Programmed to Fail

The World Bank Clings to a Bankrupt Development Model

by Walden Bello and Shalmali Guttal

Multinational Monitor, July/August 2005

Bangkok - Like its sister institution the IMF, the World Bank has seen its legitimacy, if not its authority, sharply eroded over the last decade.

The tarnished image of the Bank marks a major change from the state of affairs 10 years ago, when, to great fanfare, Australian-turned-American James Wolfensohn assumed the presidency of the Bank. With the help of a well-oiled public relations machine headed by ex-Economist writer Mark Malloch-Brown, he tried to recast the Bank's image as an institution that was moving away from structural adjustment's emphasis on markets, deregulation and privatization, and making poverty elimination its central mission, while also promoting good governance and supporting environmentally sensitive lending.

While Wolfensohn won some sympathizers in the elite media, especially in the United States, his image makeover failed. Intensifying street protests in developing countries, and in the United States and Europe; biting criticism from the U.S. Congress; corruption scandals; and betrayals of commitments to good faith dialogue with civil society all overwhelmed the Bank's PR offensive.

Most of all, the Bank's record of ongoing failure - a debt relief program that did not deliver the goods; ongoing support for environmentally destructive projects; its ideological commitment to the "market-based" approaches favored by big corporate interests, even as they left their purported beneficiaries among the poor worse off; and a crushing burden of global poverty that persisted not just despite but in part because of Bank policies - destroyed the notion of a progressive, poverty-alleviating Bank.

Reality Behind the Rhetoric

A report of a commission mandated by the U.S. Congress to look at the international financial institutions destabilized the Bank in early February 2000. Headed by academic Alan Meltzer, the commission came up with a number of devastating findings: 70 percent of the Bank's non-grant lending was concentrated in 11 countries, with 145 other member countries left to scramble for the remaining 30 percent; 80 percent of the Bank's resources was devoted not to the poorest developing countries but to the better off ones that have positive credit ratings and, according to the commission, could therefore raise their funds in international capital markets; the failure rate of Bank projects was 65 to 70 percent in the poorest countries and 55 to 60 percent in all developing countries. In short, the commission found, the World Bank was irrelevant to the achievement of its avowed mission of alleviating global poverty.

Much to the chagrin of Wolfensohn, few people came to the Bank's defense. Indeed, more interesting was that many critics from across the political spectrum - left, right and center - agreed with the report's findings, though not necessarily with its recommendations. Among the critics was Wolfensohn's occasional ally, financial guru George Soros, who agreed with the conservative Meltzer that the Bank's "lending business is inefficient, no longer appropriate, and in some ways counterproductive and need[s] to be reformed to eliminate unintended adverse consequences."

Meanwhile, the political aftermath of the Asian financial crisis wreaked havoc with the World Bank's stated aim of promoting "good governance." This loudly proclaimed goal was contradicted by sensational revelations regarding the Bank's relationship with the Suharto regime in Indonesia - an involvement that continued well into the Wolfensohn era. The Bank had funneled some $30 billion to the dictatorship over 30 years. According to Jeffrey Winters and other Indonesia specialists, the Bank accepted false statistics, tolerated the fact that Suharto and his cronies siphoned off 30 cents of every dollar in aid for corrupt uses, legitimized the dictatorship by passing it off as a model for other countries, and was complacent about the state of human rights and the Suharto clique's monopolistic control of the economy. Suharto's loss of power in the tumultuous events of 1998 and 1999 was paralleled by the erosion of the credibility of the World Bank's rhetoric about good governance.

The Bank took more hits as news of corruption and malpractice came to light in Bank-supported infrastructure projects. Prominent among these were the Lesotho Highlands Water Project (LHWP) and the Bujagali Falls dam in Uganda. In 2001, the Lesotho High Court began investigating charges of bribery against several major international dam-building companies and public officials in connection with the LHWP. Meanwhile, the Bank quietly conducted its own internal investigation of three of the companies charged with paying bribes and concluded that there was insufficient evidence to punish them for corruption. In 2002, the Lesotho High Court eventually succeeded in convicting four companies for paying bribes, among them Acres International, a long-term ally and favored contractor of the World Bank - which the Bank had cleared in its internal investigation. It took the Bank well over a year to eventually announce that it would debar Acres International from contracts for a period of three years.

The image of a new, environmentally sensitive Bank under Wolfensohn also evaporated in the avalanche of criticism that followed the Meltzer report. The Bank staunchly backed the controversial Chad-Cameroon Pipeline, which would seriously damage ecologically sensitive areas like Cameroon's Atlantic Littoral Forest. Bank management was caught violating its own rules on the environment and resettlement when it tried to push through the China Western Poverty Reduction Project, which would have transformed an arid ecosystem supporting minority Tibetan and Mongolian sheepherders into land for settled agriculture for people from other parts of China. Pressure from nongovernmental organizations (NGOs) globally forced the World Bank's withdrawal from part of the project that involved resettlement of 58,000 ethnic Chinese to Qinghai Province's Dulan County, the home of Tibetan and Mongolian sheepherders. However, other environmentally destabilizing components of the project were approved.

A look at the Bank's loan portfolio revealed the reality behind the environmental rhetoric: environmental loans as a percentage of the Bank's total loan portfolio declined from 3.6 percent in fiscal year 1994 to 1.02 percent in 1998; funds allocated to environmental projects declined by 32.7 percent between 1998 and 1999; and more than half of all lending by the World Bank's private sector divisions in 1998 was for environmentally harmful projects like dams, roads and power. So marginalized was the Bank's environmental staff that Herman Daly, the distinguished ecological economist, left the Bank because he felt that he and other in-house environmentalists were having no impact on agency policy.

The Failure of Debt Relief

A major World Bank-led initiative launched under Wolfensohn's watch - the plan to reduce Third World debt - also ran into trouble. The Bank initiative emerged in response to the failure of initiatives such as the U.S.-government-supported "Brady Plan" to make a dent in the massive debt of developing countries that had sparked the Third World debt crisis of the early eighties. With more and more voices demanding total debt cancellation, the Bank sought to derail the potential insurgency with the call for significant reduction of developing country debt. When the call was turned into a concrete proposal after consultation with creditor governments, the number of countries eligible for debt reduction was reduced to 42 out of 165 developing countries. Moreover, "HIPC," or the "Highly Indebted Poor Countries" initiative, stipulated that debt reduction of eligible countries would be granted by the large creditor countries in exchange for "economic reforms" - more structural adjustment - undertaken by the debtors.

Trumpeted at the G-7 meeting of rich countries in Cologne in July 1999, the HIPC initiative was in trouble a few years later. As of 2002, only 20 of the eligible 42 counties were able to comply with the conditions imposed by the Bank and the IMF. Of these 20, it was revealed that, despite reductions in their overall debt stock under the program, four would actually have annual debt service payments in 2003-2005 that would be higher than what they paid in 1998-2000; five countries would be paying as much in debt service as before HIPC; and six countries would have their annual debt service reduced by a modest $15 million. Not surprisingly, developing countries began to see HIPC as a fraud.

Along with the British government, the World Bank made a desperate effort to get the creditor countries to revive the HIPC in 2005. Instead of expanding the number of eligible countries, the G-8 announced before their summit in Gleneagles, Scotland, in early July, that the number would be only 14 - those that had fully implemented economic reforms demanded within HIPC. An additional 13 might be added depending on their compliance with "economic reforms." Critics pointed out that the 27 eligible and potentially eligible countries would cover less than 10 percent of the population of the developing world, and, what's more, that the total amount promised by the G-8 - $55 billion - would come to little more than two years worth of interest payments from the South to multilateral and bilateral creditors.

Recently leaked documents from the IMF indicate that this already gutted G-8-World Bank proposal for debt reduction may face trouble because of the reluctance of IMF leadership to give up control over the policy environments of indebted countries. A June 30 office memo to the IMF's Executive Board from the Belgian, Swiss, Dutch and Norwegian executive directors indicates that at least these directors oppose loosening policy conditionalities on countries that receive full debt cancellation.

HIPC was one of the acronyms associated with Wolfensohn; another was PRSP. His presidency brought with it much rhetoric about the Bank adopting a new approach to development. At the World Bank-IMF meeting in September 1999, the World Bank's Structural Adjustment Program was renamed Poverty Reduction Strategy Papers (PRSPs). The PRSP was a new incarnation of the standard Bank-Fund adjustment paradigm with its trademark conditions: unilateral trade liberalization, privatization of essential services and deregulation of labor and financial markets. The new era was supposed to signal a change in macroeconomic strategy. As U.S. Treasury Secretary Larry Summers (formerly the chief economist at the World Bank) put it, the new approach would consist of "moving away from an IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development." It would be "a new, more inclusive process that would involve multiple international organizations and give national policy makers and civil society groups a more central role." The Bank, instead of the Fund, became the new lead agency.

But the new approach, at closer inspection, was suspiciously like the old one. Beneath the anti-poverty rhetoric, not much changed.

Several comprehensive studies of PRSPs have been released in recent years. Probably the most favorable study was commissioned by the Strategic Partnership for Africa. Yet a close reading shows very little actual progress. In summing up the review of the results of PRSPs in eight African countries, the study notes that "many of the corresponding gains in terms of performance and results remain potential rather than actual. Decisive further steps will be necessary to realize the potential."

One of the few clearly positive elements noted by the report is that PRSPs have achieved "a useful mainstreaming of anti-poverty efforts in national policy processes in Africa," though exactly what that means is unclear. More centrally, the authors conclude, "whether or not vicious circles of patrimonial politics, state weakness and ineffectual aid can be replaced with virtuous ones, based on greater national ownership of anti-poverty effort, is still uncertain."

Most other assessments are much more negative. A study by the Economic Policy Empowerment Program of the European Network on Debt and Development (Eurodad) noted that while the PRSPs stress the importance of social safety nets and reducing poverty, the prescribed macroeconomic reforms to achieve them are "undiscussed" and are indistinguishable from the previous macroeconomic frameworks focused on deregulation, trade liberalization and privatization.

As for "process," most studies confirm the Eurodad study's contention that the so-called "participatory approach" of the PRSPs involve "little more than consultations with a few prominent and liberal CSOs [civil society organizations] rather than broad-based, substantive public dialogue about the causes of incidence of poverty." Authentic local organizations are routinely excluded: "Local, vernacular forms of civil society organization such as labor unions, peasant organizations, social movements, women's groups and indigenous peoples' organizations have not been invited into the process, and the little public discussion that has taken place has been limited to well-resourced national and international non-governmental organizations."

Focus on the Global South conducted a detailed look at the PRSPs for three transition countries - Vietnam, Laos and Cambodia. The PRSP approach in those countries revealed the same one-size-fits-all policy matrix emphasizing rapid growth, the tearing down of the state sector in favor private enterprises, deregulation, more liberal foreign investment laws, trade liberalization, export-oriented growth, and commercialization of land and resource rights. This time, however, the anti-poverty rhetoric was deployed to drag in NGOs and people's movements so as to lend the content and process legitimacy.

"The PRSP is upheld by the World Bank and the IMF as a comprehensive approach," noted the authors. "That it certainly is," the Focus analysis concludes, "but not for poverty reduction. The PRSP is a comprehensive program for structural adjustment, in the name of the poor."

Managing Civil Society

Facing increasing dissatisfaction with his so-called new approach, Wolfensohn tried to manage his critics from civil society via "constructive engagements" and "multi-stakeholder dialogues." Most prominent among these were the Structural Adjustment Participatory Review Initiative (SAPRI), the World Commission on Dams (WCD) and the Extractive Industries Review (EIR). Although focused on different areas of Bank operations, all three initiatives sought to bring Bank critics to a negotiating table in a bid to prove that the Bank was willing to listen to its detractors and become more responsive to criticisms about its operations and polices. But the reality proved to be quite the opposite. In all three cases, the Bank showed itself to be unwilling to accept and act on the outcomes of these initiatives.

o The Structural Adjustment review

Wolfensohn's "feel good" approach was put to a test - and by all accounts failed - in the very first "constructive engagement" exercise he committed the Bank to through the Structural Adjustment Participatory Review Initiative (SAPRI). In 1996, Wolfensohn accepted a civil-society challenge to conduct a joint Bank-civil society-government assessment of the actual results of structural adjustment programs (SAPs). The SAPRI initiative was launched in 1997.

SAPRI was designed as a tripartite field-based exercise, and a civil society team worked with a Bank team appointed by Wolfensohn to develop a transparent and participatory global methodology for gathering and documenting evidence of the impacts of World Bank-IMF SAPs in seven countries. This included local workshops, national fora and field investigations. The process was also undertaken by civil society organizations in two additional countries where the Bank and governments refused to participate.

Despite agreement on the common rules of the exercise and the review methodology, the World Bank team played an obstructionist role throughout the SAPRI process. For example, at public fora, instead of trying to listen to and learn from the evidence presented by civil society representatives about the impacts of SAPs, Bank staff almost always argued points and in the end, claimed that the presentations (which were part of the agreed-upon qualitative input) constituted "anecdotal evidence."

While civil society at the national level tended to accept joint research findings despite reservations, the Bank almost always found extensive faults in the draft reports. In Bangladesh, the Bank had over 50 pages of objections to the joint report covering four or five topics.

Civil society groups, however, remained firm that the Bank adhere to the commitments it had made to the methodology and process, and pushed ahead with field investigations. An increasing amount of data started to emerge about the impacts of SAPs from farmers, workers, women's and indigenous peoples' organizations, and even governments.

As the Bank's ability to control country processes diminished, so also did its ability to control the output of the review. Even before the final and concluding national fora were reached, field investigations already indicated major problems in all aspects of adjustment programs - from trade and financial sector liberalization to the privatization of utilities and labor-market reforms.

Reluctant to go public with these findings, the Bank team backed off from an earlier (written) agreement to present all SAPRI findings in a large public forum in Washington D.C., with Wolfensohn present. Instead, the Bank team insisted on a closed technical meeting and a small session in Washington D.C. scheduled when Wolfensohn was not in town. Most important, the Bank now insisted that it and civil society each write separate reports. The Bank report used the Bank's own commissioned research as the basis for its conclusions and barely referred to the now five-year SAPRI process. In August 2001, the Bank pulled out of SAPRI and buried the entire exercise.

In April 2002, the full SAPRI report (under the name of SAPRIN, to include findings from the two countries where civil society conducted investigations without Bank involvement) was released to the public and received widespread media coverage. The Bank entered the fray again and Wolfensohn requested a meeting with SAPRIN members. He expressed regrets that he and his staff had not been in touch with SAPRI and promised to read the report and discuss it seriously in the near future. To date, however, neither the Bank nor Wolfensohn have shown any commitment to review and make changes to their adjustment lending. On the contrary, structural adjustment policies continue to be the mainstay of Bank-Fund lending.

o The World Commission on Dams

The WCD also proved to be a thorn in the Bank's side. Established in 1997 following a meeting convened in Gland, Switzerland by the World Bank and the World Conservation Union (IUCN), the WCD was the first body to conduct a comprehensive and independent global review of the development effectiveness of large dams and to propose internationally acceptable standards to improve the assessment, planning, building, operating and financing of large dam projects.

Although co-sponsored by the World Bank, the origins of the WCD lie in the numerous anti-dam struggles waged by dam-affected communities and NGOs around the world, in particular those targeting World Bank-funded projects from the mid-1980s onwards.

Chaired by then-South African Minister of Water Resources Kader Asmal, the WCD was comprised of 12 commissioners from eminent backgrounds, and included representatives from the dam building industry, anti-dam struggles, indigenous people's movements, civil society organizations, the public sector and academia.

Over a period of two and half years, the WCD commissioned a massive volume of research and received nearly 1,000 submissions from around the world on the environmental, social, economic, technical, institutional and performance dimensions of large dams.

The WCD's final report, Dams and Development: A New Framework for Decision-Making, was launched by Nelson Mandela in London in November 2000. Despite deep differences in the backgrounds and political perspectives among those involved in the WCD process, the WCD reached a consensus on the need to massively curtail large dam construction and protect the rights of those displaced by large dams.

Although the WCD worked independently from the World Bank, the Bank had played a more active role in the development of the WCD Report than any other institution. Bank representatives were active members of the WCD Forum, and the Bank was consulted at every stage of the WCD's work program. But the Bank was quick to distance itself from the WCD recommendations - which would have required a major change in the way Bank does business.

At the report's launch in November 2000, Wolfensohn said that the Bank would consult its shareholders on their opinions. The Bank's subsequent position on the WCD report was based primarily on the responses of dam-building government agencies in the major dam-building countries, which rejected the report's findings and guidelines, and deemed them inapplicable and even anti-development. In a March 27, 2001 statement, the Bank stated that, "consistent with the clarification provided by the WCD Chair, the World Bank will not 'comprehensively adopt the 26 WCD guidelines,' but will use them as a reference point when considering investments in dams."

The Bank is now actually planning to re-engage in financing large-scale dams.

o The Extractive Industries Review

The experience of the WCD was relived in yet another "dialogue between all parties" in the Extractive Industries Review (EIR). The EIR was announced in September 2000 during the World Bank-IMF annual meeting in Prague.

Challenged in a public meeting by Friends of the Earth International Director Ricardo Navarro on the impacts of World Bank-financed oil, mining and gas projects, Wolfensohn responded - to the surprise of his staff - that the Bank would undertake a global review to examine whether Bank involvement in extractive industries was consistent with its stated aim of poverty reduction.

Led by Indonesia's former environment minister Emil Salim - himself a controversial figure in the eyes of peoples' environmental movements - the EIR process was less thorough, less independent and less participatory than the WCD process.

But despite Bank interference, the EIR report turned out to be a surprisingly strong document. Although the report did not respond to all the concerns and demands of peoples' movements and NGOs, it contained strong language and recommended that the Bank and its private sector arm, the International Finance Corporation, phase out their involvement in oil, mining and natural gas within five years and shift their financing to renewable energy. The report resulted in a strong outcry among several private financiers (such as Citibank, ABN Amro, WestLB, Barclays) for whom Bank involvement in the oil, mining and gas projects is essential before they are willing to extend financing.

As with the WCD report, the World Bank ignored many of the EIR report's important recommendations. Following the release of the EIR report, a leaked copy of the World Bank management's response (prepared on behalf of President Wolfensohn) flatly rejected the ambitious proposal that the Bank phase out support for extractive industry by 2008. Ending the financing of oil projects "would unfairly penalize small and poor countries that need the revenues from their oil resources to stimulate economic growth and alleviate poverty," the management report stated. As an example, the report cited Chad and Cameroon, where the Bank has financed an oil pipeline despite vociferous opposition by local communities and environmental groups. The pipeline has been dogged with controversies about violations of human rights and environmental standards.

Quizzed about the Bank management's response to the EIR report at an awards ceremony in Georgetown University in Washington, D.C. in February 2004, Wolfensohn responded that he had not seen the management response before it was leaked. He also claimed that the Bank had an obligation to respond to those in the process who were not part of the represented consensus as well. Here too was a repeat of the post-WCD scenario as Wolfensohn hid behind the "Southern countries" rhetoric: the World Bank could not make firm commitments to implement recommendations - such as respecting human rights and ensuring that oil, gas or mining projects do not go ahead without the free, prior and informed consent from local indigenous peoples - objected to by Southern governments.

Though the Bank was an initiator and sponsor of both the WCD and EIR, it refused to adopt their findings even in principle, hiding behind the opposition of its larger developing country clients such as China and India. In late 2004, the World Bank announced that it will pursue a new framework for addressing the social and environmental impacts of the projects it finances. Its "country systems" approach would rely mainly on borrower governments' social and environmental standards and systems rather than the Bank's own policies for project implementation. Thus the Bank is removing the minimal set of standards by which its commitment to environmental and social sustainability can be assessed. The new "country systems" approach will likely let the Bank off the hook from such assessments; now it can conveniently claim that it is driven by the wishes and needs of its borrowers rather than its own centralized policies.

Not Feeling So Good

Arguably, the most important lesson to be learned from the last decade is that the World Bank is much too large and politically motivated an institution, and is too central in the structure of U.S.-led global capitalism, to be changed by a single individual, even one as charismatic and shrewd as James Wolfensohn. In the last instance, the Bank, like the IMF, serves as an extension of U.S. corporate and strategic interests. Wolfensohn could only modify its performance at the margins.

Whatever his personal intentions, Wolfensohn's institutional role increasingly determined his behavior. And the increasingly conflictive relationship between him and civil society came to a boil during the tumultuous World Bank-IMF annual meeting held in Prague in September 2000, which had to be cut short owing to massive demonstrations. Confronted with a list of thoroughly documented charges by NGOs at the famous Prague Castle debate, Wolfensohn lost his cool, exclaiming, "I and my colleagues feel good about going to work every day." It was an answer that was matched only by then-IMF Managing Director Horst Koehler's equally famous line at the same debate: "I also have a heart, but I have to use my head in making decisions."

No doubt Wolfensohn's replacement, former U.S. Deputy Defense Secretary Paul Wolfowitz, will continue to feel good as he goes to work every day. The story will surely be different for the millions of victims of World Bank policies and projects.

The End of an Illusion

By 2005, efforts towards reform had ground to a stalemate at both the Bank and the IMF. Perhaps nowhere was this more evident than in the area of institutional control and decision-making. In both institutions, voting power depends on the size of a country's capital contributions. At the World Bank, the U.S. share is 17.6 percent, above the critical 15 percent needed to exercise a veto over major lending decisions. At the IMF, the United States controls 19 percent of the vote, comfortably above the 15 percent needed to veto vital policy and budgetary decisions.

Even mild proposals for governance have very little chance of passing. For instance, Joseph Stiglitz has proposed that "pending a reexamination of the allocation of voting, the direct voice of the borrowing countries in the executive boards of the IFIs [international financial institutions] be increased, e.g., by establishing two additional seats with half votes or repackaging constituencies." But in the context of the IMF and World Bank, such mild palliatives are considered wild and radical notions.

Given the controversy swirling around the relevance of the two institutions, one would have thought that the rich minority would have been willing to do away with particularly aggravating customs, namely that the head of the Fund is always a European and that of the Bank must be from the United States. On two occasions in the last few years, in 2000 and 2004, the European bloc had a chance to make the selection of the managing director by merit rather than nationality. On both occasions, Europeans were chosen: the German Horst Koehler in 2000 and the Spaniard Rodrigo Rato in 2004.

The Europeans were not alone. Washington had no intention of yielding the position of president of the World Bank to anybody but an American when James Wolfensohn's tenure was up. But no one could have expected that the choice for president would be a man with no experience in development and who was the very symbol U.S. unilateralism: Paul Wolfowitz, formerly Bush's deputy secretary of defense. Indeed, Wolfowitz's appointment signified that the future would belong not to reform of the IFIs but to a more determined effort to transform them into compliant instruments of U.S. foreign policy.

Most developing country governments now view reform of the IFIs as something of a sick joke. In civil society, the failure of reform has made the demands to abolish the IMF and World Bank, as well as the World Trade Organization, no longer seem like rhetorical outbursts of far-left groupings. What would take the place of the current multilateral agencies has become a respectable topic even among establishment academics. No doubt the institutions will limp along in the next few years, but the damage to their credibility appears to be mortal.

Walden Bello and Shalmali Guttal are members of the staff of Focus on the Global South, a Bangkok-based analysis and advocacy institute focusing on issues of trade, development and security. Many of the themes touched on in this article are further developed in Bello's most recent book, Dilemmas of Domination: the Unmaking of the American Empire (New York: Henry Holt and Company, 2005.

International Monetary Fund (IMF) & World Bank

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