Hypocritical and Iniquitous

Two-and-a-half years ago, James Wolfensohn became president of the World Bank and, as a successful investment banker himself, vowed to reform it.

He made some dramatic changes. He canceled several controversial projects. He posted more officials in countries they are supposed to be helping. He pledged to concentrate more on the truly poor.

We can expect him to review these achievements when he speaks Monday to the World Affairs Council in San Francisco. And many of his critics say Wolfensohn's aims are good, that he is on the right path (although moving slowly along it).

For him and these critics the most important task is to redirect the band from financing bad projects to financing good ones. This does not go far enough. Although it addresses the bank's extraordinary incompetence, it ignores injustice at the core of the bank's existence.

The World Bank, founded during World War II to help the globe's poorest nations develop, is arguably the most powerful international organization in the world.

It is funded by taxpayers of the wealthier countries. From its headquarters in Washington, D.C., the bank not only lends $20 billion a year to developing nations, it designs the projects and tells governments how to fun their economies.

The 10,000 well-paid employees are famous for their self-confidence, although few have any field experience or language skills in the countries they deal with.

Not surprisingly, the bank has utterly failed in its mission to help the developing world. In fact, after decades of loans for huge white-elephant projects, like roads that open up the Amazon rain forest to loggers or dams that displace hundreds of thousands of poor people in India, the bank has caused terrible environmental and social damage. And pushed many borrowers deeply into debit.

By the bank's own admission, more than a third of its projects are failures.

The worst, most unjust thing about the bank is not that it makes bad decisions, but that it makes bad decisions with impunity. the borrower, never the bank, pays for its mistakes.

The borrower must repay the bank in full even if the new canal fails to deliver water, as is the case with most irrigation projects in India, or even if the agricultural project ruins the soil, bankrupts the farmers or gives rise to a malaria epidemic (as did the Polonoroeste project in Brazil).

And the cost is not only financial. Failed projects waste money that might have been better spent elsewhere. They delay improvements that might have made an important difference to the lives of many individuals. They very often impose large-scale social and environmental disruption on a society. And because the bank lends on a large scale, its failures are likewise on a large scale.

But no matter the cost, no country has ever defaulted on a World Bank loan. The bank's imprimatur has become essential for any international loan. And the bank has always been willing to make new loans to cover old ones. The result is a crippling and ever-growing burden of fruitless debt.

This system is iniquitous because the bank is deeply involved in choosing, planning and implementing the projects it finances. The failure of these projects is due as much to the bank as to its borrowers. Thus, the bank has power without responsibility.

And the system is hypocritical because, while the bank preaches the joys of risk-taking and entrepreneurship to its borrowers, it is completely protected from the cold winds of the free market.

Indeed, in a perverse way, the bank profits from its failures more than from its successes, since failed projects are more likely to push a country into furthering borrowing. And, as its lending, profits, budget and staff increase, so do the bank's power and stature.

As a prosperous bureaucracy lending money to debt-ridden supplicants, the bank is able to insist on involving itself in nearly every domestic issue confronting the borrowers - from economic and financial policy, to military, social, legal, environment and administrative matters. Therefore the bank has no incentive to lend well, only to lend more. This is not only grossly unfair, it is an impediment to good lending.

The bank has a mandate to ensure that its investments make economic sense. To the extent that it fails to do so, Wolfensohn should reduce (not eliminate, for borrowers must accept their share of responsibility) the repayments due from its borrowers.

Until it does so, until the World Bank shares in the consequences of its actions, it is playing at reform.

(Reprint, The San Francisco Examiner, November 1997)

Copyright © 1996. The Light Party.

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