The World Bank at a Crossroads

The World Bank at a Crossroads
By Bart Mongoven

The World Bank and International Monetary Fund (IMF) ended their joint annual meeting in Singapore on Sept. 20. Among the most significant outcomes was the ratification of a change in the voting structure at the IMF. The move gives China, Turkey, South Korea and Mexico -- newly industrialized countries, in the Bretton Woods context -- significantly more power than before.

This shift arises during a time of varied debates about the future of the Bretton Woods institutions, and it comes at a crucial moment in the life of the IMF's sister organization, the World Bank. Currently, three separate trends are bringing considerable pressure to bear on the Bank, and the institution is nearing the point where it will be forced to shift course.

One significant trend is the rise of new economic powers since the Bretton Woods institutions were created. The change in IMF voting powers was made to better reflect these new realities -- bringing into sharp relief the fact that the World Bank's structure remains unchanged. For instance, China is now the world's fourth-largest economy, but remains one of the Bank's least powerful members. Second, the Bank is under pressure from the United States to work on corruption-related issues (particularly, to make transparency a precondition for lending) and, in response to issues activists, to build on programs to minimize certain social and environmental impacts associated with development projects it funds. Third, there is growing competition in the realm of national development lending -- particularly from China, which does not require banks to consider issues like corruption or environmental/human rights concerns in making loans.

In this changing atmosphere, the World Bank will have to choose whether it wants to become a smaller, leaner lending institution whose prestige is largely symbolic, or whether it wants to compete as a major player in international project finance. If it chooses the first option, the Bank will rely heavily on its background in ascertaining that development projects will meet certain environmental and social criteria. Taking the latter option will require moderating some of the Bank's more idealistic approaches to corruption, environmental protection and human rights, so as to compete better with national development lending -- and with an eye toward political influences that will shape developing countries over the long term.

Changing Economies

The World Bank lends money to fund major infrastructure projects such as roads and power facilities, and provides other forms of assistance, such as technical consulting, for specific development projects. The IMF provides macroeconomic financial aid to countries with systemic financial problems. It provides funding and advice (or orders, depending on one's perspective) to governments that need assistance with economic restructuring programs, particularly after periods of hyperinflation or currency collapse.

When they were born -- at the same set of meetings, in the wake of World War II -- both institutions allocated voting powers for members in ways that were proportionate to the size of each country's economy. Over the next 60 years, however, the relative size of the world's economies changed, with Europe and the United States sliding down somewhat on the scale of global gross domestic product. Because the institutions' voting structures were not adjusted to reflect these shifts, China and the Asian economies (except Japan) remained largely on the sidelines.

The IMF now has agreed to adjust its structure -- giving China, South Korea, Mexico and Turkey significantly greater power initially, with further changes expected in 2008.

The decision comes at the expense of the United States (which supported the realignment) and the European Union (which opposed it). As the largest donor to the Fund, the United States remains the most powerful force within it, but widening the power base is a move meant to bring newly industrialized countries to view the IMF not with suspicion but as an important, potentially powerful tool in maintaining financial stability.

The World Bank, however, retains the same system that has been used for decades; the United States is the dominant force (with the right, for instance, to name the Bank's president), and the EU remains highly influential. The newly wealthy states of Asia have little direct influence over policy direction and decision-making.

The Influence of Activists

In recent years, the impact of activists has become evident in the mountains of new rules the Bank applies to loans for projects in developing countries. These rules represent an attempt to sue for peace with critics in the nongovernmental organization (NGO) community and donor governments -- primarily in Europe -- who argued that, in ignoring the environmental and social consequences of its lending, the Bank had fallen out of step with its members' values and perspectives. A particular friction point has involved criticisms of the Bank's lending for major infrastructure and extractive projects. From the Bank's standpoint, these loans strengthen the foundations of growing economies, but ecologists and human rights campaigners believe these projects have brought to developing countries the types of problems that donor countries are learning to regret.

The Bank's critics tend to fall into two distinct groups -- ideologues and opportunists on one side, and realists and idealists on the other.

The realists and idealists sincerely oppose the ecological, social and/or human rights issues that can be associated with projects the Bank funds. These critics have battled over lending for dams, mining and extractive projects for more than 20 years. They do not argue whether the Bank has a legitimate role to play in developing countries; rather, they claim that in supporting certain projects, the Bank does not help to improve the plight of the poor as a whole.

The second group of World Bank opponents are ideologues and opportunists. The ideologues oppose the Bank on grounds that it is an agent of Western capitalism and Western governments. Opportunists are those who use the ideologues' arguments and rhetoric with the goal of gaining political or personal power. On the whole, both the ideologues and opportunists frequently have stood with the realists and idealists, often (usually intentionally) becoming indistinguishable from them. But the key difference is that activists in this second group were only marginally concerned about the issues raised by Bank lending; their focus instead was either on the political and ideological implications of the bank's continued influence or on winning power for themselves.

In response to the increasing calls for change from both the idealist and ideological camps, the Bank, under former President James Wolfensohn, embarked on a series of reforms to address many of the social and environmental questions being raised. Wolfensohn created departments that were staffed by career activists to work closely with NGOs on questions about the social and environmental implications of the Bank's lending. Activists were invited to participate in hearings, and their concerns began to be taken into consideration.

Once Wolfensohn's reforms took effect, government ministers seeking loans from the Bank were surprised by the details they were asked to provide about environmental and social implications of the project at issue. These ministers learned the game: They had to work with credible NGOs on the ground and to win their support in order for the project to go forward quickly and easily. Without the consent of local, credible NGOs, the project would be subject to numerous reviews at the World Bank. And though such reviews did not necessarily mean withdrawal of the Bank's funding, they could be expensive, time-consuming and, often, require changes to the project to address the same concerns NGOs would have raised.

In this environment, the ideological critics found themselves in a bind. Their decade-long criticisms over implications of Bank lending for environmental (or human rights or indigenous rights) issues were being addressed in practical terms. The second group did not really want environmental and social impact statements so much as they wanted a platform for criticizing the institutions. Thus, as the Bank surrendered to mainstream critics and acted on the issues at hand, the ideological activists turned to a more traditional, populist set of arguments.

Populist opposition was not hard to build. In many countries, the World Bank is viewed as a vehicle of neoliberal imperialism, and saying that a project is a "World Bank project" can hurt the project's champions politically. This was evident in the recent controversy over a paper mill in Uruguay, which was heavily criticized by Buenos Aires for the pollution it would bring to Argentina. The Argentineans made much of the fact that the paper mill was a Bank-funded project -- calling it a World Bank "operation." While it is true that the Bank provided free consulting for the project, it was not a key player in its construction or operations. Still, the argument that it was Bank-supported became a significant part of the political battle over the mill.

Populist sentiments against the Bank climbed further when Paul Wolfowitz, a neoconservative with a reputation as an "architect of the Iraq war," was named as Wolfensohn's successor in 2005. Wolfowitz has maintained the reforms that Wolfensohn put in place, and he continues to seek the support and guidance of NGOs. But ideological critics of the Bank have seized upon his background and current office as proof that the Bank is an aggressive, imperialistic instrument of Western, and particularly American, foreign policy.

Competition and Lending Strictures

The heightened requirements for disclosure and bureaucracy that have come with increased NGO influence at the World Bank have significantly changed the way the institution does business. No longer does a country merely apply for a loan, show its ability to repay it, and get the money. Now there are transparency criteria, civil society consultations and other requirements.

For many developing countries, then, it has made sense to seek out alternative lenders -- whether private finance or national development agencies -- and this is now becoming statistically evident. Partly as a result of the new requirements demanded by the Bank, the institution's funding provided for major projects fell from a peak of almost $20 billion in 1999 to $13 billion in 2005. Though it is not a for-profit institution, the Bank depends on interest payments from customers for a significant portion of its capital, and losing one-third of its clientele is obviously not to the Bank's liking.

The trend of transparency has overlapped with China's rise as an economic power. Beginning in the mid-1990s, China shifted from being the World Bank's largest customer to one of its serious lending competitors. The strings attached to loans from Beijing have been, for many governments, considerably less troublesome and have presented a welcome change from World Bank rules. Faced with the choice of oversight and rules on the one hand or offers of (inexpensive) materials and (inexpensive) construction crews from China on the other, the decision for these loan applicants was easy.

In the early days -- and at the height -- of China's economic expansion, both lender and recipients could be comfortable with these arrangements. But now that China has reached significant size and influence, and its own systemic social and financial problems are being more acutely felt, recipient countries are beginning to sense the true cost of the deals. Word is slowly getting out among developing countries that loans from China, like those from the Bank, come at the price of political influence.

Meanwhile, private banks in the West also face growing pressure to subscribe to a code of conduct that in many ways mirrors that of the World Bank -- or its private lending arm, the International Finance Corporation (IFC). The largest banks in the United States -- including Citigroup, Bank of America Corp. and JPMorgan Chase & Co. -- have signed onto this initiative, through a vehicle called the Equator Principles, and many major European lenders are following.

The Equator Principles and the IFC guidelines are putting the brakes to lending for controversial or sizeable projects at the same time that developing countries are coming to realize that loans from China -- and from other newly industrialized countries -- are not as free from complications as they at first appeared.

In many ways, this situation presents the World Bank with an opportunity to recapture some of its lost share of international project finance. The obvious temptation would be to loosen its controls slightly and market itself as less of a "Big Brother," but such a plan would not be likely to succeed as China continues with lending and attempts to increase its influence globally.

The World Bank stands at a crossroads. One road leads to a future as a smaller institution, with the Bank a recognized authority on whether and which development projects are worthy of international funding. This would create a situation in which a loan or a project could be considered politically questionable unless provided or endorsed by the World Bank -- and it would place project finance done outside these bounds under a microscope. The other road would bring the Bank to compete, on its own, to remain a major player in international project finance. This would entail a forced embrace of China as a more powerful voting member of the World Bank, as well as policies that accommodate China's approach to lending. (This would not, of course, change China's lending independent of the Bank, but it would make some of those activities more transparent.)

Under Wolfowitz, the Bank has continued to steer a fairly idealistic course. The U.S. demands on transparency have angered the EU and cost the Bank customers, as have NGO and European demands for human rights and environmental studies as part of its lending practices, but Wolfowitz has not bowed to these realities. It could be tempting to battle for market share. Based on this history, however, it appears the Bank is leaning toward becoming a smaller, leaner and more symbolic entity -- disentangled from the bulk of international project finance, but preserving and potentially increasing the political influence it brings to bear.
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