Envío Digital
Central American University - UCA  
  Number 159 | Octubre 1994



World Bank and IMF to the Stand

As the IMF and the World Bank celebrate their 50th birthday, a universal cry arises for democratic changes in those institutions. What is asked from them as regards foreign debt? What claims are made concerning the works of infrastructure that they finance?

Envío team

This year marks the 50th anniversary of the founding of the World Bank and the International Monetary Fund (IMF), two institutions targeted by growing criticism for their role in financing and promoting an inequitable model of international development that is non participatory and very damaging to the environment.

50 Years is Enough

Hundreds of grassroots, nongovernmental, religious, environmental and development organizations from the United States, Europe and Canada have united around the slogan, "50 Years is Enough!" to raise public awareness in the North of the disastrous social, economic and environmental history of these two Bretton Woods financial creations.

Given the continued resistance of these two institutions to deep and thoroughgoing change, the campaign's purpose is to limit their power and promote public examination of the possibility of creating new structures or modifying the existing ones to assure more adequate and appropriate support to authentic development in the countries of the South and throughout the world.

The phrase, "50 Years is Enough!" was chosen to express the conviction of a growing number of people around the world that the type of development promoted by the World Bank and the IMF, which works against the poor and the environment, should no longer be permitted.

envío supports these organizations' campaign by publishing their statement on the third world debt, as well as their critique of the latest World Bank report on infrastructure.* The documents have an interesting relationship to each other.

Foreign Debt and Bankrupt Countries

The total debt owed by the developing countries is now some $1.7 trillion, of which a full 17% is with the World Bank and the IMF. The poorest nations in the world most of them in sub Saharan Africa are entirely unable to pay their debts. The debt burden for countries like Nicaragua, Peru, Jamaica or the Philippines, considered to be in better situations, is so heavy it has led to economic stagnation.

The debt crisis, which arose during the easy lending period of the 1970s, increased at the end of that decade when interest rates shot up due to a decision of the US Federal Reserve. Since prices for the main export products of these indebted countries plummeted just as the interest rates rose, it became even harder for them to pay their debt.

Much of the money lent in the 1970s ended up in the hands of dictatorships, who used a large part of it either in grandiose but useless projects or to finance their repressive military budgets. The unproductive use of the loans and the corruption linked to them exacerbated the debt crisis that had been building in the third world for more than a decade. Unlike individuals and businesses, nations do not declare bankruptcy, but the fact is that many countries today are in a state of undeclared economic ruin.

IMF and World Bank: Multimillion Reserves

The interest of the multilateral financial institutions and creditor nations in assuring that the debt continue to be paid led the World Bank and IMF to impose structural adjustment programs on the indebted nations. The debt pressure and the collapse of prices for many of their export products, combined with the export plans designed by the World Bank and the IMF in their adjustment plans, has trapped most of the debtor nations in a vicious circle of crisis. It has forced them to sell off their national patrimony, destroyed their natural resources and eliminated any hope of economic improvement from their future.

While many commercial banks and creditor nations including the United States agree with reducing or restructuring some of the developing countries' foreign debt, the World Bank and IMF refuse to either reduce or restructure the debt owed to them, arguing that it would negatively affect their image and, thus, their ability to attract funds for more loans. But both the World Bank and the IMF have significant capital reserves $17 billion and $35 billion respectively that could be used to cancel the debts. No principle of either the World Bank or the International Monetary Fund bars these institutions from forgiving or restructuring debts.

The World Bank openly granted loans to governments such as those of Ferdinand Marcos government in the Philippines, Mobutu in Zaire and Somoza in Nicaragua. According to the World Bank's own internal analyses, 35% of the projects it has financed have been unsuccessful. Nonetheless, it assumes no financial responsibility for these failed projects and does not contemplate reducing the pending debts for them, despite the fact that it advocates a reduction of the debt with industrialized countries and commercial banks. For its part, the IMF has subjected the impoverished countries to stabilization and adjustment programs that in almost all cases have led to severe recessions and increased their debts even more.

Four Alternative Proposals

The solutions these institutions impose to deal with the debt crisis austerity measures and credits for structural adjustment that increase the countries' inability to pay their debt, affect their poor and destroy their environment do not go to the root of the problem and should be rejected.

The campaign "5O Years is Enough!" has a number of basic proposals to reduce the debt the developing countries owe the IMF and the World Bank.

* The World Bank should use its estimated $17 billion in accumulated reserves to cancel 100% of the outstanding debt, including arrears, of nations classified as Severely Indebted Low Income Countries (SILICs) those with an annual per capita income below US$675 for "hard loans" the World Bank extended through its International Bank for Reconstruction and Development (IBRD). First among such nations is Nicaragua. For those considered Severely Indebted Lower Middle Income Countries (SILMICs) with an annual per capita income of between $675 and $2,695 50% of their loans with the IBRD should be cancelled.

* The World Bank should write off its loans for projects that have ended in economic failure, particularly those with serious negative impacts on populations and the environment. Just like any commercial bank, the World Bank should assume responsibility for the failure of projects it has designed and financed. Such a change in its policies would also contribute to creating more openness in the institution and improving the quality of its financial practices.

* The World Bank has recognized the failure of a considerable number of its projects. Already disbursed credits for these projects should be scrutinized by an international tribunal, chosen by the Bank's Council of Executive Directors to determine fair measures for canceling the debt linked to these projects and to demarcate the responsibility of both the Bank and the loan recipient for these failures. This tribunal could also establish criteria to evaluate the problems in the already concluded projects, in addition to fair measures to cancel the debts for them.

* Hand in hand with canceling 100% of the pending debt of the SILIC countries with the IMF and 50% of the one the SILMIC countries have with this institution, all the Enhanced Structural Adjustment Facility (ESAF) programs in the developing countries should be abolished.

And the Future Debts?

The "50 Years is Enough!" campaign also has proposals for criteria by which the World Bank and the IMF should extend loans in the future.

In addition to forgiving the debts, steps should be taken to assure that any future indebtedness of these countries is based on consensus among its citizenry, who should be informed about the debt they are taking on and accept its payment. A process such the one we propose would oblige the governments and lending institutions to make agreements only when a clear and free commitment to repay the loans exists.

An international convention should establish the criteria for future debt obligations, to make them legitimate and reclaimable according to international law. This convention could demand that:
* the documents and basic details of the loan agreement be published so they can be analyzed by public opinion 60 days before signing;
* open and public forums be held to solicit the citizenry's opinions;
* the agreement be approved by the legislative branch and be signed publicly signed by the responsible government officials;
* the credit be used for the objectives that were made known publicly;
* credit not be provided to those governments that have been identified as systematic human rights violators by regional and international human rights institutions.

The international financing institutions would be obliged to ensure that these criteria are met. If a given tribunal of justice were to establish that a debt was contracted outside the framework of these criteria, it would be considered invalid.

A New, Mistaken Report

The World Bank's 1994 Report on World Development, dealing with the infrastructure it financed in the South, reflects the Bank's unwillingness to recognize its errors and accept alternatives to its failed policies.

It is incomprehensible that the Bank the world's major multilateral financier of infrastructure projects thinks it can address this issue without recognizing its own responsibility in perpetuating conditions that leave millions of poor people with inadequate access to infrastructural services.

In the introduction to the report, World Bank president Lewis Preston does recognize that "having more efficient, more accessible and less costly infrastructure services is, of course, also an essential element for a more effective reduction of poverty," the Bank has repeatedly ignored the opportunities offered it to translate this vision into effective practice. The Bank's persistence in financing mega projects and its refusal to examine alternative options have meant that it plays a significant role in excluding many poor people around the world from adequate infrastructural services.

"The report uses all the fashionable phrases about the need to find new ways to meet people's need for infrastructure that are more inventive, more efficient, more user sensitive and friendlier to the environment," declares Owen Lammers, executive director of the International Rivers Network, a member of the "50 Years is Enough!" campaign. "Unfortunately, alternatives to large and costly infrastructural investments are part of the Bank's vocabulary, but not its practice. Seldom has the Bank found a socially and environmentally destructive project that it does not want to fund."
Introducing commercial principles into the attention to public services, as the report proposes, could theoretically facilitate sustainable economic development, combat poverty, give people greater control over local industrial and agricultural development and improve services. In practice, however, the kind of privatization and marketing of public infrastructure currently being promoted by the World Bank has, in the majority of cases, resulted in a massive concentration of wealth and less obligation to be publicly accountable for projects.

Financing the privatization of roads, telecommunications, water and electricity has improved these services for a minority, while the poor and middle sectors pay higher rates even as they see their access to services reduced and have had to deal with the deterioration of other basic and important services.

The Document's Central Message

The World Development Report makes the dubious claim that the poor will benefit from increases in train, water and electricity rates, but makes no recommendations to guarantee that the additional income generated by the increases will be spent to benefit the poor. "If the Bank is so concerned about the poor," asks Walter Hook, executive director of the Institute for Transportation and Development Policies, "why does it not propose increasing property and income taxes for the high income brackets and using those resources to guarantee greater access by the poor to infrastructure services, instead of increasing rates to the users, which affect both the rich and poor?"
The report is dense and contradictory, and requires careful reading in order to analyze its central message, which is this: infrastructural works are those which help integrate the developing countries into the world economy by assuring access to the developed countries' export markets through "high quality" infrastructure.

Investment in infrastructure along with the policies of freeing up trade also promoted by the Bank do not thus appear to be motivated by the needs of the poor but rather by the desires of investors, who are today looking for opportunities and high profit margins in the Third World and Eastern Europe.

Stating that the development of infrastructure should be motivated by demand contradicts an explicit central premise of the report. The reality is that the poor lack the resources and political weight to demand the type of infrastructure that responds to their needs. Economic liberalization and other structural adjustment policies imposed on the Southern countries by the World Bank daily reduce the ability of the poor to channel such investments in their favor. In this sense, the Bank's concerns about reducing poverty and its report's affirmation that infrastructural development favors the poor are not particularly convincing.

The report's treatment of the question of participation helps reinforce this skepticism. Participation is limited to community level infrastructure projects, and no mention is made of citizens' right to influence decisions about national investments that should be made in strategic sectors: electricity, water, transportation. They should participate in decisions about what to invest in, how to invest and even whether to invest at all.

Through rhetoric and the symbolic financing of little more than "showcase" programs in the social and environmental arenas, the World Bank wants people to believe that it is a reformed institution. In practice, it continues to violate its own publicly proclaimed principles and ignores opportunities to promote sustainable, participatory and environmentally sensitive development.

A quick glance at some of the projects and policies currently funded by the World Bank demonstrates the contradiction between what the report says and what the World Bank does.

Water: Anti Ecological Projects

More than 1.2 billion people in the world currently have no access to potable water, and more than 1.7 billion are without proper sewage systems. UNICEF estimates that over 80% of these people could have potable water and sanitary services by using simple technologies that are cheaper than conventional systems by a third.

In the 1980s, however, over half of the $35 billion loaned by the Bank for water related projects was devoted to large scale ones. Only 0.4% of this money was earmarked to small scale irrigation projects, only 0.6% to watershed management and only 2.3% to water conservation.

Since 1948, the World Bank has invested $54 billion in more than 500 dams in 93 countries, despite clear evidence that these are anti economic projects that are usually less efficient and generally have negative social and environmental impacts.

In April 1994, the Bank approved a $460 million loan to China for the construction of the Xiaolangdi dam, a US$3.5 billion project that, given its design, will have a use life of only 20 years. Some 200,000 people will be displaced from the area where the dam is to be built and, although the project will be beneficial in terms of flood control, the World Bank's own consultant recognizes that his estimate of these benefits is superficial, since he did not have access to the economic data necessary to carry out a complete analysis.

In July 1994, the World Bank considered funding another large scale hydroelectric project Arun III in Nepal. Its price tag is US$1.75 billion, equivalent to three times the national budget. It will cost US$4,300 per kilowatt two to three times the cost of the small scale hydroelectric projects currently being developed all over Nepal. The Bank is so concerned about the growing support these alternative technologies are receiving in Nepal that, against its own information policies, it is attempting to block access to public documents regarding Arun III.

Energy: Inefficient Projects

In the countries of the South, energy generation is the most capital intensive sector, absorbing between a quarter and a third of all public investment. Since its creation, the World Bank has lent more than $55 billion to energy related projects.

In spite of its own conclusions that efficiency measures in final use can drastically cut the use of electrical current and save billions of dollars to both consumers and governments, the Bank continues to fund inefficient energy projects: huge hydroelectric installations and coal burning plants.

These installations rarely reach their full generating capacity, are approved with little or no public consultation or local participation and have meant enormous environmental and social costs.

Between 1980 and 1990, less than 1% of the Bank's energy loans funded measures for greater final use efficiency and energy conservation that could reduce the need to build new and costly generating installations.

Projects that Displace Millions

The World Development Report points out that the involuntary displacement of people should be avoided or minimized, given its disintegrating and impoverishing effects. Nonetheless, 134 infrastructure projects that the Bank is currently financing have forced the resettlement of 2 million people and at least 2 million more will be displaced by projects to be approved through 1996.

Despite the Bank's internal reports, which have been unable to identify a single case where the displaced people have been rehabilitated in accord with the World Bank's own policies, the number of people displaced by Bank projects continues to grow. The fact that the World Bank cannot even comply with its own resettlement policy one of its oldest, most internally reviewed and externally examined policies makes clear this institution's operational incompetence and the need to review the structure and culture of loan and project approval in depth.

Communication: Large Scale Monopolies

The World Bank has promoted the privatization of telecommunication services with true ideological fervor, without taking into account each country's specific circumstances. In some countries, this has led to a greater concentration of wealth and reduced many people's access to services.
The privatization of TELMEX, Mexico's telecommunications services, guaranteed the new owners a monopoly for at least 10 years and allowed lower cost services for large companies, both national and foreign. Meanwhile, the rates for services to small businesses and domestic use increased dramatically.

The privatization of telecommunications in Argentina has reduced services to consumers and local businesses, while generating enormous profits for its new owners. Basing itself on World Bank advice, the Argentine government did not set rate limits and granted the new owners an eight year monopoly. As the Chicago Tribune reported, the price of local calls after privatization went up unbelievably: no less than 96,000%!
In Ecuador, the local newspaper Hoy reported that, with the aid of a World Bank loan, the government froze funds belonging to EMETEL, the state telecommunications enterprise, with the aim of weakening it to later justify its privatization.

Roads: Subsidizing the Rich

According to the World Bank's own assessment, large scale investments in new road networks in the South in the 1960s and 70s created more infrastructure than the governments were able to maintain. By the 1990s, a significant part of this infrastructure has seriously deteriorated.

And, although the Bank has begun to channel more resources for road maintenance, in 1992 and 1993 it continued to approve loans to expand roads: US$177 million in Thailand, $150 million in the Philippines, $153 million in India and $580 million in China.
It is also funding new construction in Albania, Poland, Rumania and Hungary. Worst of all: the International Finance Corporation the World Bank entity set up to finance the private sector is lending hundreds of millions of dollars for investments in new automobile manufacturing plants in Central and Eastern Europe.

In the countries of the South, only 5 10% of the population has the wherewithal to purchase a car. Considering that private cars use over half the road space in these countries, expanding this capacity without taking into account real demand is essentially a subsidy to the richest 5% of the population.

Public Transportation: Long Forgotten

The World Development Report makes no mention of the need to increase the recovery of costs from vehicles circulating with only one occupant, which most vehicles using these very costly roads do. Applying appropriate rates to highway use could considerably increase fiscal revenue with contributions by those with medium and high incomes. Such funds could then be used to improve the basic infrastructure of those who depend on public transportation and to build other infrastructural works that the poor need but for which they are unable to pay.

In Argentina, it was assumed that privatizing the country's highways would reduce transportation costs. But reality has been quite different: one company that won the contract to repave and repair nearly 10,000 kilometers of roads virtually limited itself to building toll booths. A Miami Herald report notes that vehicles making the 900 kilometer round trip from the countryside to the capital of Buenos Aires had to stop eight times and pay a total of $78 in tolls, significantly reducing the profits of the small farmers who must use that route.

In Poland, bus fares shot up 61% due to "cost recovery" measures promoted by the World Bank, which has reduced the use of public transport from 36 million to 32.1 million trips per year.

The use of public transportation in what was East Germany has dropped 47% due to similar measures. And in the former Soviet Union, fully half of heavy internal transportation transferred from rail to highway travel just from 1992 to 1993 as a result of restructuring the railways.

The pressure on governments to increase public transportation fares should cease if these measures touch off a reduction in the use of collective transportation or if there are no parallel policies to mitigate the negative impact of this increase on the low income community. Instead, a tax increase for the highest income bracket users of private vehicles should be promoted.

"The 1994 World Bank report will be remembered not for what it says but, above all, for what it does not say about infrastructure," comments Karan Capoor, political analyst for the Environmental Defense Fund, member of the "50 Years is Enough!" campaign. "It offers us more clear evidence that the World Bank either lacks the will, or is incapable of reforming its erroneous policies."

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