind down the IBRD (Foreign Affairs, January/February 2006) follows upon the recommendations of the Meltzer Commission (US Congress, 2000) for a triage of borrower countries: debt cancellation, performance-based grants for the most destitute of highly-indebted countries, as opposed to the more “credit-worthy” borrowers with access to capital markets, who should be weaned from multilateral lending agencies and henceforth be serviced by private lending sources (i.e. the financial analogue of “targeted” programs in health services). Indeed, this targeted approach is the persuasive face and generic template for the privatization of social services.

A Targeted Approach to Development Financing

In 1995, James Wolfensohn’s appointment as president of the World Bank2 provided the occasion for strident calls from the American Enterprise Institute (AEI) urging Wolfensohn “to begin an orderly transition to private ownership. For the same skills through which Wolfensohn achieved his great success in the world of finance [as a Wall Street investment banker] could be turned toward a successful privatization of this huge financial institution. Transition to private Bank ownership promises to save taxpayers in America and other Western countries billions of dollars in the coming years - even to refund billions of dollars to their national treasuries. No less important, a privately owned and operated World Bank could be more effective at promoting and supporting international economic development than the current organization -- whose very structure encourages unsound, even perverse, economic practices in the countries to which it lends”3.

In the event, Wolfensohn ignored these calls and proceeded with a makeover of a multilateral development lender faced with mounting criticisms over its undemocratic governance and its promotion of a neo-liberal orthodoxy (structural adjustment, privatization, deregulation and liberalization, retrenchment of the developmentalist/welfarist state, a laissez faire global capitalism) and its alleged impact on the environment, on gender and social equity, on marginalized indigenous communities, and indeed, on economic growth4. Notwithstanding this latest re-discovery of the distributional consequences of market-driven growth5, the renewed focus on poverty reduction (“enhancing the voice and participation of the poor to achieve more equitable outcomes”) by no means sidelined economic growth and infrastructural development as bank lending priorities, let alone the undiminished efforts to establish or to reinforce the legal and judicial institutions for the functioning of capitalist market economies (“improving governance, strengthening the rule of law, and stamping out corruption”).

In giving prominence to the bank’s poverty reduction mission however, Wolfensohn laid the ground for a subsequent challenge to the bank to confine its efforts to the poorer member countries - via monitored grants targeted at poor countries which lacked investment-grade ratings - while outsourcing to private capital markets its development lending to “market-capable” middle-income countries. In short, a more nuanced privatization of the bank’s development lending activities which was less concerned with private ownership of the bank as such.

This of course was a key recommendation of the Meltzer Commission in its report6 to the US Congress in 2000: a triage of borrower countries offering debt cancellation and performance-based grants for the most destitute of highly-indebted countries, as opposed to the more “credit-worthy” borrowers with access to capital markets, who should be weaned from multilateral lending agencies and henceforth be serviced by private lending sources (i.e. the financial analogue of “targeted” programs in health services7). Indeed, this targeted approach is the persuasive face and generic template for the privatization of social services8.


Footnotes:
  1. Professor, Health & Social Policy Research Cluster, Women’s Development Research Center, Universiti Sains Malaysia, 11800 Penang, Malaysia
  2. shorthand for the “World Bank Group” which includes the International Bank for Reconstruction and Development (IBRD), lending to the governments of middle- and lower-middle income countries at market-based rates, the International Development Association (IDA), which provides concessional rates and performance-based grants to the poorest countries, and the International Finance Corporation (IFC), which promotes private sector involvement in development and its financing. Kenneth Rogoff, professor of economics at Harvard University and former chief economist at the International Monetary Fund (IMF) explains that “the IBRD has only a small amount of paid-in capital [5 percent of callable capital]. It finances most of its lending activities, which amount to more than $100 billion, through borrowing. That is, the IBRD taps international capital markets using its triple-A rating, and then lends to developing countries and emerging markets at a mark-up of between 0.5 percent and 0.75 percent, generally (but not always) far below the rate at which they could borrow on their own. The Bank uses the difference to help defray the Bank's $1.5 billion in operating expenses, including the cost of its 10,000-plus employees” (Economist, July 24, 2004).
  3. Nicholas Eberstadt & Clifford Lewis. Privatizing the World Bank. The National Interest, Summer 1995. A year earlier, AEI senior fellow Alan Walters, a former professor of economics at the London School of Economics & Political Science as well as chief economic adviser to Margaret Thatcher, had written that “as distinct from practical policy, the ideal solution would be to abolish the Fund and the Bank – wind them up and disperse their expertise to other activities. The Bank and the Fund were the progeny of a generation that regarded government management of banking and finance as being the only way forward. Yet in the intervening years, we have become increasingly aware of the advantages of getting government and politics out of monetary policy and finance. The widespread and rapid movement towards independent central banks or towards currency board arrangements is the most obvious example of this change … The practical, in contrast to the ideal, reforms I have emphasised – capping Bank and Fund total portfolios and differential interest rates related to market rates [i.e. risk-adjusted interest rates] – are quite modest, but still unlikely…All attempts to downsize [the BWIs] end up by making them bigger…” Alan Walters. 1994. Do We Need the IMF and the World Bank? London: Institute of Economic Affairs.
  4. Branko Milanovic. 2003. The Two Faces of Globalization: Against Globalization as We Know It. World Development 31(4):667-683.
  5. see for example Hollis Chenery, Montek Ahluwalia, Clive Bell, John Dulloy and Richard Jolly. 1974 Redistribution with Growth: Policies to Improve Income Distribution in Developing Countries in the Context of Economic Growth. (A Joint Study by the World Bank's Development Research Center and the Institute of Development Studies, University of Sussex). London: Oxford University Press.
  6. Report of the International Financial Institution Advisory Commission (chair: Allan H Meltzer), March 2000, US Congress www.house.gov/jec/imf/meltzer.htm (accessed on January 3, 2002)
  7. for a critical analysis of the World Bank’s targeted approach in Investing in Health (World Development Report, 1993), see Asa Cristina Laurell & Oliva Lopez Arellano. 1996. Market Commodities and Poor Relief: The World Bank Proposal for Health. Int J Health Services 26(1):1-18.
  8. for a discussion of universalism and targeting in social policy and development practice, see: Thandika Mkandawire. 2005. Targeting and Universalism in Poverty Reduction. United Nations Research Institute for Social Development, Social Policy and Development Programme Paper Number 23. Geneva: UNRISD; CK Chan. 2006. What’s new in the Arusha statement on New Frontiers of Social Policy? Global Social Policy 6(3):265-270


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