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Why the Developing World Hates the World Bank

Guest Column
Payal Parekh & Oren Weinrib

In the current global economy, the World Bank often functions like an international traffic cop of capital. If it says “go” by committing funds to a development project or interim loans to a government, other private and public capital may follow. If a country and its citizens resist the directives of the Bank, they will likely be cut off from both it and other sources of desperately needed assistance. The World Bank can thus exert a tremendous amount of power over the policies of developing countries, such that major decisions about people’s lives are made not by their own governments but by an international financial institution that is accountable only to its wealthy patrons. In essence, the Bank institutionalizes a modern financial imperialism.

Not surprisingly, the consequences of the World Bank’s programs have often been disastrous for powerless citizens in the developing world. As just one example, the Bank often requires countries to impose user fees for healthcare and education services. The worst impact of such a measure is borne by the same impoverished people that the Bank presumably would like to help. In Kenya, where one in seven people has HIV, Bank-mandated user fees for STD clinics have resulted in a decrease in attendance of 40 percent for men and 65 percent for women over a nine-month period. Although both UNICEF and the World Health Organization have reported that user fees compose a minimal portion of health and education budgets, the Bank insists on such fees despite the consequences.

Before further examining such injustices, let us pause to ask how this pattern can be reconciled with the World Bank’s supposed goals of helping the developing world recover from the burdens of colonialism and “catch up” to the West. To determine whose interests are truly served by the decisions of the World Bank, we must examine the power structure of the World Bank and the types of projects it participates in.

The World Bank was created in July 1944 with the aim of creating a stable global economic system. It quickly became the dominant financial institution for lending to developing countries. It usually acts by making long-term loans to governments for projects such as dams or bridges, or to support economic reform programs.

The World Bank has 177 member countries, but the governing structure of the Bank is not democratic. The principle: one dollar, one vote. Therefore, China and India represent 39 percent of the world’s population but have only 5 percent of the total votes. Six countries -- the United States, Canada, Japan, Germany, the United Kingdom and France -- control about 45 percent of the decision-making power. The Bank works under a veil of secrecy and is not required to reveal its internal documents.

The World Bank makes three types of loans. Project loans are given for large infrastructure projects such as dams, mines and power plants. Sector adjustment loans are given to meet the direct cost of a project, but are also used to support sector-specific policy changes. The third type of loans, under the Bank’s Structural Adjustment Program (SAP), provides short-term support in exchange for major policy changes within a country.

Who benefits from World Bank loans and the policy changes in the developing world? Most directly the G7 industrialized nations that dominate the decision-making apparatus. As the Enron fiasco highlights, this translates to the multinational corporations who exert extraordinary influence over these governments. According to Corpwatch, the World Bank awards 40,000 contracts to private firms. The United States Treasury Department calculates that for every $1 the United States contributes to international development banks, U.S. corporations receive more than $2 in bank supported contracts.

The effects of this undemocratic system are dramatic. Many World Bank projects have high environmental and social costs. Projects are often economically unsound, poorly designed, and inefficient. In the Narmada Valley of India, a feasibility study of the Sardar Sarovar Dam overestimated river water volume by 17 percent. Upon completion, the project will have displaced 200,000 people and submerged fertile land. Grassroots pressure forced the World Bank to reassess the project, and an independent review published in 1992 revealed serious flaws that ultimately led to the Bank’s pull-out in 1993. By the Bank’s own account more than one-third of the Bank’s projects in 1991 were failures.

The World Bank and IMF’s structural adjustment program (SAP) originated in response to the debt crisis Mexico faced in 1982. A combination of irresponsible lending by commercial banks, a global recession, rising oil prices, and a collapse in the commodities market left developing countries unable to make debt payments.

The World Bank, along with the International Monetary Fund, offered Mexico a bailout loan that had strict policy conditions attached to it. SAPs often require countries to devalue their currencies, lift import/export restrictions, privatize public enterprises, remove state subsidies, and balance the budget. These prescriptions have the effect of generating foreign exchange, making it easier for foreign goods to enter a country, cutting essential government services such as education and healthcare, and increasing the price of necessary goods in a country. Governments agree to such harsh measures because they are faced with the threat of being cut off from external aid. One could say that the World Bank has the developing world “by the balls.”

Although colonialism in the form of direct government rule has ended, the vast economic power of the industrialized world allows it to control the developing world by forcing them to accept “free-market” capitalism -- a fiction in a world with closed borders, skewed playing fields, and the military might of the West. The World Bank has forced many developing nations to rewrite laws dealing with issues such as trade, budgets, labor, the environment, and healthcare. This erodes the sovereignty of developing countries and forces their citizens to live under the harsh rule of the World Bank.

Many of the countries of the global South fought colonial rule and now are resisting this new form of economic imperialism. Grassroots resistance in India forced the World Bank to withdraw funding from the Sardar Sarovar dam. There is also an increasing awareness among citizens of North American and Europe that their governments are subjecting the third world to gross injustice to feed the profits of corporate elite.

MIT students now have a profound opportunity and responsibility to question the global order championed by the World Bank -- its President, James Wolfensohn, has been chosen as our commencement speaker. How will students respond to a speaker who champions not the dream of a better world but the injustice of the status quo?

Payal Parekh is a graduate student in the MIT/WHOI Joint Program and Oren Weinrib is a local community activist.