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Selwyn Johnston

INDEPENDENT COMMUNITY REPRESENTATIVES'

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(Cairns... Far North Queensland)

 

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BRETTON WOODS INSTITUTIONS


           
INDEX

Bretton Woods Institutions

The World Bank

The World Bank: Banking on Disaster?
The International Monetary Fund

 
Structural Adjustment Programmes

 

The Bretton Woods Institutions

The World Bank and its sister organization, the International Monetary Fund (IMF), known as the Bretton Woods Institutions, were created in 1944 and have become the largest lenders to governments of developing countries. Here are some background papers on their history, policies and impacts on people and the environment:

What are the Bretton Woods Institutions?

The World Bank and its sister organization, the International Monetary Fund (IMF), were created at Bretton Woods, New Hampshire in 1944.

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The World Bank

The World Bank's primary mandate is poverty alleviation. Originally created to finance the reconstruction of war-torn Europe, the World Bank has become the primary financier of development projects in the Third World and has also become the Third World's largest creditor. Together the countries of the Third World owe the World Bank more than US$160 billion (Annual Report, 1994)

The World Bank is currently the largest multi-national lending and technical agency dealing with Third World development. As the world's leading development agency, the World Bank has a wide-ranging mandate, from consolidating loans for large-scale development projects to providing structural adjustment loans and sectoral adjustment loans to developing countries experiencing balance of payments problems.

The World Bank is owned jointly by Western and Third World governments and now consists of four organizations:

IBRD, the International Bank for Reconstruction and Development. Created in 1944, the IBRD provides development loans at just below commercial rates to developing countries and the former Soviet Union. Loans guaranteed by creditor governments allow the World Bank to borrow in capital markets with a triple-A rating. Subscriptions to IBRD by the 176 member countries are made up of paid-in-capital (a down payment in effect, making up only a small portion of the total) and callable capital (a promise to pay, if necessary);

IDA, the International Development Association - Created in 1960, and drawing on funds made up of taxpayer dollars from its 156 member countries, the IDA provides long term loans at no interest to the poorest countries in the world. These loans are earmarked for infrastructure projects including dams, open pit mines, and road construction. Financing comes from triennial "replenishments" from donor governments.

IFC, the International Finance Corporation - Created in 1956, the IFC provides financing for private sector growth in developing countries.

MIGA, the Multilateral Investment Guarantee Agency - Created in 1988, MIGA provides loan guarantees to donor country private enterprise wishing to invest in developing countries.

Colloquially, most references to the "World Bank" refer either to the IBRD alone or to the IBRD and IDA.

GOVERNANCE

The World Bank is run by a Board of Governors, made up of each member country's finance minister or central bank governor. The Governors appoint Executive Directors who are responsible for determining World Bank policies and approving individual loans.

Each of the top five contributing countries (U.S., Japan, Germany, France and Britain) appoints its own individual executive director. The remaining 171 member countries share 19 executive directors among them.

The World Bank's board of executive directors approves individual projects for financing. Although each director has only one vote, many directors also represent other, mostly borrowing members. Directors must therefore simultaneously promote the interests of both creditors and borrowers interests that may often conflict.

Traditionally, World Bank Executive Director voting is kept secret.

According to custom, the Bank's president is nominated by the U.S. president and is an U.S. citizen. The current President is James Wolfensen.

CONTRIBUTIONS

The largest contributors to the World Bank are the U.S. (17.9%), Japan (7.43%), Germany (5.74%), France and Britain (5.5% each).

The World Bank has lent $313 billion to its member countries and is the Third World's largest creditor: together the countries of the Third World owe the World Bank more than US$170 billion.

Analysts have noted that the guarantees or callable capital portion of IBRD subscriptions expose member country taxpayers to significant financial risks. Should more of the World Bank's borrowers fall into arrears, a very real possibility given that internal reviews by Bank management have classified 37% of the World Bank's loan portfolio as "high risk", the Bank could be forced to ask member countries for the US$ billions in callable capital owed it.

The Bank's annual administrative budget alone is over US$1.4 billion and the Bank has recorded a profit every year since 1947. In 1994, this profit amounted to US$1.05 billion. In 1994 the World Bank's outstanding loans totalled US$109.3 billion, not including the US$62.3 billion owed to the International Development Association.

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THE INTERNATIONAL MONETARY FUND

The International Monetary Fund (IMF) is the central institution of the international monetary system. It has two main roles. It exercises a surveillance function by monitoring the economic policies of all the member countries and providing policy advice. It also provides financial assistance to members faced with balance of payments problems.

These loans are disbursed on the condition that debtor countries adhere to the IMF's economic advice, generally known as Structural Adjustment Programmes. At the end of 1994, 179 countries were members of the IMF.

STRUCTURE

Each country makes cash subscriptions (called a "quota") to the IMF, the amount of which determines a country's votes in operating the fund and the amount it is allowed to borrow. Countries may borrow up to 25% of their quota with no questions asked. Further borrowing, however, requires submitting to IMF economic reforms.

GOVERNANCE

The U.S., Japan, Germany, France and Britain control the IMF with 40% of the votes between them.

According to tradition the president of the IMF is a European. The current President is Michel Camdessus of France.

CONTRIBUTIONS

In total, the IMF has lent $152 billion to its member countries.

Source: The World Bank, Annual Report, 1994, appendices.

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The World Bank: Banking on Disaster?

Backgrounder

An international public is beginning to demand some accountability for a list of expensive failures of the Bretton Woods Institutions (the World Bank and the IMF). These institutions have been the recipients of enormous infusions of taxpayer money, garnered from the governments of G7 and European Union countries.

The projects the Bank finances have been responsible for the destruction of forests, fisheries and river banks; they have led to the displacement or forced resettlement of over two and a half million people; they are frequently not kept to minimum environmental performance or cost containment standards; as a result, they stand for the potential misspending of millions in member country public monies and taxpayer dollars.

The Bank and the IMF seem increasingly out of touch with growing criticism of their economic, social, and environmental performance.

The collapse of the gold standard and the rise of an integrated global economy have caused the World Bank to move towards loan guarantees for private investment through private capital facilities such as the IFC (International Finance Corporation) and the MIGA (Multilateral Investment Guarantee Agency).

However, the Bank is supported, ultimately, by taxpayers in G7 countries.

Taxpayer money should not be used to finance or to back up risky private sector transnational ventures, especially those that lead to environmental destruction and increased opportunity for human rights violations.

Increasingly, the international public feels that these multilateral agencies should step into a gap and invest in sustainable agriculture, renewable energy sources, developing public transportation infrastructures, and appropriate technology transfers - all ventures unlikely to be funded by private capital.

Following is a brief survey of the ways in which recent World Bank projects have failed to alleviate poverty, foster sustainable development, or maintain any sense of environmental responsibility.

A. World Bank Projects - Poverty and Environmental Destruction

Some of the most devastating projects include:

The Sardar Sarovar dam, one of 3,000 planned for the Narmada River in India. This dam has begun to displace more than 240,000 people from their land. Most have been moved into squalid resettlement sites with poor land, no clean water and no electricity.

The Polonoroeste Frontier Development Scheme started a colonisation process in the Brazilian rainforest by inundating it with settlers. They proceeded to cut down an area of the forest the size of Great Britain.

Thailand's Pak Mun dam project has completely destroyed fisheries along the Mun River, reducing thousands to abject poverty and forever altering the diet of many more who live downstream from the river in Laos, Cambodia and Vietnam.

Singrauli in India is home to twelve open pit coalmines, which have polluted water, food crops and fish stocks. More than 300,000 people were resettled to complete the project. Many live in slum conditions lacking secure land tenure and basic sanitation facilities. The Indian press called the area "the lower circles of Dante's Inferno."

A recent World Bank review of involuntary resettlement found that the World Bank had forcibly resettled 2.5 million people since 1986 alone, and projects currently in the portfolio will displace another 2 million.

Moreover, despite World Bank policies that state people should be left at least as well off after resettlement as before, the review could not find a single example of a Bank-financed resettlement plan in Latin America or Africa where the Bank's guidelines had been properly implemented. [1]

B. World Bank Failed Loans

 

  1. Project failures are not isolated accidents. Disasters like Sardar Sarovar, Pak Mun, and Singrauli are not isolated examples. Instead, failures are endemic throughout the World Bank project portfolio. A 1992 internal review of the World Bank's $140 billion loan portfolio by then Bank Vice-President Willi Wapenhans found that more than one-third of World Bank projects were failing, and that the Bank's portfolio is in "steady and pervasive" decline. [2]

  2. Compliance with loan covenants is rare. The Wapenhans report also found that only 22% of legal loan covenants, especially financial covenants (such as failure to undertake proper financial audits) are in compliance. Mr. Wapenhans called this level of non-compliance "gross" and "overwhelming".
  3. New projects not sound ones. The Wapenhans report also identified a tendency to approve new loans to the detriment of project quality, citing a "pervasive preoccupation with new lending" within the World Bank. The pressure to lend was also identified in a 1992 report which noted that "the Bank tends to focus on quantity (volume of loans) rather than quality (results)." The more projects a Bank staff member can secure loans for, the greater the staff member's prestige within the Bank itself. This leads to lowered standards for project approval.

    According to Wapenhans, this approval culture has led staff to perceive project appraisals both as marketing devices for securing loan approval and as opportunities for achieving personal recognition. "Appraisal", observed Wapenhans, "becomes advocacy."

C. World Bank Borrowers - "High Risk"

The consequences of these lax standards for project approval have been predictable. Since 1980 there has been a significant deterioration in the quality of the portfolio. According to notes from an informal World Bank Board of Executive Directors seminar, by 1992 more than one-third of Bank borrowers were either "...facing or in serious danger of facing, severe financial pressures which could pose a risk of protracted arrears to the Bank."

Clearly a portfolio of such poor quality poses significant risks for the Bank's triple A credit rating, and thus for taxpayers who guarantee World Bank bonds. [3]

D. World Bank Credibility - Cost Overruns and Lavish Expenditures

 

  1. Besides these commitments to shaky projects, there have been a number of internal embarrassments for the World Bank.

    In 1993-94 huge cost overruns in the construction of the new World Bank Headquarters in Washington, DC led to an internal inquiry and disciplinary measures against Bank staff. Originally estimated at US$206.5 million, the project came in nearly $100 million over budget.

    In discussing the incident, bank spokespersons said: "Cost estimates weren't updated frequently enough, insufficient attention was paid to budget ceilings, and project management failed to keep senior management and the board properly informed." [4]

  2. Moreover, World Bank staffs are among the highest paid civil servants in the world.

    The World Bank's Washington headquarters employ 6,338 regular and fixed term staff. Average remuneration - salary plus benefits - in 1994 was US$134,400. In addition, World Bank salaries are generally tax-free.

    In 1993 the Economist Magazine found that World Bank salaries were eclipsed only by those of the European Bank for Reconstruction and Development and which has come under severe criticism from donor countries for the opulence of its headquarters and extravagant spending on salaries. [5] [6]

E. Questionable World Bank Reforms

 

  1. In response to growing international criticism, the Bank appointed its own 'Inspection Panel'.

    The U.S. Congress has been especially critical: it voted in 1994 to withhold a portion of its 1995 funding to the Bank pending significant reform. Yet the Inspection Panel does little to make the World Bank more accountable, transparent or democratic.

    The Panel itself has little clout within the Bank: it carries on independent evaluations of the social and environmental impacts of World Bank projects, but its recommendations, which may include project adjustment or cancellation, are fed into the Bank's Board of Executive Directors who have the power to ignore them.

    The Board has not rejected a single project put before it since 1944.

  2. The new information policy does little to increase access by those directly affected by projects.

    The information policy still leaves the disclosure of most documents to the discretion of Bank staff, the Board of Executive Directors, or borrower governments. Therefore, the Bank, not the public, continues to control ultimate disclosure decisions. Canadian taxpayers, as a result, have no right to know how their billions are being spent. [7]

Endnotes

[1] "Resettlement and Development: The Bankwide Review of Projects Involving Involuntary Resettlement 1986-1993." The World Bank, Environment Department. April 8, 1994.

[2] "Effective Implementation: Key to Development Impact: Report of the World Bank's Portfolio Management Task Force." (Wapenhans Report), 1992.

[3] "Informal Board Seminar on the Status of the IBRD Portfolio." The World Bank, March 6, 1992.

[4] "World Bank Building Costs Extra $100 million," Globe and Mail, July 16, 1993.

[5] World Bank salaries have been calculated from the World Bank's 1994 annual report. Total Staff costs are found on pg. 161. The number of staff is found on pg. 160.

[6] "Affluent Apparatchiks" The Economist, April 24, 1993.

[7] Patricia Adams, "New Rules for Secrecy" Down to Earth, December 15, 1993.

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Structural Adjustment Programmes

Backgrounder

Structural adjustment programmes (SAPs), were originally designed to stabilise developing country economies. Instead, they have imposed harsh economic measures, which deepen poverty, undermine food security and self-reliance and lead to unsustainable resource exploitation, massive environmental destruction, and population dislocation and displacement. Given the mounting evidence, Northern countries must reconsider the appropriateness of using their lending and aid programmes to support the structural adjustment regimes of the World Bank and IMF.

What are SAPs?

"Structural adjustment" is the name given to a set of "free market" economic policies imposed on countries by the World Bank and International Monetary Fund (IMF) as a condition for receiving financial assistance. SAPs are designed to improve a country's foreign investment climate by eliminating trade and investment regulations, boosting foreign exchange earnings by promoting exports, and reducing government deficits through cuts in spending.

The kind of structural adjustment programmes referred to here are programmes developed by the World Bank and International Monetary Fund (IMF) in the early 1980s. These programs attach a number of stringent conditions to cash transfers. They have offered the Bank and the IMF a means of gaining stronger influence over the economies of debt-strapped governments in the South.

New loans and aid are given only if the debtor nation implemented IMF/World Bank-sanctioned reforms. In order to continue receiving funds, countries already devastated by debt obligations have little choice but to adhere to conditions mandated by the IMF and World Bank. In addition, most donor countries, including Canada, will not contribute bilateral assistance to any developing nation unless that country has accepted these conditions and adopted structural adjustment programmes.

Although SAPs differ from country to country, they typically force indebted countries into adopting a series of harsh economic measures, which include:

a shift from growing diverse food crops for domestic consumption to specialising in the production of cash crops or other commodities for export;

abolishing food and agricultural subsidies to reduce government expenditures;

deep cuts to social programmes, usually in the areas of health, education and housing, and massive layoffs in the civil service;

currency devaluation to make exports cheaper but imports more expensive;

liberalization of trade and investment and increases in interest rates to attract foreign investment;

privatisation of government-held enterprises.

Australians, who will soon feel the severe impacts from recent Federal and State budgets, will begin to identify with the citizens of developing nations who suffer SAP cutbacks to health, education and other basic social programmes.

The Argument for SAPs

The World Bank and IMF argue that SAPs are necessary to bring a developing country from crisis to economic recovery and growth. They believe economic growth, driven by foreign investment, to be the key to development. The resultant wealth, they claim, will eventually "trickle-down" or spread throughout the economy and eventually to the poor. SAPs are not designed to achieve social well being; multilateral agencies and other donors simply hope that applying free market principles to a developing economy will improve social welfare in the process.

This process of adjustment, as described by many World Bank and IMF officials to developing countries, is one of "sacrifice," of "present pain for future hope."

Arguments Against SAPs

Non-governmental organizations (NGOs), grassroots organizations, social movements, church groups, economists, social scientists and a number of United Nations agencies have rejected the narrow conception of economic growth as the link between adjustment and the achievement of social objectives.

As long as social objectives remain, at best, secondary goals of SAP policies, the goal of equitable resource and wealth distribution will remain marginal and incidental. They charge that SAP policies have contributed to a significant redistribution of income and wealth from poor to rich both nationally and internationally.

The objection to SAPs rests on the following bases:

They rely too heavily on unfettered free markets as the essential engine of growth;

They over emphasise restoring the balance of payments, rather than adopting a more just and equitable approach to resolving the debt crisis;

SAPs lack transparency, accountability and public participation in their design and implementation;

A fixation on deregulation, privatisation and dismantling of the state, undermining the state's sovereignty and limiting its role for socio-economic intervention;

SAP implementation pays little attention to private wealth and income concentration and the exclusion of the poor from decision and control over resources. It ignores both private sector inefficiency and the political repression needed to impose SAPs through more authoritarian states, thereby undermining democracies and democratic practice;

SAPs hurt the poor disproportionately through deep cutbacks in social programmes. Poverty alleviation programmes designed to cushion the effects of adjustment cannot reverse the impact that SAP policies play in contributing to the general decline in the social sector.

Women are particularly affected by cutbacks to social programmes. User fees, privatisation, massive layoffs and cutbacks of social services have led to deepening malnutrition, hospital closures, and deepening poverty;

SAPs rely too much on investment that is short-term, concentrated in the export sector, neglecting and even undermining food security and self-reliance;

They mandate drastic currency devaluations, which radically diminish the buying power of local people's wages, sometimes from one day to the next, so that many basic necessities become inaccessible.

SAPs, as currently designed and implemented, violate the UN Convention on the Rights of the Child, the UN Declaration on the Right to Development, and Convention of the Elimination of Discrimination Against Women.

There remains no strategy for adjusting the whole world economy, which includes the Northern economies, to the priority goals of equitable and sustainable development and poverty reduction through more equitable trade policies, debt reduction, technology transfer and increased concessional transfers to the poorest countries;

SAPs and Their Ecological Consequences

Despite claims to the contrary, the World Bank and IMF have paid little or no attention to the environmental impact of SAPs. A number of comprehensive studies have clearly demonstrated how SAP policies have led to increased environmental destruction, dislocation and displacement. SAP policies call for increased exports to generate foreign exchange to service debt.

Developing countries' most important exports, including timber, oil and natural gas, minerals, cash crops, and fisheries are all derived from natural resource extraction. The resulting acceleration of resource extraction and commodity production is not ecologically sustainable.

Deforestation, land degradation and desertification, soil erosion and salinization, biodiversity loss, increased production of greenhouse gases, increase in water-borne disease, the flooding of immense tracts of productive land, air and water pollution, are but a few of the long term environmental impacts that can be traced to the imposition of SAPs. In addition, SAP induced government cutbacks mean less money for enforcement of environmental regulations.

Gender and SAPs

Most studies conclude that women are bearing a disproportionate share of the burdens imposed by SAPs. The macro-economic thinking on which SAPs are based takes little account of the sexual division of labour, of resources within the household, and how shifts in entitlements and incentives have a dramatic impact on women's labour. Women, primarily responsible for child rearing, are heavily dependent on health services; this, combined with their very limited access to productive resources, places them at a particular disadvantage when public spending on health is reduced.

The introduction of user fees in hospitals and clinics has cut attendance at such facilities. As a result, maternal and infant mortality rates have risen sharply. SAPs promote the production of export-oriented crops; these tend to be grown by men. This leaves women with little support and marginal land and fewer resources to grow food crops for their family's consumption.

Compensatory programmes have been put in place recently as an attempt to alleviate the impact of SAPs on the poor, but they tend to bypass women. Most structural adjustment programs, in fact, are designed around the assumption that women (and children) are dependents of men. Since compensatory programs are based on existing channels of distribution within communities and households, and since these channels often discriminate against women, they will never have any real access to any new resources received through them.

Towards an Alternative

Supporters of SAPs often explain that while SAPs are difficult to implement there simply is no alternative. The World Bank and IMF have indeed succeeded over the 1980s in reducing the development options for virtually every Southern country to one: the adoptions of SAPs.

There have been a variety of alternatives suggested. The UN Economic Commission for Africa provided a comprehensive and credible alternative to SAPs in 1989.

The African Alternative Framework called for "adjustment with transformation" which called for a reduction in the continent's reliance on external trade and financing, for the promotion of food self-sufficiency and for greater popular participation in economic planning and decision-making.

The Third World Network and Freedom from Debt Coalition have proposed numerous alternative policies in the areas of international trade and sustainable development. Some specific alternatives for reform include:

promoting diversification in the products that Southern countries export and increasing processing capacity. This would coincide with the recognition of providing some protection to infant industries and the promotion of greater regional trade;

recognising the need for states to play a greater role in facilitating the diversification away from traditional commodities, determining and promoting investment priorities;

economic policies and planning which include a gendered analysis of the various options;

policies that take into account environmental impacts and include sustainable natural resource use that benefits local communities;

an emphasis on non-price structural reforms such as land reform, institutional reforms to increase democratic practice and accountability;

at the international level, measures to reduce the debt problems of poorer countries, regulate capital markets and address unfair trading practices.

What is urgently required is an opening up of the political and economic space so those alternatives, such as those listed above, can be seriously considered and implemented. The greatest obstacle to this continues to be the total control over the development debate currently exercised by the Bank and IMF.

Recommendations

The principles behind sustainable development require that Governments move away from the paternalistic view implied by "aid," "assistance" and "leverage" toward a more appropriate, cooperative approach that reflects shared interests and reciprocal responsibilities.

Constructive partnerships should be based on negotiated "frameworks for policy dialogue," involving the governments as well as intergovernmental bodies and elements of civil society.

Governments should seek to replace an approach based on policy leverage and support for Structural Adjustment Programmes with "Sustainable Development Agreements," that are the outcome of a broadly democratic and transparent dialogue which includes all social sectors concerned, particularly popular organizations and NGOs. These agreements would include:

the promotion of "soft-path" projects;

guarantees for economic, social and political rights; employment and income distribution;

environmental sustainability;

gender and racial equity.

Such "Sustainable Development Agreements" have been successfully negotiated between the Dutch government and governments of Costa Rica, Benin and Bhutan. The promotion of these agreements, however, should not be seen in isolation from the need to work at resolving other issues such as the debt crisis, reforming international financial institutions and unfair trade.

 

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