In a recent article entitled Reforming
the World Bank: Creative Destruction (Foreign Affairs, January/February
2006), Jessica Einhorn, dean of the Paul H. Nitze School of Advanced International
Studies (SAIS, Johns Hopkins University), called for the disbandment of
the International Bank for Reconstruction and Development (IBRD). Addressing
her remarks to the World Bank's new president, Paul Wolfowitz [1]
and its major funders, she called for an end to the bank's lending
to middle-income countries, and for a focus instead on the poorer countries
which have little or no access to private capital markets as credit sources
for development financing.
Einhorn, who retired in 1998 as managing director of the World Bank (shorthand
for the "World Bank Group" which includes the International
Bank for Reconstruction and Development (IBRD), lending to the governments
of middle- and lower-middle income countries at commercial rates, the
International Development Association (IDA), which provides easier credit
terms and grants (with conditionalities) to the poorest countries, and
the International Finance Corporation (IFC), which promotes private sector
involvement in development and its financing) may seem to have found common
cause with NGO critics campaigning against the Bretton Woods institutions
(BWIs).
Their motivations in fact are quite the opposite. Focus on the Global
South for instance regards the BWIs as instruments of metropolitan capital
by and large, as enthusiastic purveyors of the neo-liberal agenda, and
call for their dismantling and replacement by more accountable and people-responsive
institutions for development financing.
Einhorn, who echoes the call to wind down the IBRD, seeks however to extend
the neo-liberal agenda to the World Bank itself (in effect, outsourcing
the IBRD's lending activities to private capital markets), with her call
for "targeted" development financing:
In the World Bank's first years of existence, the IBRD dominated the
institution. Now, however, lending to middle-income countries has diminished
in both size and emphasis: the IBRD's gross disbursements have declined
from nominal levels of $13-14 billion a decade ago to about $10 billion
in fiscal years 2004 and 2005. Private capital flows to emerging markets
[by comparison have increased to] over $300 billion a year. The IBRD seems
to be a dying institution… some countries that originally depended on
IBRD lending no longer need the IBRD because they can get funding from
private sources… The financial markets of today bear no similarity to
those of 1944… The whole concept of a lending institution with a big balance
sheet tied up in long-term loans has been overtaken by securitization,
in which loans are just the starting point for packaging together securities
that can be sold and traded in the marketplace. Looking ahead ten years,
the growth of the market for credit derivatives will most likely mean
that credit to middle-income countries will be just another derivative
financial instrument - to be bought, sold, and managed in private portfolios.
On the eve of the East Asian currency crisis, the IMF quarterly Finance
& Development reported in June 1997 that official development finance
(grants and loans) had declined from US$56.3 billion in 1990 to US$40.8
billion in 1996 ("Developing countries get more private investment,
less aid"). Concessional aid and grants, increasingly targeted at
refugee and emergency relief, held fairly steady at about US$30 billion
annually, but the non-concessional loan component of official development
finance fell from US$27.1 billion (1990) to US$9.5 billion in 1996. Over
the same period however, private capital flows (commercial bank loans,
bonds, foreign direct investment, and portfolio equity investments) increased
dramatically from US$44.4 billion to US$243.8 billion.
The World Bank's counterpart publication Global Development Finance reported
in 2001 that "in real terms, concessional [aid] flows worldwide increased
by nearly 50% between 1970 and 1980, and by 32% in the ensuing decade.
They then plunged 25% in the 1990s… concessional flows have risen modestly
since 1997… reflects some temporary factors, notably the rise in Japanese
aid in response to the financial crisis in East Asia… However concessional
aid in 2000 was still much less than in the early 1990s… total official
development finance – concessional and non-concessional resources – to
developing countries was US$38.6 billion in 2000, another significant
decline after the steep drop in 1999 [US$45.3 billion, down from US$54.6
billion in 1998]. The decline was due to non-concessional flows that fell
back again in 2000, reflecting the ability of some countries to prepay
on rescue packages as they emerged from the global financial crisis [and
duly] returned to market-based financing from commercial sources".
The privatization of the IBRD should come as no surprise. Global production
overcapacity, massive increases in speculative financial flows, historically
low interest rates, property and asset bubbles, and resurgent militarist
Keynesianism are expressions of a systemic glut of capital that has been
building up over several decades, ceaselessly seeking out profitable outlets
for deployment and redeployment.
Likewise, the neo-liberal agenda of privatization, market creation and
market deepening, and retrenchment of the welfarist-cum-developmentalist
state, is driven by over-accumulated capital seeking to extend its circuits
into hitherto non-commercial public sector domains for continued accumulation.
As an agent of global social reproduction, the World Bank itself is also
subject to forces pushing for privatization (in this case, divestment
of its development financing role to private capital markets), much in
the way that welfarist states are urged to selectively offload their more
profitable (or commercially viable) social services to the private sector.
Not surprisingly (as an institutional compromise and accommodation), the
World Bank, without requiring much of a push, seems to have re-positioned
itself to be an even more influential agent which can promote the privatization
and retrenchment of the welfarist/ developmentalist state.
We see, for instance, expanded roles for the IFC and the Multilateral
Investment Guarantee Agency (MIGA) within the World Bank Group (IFC and
MIGA commitments rose from 3.3% of World Bank loans in 1980 to 25% in
2000); World Bank bonds, first issued in 1989 to raise funds in private
capital markets to make up for funding shortfalls from donor countries
(up to 80% of the bank's funds now come from the sale of bonds); World
Bank Institute, a reorganized ideological hub to propagate more vigorously
the neo-liberal agenda through a global network of affiliated and influential
think-tanks, in the process, disingenuously exaggerating the role of the
"free" market in fostering "development", and denigrating
the state-led experiences of much of East & Southeast Asia. (Notwithstanding
these efforts, the BWIs' reputations and influence have been battered
of late, in much of Latin America, most notably Argentina, in East Asia
in the wake of the 1997 currency crises, in the ex-Soviet states, and
by high profile defections such as the Nobel economics laureate Joseph
Stiglitz).
Since the time of AW Clausen (World Bank president, 1981-1986, former
president Bank of America, not coincidentally a time when metropolitan
banks were flush with liquidity from Eurodollars and petrodollars), there
had been persistent calls from certain US quarters for the BWIs to divest
more of their development financing activities to private capital markets.
The same interests presumably are among the perennial chorus clamoring
to reduce US contributions to multilateral lending agencies.
The Meltzer Commission, in its report to the US Congress in 2000, recommended
in effect a triage of borrower countries: debt cancellation, outright
grants and performance-based concessional loans for the most destitute
of highly-indebted countries, as opposed to the more "credit-worthy"
borrowers with access to capital markets, who should be weaned from multilateral
lending agencies and henceforth be serviced by private lending institutions
(i.e. the financial analogue of "targeted" programs in health
services). Indeed, this is the persuasive face and generic template for
the privatization of social services.
There's perhaps a moral to this tale: Be careful what you ask for, because
you may get it. Well, not quite. The IBRD of course has its own entrenched
interests and institutional staying power. Einhorn hints at the outlines
of a possible compromise for a downsized IBRD in her concluding remarks:
Any advocate of reform must be frank about the bureaucratic interests
that currently want the IBRD to survive as long as possible. The IBRD
has become a crucial source of financial support and clout for the development
community. IBRD income helps sustain the World Bank's administrative budget
of $2 billion and finances large off-budget transfers of money to IDA
countries ($600 million in the last fiscal year alone)…The G-20 [governments]
should convene a group of eminent persons from outside of government,
led by a distinguished former finance minister or head of government from
a middle-income country, for the purpose of considering the ideal institution
to meet the needs of middle-income countries. In providing the option
of an orderly and consensual way to shut down the IBRD, the group…could
appoint a team of able and prudent financial engineers, headed by a retired
central-bank governor, to elaborate a set of modern financial designs
for meeting whatever needs the group envisions, such as grants for technology
research or a credit backstop facility using derivative instruments to
insure loans made to developing countries. The new institution would be
free to join its operations with the IFC and the Multilateral Investment
Guarantee Agency to promote private sector involvement in novel ways.
No sovereign guarantee would be required, and lending, investment, or
guarantees could occur at the local, regional, or even global level—to
support initiatives for the global commons, for example.
Learning from their experiences during the Third World debt crises of
the 1980s, private financial capital will find it useful to retain an
institutional intermediary which underwrites or absorbs the financial
risks of development lending. Rather than assume the risks directly as
they did with their reckless lending in the Third World in the 1970s and
1980s (and then relying on the BWIs' muscle for debt collection when the
loans went sour), finance capital much prefers to mitigate these risks,
via World Bank bonds and other financial instruments, or offload them
onto a rump IBRD working in conjunction with the IFC and MIGA to facilitate
"public-private partnerships" in development financing.
The substance of such "public-private partnerships" is evident
from this Economist (February 13, 1999) report:
"traditionally, the World Bank's main products have been loans.
But in recent years it has offered partial guarantees for investment projects
as well, taking on some of the risks that investors eschew…World Bank
guarantees [for sovereign or corporate bonds] have many advantages over
loans. They help countries to regain access to private capital markets,
can be tailored to cover the particular risks that worry investors most,
and can help countries extend the maturities of their borrowing. Those
inside the Bank who deal with guarantees reckon that perhaps a dozen such
deals could be done a year. Yet some of their colleagues are skeptical.
They point out that private money with a World Bank guarantee costs a
country more than a straight World Bank loan. They worry that such guarantees
are an inefficient use of Bank money: under the Bank's conservative rules,
guarantees must be accounted for (on a net present value basis) exactly
as if they were loans. They fret about "stripping": that investors
would repackage the bonds, selling the World Bank's guarantees separately
in a way that might raise the Bank's own borrowing costs. For a guarantee
to be acceptable to investors, it has to be irrevocable; once a bond is
guaranteed, the World Bank is committed"
As with the shriveling welfarist states, the rump IBRD would also retain
those tasks which remain unattractive to private capital - unprofitable
or uncommodifiable services, global public goods and global commons, and
externalities which accrue for example from the development of vaccines
and drugs for neglected diseases, or research into environmentally-friendly
technologies or measures to cope with threatening emergent pandemics.
The poorer credit risks for sovereign lending of course would remain the
province of the IDA, which might then face more straitened circumstances
arising from reduced off-budget transfers (cross subsidies) from IBRD
incomes, and become increasingly dependent on the tender mercies of "philanthropic
Keynesianism" a la Gates.
The IBRD is deservedly castigated by social activists for its many failings.
Einhorn's proposals for privatizing development financing however do not
address the needs of the people of the South. They pander to the priorities
and dictates of global finance capital.