World Bank Essay, Research Paper

World BankSince the 1950’s the World Bank has had an indifferent, to say the least, affect on theThird World. The actions of the Bank have always come under severe scrutiny because of theimportant role it plays in many lives of Third World peoples. This paper will outline therole of the Bank; some of the arguments against its policies, power, and influence; reasonswhy the Bank has found it difficult to achieve favourable outcomes in its policies; andwhether it has in fact been beneficial to the people it claims to help. The World Bank wasset up initially as an aid organisation to help “foster the reconstruction of Europe, andlater guarantee loans made by private banks for projects in the poorer, developingcountries”1. The former of the objectives never eventuated to the extent of its founders’hopes. The World Bank ( otherwise known as the Bank ) was subjugated to a minor role in thepost war reconstruction of Europe, due to the more robust influence and attraction of theMarshall Plan. Of the $41.8 billion in loans, made in the decade after the end of the war,only $497 million was disbursed from the Bank. This was a result of the war-torn countriesneeding “rapidly disbursed grants and concessional loans for balance of payments support andimports necessary to meet basic needs.”2 The Bank, on the other hand, provided loans forspecific projects that required lengthy preparation. Thus, the Banks diminished role inEurope, lead it to focus its lending to Third World countries, and this became the core ofits operations from the 1950’s. The World Bank’s goal to “reduce poverty and improve livingstandards by promoting sustainable growth and investments in people”,3 has been challengedby many, who all see the role of the Bank being either detrimental to the economy’s of thecountries it is supposed to help, or the social cost being too high for the economicprograms being put in place. A number of arguments, have been developed that make light ofthe Banks preponderant shortcomings and its many social inequities. It must be said that afull analysis of the Bank short comings could include thousands of pages. This paper will,however, take only a representative few, which it is hoped can suffice a fair and broadanalysis. These are described below. The World Bank, in the opinion of Yunus4, hassingle-mindedly pursued growth until it is distracted by other issues such as hunger, women,health, the environment, etc. The Bank then tries to adapt itself to these considerationswithout giving up its basic goal and adopting these issues as rhetoric, but they are seldomput into action. This ineffective action may be explained by two factors. Firstly, thetheoretical framework within which the Bank operates does not assign any urgency or primacyto poverty reduction, thus its pronouncements only get prescribed through humanitarianadd-ons, such as safety-net programs. Secondly, Bank staff were not employed to eliminatepoverty, but for qualities that may not have immediate relevance for poverty reduction;meaning they are not the right people to undertake such sensitive social projects as theWorld Bank does. Susan George, a long time critic of the World Bank, sees the role of theBank being purely to make sure the debt of Third World countries is being serviced5. Sheclaims that the Bank presides over a net outflow of capital from the Third World, which willcontinue to further drive their economy’s into ruin and poverty. At the same time the Bankhas enforced structural adjustment programs that have cured very little at all. Georgebelieves that these economic policies have caused “untold human suffering and widespreadenvironmental destruction,” emptying debtor countries of their resources and rendering themless able each year to service their debts, let alone invest in human capital. The policiesinherent in creating such harmful effects are, according to George, the result of a capitalintensive, energy-intensive, unsustainable Western model of development, which is onlyfavourable to Third World elites, Northern banks and multinational corporations. SusanGeorge, believes that the World Bank has induced social and economic outcomes whichultimately affect the Western world in adverse ways. These outcomes she describes as debtboomerangs,6 and are described below. The first “boomerang” is debt induced poverty. Thiscauses Third World people to exploit natural resources in the most profitable and leastsustainable way, causing an increase in global warming and a depletion of geneticbio-diversity, thus affecting all citizens of the world. Secondly, the illegal drug tradefor heavily indebted countries, like Peru, Bolivia, and Colombia, is their major exportearner. Thus giving them little alternative, but to condone such activities. The social andeconomic costs of drug consumption in the US alone, has cost $60 billion. Thirdly, Westerngovernments have allowed their banks tax concessions so they may write off so-called “baddebts” from Third World countries. However this has not reduced the real debts of poorcountries, and in the case of the UK has cost the government $8.5 billion. Fourthly, therehave been lost exports to Western countries from the Third World due to the burden of highdebt servicing costs. It has been estimated that this accounts for one fifth of total USunemployment. Fifthly, legal and illegal immigration from the Third World has resulted in100 million economic refugees, resulting in enormously high economic costs to Westernnations. Lastly, conflict is often an effect of the strain put on debt burdened Third Worldcountries, this may be seen as possibly an influence for Iraq’s invasion of Kuwait. TheWorld Bank is often seen as being party to disbursing funds to malicious and repressiveregimes, that often use these loans to further entrench their power. An ardent critic ofthis aspect of the Banks operations is Patricia Adams. Adams argues that there are largeamounts of debt owing to the Bank that are very odious in nature.7 Odious debts may bedefined as any “debt that has been incurred by a government without the informed consent ofits people, and one that is not used in the legitimate interest of the State.”8 Many of theactivities that Third World governments undertake are often not in the interest of thepeople that they represent, this can be seen by the treatment of the Penan people ofSarawak, whose forests are being traded away for the benefit of others. Much of the abovedebate has been structured around the effectiveness of the World Bank’s structuraladjustment programs which were developed to force the borrowing countries into macroeconomicdiscipline. These policies have resulted in huge social and economic changes, which hascaused much hardship to many of the countries’ citizens. For example, Oxfam, a Britishcharity, released a study9 recently on Latin America, that suggests that after a decade ofstructural adjustment, and despite economic growth, more people than ever are living inpoverty. These studies, however, are often very subjective as there is no way to easilymeasure welfare of the poor, especially in countries where statistics are sparse. The WorldBank has just issued a report10 that suggests that Third World nations may find it verydifficult to grow at a rate that will create enough wealth to lead to sustainabledevelopment if they rely on commodities as their major export. This, the Bank, suggests maybe so as many Third World countries export mainly commodities. Countries where manufacturedexports accounted for at least 50% of total exports enjoyed average annual GDP growth of6.8% between 1980 and 1992. While those that exported mainly non-oil commodities grew byonly 1.4% – so slowly, that real income per head declined. The countries that the World Bankcategorises as low-income commodity producers have an average annual income of $420 perhead, and their commodity exports make up over 50% of their total exports. Average commodityprices have dropped by more than half in real terms since 1980, representing an annual lossto low-income commodity producers of $100 billion – almost twice they received in foreignaid. Another factor which has contributed to their low growth has been that world trade incommodities has grown far slower than trade in manufactured goods and services. Africancountries, in particular, have adopted policies that have stunted growth in non-commodityindustries, such as agriculture. These policies are ones similar to import barriers onmanufactured goods such as tractors, which are used to increase the efficiency of

agricultural sector, and export taxes on farm produce. As a result not only has Africaremained heavily dependent on primary commodities, but its market share has also dwindled. The continent’s share of world coffee production, for example, has shrunk from 29% to 15%over the past two decades. Shocks to supply, such as bad harvests, make the prices ofcommodities twice as volatile as those of manufactures. This is a particularly seriousproblem for countries such as Zambia, Rwanda, and Uganda, where a single commodity makes upmore than three quarters of total exports11. A possible way to stabilise prices andtherefore incomes would be the use of derivative – financial instruments such as futurescontracts, swaps and options. These are a better way for developing countries to hedge theirprice risk, so that their incomes can be more consistent and permanent. Much of theineffectiveness of the World Bank’s policies have been explained by inadequate andinefficient use of the Banks funded projects. These Bank projects have been plundered infour ways according to the Bank12: Firstly, facilities have not been maintained properly. Approximately 40% of the power generating capacity in poor countries is out of action at anyone time; this results in costs being burdened on the user, for example, electric generatorsare a needed extra cost to make up for when their are power shortages. Assets that are badlymaintained also deteriorate rapidly: a third of the roads built in sub-Saharan Africa in thepast twenty years have been eroded for want of upkeep. Secondly, infrastructure building hasoften been developed using the wrong technology and in the wrong place. The problem withthis occurrence is that the cost of big capital projects are sunk: once built, powerstations and roads cannot be moved or put to other uses. For instance governments have builtwide roads, where narrower ones would of sufficed. Thirdly, major inefficiencies have beendetected in the running of infrastructure services. Railways, in particular have beenovermanned – one estimate suggests that at times two-thirds of the railway staff in Tanzaniaand Zaire have been surplus to service requirements.13 Fourthly, prices have been heldbelow costs. Much of the utilities (power, water, gas, etc.) have been heavily subsidised,and lead to increased pressure on state resources – leading to lower spending in moreimportant area’s such as eduction and health. Only half of the marginal costs of electricitywere covered by revenues in developing countries in the 1980’s, and rail subsidies in thesecountries often amounted to 1% of GDP, which is course about 10 times that of mostdeveloped nations. A recent study by Elliot Berg14, an American development economist, givesan analysis on both economic and social indicators, which has come up with some interestingresults. Judging by income indicators ( how much money people have ) both Latin America andsub-Saharan Africa have suffered badly over the past twenty years where income per head hasdeclined, with only a gradual improvement in the last few years. Economic decline also tooka toll on the poor: household consumption decreased; real wages fell; and the number of”poor” people ( defined by a minimum income required for basic consumption ) increased. Ifone looks at social indicators, on the other hand, the picture looks very different. Itappears from Berg’s study that people in Latin America and most of Africa are living forlonger and in better conditions. In Latin America infant mortality decreased during the1980’s; illiteracy rates fell or stayed the same; and life expectancy increased or stayedconstant. Child malnutrition scored no rise, and vaccination rates increased in 19 of the 22countries that track them. Africa has seen similar results: life expectancy has increased in33 out of 42 countries; illiteracy has declined; fewer children are dying as infants as did15 years ago; and more people are vaccinated. These conflicting outcomes can only suggestthat, at the very least, some of the World Bank’s policies are being useful to some extent. CONCLUSION The world bank has been, no doubt, less that perfect in achieving its objectives. What one must take into account, however, is what would of been achieved without the WorldBank? This question is, of course, impossible to answer, but by contemplating what mighthave been without the World Bank it does allow for a more appreciative view of its trackrecord. The social costs of imposing western style economic theory and organisation on ThirdWorld nations has brought about alot of hardship and distress. This, however, has not beento no avail. As described above, in some important indicators there has been substantialimprovement in the Third World. The criticisms have far outweighed those in support of theWorld Bank, and many of these criticisms are rightly justified. One outcome that continuesto crop up is the insensitivities to the needs of the indigenous peoples and the lack ofregard to the environment. The Banks new role from the 1950’s onwards, was to bridge the gapbetween world financial markets and creditworthy borrowers in poor countries. In the 1950’sworld financial markets were barely developed and there were no suitable means for manyThird World countries to raise capital without the help of multilateral aid organisationssuch as the World Bank. It was in the next twenty years that the Bank became most active intargeting specific infrastructure projects and dispersing massive amounts of capital toThird World countries. Last year, however, the Bank lent around $24 billion to them; netprivate capital flows to developing nations reached $88 billion15. Suggesting, perhaps, thatfinancial markets are starting to play a large enough role to do without the Bank, except ofcourse, in those countries who do not have adequate access to world financial markets. Finally, many believe16 that the World Bank will not become an effective organisation untilmany of the debts of the Third World nations are forgiven. This question itself deservesmany pages of writing, and is far beyond the scope of this paper, but a late development inthe running of the World Bank has given hope to some of those espousing this idea. The newpresident of the World Bank, an Australian interestingly, has suggested that a new relieffund17 may be set up to forgive some of the more heavily indebted nations. This is asignificant step in the direction of the Bank and could possibly see a new era of ThirdWorld development. BIBLIOGRAPHYAdams, P. “Odious Debts” Routledge, London, 1994. Author Unknown., “How Poor Are The Poor.” The Economist , October 1st, 1994. Author Unknown, “Fit at Fifty” The Economist, July 23rd 1994. Author Unknown “Investing In Development” The Economist, June 25, 1995Berg, E., “Poverty and Structural Adjustment in the 1980’s: Trends in Welfare Indicators inLatin America and Africa.” Development Alternatives, Inc, Washington, DC, 1995 George, S.,”The Debt Boomerang”, South End Press, 1992. Holman, M. “World Bank Relents: About-Face OnAfrica” The Australian, Sept 20, 1995 Rich, B., “World Bank/IMF 50 Years Is Enough”, SouthEnd Press, Boston, 1994. The World Bank, “A Global Partnership”, World Bank, Washington,1995. The World Bank., “Global Economic Prospects and the Developing Countries “,Washington, DC, 1994 The World Bank., “World Development Report”, Washington, DC, 1995Walters, Sir Alan., “Do We Need the IMF and World Bank?”, Current Controversies, Instituteof Economic Affairs, London, 1994. Yunnus, M., “Redefining Development”, Zed Books,Washington, 1994. 1 Walters, Sir Alan., “Do We Need the IMF and World Bank?”, Current Controversies,Institute of Economic Affairs, London, 1994. 2 Rich, B., “World Bank/IMF 50 Years IsEnough”, South End Press, Boston, 1994. 3 The World Bank, “A Global Partnership”, WorldBank, Washington, 1995. 4 Yunnus, M., “Redefining Development”, Zed Books, Washington, 1994. 5 George, S., “The Debt Boomerang”, South End Press, 1992. 6 Ibid. 7 Adams, P. “OdiousDebts” Routledge, London, 1994. 8 Ibid. 9Author Unknown., “How Poor Are The Poor.” TheEconomist , October 1st, 1994. 10 The World Bank., “Global Economic Prospects and theDeveloping Countries “, Washington, DC, 1994 11 The World Bank., “Global Economic Prospectsand the Developing Countries “, Washington, DC, 1994 12 The World Bank., “World DevelopmentReport”, Washington, DC, 1995 13 Author Unknown “Investing In Development” The Economist,June 25, 1995 14 Berg, E., “Poverty and Structural Adjustment in the 1980’s: Trends inWelfare Indicators in Latin America and Africa.” Development Alternatives, Inc, Washington,DC, 1995 15 Author Unknown, “Fit at Fifty” The Economist, July 23rd 1994. 16 Rich, B.,”World Bank/IMF 50 Years Is Enough”, South End Press, Boston, 1994. 17 Holman, M. “WorldBank Relents: About-Face On Africa” The Australian, Sept 20, 1995