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 de facto disbandment of the International Bank for Reconstruction and Development (IBRD). Addressing her remarks to the World Bank’s new president, Paul Wolfowitz (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 member countries who 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. Groups such as Focus on the Global South regard 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 groupcould 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 in 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 eschewWorld 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 sceptical. 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 however address not the developmental financing needs of the South, they pander to the priorities and dictates of global finance capital.
Chee Chan Khoon lives in Penang, Malaysia. Email: firstname.lastname@example.org