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When Reality Contradicts Rhetoric: The World Bank’s Lending Practice

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By Sanuj Shah

The World Bank is the world’s largest multilateral development lending institution. Its aim, as Bank literature claims, is poverty reduction in the third world countries. Governments look to the World Bank as they grapple with the most basic, yet daunting, challenge of our time: poverty. It is scarcely an exaggeration to assert that whether the millions who live or die every year hinge upon the decisions made by the World Bank.

In light of this statement, there are two very important things we need to understand. First, that the lending done by the World Bank to foster economic growth has on the contrary increased global inequality. Second, the fact that even though the Bank has been committed towards its free market ideology from the very beginning, its lending policies aren’t shaped by ideology alone. The loan given by the Bank to debtor countries comes with strings attached in the form of policy prescriptions called “structural adjustment policies.” This forces these countries to open up their economies to penetration by foreign corporations, allowing access to the country’s workers and environment at bargain basement prices. As a result, there is increased privatization and a slash in government budgets leading to cutbacks in spending on health care and education.

The real function of World Bank is not to promote development but to integrate the ruling elites of third world countries in the global system of rewards and punishments. For more than a decade, Mexican elites have followed the “Washington consensus” of policy reforms designed by the World Bank. This has created some billionaires, yet for most of the 85 million Mexican people life is more difficult now than it was ten or twenty years ago.The governance structure of the World Bank leaves little doubt that it is an instrument of domination by the rich countries of the poor countries.

In theory, the Bank is owned by 188 member countries, however, in practice the P5 nations cast a considerable influence over its functioning, on the grounds of having the largest Bank ‘shares’. It is not surprising to learn that over the years the Bank presidents have been Americans, even though the Bank has not lent to the US even once. Being the most prosperous country, the US has the maximum number of votes, in fact the only country to have in excess of 15%, making it the only one to have a veto. This means that it literally dictates the functioning of the Bank. History has proven the same, when Iraq under Saddam Hussein in the 1990s, was not able to borrow from the World Bank.

There should be an immediate shift of the Bank’s lending policies. Such a shift should entail the cancellation, outright and without preconditions, of past debts, the interest on which, not the repayment of principals, prevent the debtor countries from investing in the poor. There is a direct connection among Bank lending, Third World debt and reduced social expenditure: ceteris paribus, the more the countries owe (as a percentage of their GDP) the more they pay in debt servicing and fewer the resources available for investing in poverty reduction programs. There needs to be an ideological paradigm shift at the Bank, one that is genuinely committed to reduce the poverty that market reforms tend to create. A pro-poor World Bank is only possible if these poor countries have a greater voice inside the Bank.

Apart from a policy reform the Bank needs a structural reform. This would involve either enlarging the size of the board of executive directors, so Newly Industrialized Countries (NICs) or developing countries are individually represented, or changing the terms upon which the current executive directors serve at the World Bank. Since practically most of the Bank’s lending is directed towards the Third World, the president of the Bank should therefore be someone who is familiar with that part of the world. The presidency should therefore be rotational to allow democratic geographical representation.

There is, therefore, an urgent need to transform the structure of the World Bank and rethink its neo-liberalistic ideology. The World Bank’s uniqueness lies both in its depth and clarity, and in its optimism that the World Bank, warts and all, can be revolutionized in the 21st century!

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