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World Bank Opposes Changing Loans to Grants for Poor Countries


J.R.R. Tolkien’s “Lord of the Rings” has captivated millions on the big screen because it is an archetypal tale of power and human nature. The corrupting influence of power, its overwhelming temptation even to those whose intentions are good, the dilemmas encountered in opposing evil — these issues are played out every day here in Washington, the center of the most concentrated power on Earth.

A case in point: the Bush Administration has put forth a proposal that would reduce the power of the World Bank, one of the most powerful institutions in the world. The Administration is pushing for a reform that would convert up to 50 percent of the World Bank’s loans — for poor countries — to grants. President Bush has suggested that these grants be made for specific projects such as health, education, and sanitation.

This proposal has met with unusually fierce resistance, most remarkably from European governments — who have almost never publicly opposed any US policy at the Bank for the past half-century. It is a major sticking point between Europe and the United States at this week’s UN Financing for Development conference in Monterrey, Mexico. To understand the reason for this conflict, we must look at the nature of the World Bank’s power.

The World Bank loaned about $17 billion last year, but that is only a small part of its means of influence. The Bank is also a leading member of the creditors’ cartel that is headed by the International Monetary Fund. This cartel monopolizes international credit markets in the same way that OPEC attempts to monopolize the production and distribution of oil. In other words, if a government does not meet the approval of the IMF, it will not be eligible for most loans from the World Bank, other multi-lateral institutions, rich country governments, and often private banks as well.

As a result of this arrangement, the IMF and the World Bank together have the power to make the most important economic decisions for dozens of low and middle-income countries. Of course these decisions do not necessarily reflect the will or best interests of these countries’ residents. In fact they are often immediately disastrous — as we have seen in the collapse of the Russian economy in the 1990′s, the Asian economic crisis, or currently, the economic meltdown in Argentina.

“The era of structural adjustment has failed,” said Harvard economist Jeffrey Sachs in New York a few weeks ago. He was referring to the last 20 years, in which the policies of the IMF, World Bank, and the “Washington consensus” have been implemented as never before. The result, for the vast majority of low and middle-income countries, has been the worst economic failure since the Great Depression. From 1980-2000, income per person grew less than half as much as it did in the prior two decades (1960-1980).

Yet the creditors’ cartel that ushered in the failed policies — including indiscriminate and often reckless opening to capital flows and trade, Enron-style de-regulation, privatization, and de-industrialization — remains solid. The Bush Administration’s attempt to convert half of the World Bank’s loans to grants is being resisted because it is rightfully seen as undermining the power of this cartel.

Although the World Bank might still try to use the grants to further its agenda, it would lose one instrument of control: these funds would no longer add to the crushing debt burden that binds so many countries to their masters in Washington. This is leverage that they do not want to give up, and for this same reason the Bank (and the IMF) have been unbearably slow and stingy in granting debt relief to the world’s poorest countries. It doesn’t matter that most of this debt can never be repaid: it is all about power.

The Bank has successfully lobbied the European governments (another ironic political twist: we give them taxpayer dollars to help the poor, and they spend it to influence government officials for their own ends) and some non-governmental organizations to take their side.

Never mind that the liberals dream of using the power of the creditors’ cartel for noble purposes. They would do well to consider Tolkien’s Lord of the Rings: like the One Ring that served as his metaphor for the forces of evil, and weapons of mass destruction, this cartel is inherently bad. What good can come of an arrangement that delivers the economic fate of hundreds of millions of people to the hands of a small, unaccountable group of men?

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