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Is Bush Bad News for the World Bank?

by Walden BelloFocus on the Global South
January 18th, 2001

The coming to power of the Republicans in Washington, DC, spells deep trouble for the International Monetary Fund and the World Bank. The Bretton Woods institutions will lose their liberal internationalist protectors like Treasury Secretary Larry Summers who believe in using the Fund and Bank as central instruments to achieve US foreign economic policy objectives.

And coming in with President-elect George W. Bush will be a set of conservative analysts and technocrats representing the thinking of the US Congress' Advisory Commission on International Financial Institutions. Also known as the "Meltzer Commission," after its chairman, banker Alan Meltzer, the body issued earlier this year a report condemning the IMF for promoting global macroeconomic instability and portraying the World Bank as irrelevant to the mission of promoting development and reducing global poverty.

Confronted with four years of Republican hegemony, James Wolfensohn, president of the World Bank, is rumored to be contemplating resigning before the end of his second term in office.

The IMF's Stalingrad

The Washington political transition catches the IMF and the World Bank at their most vulnerable state in years. If any event may be said to have contributed to undermining the Fund, it was the Asian financial crisis, whose legacy of collapsed financial systems, bankrupt corporations, and rising poverty and inequality continue to plague the region. Indeed, one can say that the Asian financial crisis was the Stalingrad of the IMF. Bearing in mind the limits of metaphor, the IMF during the Asian financial crisis acted like the German Sixth Army, making one wrong move after another on the way to disaster.

It was the IMF that helped trigger the massive flow of volatile speculative capital into the region by pressing the Asian governments for capital account liberalization prior to the crisis, egged on by the US Treasury Department. It was the IMF that converted the financial crisis into an economic collapse by confidently moving in after the panicky flight of speculative capital began with a tight fiscal and monetary formula that drastically reduced government's capacity to counteract the downturn in private sector activity.

It was the IMF that assembled the high-profile multibillion dollar rescue packages that were meant to rescue foreign creditors even as local banks, finance companies, and corporations were told to bite the bullet by accepting bankruptcy. It was the IMF that imposed on the fallen economies a program of radical deregulation and financial and trade liberalization that was essentially Washington's pre-crisis agenda that the tigers had been able to frustrate during their days of prosperity. And it was the IMF that, at the urging of the US Treasury Department, killed the proposal for an Asian Monetary Fund (AMF), which would have pooled together the reserves from the more financially solid economies to shore up the currencies of those countries being subjected to speculative attack.

As the stricken economies registered negative growth rates and record unemployment rates in 1998, and over one million people in Thailand and 21 million in Indonesia fell below the poverty line, the IMF joined corrupt governments, banks, and George Soros as the villains of the piece in the view of millions of newly impoverished Koreans, Thais, and Indonesians.

But equally as consequential for its future as an institution was the fact that the IMF's actions brought the long simmering conflict over the role of the Fund within the US elite to a boil. The American right denounced the Fund for promoting moral hazard, with some personalities like former US Treasury Secretary George Shultz calling for its abolition, while orthodox liberals like Jeffrey Sachs and Jagdish Bhagwati attacked the Fund for being a threat to global macroeconomic stability and prosperity. Early in 1999, a conservative-liberal alliance in the US Congress came within a hair's breath of denying the IMF a $14 billion increase in the US quota. The quota increase was salvaged, with arm-twisting on the part of the Clinton administration, but it was clear that the long-time internationalist consensus that had propped up the Fund for over five decades was unraveling.

Another Disaster

The Fund's performance during the Asian financial crisis led to a widespread reappraisal of Fund's role in the Third World in the 1980s and early 1990's, when structural adjustment programs were imposed on over 90 developing and transition economies.

Judged by the extremely narrow criterion of promoting growth, structural adjustment programs were a failure, with a number of studies showing that adjustment had brought about a negative effect on growth. Indeed, after over 15 years, it was hard to point to more than a handful as having brought about stable growth, among them the very questionable case of Pinochet's Chile. What structural adjustment had done, instead, was to institutionalize stagnation in Africa, Latin America, and other parts of the Third World. For example, in Latin America income expanded by 75 per cent during the sixties and seventies, when the region's economies were relatively closed, but grew by only six per cent in the past two decades.

Broadening the criteria of success to include reduction of inequality and bringing down poverty, the results were unquestionable: structural adjustment was a blight on the Third World. Imposed at the start of the 1980's, adjustment was a central factor in the sharp rise in inequality globally, with one authoritative UNCTAD study covering 124 countries showing that the income share of the richest 20 per cent of the world's population rose from 69 to 83 per cent between 1965 and 1990.

As a consequence of greater public scrutiny following its disastrous policies in East Asia, the Fund could no longer pretend that adjustment had not been a massive failure in Africa, Latin America and South Asia. During the World Bank-IMF meetings in September 1999, the Fund conceded failure by renaming the ESAF the "Poverty Reduction and Growth Facility" and promised to learn from the World Bank in making the elimination of poverty the "centerpiece" of its programs.

But this was too little, too late, and too incredible. Support for the IMF in Washington was down to the US Treasury. Indeed, so starved of legitimacy and support was the Fund at the end of the 20th century that US Treasury Secretary Larry Summers, who in an earlier incarnation as chief economist of the World Bank had been one of the chief backers of structural adjustment, found that he could only save it by damning it. The IMF, he told Congress, deserved to be preserved as a part of the international financial architecture, but when it came to dealing with developing countries, Washington would support "a new framework for providing international that moves beyond a closed, IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development."

Meltzer Torpedoes the Bank

The Asian financial crisis triggered the IMF's crisis of legitimacy. However, under Australian-turned-American Jim Wolfensohn's command, the World Bank seemed likely to escape the massive damage sustained by its sister institution. Since assuming office in 1996, Wolfensohn, by opening up channels of communication with the non-governmental organizations and with the help of a well-oiled public relations machine, tried to recast the Bank's image as an institution that was not only moving away from structural adjustment but was also making poverty-elimination its central mission, promoting good governance, and supporting environmentally-sensitive lending. The best defense, in short, was to expand the agency's agenda.

But the torpedo in the form of the Meltzer Commission found its mark in February of 2000. Exhaustively examining documents and interviewing all kinds of experts, the Commission came up with a number of devastating findings that bear being pointed out: 80 per cent of the bank's resources are devoted not to the poorest developing countries but to the better off ones that have positive credit ratings and, according to the Commission, can therefore raise their funds in international capital markets. The failure rate of Bank projects is nearly70 per cent in the poorest countries and about 60 per cent in all developing countries. The World Bank, in short, was irrelevant to the achievement of its avowed mission of global poverty alleviation.

And what to do with the Bank? The Commission urged that most of the Bank's lending activities be devolved to the regional developing banks. It does not take much, however, for readers of the report to realize that, as one of the Commission's members revealed, it "essentially wants to abolish the International Monetary Fund and the World Bank," a goal that had "significant pockets of our Congress."

Much to the chagrin of Wolfensohn, few people came to the defense of the Bank. Instead, the realities of the Bank's expanded mission were exposed in the months leading up to the World Bank-IMF meeting in Prague in September. The claim that the Bank was concerned about "good governance" was contradicted by the exposure of its profound involvement with the Suharto regime in Indonesia, to which it had funneled over $30 billion in 30 years. According to several reports, including a World Bank internal report that came out in 1999, the bank tolerated corruption, accorded factual status to false government statistics, legitimized the dictatorship by passing it off as a model for other countries, and was complacent about the state of human rights and the monopolistic control of the economy. That this close embrace of the Suharto regime continued well into the Wolfensohn era was particularly damning.

The image of a new, environmentally sensitive Bank under Wolfensohn also evaporated in the avalanche of criticism that came after the Meltzer report. The Bank was a staunch backer of the controversial Chad-Cameroon Pipeline, which would seriously damage ecologically sensitive areas like Cameroon's Atlantic Littoral Forest. And Bank management was caught violating its own rules on environment and resettlement when it tried to push through the China Western Poverty Project that would have transformed an arid ecosystem supporting minority Tibetan and Mongolian sheepherders into land for settled agriculture for people from other parts of China.

A look at the Bank's loan portfolio revealed the reality behind the rhetoric: loans for the environment as a percentage of the Bank's total loan portfolio declined by 32.7 per cent between 1998 and 1999; and more than half of all lending by the World Bank's private sector divisions in 1998 was for environmentally harmful projects like dams, roads, and power. Indeed, so marginalized was the Bank's environmental staff within the bureaucracy that Herman Daly, the distinguished ecological economist, left the Bank staff because he felt that he and other in-house environmentalists were having no impact at all on agency policy.

Confronted with a list of thoroughly documented charges from civil society groups during the now famous Prague Castle Debate sponsored by Czech President Vaclav Havel during the tumultuous IMF-World Bank meeting in Prague on September 23 of last year, Wolfensohn was reduced to giving the memorable answer, "I and my colleagues feel good about going to work everyday." It was an answer that, in underlining the depth of the Bretton Woods system crisis of legitimacy, was matched only by IMF Managing Director Horst Koehler's famous line at that same event: "I also have a heart, but I have to use my head in making decisions."

All this makes for interesting politics in the next few years. The motivation of the incoming Republicans in criticizing the IMF and World Bank lies in their belief in free-market solutions to development and growth. This may not coincide with that of progressives, who see the IMF and World Bank as a tool of US hegemony. But the two sides can unite behind one agenda at this point: the radical downsizing, if not dismantling, of the Bretton Woods twins.

Dr. Walden Bello is executive director of the Bangkok-based Focus on the Global South (FOCUS), a program of the Chulalongkorn University Social Research Institute.