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The World Bank: Development Agency, Credit Union, or Institutional Dinosaur?

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The World Bank: Development Agency, Credit Union, or Institutional Dinosaur?
The World Bank: Development Agency,
Credit Union, or Institutional Dinosaur?
in press (spring 2008 issue):
International Journal of Political Economy
Chan Chee Khoon 1
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 lending
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. Jessica Einhorn’s call to wind down the IBRD (Foreign Affairs,
January/February 2006) follows upon the recommendations of the Meltzer
Commission (US Congress, 2000) for a triage of borrower countries: debt
cancellation, performance-based grants 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 sources (i.e. the financial analogue of “targeted”
programs in health services). Indeed, this targeted approach is the persuasive face
and generic template for the privatization of social services.
A Targeted Approach to Development Financing
In 1995, James Wolfensohn’s appointment as president of the World Bank 2 provided the
occasion for strident calls from the American Enterprise Institute (AEI) urging
Wolfensohn “to begin an orderly transition to private ownership. For the same skills
through which Wolfensohn achieved his great success in the world of finance [as a Wall
Street investment banker] could be turned toward a successful privatization of this huge
financial institution. Transition to private Bank ownership promises to save taxpayers in
America and other Western countries billions of dollars in the coming years - even to
refund billions of dollars to their national treasuries. No less important, a privately
owned and operated World Bank could be more effective at promoting and supporting
international economic development than the current organization -- whose very
1
Professor, Health & Social Policy Research Cluster, Women’s Development Research Center, Universiti Sains
Malaysia, 11800 Penang, Malaysia [email protected]
2
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 market-based rates, the
International Development Association (IDA), which provides concessional rates and performance-based grants to the
poorest countries, and the International Finance Corporation (IFC), which promotes private sector involvement in
development and its financing. Kenneth Rogoff, professor of economics at Harvard University and former chief
economist at the International Monetary Fund (IMF) explains that “the IBRD has only a small amount of paid-in
capital [5 percent of callable capital]. It finances most of its lending activities, which amount to more than $100
billion, through borrowing. That is, the IBRD taps international capital markets using its triple-A rating, and then
lends to developing countries and emerging markets at a mark-up of between 0.5 percent and 0.75 percent, generally
(but not always) far below the rate at which they could borrow on their own. The Bank uses the difference to help
defray the Bank's $1.5 billion in operating expenses, including the cost of its 10,000-plus employees” (Economist, July
24, 2004).
2
structure encourages unsound, even perverse, economic practices in the countries to
which it lends” 3 .
In the event, Wolfensohn ignored these calls and proceeded with a makeover of a
multilateral development lender faced with mounting criticisms over its undemocratic
governance and its promotion of a neo-liberal orthodoxy (structural adjustment,
privatization, deregulation and liberalization, retrenchment of the developmentalist/
welfarist state, a laissez faire global capitalism) and its alleged impact on the
environment, on gender and social equity, on marginalized indigenous communities, and
indeed, on economic growth 4 . Notwithstanding this latest re-discovery of the
distributional consequences of market-driven growth 5 , the renewed focus on poverty
reduction (“enhancing the voice and participation of the poor to achieve more equitable
outcomes”) by no means sidelined economic growth and infrastructural development as
bank lending priorities, let alone the undiminished efforts to establish or to reinforce the
legal and judicial institutions for the functioning of capitalist market economies
(“improving governance, strengthening the rule of law, and stamping out corruption”).
In giving prominence to the bank’s poverty reduction mission however, Wolfensohn laid
the ground for a subsequent challenge to the bank to confine its efforts to the poorer
member countries - via monitored grants targeted at poor countries which lacked
investment-grade ratings - while outsourcing to private capital markets its development
lending to “market-capable” middle-income countries. In short, a more nuanced
privatization of the bank’s development lending activities which was less concerned with
private ownership of the bank as such.
This of course was a key recommendation of the Meltzer Commission in its report 6 to the
US Congress in 2000: a triage of borrower countries offering debt cancellation and
performance-based grants 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
3
Nicholas Eberstadt & Clifford Lewis. Privatizing the World Bank. The National Interest, Summer 1995. A year
earlier, AEI senior fellow Alan Walters, a former professor of economics at the London School of Economics &
Political Science as well as chief economic adviser to Margaret Thatcher, had written that “as distinct from practical
policy, the ideal solution would be to abolish the Fund and the Bank – wind them up and disperse their expertise to
other activities. The Bank and the Fund were the progeny of a generation that regarded government management of
banking and finance as being the only way forward. Yet in the intervening years, we have become increasingly aware
of the advantages of getting government and politics out of monetary policy and finance. The widespread and rapid
movement towards independent central banks or towards currency board arrangements is the most obvious example of
this change … The practical, in contrast to the ideal, reforms I have emphasised – capping Bank and Fund total
portfolios and differential interest rates related to market rates [i.e. risk-adjusted interest rates] – are quite modest, but
still unlikely…All attempts to downsize [the BWIs] end up by making them bigger…” Alan Walters. 1994. Do We
Need the IMF and the World Bank? London: Institute of Economic Affairs.
4
Branko Milanovic. 2003. The Two Faces of Globalization: Against Globalization as We Know It. World
Development 31(4):667-683.
5
see for example Hollis Chenery, Montek Ahluwalia, Clive Bell, John Dulloy and Richard Jolly. 1974 Redistribution
with Growth: Policies to Improve Income Distribution in Developing Countries in the Context of Economic Growth.
(A Joint Study by the World Bank's Development Research Center and the Institute of Development Studies,
University of Sussex). London: Oxford University Press.
6
Report of the International Financial Institution Advisory Commission (chair: Allan H Meltzer), March 2000, US
Congress www.house.gov/jec/imf/meltzer.htm (accessed on January 3, 2002)
3
sources (i.e. the financial analogue of “targeted” programs in health services 7 ). Indeed,
this targeted approach is the persuasive face and generic template for the privatization of
social services 8 .
The Privatization of Development Financing
Along with Meltzer, the most sustained calls to outsource the IBRD’s lending have come
from his colleague Adam Lerrick, a Carnegie Mellon University economist and visiting
scholar at the American Enterprise Institute. Lerrick, who had served as senior advisor to
Meltzer during his tenure as chairman of the International Financial Institution Advisory
Commission (1999-2000) has 25 years experience as an investment banker.
Early in his career, he was responsible for new products development for international
capital markets at Salomon Brothers and Credit Suisse First Boston (1982-1988). He
went on to specialize in syndicating sovereign bond issues in the 1980s, i.e. private
lending to sovereign borrowers which included the governments of Sweden, West
Germany, Italy, Denmark and France among others, and moved on to restructuring of
distressed assets and loans in the 1990s. Currently, he is chairman of Sovereign Debt
Solutions Limited, a capital markets advisory firm which was retained from 2003-2005 to
negotiate on behalf of 30,000 European retail investors, in collaboration with
HypoVereinsbank (Germany’s second largest bank), and DSW, the largest German
investor rights protection organization, which collectively constituted the largest group of
foreign creditor claimants in the $100 billion Argentina debt restructuring.
In calling for the disbandment of the IBRD, Lerrick has emphasized its diminishing
relevance and modest contribution to global development financing, amounting to less
than five percent of private capital flows to IBRD’s investment-grade middle-income
borrowers (emerging market economies).
On the eve of the East Asian currency crisis, the IMF quarterly Finance & Development
reported in June 1997 that official development finance (multilateral and bilateral 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 net flows
fell from US$27.1 billion (1990) to US$9.5 billion in 1996. Over the same period
however, private net 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. In 2003, official and private net flows were returning to pre-
7
for a critical analysis of the World Bank’s targeted approach in Investing in Health (World Development Report,
1993), see Asa Cristina Laurell & Oliva Lopez Arellano. 1996. Market Commodities and Poor Relief: The World
Bank Proposal for Health. Int J Health Services 26(1):1-18.
8
for a discussion of universalism and targeting in social policy and development practice, see: Thandika Mkandawire.
2005. Targeting and Universalism in Poverty Reduction. United Nations Research Institute for Social Development,
Social Policy and Development Programme Paper Number 23. Geneva: UNRISD; CK Chan. 2006. What’s new in the
Arusha statement on New Frontiers of Social Policy? Global Social Policy 6(3):265-270
4
crisis levels, with volumes of $28 billion and $200 billion respectively. By 2006, private
net flows to developing countries had reached $646 billion.
David de Ferranti, who retired in 2005 as World Bank vice-president for the Latin
America and Caribbean department, points out however that private flows to emerging
markets go mostly to private investments – car factories, hotel and tourist resorts, Cola
bottling plants, and such like. Private lending for public (or publicly guaranteed) projects
on the other hand is roughly comparable in scale to the lending of official agencies,
including the IBRD’s gross disbursements of about $10-12 billion in recent years 9 .
But more important perhaps than IBRD’s market share of sovereign lending is its very
existence as an option for lower-priced loans. As a fallback option, it allows some
bargaining leverage to sovereign borrowers in the international capital markets, and thus
acts as a price bulwark (price brake) against what might otherwise be even higher-priced
loans from private lenders. (Private lenders, who complain endlessly about the “unfair
competition” of IBRD’s “subsidized” lending, leveraged from its cost-free shareholder
capital, for the same reasons would be wary about any move to further scale-up lending
by the IFC to private borrowers, and greater flexibility extended to IBRD for lending to
sub-national public borrowers without the hitherto requisite sovereign guarantees).
The interest spread between multilateral and private lending would be especially dramatic
in times of extreme capital market volatility. This was the case during the 1997 Asian
financial turmoil when the crisis-affected countries were faced with two options –
exorbitant rates demanded by private lenders with the appetite for extraordinary risk 10 ,
and lower (but still ramped-up) rates and stiffer conditionalities from multilateral lenders
(e.g. the BWIs’ demands for market-opening concessions in the financial and other
sectors in South Korea, as part of their emergency loans).
In less tumultuous times, middle-income governments appreciate the longer maturities of
IBRD loans along with the lower interest rates (and sometimes the technical assistance
which comes bundled with it). But this however is offset against the “hassle” factors:
longer negotiations, BWI policy dictates (conditionalities), more stringent fiduciary
requirements, and stipulated procedures for procurements. Their borrowing patterns from
private vs. multilateral lenders consequently reflect a fluid mix of circumstances which
includes the prevailing interest rate differentials between the two lending sources.
Multilateral Lending in Crisis?
IBRD lending to middle-income borrowers nonetheless has been on a downward trend
for more than a decade 11 , declining from about $18 billion annually in the early 1990s to
9
David de Ferranti 2006. The World Bank and the Middle Income Countries, in Rescuing the World Bank (ed. Nancy
Birdsall) Wash. DC: Center for Global Development
10
the risk premium for emerging market borrowers was as high as 12% two years after the Asian financial crisis of
1997 (see Adam Lerrick. Why Is the World Bank Still Lending? Wall Street Journal, 28 October 2005). The difference
has since fallen to less than 2 percentage points because of the continuing glut of liquidity and the perception that risk
in the emerging markets had receded.
11
presentation of Nancy Birdsall (Center for Global Development), from a transcript of a seminar The World Bank
Under Wolfowitz at the American Enterprise Institute (AEI), Washington, DC, June 7, 2005. (see also de Ferranti,
2006)
5
$11 billion in 2004 before recovering to $14.1 billion in 2006. The surfeit of capital in
the global financial markets clearly has contributed towards IBRD’s declining loan
portfolio. More recently, buoyant commodity prices and brisk economic growth, and
migrant remittances ($25 billion from expatriate Indians alone, in 2005-2006) 12 , have
enabled some countries to make early repayments on their outstanding loans to the
Bretton Woods institutions. Less obvious was the fact that with privatization, large
infrastructure projects in some countries (dams, water, energy, communications,
highways) which in the past might have been undertaken by national governments 13
became ineligible for IBRD lending, since sovereign guarantees are required of IBRD
loans which cannot be extended to privatized entities or projects. As long as global
capital markets were awash with liquidity, borrowing from private lenders was a feasible
alternative for development financing, and indeed the availability
According to the World Bank’s Infrastructure Action Plan (July 2003), IBRD lending for
“bricks and mortar” infrastructure projects declined by 50 percent between 1993 and
2002, but over that same period, IFC infrastructure lending increased by 88 percent. At
the same time, IBRD lending for infrastructure-related “policy and regulatory reforms,
and institutional capacity building” increased by 104 percent, to create the policy and
regulatory environment for the operation of privatized infrastructure and utilities.
IBRD’s current budget concerns, more specifically, the declining income streams from
existing and projected loan portfolios, are thus in part a consequence, ironically, of its
neo-liberal push for privatisation (and decentralisation). The shifting balance between
sovereign vs. private sector lending by the World Bank Group is evident from the
increasing share of the IFC’s lending, which more than doubled from $2.7 billion in 2001
to $6.7 billion in 2006. Over the same period, IBRD lending recovered at a more
measured pace from $10.5 billion to $14.1 billion. To boost IBRD lending volumes
further, there are also moves to re-think and perhaps amend the World Bank Group's
Articles of Agreement to allow the IBRD (or a separate lending window) to lend to subnational public borrowers without the need for a sovereign guarantee, a requirement
under the existing regulations which limits IBRD’s potential clientele and its lending
volumes 14 .
12
Siddharth Srivastava. 2007. Indian-Americans stake their political claim. Asia Times online, September 14, 2007
(citing the Reserve Bank of India)
13
“..after a decade of rapid growth, infrastructure lending reached $8.5 billion in 1987, representing half of total Bank
lending in that year. It then fluctuated around this volume till 1998, representing on average about 40 percent of Bank
lending during the period. In the next four years, infrastructure lending declined sharply to an average of $5.7 billion
per year, or less than 30 percent of total Bank lending (an all-time low)…” (Infrastructure: Lessons from the Last Two
Decades of World Bank Engagement. World Bank Infrastructure Network. Discussion Paper, January 30, 2006). The
shift to private lending sources for infrastructure was significantly slowed in the early 1990s by the mounting resistance
of social movements and NGOs campaigning against the social inequities and environmental costs of these projects.
Private investor confidence further plunged in the wake of the Asian and other financial crises, paving the way for a
revival of World Bank Group lending for infrastructure from 2003, along with “public-private partnerships” and other
initiatives for mitigating investment risk.
14
IBRD’s lending to sub-national entities hitherto had been restricted to loans to national governments for on-lending
to sub-national entities, or direct loans to sub-nationals which were secured by sovereign guarantees. With
decentralization, the market potential for sub-national lending has expanded, and IBRD, in conjunction with IFC has
embarked on a pilot project, the Sub-National Development Program (2007-2009, with projected commitments of $800
million) which will develop and pursue lending possibilities to local governments and local utilities in (mostly) middleincome countries. Taking advantage of the IFC’s less restrictive Articles of Agreement which were principally
6
Over and above this, in the wake of repeated financial crises in Asia and elsewhere, the
BWIs have been severely criticized for their instrumental roles in the premature
liberalization of capital accounts in countries without the requisite depth and maturity of
capital markets, nor the institutional capacity to cope with volatile and damaging capital
flows in these shallower markets. The Asian crisis was furthermore much exacerbated by
the IMF’s deflationary prescriptions to crisis-affected borrowers (raise interest rates, cut
government spending), which transformed what began as a currency crisis into full-blown
financial and economic disasters.
Most dramatically, Argentina, which had assiduously complied with the IMF’s
macroeconomic policy prescriptions, collapsed in 2002 resulting in widespread economic
damage and misery, with more than 40 percent of the population plunged below the
poverty threshold by early 2003. Following an arduous recovery, Argentina, along with
Brazil decided on an early payback of IMF loans to free themselves from further policy
dictates from the BWIs 15 . This was followed by declarations of similar intent by
Indonesia, Thailand, Russia, Venezuela, and Uruguay, such that by 2006, Turkey alone
accounted for about 75 percent of the IMF’s loan portfolio. Meanwhile, the Philippines,
India, and China announced that they would henceforth be borrowing less from the IMF,
while the World Bank projected that major borrowers including China, Indonesia,
Mexico, and Brazil would similarly scale down their borrowings from the IBRD (see
footnote 16, N Woods). The bank’s biggest borrowers have repaid $26 billion more than
they took out in new loans during the five year period 2001-2006.
Ngaire Woods, the founding director of the Global Economic Governance Program at
Oxford University elaborates on the problems thus created for the BWIs 16 , which had
become increasingly reliant since the 1980s on lending incomes from middle-income
borrowers:
Many people imagine that rich countries pay for the IMF and World Bank.
United States and G7 contributions [actually] waned rapidly over the past twenty
years [when] a large part of the bill for the IMF and the World Bank was shifted
to poorer or borrowing countries during the 1980s. By charging borrowing
countries more for loans, each institution built up reserves and investment
designed for lending to the private sector and did not require sovereign guarantees, the pilot project would build upon
the IFC’s experience with lending to municipal entities, and could eventually lead to a separate institution within the
World Bank Group, a lending window for sub-national entities without the requirement of sovereign guarantees. (see:
Sub-National Development Program: A proposed World Bank Group initiative to scale up and mainstream technical
assistance and financial support to sub-national entities (June 30, 2006). Washington, DC: World Bank
15
in the wake of these highly disruptive episodes of capital market volatility, the BWIs’ credibility and influence has
been severely battered, in much of Latin America, in East Asia in the wake of the 1997 currency crises, in the ex-Soviet
states, and further undermined by trenchant critiques from establishment luminaries and insiders such as the Nobel
economics laureate Joseph Stiglitz. Indeed, it may well be the declining influence of the BWIs, whose neo-liberal
policy dictates in any case are increasingly enforced via the leverage and workings of private capital markets and the
international ratings agencies, which allows some ruling circles to contemplate the eventual demise of the BWIs
without undue alarm or lament.
16
Ngaire Woods. 2006. The Globalizers in Search of a Future: Four reasons why the IMF and World Bank
must change, and four ways they can. (CGD Brief, April 2006). Washington, DC: Center for Global Development
7
income, relieving wealthy countries of responsibility [which nonetheless] retained
control of the organizations. The problem for the institutions [in recent years] is
that income from their investments has diminished at the same time as their
lending has slowed down. The IMF has relied for the lion’s share of its income
on large emerging market borrowers. But by 2006 Brazil, Argentina, and other
emerging economies had repaid large loans from the organization. The IMF was
projecting that payments of charges and interest to the organization would more
than halve from $3.19 billion in 2005 to $1.39 billion in 2006 and halve again to
$635 million in 2009. The World Bank has also reported a drop in income from
borrowers’ fees and charges from $8.143 billion in 2001 to $4.403 billion in
2004, [while] its investment income dropped from $1.540 billion in 2001 to $304
million in 2004. The Bank’s response has been to cut loan fees and to raise the
lending limit for big borrowers in the hope that this will regenerate a desire to
borrow from the Bank. Some of the largest borrowers from the IMF and World
Bank are now turning elsewhere for loans and for monetary and financial
insurance… In Asia, monetary authorities will have amassed reserves reaching
$1.430 trillion by 2006, up from a level of $496.9 billion in 2002. The costs to
these countries of holding reserves is [nonetheless] very high, as can be the cost
of private sector finance.
Adam Lerrick evidently is alert to the challenge that the BWIs’ responses might pose for
private lenders, in the form of heightened competition:
…[it is a] fiction that the Bank actually wants countries to graduate from
[eligibility for] its lending programs. In the two most recently available years,
2002 and 2003, the emerging economies actually repaid a net $10 billion to the
Bank [taking advantage of prevailing low interest rates to prepay on older
higher-interest loans]. Unfortunately, the Bank thinks of itself as a bank and not
as a development agency. No bank wants to lose its best clients, and because the
Bank charges the same interest rate to all of its borrowers, it has every incentive
to lend to its best lowest-risk clients and retain their business. As the cost of
borrowing in the capital markets for emerging countries has declined, the Bank
has lost its cost advantage [relative to private lenders]. Instead of applauding
these countries’ success in attracting private capital and refocusing its resources
on the poorest countries without access to private financing, the Bank is pursuing
its former clients… 17
Indeed, Lerrick goes so far as to accuse the IBRD of sacrificing its environmental and
social standards 18 in its desperation to hold on to its credit-worthy clients:
It's attempting to woo them back by reducing the financial costs of the loans and
by reducing the non-economic conditions [social and environmental safeguards,
17
symposium transcript The Future of the World Bank (Center for Global Development, Washington, DC, September
23, 2005 ), panel on Who Needs the World Bank? The Future of China, India and the Middle-Income Countries. David
de Ferranti, Adam Lerrick, Lawrence MacDonald (moderator).
18
a concession, of contested substance, to the lobbying efforts of social activists. see also Bosshard, 2004 (footnote
23).
8
impact on local community, indigenous peoples, gender] that are attached to
them. Only 6 weeks ago the Bank actually reduced its commitment charges and
its lending spread in order to attempt to bring back the middle-income countries.
In a 2005 Wall Street Journal article 19 , Lerrick continues in the same vein:
Middle-income borrowers are clearly good for the Bank. Loans are more likely
to be paid and projects more likely to succeed. Without these prime clients to
raise the value of its portfolio, both its credit and its credibility would be
challenged. But is the Bank good for middle-income borrowers? With its
monopoly power lost, the Bank is struggling to maintain market share by
lowering the costs to borrowers. There is little wiggle room in the 0.75% annual
charge the Bank adds to its cost of raising money to cover its own expenses. But
as the Bank abandons its conservative strictures and searches for innovative
financial instruments, the result will be more risk without remuneration. At the
same time, it is cutting down on the social demands that are the very reason for
its lending.
Desperately Seeking Markets
The perception of the IBRD as a competitor to private lenders, and the call for its
privatization should come as no surprise. Very similar sentiments (and specious
arguments) were articulated about the need to privatize Japan Post 20 , the world’s largest
financial institution, in the run-up to the September 2005 general elections in Japan 21 :
with Japan's private banks struggling to boost profitability, the last thing they
need is a collection of big government lenders - backed by explicit and
implicit subsidies - depressing lending rates and competing with them for
business, although [some of Japan’s] government financial institutions (GFIs)
are also serving some borrowers which no private bank would touch…
[Japan’s private] banks are [now] better capitalised and keen to lend. There
are too many banking assets chasing too few borrowers, so corporate lending
remains woefully unprofitable...
Indeed, the surfeit of capital in global financial markets was fuelling not just “sub-prime”
mortgage lending in the US (and credit card debt), but was also striving to expand its
lending opportunities in microfinance in developing countries 22 :
What stands in the way of more for-profit investment from the private sector?
Paradoxically, micro-credit’s biggest backers, the IFIs [International
Financial Institutions], may also be an impediment to its further evolution.
19
Adam Lerrick. 2005. Why Is the World Bank Still Lending? (Wall Street Journal, 28 October 2005).
Gavan McCormack. 2005. Koizumi’s Coup. New Left Review No. 35 (September-October 2005)
21
The State as Sugar Daddy (Economist, 30 July 2005); CK Chan. 2005. Neo-liberalism vs. Communitarian
Capitalism: Japan’s Dilemma. http://japanfocus.org/products/details/2163 (posted on 22 September 2005).
22
Economist, March 17, 2007, citing Julie Abrams & Damian von Stauffenberg. 2007. Role Reversal: Are Public
Development Institutions Crowding Out Private Investment in Microfinance? Wash. DC: MicroRate, Inc
20
9
IFIs concentrate their loans on the big micro-lenders that do not need them,
pouring 88% more money into these groups in 2005 than they did in the
previous year. This crowds out commercial investors. Why would IFIs get in
the way? Investing in a handful of large micro-lenders is easier than making
dozens of smaller loans to untested, fledgling ones. It is also safer and more
profitable. Some argue that irresponsible lending by philanthropists is just as
harmful. They, too, can crowd out for-profit money. Aid money is better spent
where commercial cash fears to tread - such as on the next generation of
microfinance institutions. Subsidies are often needed to lend to the rural
poor, where small, scattered populations make it hard for commercial lenders
to cover their costs. IFIs, in particular, can press foreign governments to get
rid of interest-rate caps and other misguided regulations that impede microlending. Aid agencies, philanthropists and well-meaning “social” investors
can help attract [private lenders] by investing only where commercial outfits
will not.
At the 40th Annual Meeting of the Asian Development Bank (ADB) in May 2007, where
much of the discussion focused on the future role of a development bank in a region
which had experienced significant poverty reduction, the US delegation head Kenneth
Peel (US Treasury, Deputy Assistant Secretary for Development Finance and Debt) was
at pains to stress that “We should celebrate when countries no longer need ADB to
finance their development needs, not seek ways to artificially create incentives to lend to
them” 23 . Echoing the recommendations of the Meltzer Commission, Peel added that
countries that had conquered poverty should turn instead to the private sector for their
capital needs and the ADB “should step aside and declare victory” and not “seek new
mandates that stray from the mission [of poverty reduction]”.
There are signs that these imbalances between accumulation and consumption 24 ,
reinforced by growing inequality in income and wealth, are systemic and worldwide.
Global production overcapacity, massive increases in speculative financial flows,
historically low interest rates, property and asset bubbles, volatile swings in appetite for
risk among investors, and resurgent militarist Keynesianism suggest a systemic glut of
capital ceaselessly seeking out profitable outlets for deployment and redeployment.
23
statement of Kenneth Peel, head of US delegation, 40th Annual Meeting of the Board of Governors of the Asian
Development Bank, Kyoto, May 6-7, 2007 www.adb.org/AnnualMeeting/2007/govs/am2007-usa.pdf accessed on 4
September 2007.
24
in the terminology of the neo-Keynesian French Regulation School, this would be an instance of “regulation failure”
and crisis of the existing regime of accumulation: “there are long periods of time when things work, when the
configuration of social relations that defines capitalism, for instance, reproduces itself in a stabilized way. We call such
a continuing system a regime of accumulation. This refers, of course, to economics but this can be extended to politics,
diplomacy, and so on… we have to think [also] about the ways this regime of accumulation is achieved… individual
expectations and behavior must take shape so that they are in line with the needs of each particular regime of
accumulation. There are two aspects of the process. The first operates as habitus, as Bourdieu would say, in the minds
of individuals with a particular culture and willingness to play by the rules of the game. The other operates through a
set of institutions [which] may vary widely, even within the same basic pattern of social relations. Wage relations,
market relations, and gender relations have, for example, changed a lot since they first developed. We call a set of such
behavioral patterns and institutions a mode of regulation…” Alain Lipietz. 1987. Rebel Sons: The [French]
Regulation School - An interview conducted by Jane Jenson. French Politics & Society, Volume 5, n°4, September
1987. [If we add an element of periodicity, it calls to mind Kondratieff waves (business cycles) and the periodic buildup (and dissipation or destruction) of over-accumulated capital and excess capacity].
10
Indeed, Paul Sweezy and his colleagues, over the course of a half century had elaborated
a theory of capitalist stagnation drawing upon the Marxist and Keynesian traditions in
their analyses of monopolistic capitalism and the generation, realization and absorption of
surplus (value) 25 .
In the later versions, they gave increasing attention to
26
financialisation in mature capitalist economies, as over-accumulated capital extended
its circuits into financial services and risk management, and of late, along with the
increasing perception and designation of risk as a staple of modern life 27 (and inevitably,
the commodification of “risk reduction” options in diverse forms extending from
derivatives and swaps to annuities and insurance for health and welfare security, etc).
In the same vein, the neo-liberal agenda of privatization, market creation and market
deepening, and retrenchment of the welfarist and developmentalist states, is arguably
sustained by over-accumulated capital seeking to extend its circuits into hitherto noncommercial public sector (and domestic) domains as expanded arenas for continued
accumulation.
As an agent of global social reproduction, the World Bank itself is subject to forces
pushing for privatization (in this case, divestment of its development lending 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.
As an institutional response and accommodation, the World Bank seems to have repositioned itself to be an even more influential agent which can promote the interests of
private capital, even as it tries to harmonize this with “poverty reduction” (trickle down
theory, a rising tide lifts all boats, what’s next? a sideways lurch towards horizontal
equity?).
We see, for instance, expanded roles for the International Finance Corporation (IFC) and
the Multilateral Investment Guarantee Agency (MIGA) within the World Bank Group
(IFC and MIGA commitments, which promote private sector involvement in development,
rose from 3.3% of World Bank loans in 1980 to 25% in 2000) 28 .
Nonetheless, in the wake of the Meltzer Commission report, the World Bank’s Private
Sector Development Strategy (2002) was clearly sensitive to charges that multilateral
lenders in their pursuit of sovereign as well as private sector borrowers were competing
with private investors who were similarly keen on these lending opportunities to creditworthy clients:
25
Paul M. Sweezy. 1956. The Theory of Capitalist Development. New York: Monthly Review Press; Paul A. Baran
and Paul M. Sweezy. 1966. Monopoly Capital. New York: Monthly Review Press.
26
Harry Magdoff & Paul Sweezy. 1987. Stagnation and the Financial Explosion. New York: Monthly Review.
27
Ulrich Beck. 1992. Risk Society: Towards a New Modernity. New Delhi: Sage (translated from the German
Risikogesellschaft published in 1986).
28
Private Sector Development Strategy – Directions for the World Bank Group, para. 60 (April 9, 2002). Washington,
DC: World Bank.
11
Overall, World Bank Group activities have been designed to complement and
support private investors rather than displacing them. For IBRD countries,
World Bank loans are falling rapidly as a share of total private lending to
such countries. At the same time, IFC and MIGA have helped catalyze private
investment in more risky environments. During the 1990s, a higher
proportion of IFC’s investments have gone to high-risk countries than is the
case with private FDI flows (35 percent vs. 28 percent during 1990-98).
There may have been cases where the Group has lent or invested in countries
or firms that might have had access to commercial markets, or had written
political risk insurance that might have been provided by private insurers.
However, overall, the World Bank Group appears to have supported the
development of cross-border private investment and has crowded in private
investment rather than crowding it out. (World Bank Private Sector Development
Strategy, 2002, para. 87).
Privatisation? A Capital Idea, But Not For Us (World Bank)
To secure its continuing relevance, indeed survival as a multilateral development lender,
David de Ferranti, currently a senior fellow at the Brookings Institution in Washington,
DC, found it necessary to re-iterate that “much of what the World Bank actually does
directly helps to improve the climate for private investment: implementing trade reforms
and removing restrictive regulations on foreign direct investment; expanding private
provision of utilities and infrastructure; strengthening essential legal and judicial
infrastructure for private markets; freeing business from harmful and superfluous
regulations” 29 .
Along with Nancy Birdsall 30 , founding president of the Washington-based Center for
Global Development (CGD), de Ferranti has been prominent among “developmental
multilateralists” in mounting a stout defense of the World Bank and its continuing role in
development lending. Their case has been crafted over several years, articulated most
recently in a CGD publication 31 timed for release just prior to the September 2006 joint
meetings of the IMF and World Bank in Singapore. Complete with deft deflections,
compromises, and tactical alliances, its substance in unadorned language includes the
following:
•
•
•
29
re-affirm an expanding, lead role for the private sector in national and
international development
re-affirm a continuing role for multilateral development lending to sovereign
borrowers as well as to private sector borrowers
re-affirm the strategic role of multilateral lenders in promoting policy
reforms and in fostering institutional capacity to support orderly capitalist
market economies
David de Ferranti 2006. The World Bank and the Middle Income Countries, in Rescuing the World Bank (ed. Nancy
Birdsall) Wash. DC: Center for Global Development
30
Nancy Birdsall had previously held senior positions in multilateral development financing institutions, as executive
vice-president of the Inter-American Development Bank (1993-1998) and before that, as director of the policy research
department of the World Bank.
31
Nancy Birdsall (ed.). 2006. Rescuing the World Bank. Wash. DC: Center for Global Development
12
•
•
•
•
•
regain market share in international development lending, by easing off on
irksome conditionalities attached to World Bank loans (including social and
environmental safeguards) 32 , and by reducing the “hassle” factors (and
imputed costs) which credit-worthy clients consider unwarranted or
disagreeable
expand the range of financial products offered by the World Bank Group to
retain and to expand further its borrowing clientele – more flexibility on the
sovereign guarantee required of loans to governmental entities thus allowing
for expanded lending by the World Bank Group to sub-national public
borrowers (and conversely, to potential regional and supra-national clients as
well)
more lending in local currency (along with risk mitigation instruments for
foreign exchange risk); more insurance products and structured financial
products which take a diversified pool of investments, unpack the risks, and
repack them into different tranches matching the risk/reward appetites,
priorities, and capabilities of different investors
merging the balance sheets of IFC and IBRD, ramp up IFC lending to the
private sector, and MIGA investment insurance products and guarantees
development financing for global public goods addressing global CO2
emissions, knowledge banking, protected areas of ecological significance,
neglected (tropical) diseases, and threatening infectious pandemics
These elements also provided the bases for Nancy Birdsall to urge a re-conceptualization
of the World Bank as a global credit union whose members allegedly derive benefits
whether as borrowers or as non-borrowers, as opposed to a development agency largely
concerned with “poor relief” for the most marginalized and indebted poor countries 33 .
To consolidate an alliance in support of continued World Bank lending, Birdsall favors a
less lopsided governance structure with increased voting powers for the major borrowers
as stakeholders.
In the event, there were limited increases to the quotas and voting shares of a few of the
larger IMF borrowers (China, South Korea, Turkey and Mexico) in September 2006, as
part of an interim deal at the IMF/World Bank joint meetings in Singapore. For the
World Bank, however, the issue which garnered the media’s attention (after the NGOs
had been sidelined) was Paul Wolfowitz’s highly publicized crusade against corruption.
A Wolfowitz in Sheep’s Clothing?
When Paul Wolfowitz began his tenure as World Bank president in June 2005, he
disavowed a big bang presidency and affected instead a consultative listening approach,
presumably to put at ease those quarters nervous about his neo-conservative and
unilateralist credentials, not least his blood-stained record in the Middle East.
32
Peter Bosshard. 2004. The World Bank’s Safeguard Policies Under Pressure: A Critique of the World Bank’s New
Middle Income Country Strategy. Berkeley, Calif: International Rivers Network (May 17, 2004)
33
Nancy Birdsall. 2006. A Global Credit Club, Not Another Development Agency, in Rescuing the World Bank (ed.
Nancy Birdsall) Wash. DC: Center for Global Development.
13
The multilateralists led by Nancy Birdsall and David de Ferranti cautiously gave voice to
wishful expressions that no major departures in the role and functioning of the WBG
would be forthcoming, most pertinently, the IBRD’s lending activities to middle-income
borrowers. Would institutional contingencies yet make a multilateralist out of one such
as Wolfowitz? Or would the man make the institution?
By early 2006, Wolfowitz’s priorities became clearer in a hardening stance to freeze
loans to India, Bangladesh, Kenya, Chad, Ethiopia, Cameroon and Argentina amounting
to over $1 billion. The anti-corruption refrain was made explicit in an April 2006 speech
in Jakarta 34 , culminating in Wolfowitz’s assertive crusade in Singapore 35 in September
2006.
From one perspective, it was an astute strategy which covered multiple bases: by saddling
World Bank loans (and grants) with tougher anti-corruption conditionalities, it played
along with AEI neo-liberals intent on hobbling if not dismantling the IBRD; it also
played well with US legislators’ ceaseless (and selective) carping about corruption in
development assistance and foreign aid; it outflanked NGO critics of the BWIs and
sowed confusion and disarray among their diverse ranks; and it put pressure on
dependent LDCs (and World Bank staffers) and helped keep them in line.
Whether this anti-corruption drive would have significantly diminished or arrested an
uptrend in IBRD lending, let alone amounted to stealth dismantling of the World Bank
Group’s lending windows, was to remain speculative however. In an ironic turn of
events, Wolfowitz himself was forced to leave the World Bank in June 2007 amidst
accusations of impropriety for his involvement in arranging a lucrative promotion for his
lover and subordinate at the World Bank, Shaha Ali Riza, which rendered his continued
presidency untenable 36 .
In any case, those segments of private financial capital with a more systemic view of the
global political economy, learning from their experiences during the Third World debt
crises of the 1980s, 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 (including “structured finance” to cater to
investors with varying appetites for risk and reward), or offload them onto a rump IBRD
34
Paul Wolfowitz, Good Governance and Development: A Time for Action, speech delivered in Jakarta, Indonesia,
April 11, 2006
35
it was not coincidental that Singapore was chosen as the venue for the 2006 IMF/World Bank joint meetings. Quite
apart from the Singapore government’s intolerant approach to dissent and civil liberties, Singapore is also a highly
efficient, technocratic, comprador state, a “development showcase” equally known for its “pragmatism” and its
remarkably low level of corrupt practices (in the restricted “governance” sense) among government functionaries.
36
Statement of Executive Directors, World Bank, Washington, DC (May 17, 2007); Wolfowitz Resigns, Ending Long
Fight at World Bank (New York Times, May 18, 2007)
14
working in conjunction with the IFC and MIGA to facilitate “public-private partnerships”
in development financing and risk management.
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”
Robert Zoellick, who succeeded Paul Wolfowitz as World Bank president seems
undeterred by such considerations, as he seeks to strike a balance between the WBG’s
institutional interests, and those of the financial services industries. Two months into his
new job, the former Goldman Sachs vice chairman concluded that ‘the [World Bank]
group must behave more like a Wall Street investment firm to halt a worldwide slide in
lending. At stake is the bank’s survival in a rising sea of private capital. At Zoellick’s
direction, the agency is pushing sophisticated products such as loans that hedge against
the risk of a commodity-price collapse or a surge in interest rates. “Wall Street has
pioneered many of the concepts and tools; the World Bank can help apply them as a
package of development solutions for problems and clients that are not priorities for Wall
Street,” Zoellick said. To lure back customers, Zoellick wants the bank to offer products
that countries with poorer credit profiles can’t get in the private market. He cites as an
example hurricane insurance that allowed a group of Caribbean island nations to pool risk
and cut premiums by 40 percent. He’s trying to revive interest in financial instruments
known as swaps that can protect countries from abrupt shifts in the value of their
currencies. The bank is [also] offering loans that would be activated in the event of a
natural disaster” (International Herald Tribune, August 28, 2007).
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
15
environmentally-friendly technologies or public health 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 even more straitened circumstances due to reduced offbudget transfers (cross subsidies) from IBRD incomes, and become increasingly
dependent on the tender mercies of “philanthropic Keynesianism” a la Gates, or the
uncertain promises of MDG fund-raising 37 .
The Left Perspective: A Tactical Alliance, and Alternative Development Financing
Meanwhile, leftwing activists find themselves in a tactical alliance with “unilateral” neoliberals in pushing for the dismantling of the BWIs. Some adopt this stance as a
negotiating posture for eventual reforms to the BWIs, others are convinced that the BWIs
are irredeemably compromised and that efforts at reform are futile, i.e. the only
meaningful option is a search for viable (and perhaps, heroic) alternatives within a
different configuration of power:
For many Asian countries, a regional institution, which understands the
complexities of a region better than the IMF and which would thus be less
indiscriminate in imposing conditionalities, is the answer. The Asian
Monetary Fund (AMF) that was vetoed by Washington and the IMF during
the Asian financial crisis would have filled this role. Indeed, with the
“ASEAN Plus Three” arrangement, the East Asian countries may now be
moving in the direction of setting up such a regional financial grouping.
There is also movement in Latin America towards a regional institution that
would have as one of its functions serving as a source of capital and as a
lender of last resort: the Bolivarian Alternative for the Americas (ALBA),
pushed by Venezuela, Bolivia, and Cuba 38 .
This comes on the heels of an existing “borrowers’ club”, the Corporación Andina de
Fomento, (CAF, or Andean Development Corporation) which in 2001 had become the
largest source of multilateral finance in the Andean region. By 2006, CAF accounted for
more than half of all multilateral development lending to the five Andean countries, while
the shares of the Inter-American Development Bank (IDB) and the World Bank had
37
after failing repeatedly since the 1970s to deliver on promises of 0.7% of GNP from rich countries as development
aid, UK Chancellor of the Exchequer Gordon Brown proposed in January 2003 an International Finance Facility (IFF)
to raise up to $50 billion annually from these countries in the decade up to 2015, to support the Millenium
Development Goals (MDGs). The IFF would issue bonds in the international capital markets backed by legally binding
long-term donor commitments. On maturity, the bondholders would be paid through future donor payment streams,
and the development aid thus mobilized would be disbursed through existing multilateral and bilateral mechanisms.
President Lula da Silva of Brazil meanwhile spoke out in favor of an alternative mechanism which relies upon global
taxes on international currency transactions and on arms sales (variations on this proposal extend these global taxes to
carbon-use (greenhouse gas emissions), air travel, and profits of multinational corporations). For a more
comprehensive overview of proposals to scale up international development financing, see AB Atkinson (ed.) 2004.
New Sources of Development Finance. Oxford: Oxford University Press.
38
The IMF - Shrink it or Sink it: A Consensus Declaration and Strategy Paper. 2006 campaign spearheaded by Focus
on the Global South http://www.focusweb.org/content/view/985/27/ accessed on 15 Sept 2006
16
dropped to 25 percent and 20 percent respectively (combined total of $5-$7 billion) 39 . In
2007, the CAF was expected to surpass the IDB as Latin America’s largest multilateral
lender. To retain a sense of proportion however, CAF’s annual disbursements of about
$6 billion is merely one-fifth of the annual lending (nearly $30 billion) of Brazil’s
National Bank of Economic and Social Development (BNDES).
The five Andean sovereign shareholders (Bolivia, Colombia, Ecuador, Peru and,
Venezuela) contribute over 95% of the paid-in capital and 99% of the callable capital.
They have collectively borrowed nearly $25 billion from international capital markets up
till 2001, on more favorable terms than they would have obtained as individual sovereign
borrowers.
The CAF’s high paid-in capital (50% of callable capital, as against 5% for the World
Bank) along with cautious financial management give it a higher credit rating (and hence
lower borrowing costs) in international capital markets, compared to its individual
sovereign members 40 . But this also means that the CAF and its member countries are
careful to accommodate the priorities of international capital markets in order to retain its
confidence, not to mention the implicit (opportunity) costs of the paid-in capital.
As for monetary (currency) stability, in the absence of similar arrangements for
alternative lenders of last resort, some countries have resorted to building up large foreign
exchange reserves as a hedge against speculative currency attacks and also to avoid the
need for IMF loans and accompanying policy dictates when faced with volatile capital
flows.
Such reserves however entail even larger opportunity costs and furthermore deprive a
country of domestic investment and growth prospects, and hence are not a long-term
solution. Inevitably, alternatives involving regional pooling of reserves have been
explored, and the Chiang Mai Initiative (May 2000) was one such attempt by Asian
countries, in essence an interim risk pool which revives on a smaller scale the idea of an
Asian Monetary Fund:
The Chiang Mai Initiative was designed to expand the existing ASEAN Swap
Arrangement (ASA) to all members of ASEAN 41 and to create a network of
bilateral swap agreements (BSAs) between the countries of ASEAN+3
[ASEAN, plus China, Japan, and South Korea]. ASA, first established in
August 1977, was designed to alleviate temporary liquidity shortages in
member countries [through] quick activation and disbursement. The funds
available under ASA and the first 10 percent of the drawing available under
the BSAs are unconditional. Under the expanded ASA, the Agent Bank, whose
appointment is subject to rotation among the members, has the task of
39
Vince McElhinny. 2007. Banco del Sur: A reflection of declining IFI relevance in Latin America. Bank Information
Center, 1 May 2007 accessed on September 2, 2007
40
The Role of the Multilateral Development Banks in Emerging Market Economies. 2001. Washington, DC:
Carnegie Endowment for International Peace.
41
member countries in 2006 comprised Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, and Viet Nam.
17
confirming a request for liquidity and assessing and processing it as
expeditiously as possible in consultation with other member banks. Member
banks are allowed to swap their own currencies for major international
currencies for a period of up to six months and for a sum up to twice the
amount committed by the member under ASA. The idea is that a country
under speculative attack can borrow foreign currency, usually the United
States dollar, from another country and use the funds to buy its own currency
so as to stabilize the exchange rate. The general terms of borrowing are a
maturity of 90 days, renewable up to a maximum of seven times, with interest
to be paid at a rate based on the London Inter-bank Offered Rate (LIBOR)
plus a spread. Although the maximum amount of the automatic disbursement,
which is free of any linkage to an IMF program or conditionality, is currently
limited to 10 percent of the BSA facility, additional assistance can be provided
to members requesting it under an IMF program or an activated Contingent
Credit Line 42 .
As of May 2007, the 16 bilateral swap arrangements among eight countries had reached a
combined facility size of $80 billion. Meeting on the sidelines of the 40th Annual
Meeting of the Board of Governors of the Asian Development Bank in May 2007,
finance ministers of the Asean + 3 countries agreed to pool these foreign reserves to
establish a multilateral currency swap scheme 43 . In effect, this was an agreement to
multi-lateralize the Chiang Mai Initiative (CMI) and to extend it to all Asean + 3 member
countries.
In June 2003, an Asian Bond Fund (ABF) was launched by the Executives’ Meeting of
East Asia and Pacific Central Banks (EMEAP, the regional association of central
bankers). This was an initiative to promote the development of regional and domestic
bond markets which could tap into and re-channel some of the huge foreign exchange
reserves of East Asia, hitherto invested in “safe haven” developed country securities,
back into the Asian region.
As of July 2005, the Asian Bond Fund had committed US$1 billion to be invested in US
dollar denominated bonds and another US$2 billion in local currency bonds, all issued by
sovereign and quasi-sovereign borrowers from among the EMEAP member countries
(currently, Thailand, Indonesia, Malaysia, Singapore, the Philippines, China, Hong Kong,
South Korea, Japan, Australia and New Zealand) 44 . In June-July 2007, Hong Kong was
used as a test-bed by mainland Chinese banks (Export-Import Bank of China, China
Development Bank) for issuing 7 billion yuan worth of renminbi bonds 45 (equivalent
$930 million).
42
Wang Seok-Dong. 2002. Regional Financial Cooperation in East Asia: the Chiang Mai Initiative and Beyond.
Bulletin on Asia-Pacific Perspectives 2002/03. Asia-Pacific Economies: Sustaining Growth Amidst Uncertainties.
Bangkok: UNESCAP.
43
ASEAN+3 agree to cash swap scheme / Countries to pool reserves for stability. (The Yomiuri Shimbun online, May
6, 2007) http://www.yomiuri.co.jp/dy/business/20070506TDY01003.htm (accessed on May 7, 2007)
44
“The Asian Bond Fund 2 has moved into Implementation Phase” (EMEAP Press Statement, 12 May 2005)
http://www.emeap.org/press/12may05.htm (accessed on December 21, 2006)
45
China Daily, 26 July 2007, p.10.
18
Meanwhile, Venezuela's president, Hugo Chavez has announced plans for a ‘Bond of the
South’, to be jointly issued with Argentina to mobilize resources as a buffer against
financial and economic shocks. For 2006-2007, it was anticipated that $2.5 billion worth
of bonds would be issued. Argentina's president, Nestor Kirchner, called the bond the
first step “in the construction of a bank, a financial space in the south that will permit us
to generate lines of finance” 46 independent of the IMF, in times of financial volatility and
crises. Venezuela’s purchases of $2.5 billion of Argentine government bonds had helped
replenish Argentina’s reserves after it repaid $9.5 billion of debt to the IMF in late 2005.
On May 22, 2007, Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela reached
an agreement in Asunción (Paraguay) to proceed with the establishment of the Banco del
Sur, with an initial plan to raise $7 billion of paid-in capital. One important feature that
emerged was the principle of equal voting rights of member states and a consensus to
work towards a regional common currency. Still unresolved however was whether
Banco del Sur would function primarily as a development bank, or whether it would also
take on a role as a monetary stabilization fund instead of devolving this to a later stage or
to a separate institution altogether 47 . In a region as large as Latin America, with its
varying ethnic and class constellations and modes of articulation with globalizing capital,
it is not surprising that internal divisions and conflicting priorities are played out in the
founding process of the bank, much as they are evident in the ideological spectrum
extending from the more radical ALBA through to CAF and Mercosur (regional common
market with Argentina, Brazil, Paraguay, Uruguay, and Venezuela as full members), in
relation to the preferred balance between the developmentalist state and the market,
between a needs-driven, rights perspective in development and a pragmatic
accommodation (if not collusion) with existing global economic and political forces, and
on environmental, cultural, and social protection 48 .
Regional banks, borrowers’ clubs, and pooled reserves in the short to medium term may
be more expensive sources of loans than the global multilateral sources (the price for
flexibility and enlarged policy space). Private lenders keen to spike the competitiveness
of multilateral or alternative lenders will understandably be carefully monitoring these
developments.
From the perspective of Africa however, which is much less endowed with capital
resources than Asia or Latin America, the option of pooling reserves for a regional
development bank or a lender of last resort is less feasible. Its debt dependency vis a vis
the World Bank and the IMF has been described in these terms by Patrick Bond of the
University of the Kwazulu Natal in South Africa:
Africa’s debt crisis worsened during the era of globalisation. The continent now
repays more than it ever received, according to the World Bank, with outflow in
46
Tinkering at the edges of governance reform: IMF quota proposals. Bretton Woods Project website (11 September
2006) accessed on 20 September 2006.
47
McElhinny, ibid.
48
interview with Plinio Soares de Arruda (economist, State University of Campinas) on Brazil and Banco del Sur, May
18, 2007 http://www.zmag.org/content/showarticle.cfm?ItemID=12847 accessed on September 1, 2007
19
the form of debt repayments equivalent to three times the inflow in loans and, in
most African countries, far exceeding export earnings. During the 1980s and 90s,
Africa repaid $255 billion, or 4.2 times the continent’s original 1980 debt.
Repayments are equivalent to three times the current inflow of loans, with a net
flow deficit, by 2000, of $6.2 billion. For 21 African countries, the debt reached
at least 300% of exports by 2002. While ‘debt relief’ rose from around $1.5
billion in 2000 to $6 billion in 2003, it continues to be provided in a way that
deepens, not lessens, dependence and Northern control 49 .
In recent years, the situation has eased somewhat owing to buoyant commodity prices,
and the emergence of China (and to a lesser extent, India) as a significant source of
development finance for sub-Saharan Africa. According to the IMF, development
lending by China to Africa had risen to $5 billion in 2004, double the figure ten years
earlier 50 , in comparison with IDA grants and loans to Africa which had increased from
$3.4 billion in 2001 to $5.8 billion in 2007 51 .
In November 2006, President Hu Jintao announced at the Beijing Forum on China-Africa
Cooperation that China would double its assistance to Africa by 2009, and it would also
provide an additional $5 billion in preferential loans and preferential buyers’ credits. In
addition, debt in the form of all interest-free government loans that matured at the end of
2005 owed by heavily indebted and least developed countries in Africa would be
cancelled, and China would increase from 190 to over 440 the number of import items
receiving zero-tariff treatment, originating from the least developed countries in Africa 52 .
The Export-Import Bank of China plays a key role in China’s development lending and
development aid. Isabel Ortiz, citing Peter Bosshard53 and a World Bank report on China
and India’s economic ties with Africa 54 , writes that “since its foundation in 1994 to 2006,
Exim Bank China developed 259 loans in Africa alone (concentrated in Angola, Nigeria,
Mozambique, Sudan and Zimbabwe), most of them large infrastructure projects: energy
and mineral extraction (40 per cent), multi-sector (24 per cent), transport (20 per cent),
telecoms (12 per cent) and water (4 per cent). Most known examples include oil facilities
(Nigeria), copper mines (Congo and Zambia), railways (Benguela and Port Sudan), dams
(Merowe in Sudan; Bui in Ghana; and Mphanda Nkuwa in Zambia) and thermal power
plants (Nigeria and Sudan). According to the Exim Bank China Annual Report 2005, only
78 loans of the total Bank loan portfolio were concessional, below-market rate loans.
When the terms are concessional, interest rates can go as low as 0.25 per cent per
49
Patrick Bond. 2006. The Dispossession of African Wealth at the Cost of African Health. Equinet discussion paper
number 30 (March 2006). Harare, Zimbabwe: Equinet.
50
Financial Times, December 7, 2006.
51
World Bank Commits Record $5.8 Billion to Africa. (World Bank press release, September 4, 2007).
52
full text of President Hu Jintao’s speech at the Beijing Forum on China-Africa Cooperation
http://news.xinhuanet.com/english/2006-11/04/content_5289052.htm accessed on September 2, 2007.
53
Peter Bosshard. 2007. China’s Role in Financing African Infrastructure. Berkeley: International River Network and
Oxfam. For African perspectives on the emergence of China as a major source of development finance, see Firoze
Manji & Stephen Marks (eds). 2007. African Perspectives on China in Africa. Cape Town: Fahamu; see also Todd
Moss & Sarah Rose. 2006. China ExIm Bank and Africa: New Lending, New Challenges. CGD Notes, November
2006. Wash. DC: Center for Global Development.
54
Harry Broadman. 2007. Africa's Silk Road: China and India's New Economic Frontier. Wash. DC: World Bank
20
annum, subsidized by the Chinese Government; however most of the procurement has to
be imported from China. Apart from this condition [and adherence to a one-China
foreign policy], there are no other strings attached to these loans, this is, no policy
conditions, no environmental or social standards required. International and national
organizations, including civil society groups, have criticized that China is supporting
highly repressive regimes (Burma, Sudan, Uzbekistan, Zimbabwe) to satisfy China's need
for natural resources, particularly oil; creating new debt in low income countries to
promote Chinese exports; undermining the fight against corruption and the promotion of
environmental and social standards. In view of this, Exim Bank China recently approved
an Environmental Policy; it has no social safeguards yet but there are signs that this may
be reversed”. (www.networkideas.org, August 22, 2007).
Concluding Remarks
Michal Kalecki, in analyzing the systemic tendency of mature capitalist economies
towards stagnation and crisis, remarked that “the tragedy of investment is that it is
useful” 55 . For capital-poor countries seeking to build up industrial and technological
capacities, one might add that the dilemma of investment is that it is useful, and therefore
necessary.
The emergence of multi-polar sources of development financing in recent years
(multilateral, regional alternatives, bilateral, private capital markets, private philanthropy)
has created some leverage for borrowers in their negotiations with lenders over the terms
of borrowing. This leverage however can be deployed to various ends. It could diminish
the leverage and policy dictates of dominant lenders and their priorities which may be
detrimental to the national interests and well-being of people in the borrowing countries.
On the other hand, it could also undermine the efforts aimed at securing equitable and
socially just development, at fostering environmentally-responsible development, and at
reducing corruption, political repression and violation of civil rights. The independent
role of social movements in helping to bring about a more favorable conjuncture, for
minimizing the former and maximizing the latter, will remain relevant under any of these
evolving scenarios.
Penang, Malaysia
September 20, 2007 (revised)
55
Michal Kalecki. 1939. Essays in the Theory of Economic Fluctuations (p.149). London: Allen and Unwin.
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