Recent news stories about protests surrounding the spring meetings of the World Bank and the IMF have pointed out that these two institutions were set up at the end of World War II to perform needs that no longer exist. Why is the International Bank for Reconstruction and Development still around, and why is it suddenly so controversial after five decades in which the average American hardly heard of it?
Simply put, the bank is still with us because many nations’ leaders apparently think it can still play a useful role, even when they disagree with specific actions these two bodies take.
It is a global case of “It’s a dirty job, but somebody’s got to do it.” For the governments of both rich and poor nations, it is often preferably to have a multilateral institution such as the World Bank handle some matters rather than dealing with them in direct government-to-government contacts.
The bank’s first mission, reconstruction, was completed by 1960. Its secondary task, development, remains and is tackled through development assistance, making loans and grants to help poor countries increase their output or improve the health, nutrition and education of their people.
Using a multilateral institution such as the World Bank provides a political screen for rich country governments that realize some level of assistance to poor countries is a practical, but unpopular, necessity. The bank was structured to borrow at low cost in world financial markets because its bonds carry the implicit guarantee of its wealthy member countries. Making loans to governments of poor countries leverages the visible amount of help given without encumbering the budgets of the rich nations.
But giving assistance to national governments means that the bank funds projects that are the priorities of those governments. The leaders of poor countries are generally concerned about economic growth or constructing visible infrastructure such as roads, bridges, power plants and heavy industry. They often are less concerned about preserving ecosystems, preventing pollution or enhancing human rights. Hence the increasing opposition to bank-funded projects by environmental and human-rights organizations.
The bank’s institutional history adds to this problem. It was set up to aid post-war recovery in Europe. European countries suffered vast physical devastation in the war, but their human capital was still largely intact. They had skilled industrial work forces and had enjoyed good health and education systems and other local government. Buildings and machines were gone, but the human know-how crucial to run modern industrial societies was still there.
All that was necessary was to provide the money to rebuild the buildings and replace the machines. Engineers and financial analysts could review project proposals submitted by member governments without paying much attention to the thornier questions of whether these governments could successfully carry out the projects.
The situation is much different in the poorer developing countries where the bank concentrated its operations after the early 1960s. Building from scratch is different from rebuilding. While the post-war European countries generally had governments with the institutional capacity to set priorities and manage large projects, this was not true in many parts of Asia, Africa and Latin America. Progress was slower and more painful.
But the colonial heritage of these countries made them jealous of their sovereignty and unwilling to yield too much to the bank. Nor is there much evidence that Western governments and experts had any more skill in recognizing or implementing what was needed to achieve rapid, sustained economic growth. Some countries such as Korea and Taiwan did very well, and World Bank financing was helpful in the process. But their success could not be duplicated in a cookie cutter fashion everywhere.
When development assistance began in the 1950s and 1960s, there was a naïve assumption that capital was the crucial missing element and that the private sector would not supply it. Bilateral and multilateral government loans and grants would be needed. There was a further assumption that if capital was supplied and developing country governments were given a little tutelage, growth would happen pretty automatically.
Forty years of experience have shown us that capital alone does not do much if the recipient government does not adopt rational policies and does not have the institutional capacity to implement them. Moreover, the 1990s showed that private capital and technology do flow to countries that are willing and able to put them to good use.
Despite such speed bumps as the financial crisis of 1997-1999, countries such as Taiwan, Korea, Singapore, China, Malaysia, Thailand and even Indonesia and the Philippines have much higher output and far less poverty than 30 years ago. And no amount of loans or grants could make African socialism or Latin American state-owned industrialization succeed.
If the bank were to be abolished, as many protesters demand, the people and businesses of wealthy countries would not notice its absence at all, at least not in the short run. Overall, it would hurt the poorer countries. But it is also clear that the bank needs to focus its efforts on the very poorest countries, largely in Africa, that most lack the institutional capacity to manage achieve economic and social development and that appear most uncreditworthy to private investors. Haiti, Myanmar and Papua New Guinea may also fall into this category.
But it is clear that for South America and most of South and Southeast Asia appropriate government policies and private investment capital are far more important than any thing the World Bank can offer.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.