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Debate: The World Bank is an obstacle to development

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This House Believes that the World Bank is an obstacle to development

Background and Context of Debate:

"The World Bank system was created as an integral element of the post-World War II Bretton Woods system of international and multilateral institutions. The Bank was designed to avoid future world wars by ensuring an open international trading system and global financial stability. Public loans could be offered for economic development that would otherwise be unavailable to countries with poorly developed industries. The loan strategy has gradually evolved from the support of public infrastructure projects such as roads, railways, and power plants, to the provision of capital for other inputs necessary for development, namely the maintenance of educational and health services. The World Bank group comprises 4 agencies; the International Bank for Reconstruction and Development (IBRD); the International Development Association (IDA); the International Finance Corporation (IFC); and the Multilateral Investment Guarantee Agency (MIGA). This discussion focuses upon the structure and record of the IBRD and IDA. Although legally distinct entities, the agencies share a single staff, produce one annual report, and are governed by the same board of executive directors who approve the loans.The IDA raises the majority of its funds from triennial contributions by the donor countries. ‘Credits’ are then lent to the poorest countries in the world to be repaid over a period of 35 to 40 years. No interest is charged on the loan, but a service charge of 0.5% applies. By contrast, the IBRD finances its lending operations from shares purchased by the donor countries that facilitate borrowing on international capital markets.The debate about the function and success of institutions such as the World Bank is a crucial component of any broader discussion of the pervasive late twentieth century trend of globalisation." [1]

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Values: Does the Bank stand for the wrong values?

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Pro

  • The World Bank investment policy consolidates the position of the corrupt, inefficient and antidemocratic regimes of many developing countries. The Bank has evinced willingness to deal directly with almost any government without sensitivity to their human rights record. Given that developing countries are both shareholders and clients in the Bank, the agencies are unlikely to admit that loans to a particular regime will not achieve any benefit until a reformed government achieves power. The negotiation process between the Bank and the regime is invariably closed and the circulation of Bank reports restricted to the participants. The poor are disenfranchised from the very institution supposed to support their development. [2]




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Con

  • The World Bank correctly prioritises economic development over other social values. The ‘Washington consensus’ reached in the early 1980s following the debt repayment crisis in Latin America requires that loans are offered in exchange for government commitments to economic reform. The liberalization of capital markets, the adoption of realistic exchange rates, and tax reform does assist the impoverished of any society. To withhold such dramatic financial benefits on account of the human rights record of the government would serve only to punish the poor for the actions of their unelected leaders. The democratic deficit suffered by the poor of these countries is more than ever being rectified by the involvement of international and local NGOs in the loan process. [3]





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Donor countries: Is the contribution to the World Bank a poor investment?

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Pro

  • The contribution of donor countries to the World Bank is a poor investment. The Bank purchased advertisements in American daily newspapers that proclaimed; ‘World Bank : A Good Investment’ and asserted that the US companies received $1 in contracts for each dollar the United States contributes to the IDA. However, a US Treasury study showed that US companies in fact received only $0.23 in procurement for every dollar paid into IDA. Consequently, in 1997 the US refused to provide its assessed contribution to IDA. The inefficiency of the World Bank infrastructure suggests that US companies could receive a better financial return and have a more instant impact upon local development by direct investment in the developing countries. [4]




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Con

  • The World Bank should not seek its justification in being a financially sound investment for the donor countries. The broadest objective of the Bank is the alleviation of poverty and long term economic development, not generating a turnover for its shareholders. The shareholders benefit from finding an efficient agency to distribute the funds that have been earmarked for donation in the form of foreign aid rather than overseas investment. As commentators have noted, to argue that aid helps the domestic economy is like saying a shopkeeper benefits from having his cash register burgled so long as the burglar spends part of the proceeds in his shop! In any case, the IBRD represents a very favourable investment for donor countries that more than offsets the lower returns from IDA. For example, Germany receives $29.22 in contracts per taxpayer dollar contributed to IDA, and Japan $6.54 for the equivalent payment. The World Bank encourages direct investment in developing countries and bilateral investment treaties between these countries and the donor States. However, the Bank infrastructure is necessary in order to ensure donations are spread evenly across the developing world and applied to long term and sustainable projects. Private profit is not a sufficient motive to guarantee development. [5]





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Are the impacts of public projects funded by the WB disastrous?

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Pro

  • The public infrastructure projects funded by the IBRD have consistently been recognized as unmitigated disasters. Notably, Brazil’s Polonoroeste road-building project set a significant portion of the Amazon rainforest on fire; the Sardar Sarovar dam project in India uprooted 240,000 Indians and was condemned by the World Bank’s own panel of investigators; the Singrauli coal projects also in India were described as the "lower circles of Dante’s inferno". Internal reports suggest that one-third of World Bank financed projects are failing. Canada has called on its G7 partners to undertake a value-for-money audit of the loan portfolio. The current investment strategy has attracted similarly severe criticism from the ‘Bretton Woods Commission’ that comprises the most powerful bankers and financiers in the world. The mere fact that the directors of the Bank have finally recognized that development is not guaranteed by the financing of large construction projects does not show that it will succeed where its past projects have failed. The Bank has neither the expertise nor the mandate to become an education and health charity. Moreover, this ‘mission creep’ creates a risk that the Bank may be duplicating the role of existing UN agencies and non governmental organizations (NGOs). UNESCO and UNDP are currently capable of implementing the majority of the strategies that the Bank has suddenly arrogated to itself. [6]





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Con

  • The new objectives of the WB will improve the quality of lives of the populations of developing countries. It is not necessary to deny that some of the infrastructure projects supported by the IBRD, from the road-building schemes in the 1980s to the dam construction programmes of the 1990s, failed to reduce poverty and caused a degree of environmental damage. However, the appointment of James Wolfensohn as President of the World Bank in 1995 has heralded a new and bright dawn for the group. The Bank has successfully adopted a growing role in the spheres of biodiversity, ozone depletion, narcotics, crime, corruption, and postconflict reconstruction, particularly in the Balkans and West Bank. The new objectives of the World Bank will undeniably improve the quality of lives of the populations of developing countries. The funding of programmes to facilitate the halving by 2015 the number of people living in absolute poverty; the achievement by 2015 of universal primary education in all countries; and the establishment of gender equality in primary and secondary education by 2005 will offer tangible assistance to development, unlike the construction of roads and dams. In addition, the Bank has pledged to reduce infant and child mortality; ensure universal access to reproductive health services; and to reverse the loss of environmental resources. [7]





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Is the loan strategy of the IBRD financially sound?

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Pro

  • The loan strategy of the IBRD is inherently risky. Donor countries are able to make triennial contributions without necessarily being able to underwrite the 93% potential additional cost of each share. The default of Mexico on repayment of its debts in 1982 indicates the weakness of reliance on ‘callable’ liabilities. Only 3% of the Bank portfolio is set aside to protect against the loss of revenue from defaulting debtors. By way of contrast, JP Morgan sets aside funds equivalent to 100% of the sum borrowed, and the Canadian government insists on a minimum of 35% for the operation of lending operations of investment banks. Moreover, the risk of default and thus the exposure to full liability is routinely disguised by the process of ‘debt round tripping’. Where default appears imminent, the IBRD seeks the direct transfer of funds from rich country donors. Alternatively, the IBRD can seek debt restructuring through the Paris Club of creditors; the issue of new IBRD loans to refinance the old ones that come due; or even the transfer of cheap, interest free IDA credits to repay the IBRD loans. In short, the shift of credits from one side of the World Bank to the other, or the creation of additional loans does nothing to balance the books. Debtor countries are simply encouraged to borrow or beg their way out of deficit. [8]





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Con

  • The strategy for financing the loans of the IBRD is remarkably efficient. Member countries purchase shares in IBRD but pay to the Bank only 7% of the cost of shares. The remainder is ‘callable’ as a promise to pay if necessary. These contingent liabilities for donors allow the IBRD to raise the vast majority of money required for its operations from international capital markets of Europe, Japan and the United States. The reduced cost of the shares and the capacity of the Bank to raise commercial finance rather than rely solely on contributions of donor countries, guarantees that the capital contribution expected of the donor countries remain reasonable. Furthermore, the irresponsible fiscal policies of developing countries is not rewarded by the Bank. From the mid-1990s, compliance with codes of ‘best practice’ is mandatory in order to receive loans. Thus, developing countries are obliged to institute systems of banking regulation and supervision, corporate governance and accounting that facilitate repayment of the loans and the attraction of foreign direct investment. [9]





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