Inside the World Bank

What they're doing with your money is a crime

Last year Congress voted a $14-billion increase in World Bank funding from the United States, including $420 million up front. In the face of supposed concern over the budget deficit, what sort of institution could win such support?

The World Bank is the largest multilateral aid organization in the world, with an annual budget of over $20 billion and 151 member countries. The United States provides about 20 percent of its budget, with most of the rest coming from Japan, West Germany, and a few other Western industrial nations.

A branch of the United Nations, the World Bank is the largest employer in Washington outside the federal government and one of the city's most secretive institutions. No Freedom of Information Act opens its documents to public scrutiny, and it is extremely difficult for an American citizen to discover how this institution is using his tax dollars. A review of confidential bank documents, some of them leaked by bank staff members, reveals a dismal record that is often contradicted by the agency's public statements.

Bank supporters contend that its lending programs benefit the world's poor. "U.S. humanitarian interests are served by Bank activities that are designed to alleviate poverty, promote basic human needs and foster equitable economic growth," wrote Rep. Matthew F. McHugh (D–N.Y.) in The International Economy magazine, arguing that Congress should hike bank funding.

In reality, however, the World Bank is helping Third World and Eastern European governments cripple their economies and oppress their people. Bank employees measure success not by the economic well-being of the world's people but by how much money they can shovel out the door—with little regard to how that money will be used.

The bank's own Annual Operation Evaluation Division report for 1987 noted that a major problem in Africa was the bank's "unseemly pressure" on its employees to lend more money to borrowers. The problem is simple: The bank's interest lies in lending out as much money as possible, thereby increasing its influence and "proving" its effectiveness. But its borrowers' best interest—assuming borrowing governments really want to help their economies, not just shore up their political power—lies in accepting only as much money as they can use productively. The bank has some of the best policy analysts and economists anywhere, but their analysis is routinely scorned by policymakers eager to set new records and boost their careers. Employees are judged by how much money they persuade foreign governments to borrow, not by how effective the loans are.

Says a former bank consultant: "It's a money-moving organization. It routinely happens that the countries will disregard the loan conditions, yet the bank keeps giving them money year after year. Since the bank has no credibility in terms of cancelling loans or not coming through with followup loans, the borrowing governments know that they don't need to make the reforms."

This tendency to look at effort rather than effectiveness is typical of government agencies, nonprofit organizations, and regulated monopolies. Operating outside the normal structure of profit and loss, they often gauge success by measuring input (number of loans given, total lending) rather than output (increases in per capita income, life expectancy, number of countries no longer dependent on bank funding). For many such organizations, the result is inefficient use of resources.

But in the case of the World Bank, there is more at stake than mere efficiency. In fiscal year 1988, the World Bank committed over $20 billion to governments in the Third World and Eastern Europe. Despite bank president Barber Conable's talk of "the creation of an economic environment for vigorous private sector growth in developing countries," this ready supply of cash serves to prop up oppressive regimes and perpetuate policies that increase political and bureaucratic control over billions of people's lives.

The effects have been most destructive in Ethiopia where the World Bank has shored up the brutal Mengistu regime and its devastating agricultural policies. Ethiopia was hit by a severe famine in 1984–85, thanks largely to government actions that discouraged crop production and heavily penalized peasants for maintaining food reserves. The Ethiopian government responded to the famine not by changing its repressive policies but by launching a massive "resettlement" program to forcibly relocate hundreds of thousands of people within Ethiopia, thereby disrupting agricultural production. (See "All the Hungry People," REASON, June 1988.)

Throughout the famine and death, the bank has provided massive aid to the Ethiopian government—and it has become more generous over time. In 1985, bank commitments to Ethiopia totaled $160 million, about 16 percent of the government's budget. Last year, they equaled almost $200 million, nearly 20 percent of the government's budget. This would be roughly equivalent to a foreign power giving the United States about half the entire Pentagon budget. Such a large contribution inevitably makes a large impact.

One disgruntled bank employee described the bank's Ethiopian policy to me as "genocide with a human face." As Ethiopian soldiers were driving peasants into cattle cars and old trucks, a confidential 1984 World Bank report observed approvingly: "Since the 1974 Revolution, Ethiopia has achieved considerable progress and a moderate economic recovery marked by prudent financial management." If a mass famine largely caused by government is the bank's idea of a moderate recovery and prudent management, it is grossly out of touch both with economic common sense and with basic compassion.

Indeed, the World Bank has been perhaps Ethiopia's biggest cheerleader throughout the 1980s. "There is a strong need to encourage an increase in the external financial resources [foreign aid] to Ethiopia," declared a confidential bank economic memorandum in 1980. "The amounts of aid under consideration are not commensurate with Ethiopia's needs; they should be increased and should carry a high degree of concessionality," said a similar memo the following year.

The bank has been anything but selective in choosing which Ethiopian projects to fund. In 1985, it gave the Ethiopian government $4 million specifically to improve its "management of the economy." In May 1987, a $39-million handout went to "Ministry of Agriculture institutional development." That ministry is heavily involved in the brutal "villagization" program, under which the Mengistu regime has forced millions of people to abandon their private land and live in government-controlled villages, complete with guard towers.

A 1987 confidential report on Ethiopia's economy analyzed "the manner in which the efficiency of resource allocation and use might be improved in Ethiopia through a number of policy and procedural changes, with a socialist framework." Even though socialism is starving the Ethiopian people, the bank accepts the regime's fundamental premise. The World Bank essentially feels it has an obligation to give Ethiopia money, but little or no right to tell Ethiopia how to use Western dollars.

If it did try to exercise some control over how Ethiopia used its funds, the bank would fail. Even when bank aid does not go directly to oppressive projects, it is fungible—meaning that a dollar provided for the government's education/propaganda project releases another dollar that can be used for the resettlement project. Providing a tyrant with 50-year, interest-free loans inevitably increases his power.

And the bank has often had weak control over how its money is spent. In 1985, Ethiopia asked for a drought relief loan, explicitly noting that it planned to use the money for resettlement, among other things. The World Bank granted the loan but said the money should not be used for the resettlement program—an utterly unenforceable condition. "They just take the money and laugh," says Yonas Deressa, president of the Ethiopian Refugees Education and Relief Foundation in northern Virginia. "Over the past two decades the World Bank has contributed as much to agricultural disaster in Ethiopia as the governments themselves."

The World Bank's long and dismal record of getting entangled in human rights atrocities extends beyond Ethiopia. Throughout the 1960s and '70s, for example, the bank provided unconditional support for the dictatorial regime of Julius Nyerere in Tanzania. Indeed, Nyerere implemented his own notorious villagization program with bank aid and advice. To curb his people's individualist and capitalist tendencies, Nyerere sent the Tanzanian army to drive the peasants off their land, burn down their huts, load them onto trucks, and take them where the government thought they should live. They were then ordered to build themselves new homes "in neat rows staked out for them by government officials," as the Washington Post described it in 1975. For many, the result was famine and death. The bank continued to finance the project even though, according to a 1988 bank publication, its officials knew that the Tanzanian people strongly opposed the scheme.

More recently, the bank has loaned the government of Indonesia more than $600 million to move—sometimes forcibly—2 million people from the densely populated island of Java and resettle them on comparatively barren islands. Despite widespread reports of violence, a 1985 bank press release lauded the project as "the largest voluntary migration" in recent history. The Indonesian government, however, has locked up people who abandoned their new homes and returned to Java. Its goal, according to an Indonesian newspaper: to "prevent them spreading negative reports and reduce the enthusiasm of others to transmigrate."

In aiding the transmigration program, the bank has contradicted its own official policy. That policy states that the World Bank will assist projects "within areas used or occupied by tribal people only if it is satisfied that best efforts have been made to obtain the voluntary, full and conscionable agreement of the tribal people." But Indonesian law states quite baldly that tribal people's right to their lands and autonomy "may not be allowed to stand in the way of the establishment of transmigration settlements." At least one supposedly vacant island given to the transmigrants was already inhabited. The Indonesian army obligingly cleared the island by setting fire to the original inhabitants' crops.

The bank's recent public relations efforts try to create an image of the institution as a promoter of private property and freer markets, as well as a compassionate, caring organization. Regrettably, this image, too, is false. A careful examination of the bank's actions—and of its private statements—reveals a far different agenda. During the 1980s, the World Bank has in fact helped communist countries avoid market reforms.

In Romania, the most backward East Bloc country, the bank has bankrolled a herd of industrial white elephants, providing more than $600 million to help the government undercut the naturally strong agricultural sector by pouring resources into uncompetitive heavy industry. Far from urging reforms as a condition for aid, "the World Bank has been begging Romanians to take more bank money," says a veteran bank official, who requested anonymity.

Similarly, the bank's International Finance Corporation has been especially eager to bail out Poland, which joined the bank in 1986. In this near-bankrupt country, whose total debt stands at more than $40 billion, IFC officials apparently see a future customer for big loans. As a result, they bend over backward to impress the Polish government. A March 24, 1988, confidential memo from IFC chief investment analyst Douglas Gustafson to the chairman of the agency's investment committee states:

"Given the continuing uncertainties about how and when the IMF may [give aid to Poland]…there is a real danger that the Polish authorities may become frustrated with the international financial institutions.…A fast, early investment by IFC would have enormous effect on IFC's standing in Poland, would demonstrate IFC to be a flexible, responsible institution and would increase the number of investment possibilities in the pipeline. IFC would achieve a great deal of goodwill by an early investment."

So eager was the bank to make the loan in question—$18 million to a fruit and vegetable cooperative controlled by the Polish government—that it calculated the cost using an exchange rate of 175 Polish zlotys to the U.S. dollar, even though the more realistic unofficial rate in Poland is 1,400 zlotys to the dollar. Since Poland will have to repay the loan in dollars, this data fudging understates the true cost of the loan by a factor of eight, making a mockery of the entire analysis. Eight more loans—for as much as $250 million dollars—are in the pipeline.

World Bank president Conable defends the bank's efforts to help communist countries. In a September 15, 1988, letter to Rep. Barbara Vucanovich (R–Nev.), he wrote: "The World Bank has been instrumental in encouraging [communist governments] to decentralize and liberalize their economies and introduce market incentives." In reality, however, bank money has gone to finance the already-established priorities of communist governments. In November 1986, a confidential bank review of loans to Hungary, Romania, and Yugoslavia concluded: "The major problem has been the unwillingness of these countries to allow Bank involvement in policy issues. Projects have been prepared to meet Five-Year Plan objectives which could not be questioned or analyzed by the Bank."

Nowhere has the bank been less effective in fostering reform than in Hungary, its latest East Bloc star. Since Hungary joined in 1982, the bank has loaned it more than $2 billion. It has also encouraged Western banks to increase and repeatedly reschedule their loans to Hungary. The country's total debt now stands at more than $17 billion, and it is unlikely Hungary will be able to pay it any time in this century.

The bank's analysts realize that Hungary's centrally controlled economy has many serious problems, and policymakers insist that bank aid is going to help the Hungarians move toward a more market-oriented economy. In announcing a $140-million loan to Hungary for industrial restructuring, for instance, the bank's press release declared that "the loan…will help the government maintain the momentum of the reform process and the restructuring of the economy."

But Hungarian reform has been largely an illusion. Direct Communist Party control of industry has simply been replaced by indirect government bureaucratic control. While Hungarian politicians talk of the need for more market forces, the government hits small private companies with one new tax and arbitrary penalty after another. The Hungarian income tax program, introduced in 1988, is "Swedish taxes on Ethiopian wages," as one Hungarian described it to The Economist. Hungarians making just $12,000 a year, for example, face a 60 percent tax rate.

In their speeches touting the World Bank as a force for market-oriented reform, bank officials assume that their handouts provide a stronger incentive to adopt sound economic policies than does sheer necessity. But bank loans often undermine the very changes bank officials claim to be fostering. When I interviewed him in Budapest, Martin Tardos, director of the Hungarian Academy of Science's Institute of Economics was quite blunt. "The World Bank money has made life easier for the Hungarian government and made it possible to avoid deep market-oriented change," he said. "The World Bank was not setting conditions for real changes, and they accepted the rhetoric for the facts."

Even the bank's most humane-sounding development projects have resoundingly failed. Since 1973, the bank has plowed over $3 billion into African agriculture, with an emphasis on boosting food production. Yet since then, per capita food production has fallen sharply.

A 1987 World Bank annual review of project results admitted that 75 percent of World Bank African agricultural projects audited the previous year were failures. And a more comprehensive 1988 study, examining rural development projects from 1968 to 1986, concluded that half the audited projects in sub-Saharan Africa had failed, including 12 out of 15 projects in eastern and southern Africa.

Not only do unsuccessful projects waste money, but the World Bank has actually hurt African farmers by helping governments create and perpetuate state agricultural boards that monopolize the buying of crops and the selling of seeds and fertilizer. Such boards pay little attention to the farmers whose fates they control. As a recent bank report noted, "In Tanzania, the grower…is always voiceless and marginal in the system, and everybody's costs are considered except the farmers'." Before the Sierra Leone Rice Board lost its exclusive right to import rice in 1985, "half of its imports were being allocated to influential politicians to distribute at their discretion." In Cameroon in 1986, coffee farmers received only 29 percent of the world market price for their crop from the government grain board. By aiding and abetting government agricultural boards, the World Bank has helped deliver African farmers over to a system of government serfdom.

Outside of agriculture, the vast majority of bank lending is still going to shore up foundering state-owned enterprises, government credit institutions, and political and bureaucratic control of the economy—even though bank studies and spokesmen repeatedly insist that the private sector is inherently more efficient than the public sector. A 1987 bank study concluded that bank loans and other foreign aid have been major culprits in the nationalization of African economies.

Consider the following examples:

• In 1986, Rwanda received a $12.7-million grant to, among other things, "strengthen" the government's management of the agriculture sector.

• The same year, Zambia received $10 million to bolster the government's fertilizer monopoly.

• Senegal received a $45-million loan in 1987 to, among other things, increase tax collection.

• Sudan received a $47-million grant in 1987 to reform its inefficient state-owned enterprises.

Today, the World Bank prides itself on its "structural adjustment" program—its effort to provide new loans to countries in order to correct policy mistakes (and bail out state enterprises) that were often financed by previous bank loans. But an August 1988 confidential bank analysis of the effects of structural adjustment lending, comparing countries in similar circumstances, showed that sub-Saharan African countries that had received adjustment loans were doing significantly worse than African countries that had not received such loans.

Worldwide, many nations had worse economic performance after receiving a structural adjustment loan than before. A World Bank study comparing the periods before and after governments received such loans concluded that average external debt-export ratios (the ratio of a nation's total debt compared to its annual total of exports) increased from 272 percent to 392 percent, inflation increased in the majority of the countries, and the average ratio of government expenditures to gross domestic product increased from 27.0 percent to 30.5 percent. Governments that received adjustment loans increased their spending faster than comparable Third World governments that did not receive adjustment loans—even though the bank touts the program as a way to reduce government's dominance in the economy.

Over the last couple of years, the World Bank has undergone traumatic changes. In a major restructuring, it recently laid off several hundred employees (average severance pay was widely rumored to total $250,000). It has adopted free-market rhetoric and told aid recipients to tighten their belts. But the bank has not given up its fundamental belief that the governments of poor countries can spend their way to prosperity and that the way to resolve the debt crisis is to give debtor nations more loans.

"The World Bank is prepared to continue its expansion of new lending to the debtor nations and its role as a catalyst for new commercial bank lending to these countries," wrote bank president Barber Conable in a January Los Angeles Times article. Conable and others assert that the bank must help governments in their "belt-tightening" reform efforts.

In most cases, governments instead need to loosen the noose they've placed around their own economies. It is not belt-tightening to let farmers sell their crops at the full market price—thereby greatly increasing harvests. It is not belt-tightening to stop arbitrarily seizing the assets of private businesses. It is not belt-tightening to privatize state-owned companies that are sinking the government's budget. And it is not belt-tightening to remove the pervasive restrictions on foreign investment that characterize almost all the Third World's troubled debtors. World Bank loans are largely help for governments that refuse to help themselves.

The World Bank has tried to solve the debt crisis by throwing good money after bad. Yet the debt crisis occurred largely because governments tried to swallow more capital than they could digest. The clearest sign that previous loans were misused is the fact that governments cannot pay them back. Despite no indication that most Third World governments are now capable of productively using more handouts, the World Bank is encouraging Western banks to lend more—and to forgive old loans to the same governments. The bank has some peculiar notions about how to make the world more financially stable.

Some countries have benefited from the World Bank's programs. But most of the long-term aid recipients have only ended up with heavy debt loads, swollen public sectors, and artificially high exchange rates. Instead of spurring reform, most aid has simply allowed governments to perpetuate their mistakes.

Welfare for socialist regimes is a crime against the suffering poor of Eastern Europe, Africa, Asia, and Latin America. That crime is possible because U.S. citizens ignore what the bank does. The United States created the bank. American taxpayers fund 20 percent of its operations. Washington houses its 17 buildings. All seven of the bank's directors have been Americans selected by the White House, with rubber-stamp approval by the bank's board. The U.S. administration exercises tremendous influence over bank policy.

It is time Americans owned up to their responsibility. As long as the World Bank is pouring money into bottomless-pit regimes, the U.S. should not contribute another nickel to the institution.

James Bovard is an adjunct analyst for the Competitive Enterprise Institute in Washington, D.C. This article is a project of the Reason Foundation's Investigative Journalism Fund.