Jason Hickel
Jason Hickel

The World Bank’s ‘development’ delusion

When Jim Yong Kim took the helm of the World Bank in July, progressives in the development community hailed it as a turning point in the fight against poverty: for once the bank is headed not by a US military boss or a Wall Street executive, but by an actual expert in the field of development. Jeffrey Sachs called Kim’s appointment a “tremendous step” toward making the World Bank a place “where the world convenes to address the dire, yet solvable, problems of sustainable development”.

I have deep respect for Kim and his past accomplishments, but I do not share the optimism that has overcome the development community. I find it astounding that we continue to place our hope for the end of poverty in an international financial institution that is fundamentally beholden to the interests of Wall Street and the US government. And we do so against all the available evidence: history shows that most of the countries that have come under the sway of the World Bank – and its sister institution, the IMF – have experienced declining development outcomes over the past 30 years or so.

This is either an unfortunate mistake that can be fixed with a little dose of better leadership, as Sachs and the rest seem to believe, or an indication that the bank doesn’t actually care much about development and poverty reduction, and that it’s after something else entirely.

Structural adjustment

To explain the bank’s dismal record on development we have to understand its core economic strategy, namely, “structural adjustment”, which has been in place since about 1980. When the bank gives out loans to poor countries they come with strict conditions attached that require debtors to restructure their economies in line with neoliberal policy by cutting subsidies and price controls; privatising public utilities; curbing regulations on labour and pollution; removing trade tariffs; and allowing foreign corporations to buy up public assets, bid on government contracts, and repatriate profits at will.

The bank claims that this free-market “shock therapy” stimulates growth and therefore enables debt repayment. But this doesn’t actually work. Instead of helping poor countries develop, structural adjustment has basically destroyed them. While developing countries enjoyed a per capita growth rate of more than 3% prior to the 1980s, structural adjustment cut growth in half, down to 1.7%. When it was foisted on sub-Saharan Africa, per capita income began to decline at a rate of 0.7% a year. The GNP of the average country shrank by around 10% during the 1980s and 1990s, and the number of Africans living in basic poverty nearly doubled. It would be hard to overstate the degree of human suffering that these statistics represent.

This is not to say that the World Bank has accomplished nothing on the development front, of course. Its proponents are always quick to point out successes in infant mortality and school enrolment in developing countries. But such gains are dwarfed by the losses that these countries have suffered over the same period: developing countries have lost roughly $480 billion each year in potential GDP as a result of structural adjustment, and another $160 billion each year to transfer pricing and other forms of foreign tax evasion legalised as part of the neoliberal package.

When the failure of structural adjustment became apparent to the world, the bank ostensibly backed down from this policy and replaced it with “Poverty Reduction Strategy Programmes” (PRSP). But a quick look at the content of the new PRSPs shows that they cloak the same policies behind new euphemisms. If the World Bank wants to achieve a world free of poverty, how do we explain the fact that it continues to pursue policies that have such disastrous consequences for poor countries?

Transferring crisis

Some critics, like William Easterly and Ha-Joon Chang, argue that bank leaders are just a bit too overzealous about free markets and don’t realise that their policies are so destructive. Once they see the folly of their ways they will change course, the thinking goes. This kind of optimism is terribly misplaced. The World Bank will not change course because it is not actually failing at its underlying objectives.

So what is the bank after, if not poverty reduction?

To understand the World Bank’s underlying objectives, we have to consider its role in the broader context of global capitalism. Capitalism inevitably bumps up against limits to the creation of new profits – limits such as market saturation, diminishing consumer demand, resource depletion, or higher input costs. When this happens, corporations find themselves with lots of excess capital but nowhere to invest it for profitable returns. This is what economist David Harvey calls “overaccumulation” and it can lead to systemic crisis such as that which set in during the period of stagflation in the West in the 1970s.

This is where the World Bank becomes useful. When the domestic economy began to stagnate in the 1970s, Wall Street banks decided to circulate their excess capital through the World Bank in the form of loans to poor countries. These days the bank sells around $30 billion worth of AAA-rated bonds on Wall Street each year: “innovative debt products,” in bankspeak, that produce returns of more than 7%.

The success of the bank’s business model hinges on the unique power that it wields over its debtors. By attaching structural adjustment conditions to loans, the bank can force debtors to channel all their available resources toward debt repayment, requiring them to cut other expenses (such as much-needed subsidies and public services) and raise new funds by selling off assets. In addition, structural adjustment requires debtors to keep inflation low so that the value of their debt (read: Wall Street’s investment) doesn’t diminish, even though this denies poor countries an important method for stimulating growth.

In other words, structural adjustment programmes were not designed to reduce poverty (in fact, they specifically preclude poor countries from using the basic strategies that Western countries used to develop their own economies). Rather, they were designed to pull wealth from third world governments into first world banks, allowing the US to transfer the crisis of capitalism abroad for a while without having to solve its contradictions at home. It’s no accident that all of the bank’s past presidents have been US military bosses and Wall Street executives (see the full line-up here); they’ve been put there to underwrite this strategy. Kim knows this. But despite whatever good intentions he might harbour, he will have to serve the same masters.

Accumulation by dispossession

In addition to enforcing flows of tribute from the global periphery to the global core, the World Bank serves the interests of Western capitalism in a broader sense. Responding to the crisis of the 1970s, the US government retooled the World Bank and the IMF to create new market opportunities for Western corporations in the third world. Structural adjustment facilitated this agenda by prying open previously protected economies, forcing down the costs of business in developing countries, and subsidising exports from Western producers.

In other words, when there is nothing left to accumulate at home, the World Bank creates ways for US corporations to siphon value from new frontiers. This is what Harvey calls “accumulation by dispossession” – the on-going process by which capital has to plunder external resources and assets in order to maintain growth. The process of dispossession always requires force, be it through military coercion, as in the case of the American occupation of Iraq, or through the “soft power” that the World Bank wields by leveraging debt.

In addition to forcing economic liberalisation, the bank’s other key method of dispossession is privatisation. As part of its tactic for recouping loans, the bank requires debtor nations to sell off telecoms, railroads, banks, hospitals, schools, and every conceivable public utility to private companies. The bank has privatised more than $774 billion worth of assets in developing countries since 1988 alone. This amounts to $39 billion a year of profitable opportunities for Western investors in addition to the $30 billion of high-interest bonds (read: debts) that the bank sells each year.

This has disastrous consequences for the poor, since in most cases the new owners of formerly public assets have no reason to make them available to people who can’t afford to pay. But the World Bank defends this practice on the basis that it provides “a real business opportunity” for corporations. Some studies show that US businesses get up to 82 cents in new purchases for each dollar that the US contributes to the bank.

According to these standards the World Bank has been a resounding success, not a failure. Indeed, it would be absurd to imagine that a multibillion-dollar institution controlled by Wall Street and the US government would ever be left to “fail.” Thanks in large part to the World Bank and the IMF, US investments abroad have grown to more than $10 trillion and income from those investments has increased from about 20% of domestic profits in the early 1980s to about 80% in recent years. What is more, US corporations have been enjoying an increasing rate of return on those investments: from 5% in 1975 to over 11% in 1990. Never mind that poor countries have been systematically destroyed in the process.

How to transform the World Bank

This is why the World Bank is so valued by the US government and Wall Street: because it is instrumental to expanding the sphere of Western capitalism, a role not dissimilar to that which colonialism once played for Europe. This may be a good way to overcome flagging corporate profits and to stop stagflation at home, but it does not count as a serious strategy for global poverty reduction.

We have to face up to the fact that the World Band will never be an effective tool in the fight against poverty without fundamental changes in its power structure.

First, developing countries need much more control over decisions that affect them. Power in the World Bank is presently apportioned according to members’ shares, just like in a corporation. Major decisions require 85% of the vote, and the United States, which holds about 16% of the shares (and controls the presidency), wields de facto veto power. The same is true of the IMF. Developing countries together hold less than 50% of the vote, which is shocking given that the institution supposedly exists to promote their welfare.

Second, development aid should be delinked from corporate bonds. This would take Wall Street’s interests out of the equation, eliminate the pressure to siphon wealth from debtors, and allow the bank to evaluate its performance on the basis of poverty reduction outcomes instead of loan volume, as is the current practice.

These two interventions would open the door to other changes that critics have demanded for decades, such as: forgive third world debt on the grounds that it was imposed in bad faith; get rid of the blanket structural adjustment conditions associated with development loans; and eliminate the bank’s “sovereign immunity” status, which presently allows it to avoid responsibility for the perverse outcomes of its policies.

Kim probably won’t be able to accomplish these reforms because they would run up against enormously powerful economic interests. Real change will require rebuilding the global justice movement by linking together organisations that have been working on these issues for decades. As neoliberal policy has ravaged the lives of hundreds of millions of people around the world, there’s a lot of anger out there ready to be mobilised. A revolution lies waiting in the wings.

 

*This article originally appeared on Al Jazeera.

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  • 19 Responses to “The World Bank’s ‘development’ delusion”

    1. Sterling Ferguson #

      The reason why these countries went to the World bank and the IMF were because most of these country went broke. This article left this out for some reason is beyond me. The leaders of most of these countries that went to the IMF and World bank because of wide spread corruption had destroyed the economies of these countries. All of these presidents for life had robbed these countries and most of them couldn’t pay their bills. Take the case of Zim., Mugabe has single handed destroyed the economy of this country and the World bank and the IMF didn’t have anything to do with this. In Nigeria, the leaders of this country stole billions in oil money and this wasn’t caused by the World bank or the IMF. None of these dictators should be loaned money to keep themselves in power.

      September 28, 2012 at 9:17 pm
    2. Frans Verloop #

      There is an easy answer to this problem as you perceive it. Don’t borrow from the World Bank and the IMF!
      For the rest this article is full of economics howlers such as ” Capitalism inevitably bumps up against limits to the creation of new profits …” and “…low inflation … denies poor countries an important method for stimulating growth…”
      If you think that countries will continue to put lots of money in these institutions while having no control of what happens to it and if it ever will be repaid, then you live in a dream world.

      September 29, 2012 at 10:58 am
    3. Barry #

      I watched a documentary recently called “Surviving Progress”. It asks questions like “What is progress?” and talks about “Progress Traps” etc.

      Basically the reality of so called “Progress” is pretty bleak and we humans keep on making the sames mistakes over and over again. Our mistakes won’t be the end of us just yet, but our cries for our dear planet and the less fortunate living creatures will, as usual go unnoticed, possibly indefinitely.

      September 29, 2012 at 4:51 pm
    4. Rejoice Ngwenya #

      “We have to face up to the fact that the World Band will never be an effective tool in the fight against poverty without fundamental changes in its power structure.” Jason Hickel that mere political will without real cash cannot develop a nation. As Africans, we would real like to be independent of ‘foreign capital’, export all we make and keep away predatory MNCs. But we are burdened by the yoke of authoritarianism – like Zimbabwe – with a ruling elite siphoning national resources for personal use. Instead of pointing fingers at a ‘bank’, why not create ‘national equity capital’ from local resources to fire up enablers of development? Frans Verloop got it right – if you do not want to be indebted, don’t borrow. Keep lending money to Mugabe and he will recruit more police, more soldiers and buy bigger guns and more bullets. Is this ‘good social investment’ Jason? Lend money to him – give him stringent conditions. Public expenditure on non productive ‘social products’ merely increases budget deficits without eliminating poverty. How else can a country eliminate poverty without creating jobs through industrialisation driven by local and foreign ‘capitalism’? Jason talks about ‘restructuring’ the World Bank. I agree – let’s enhance our [African] shareholding in that bank then perhaps can have a bigger say.

      September 29, 2012 at 5:11 pm
    5. yendys #

      Yes developing countries should have control over decisions.

      Do you think that MIGHT lead to a Mugabe (take your pick) deciding it would be a good idea to pour in more money at less cost and without conditions direct to governments to do as they chose with the lolly.

      That will certainly help the poor!?

      Amazing how leftist thinkers just ignore practicalities and the real world.

      September 29, 2012 at 7:08 pm
    6. jandr0 #

      On practically each paragraph penned by Jason I wanted to respond with a rebuttal. The piece is riddled with assumptions, unproven conjecture, and at times, outright fallacious thinking.

      Some of these have been pointed out by Yendys, Rejoice, Frans and Sterling.

      As for the rest, I would not even know where to start, so I will skip this completely. Except saying to Jason to please add my voice with theirs.

      @Barry: I agree with you on “our dear planet and the less fortunate living creatures.” Now, in my opinion, since the latter half of the 20th century, the most damaging abuse of earth has either been done by governments, or with their (sometimes blatant, often tacit) support.

      Two personal examples dear to my heart: Khayelitsha and Stellenbosch (Western Cape).

      Stellenbosch had an understanding that the Winelands must be protected and kept as pristine as possible, hence keep industrial and residential development confined to limited areas. When I go down to the Western Cape nowadays, it feels as if I never really leave town when I drive from Stellenbosch to Helderberg area. All developments must have been approved by local governments.

      Khayelitsha resides on (previously pristine) wetlands, which used to clean (filter) the water pouring into False Bay. Now, shack upon shack upon shack. Capitalism didn’t put those people there, but government policies surely facilitated it.

      What do you suggest we do?

      September 30, 2012 at 5:11 pm
    7. Juju Esq. #

      Excellent book on this very topic: “The Shock Doctrine; The Rise of Disaster Capitalism” by Naomi Klein.

      or watch Klein on Youtube:
      http://www.youtube.com/watch?v=UNzcJImX4Ew

      >>>>

      September 30, 2012 at 9:34 pm
    8. The Creator #

      Can’t argue with most of your points (although I think the best way to reform the World Bank and IMF and WTO would be to hire al-Qaeda to solve the problem) but why in the world do you support Kim? He’s a pure corporate hack.

      October 1, 2012 at 8:58 am
    9. “When it was foisted on sub-Saharan Africa, per capita income began to decline at a rate of 0.7% a year”.

      Neoliberal policies were foisted upon sub-Saharan Africa? That’s news to me. As far as I could make out, South Africa did not privatise parastatals. Zimbabwe is run by a banana republic caricature who is kicking foreigners out. Rwanda was plagued by civil wars and are only currently enjoying some growth.

      The only country that comes to mind that did stabilise, privatise and, liberalise was Zambia. The data set is public (feel free to toy with it and make your own conclusions as to what the general smile there indicates):

      http://www.google.com/publicdata/explore?ds=kthk374hkr6tr_#!ctype=l&strail=false&bcs=d&nselm=h&met_y=indicator_100106&scale_y=lin&ind_y=false&rdim=country&idim=country:23103:23203:19303:15103:2603:19903:19603:10403:3103:4503:4803&ifdim=country&hl=en_US&dl=en_US&ind=false

      October 1, 2012 at 9:39 am
    10. Maria #

      I believe that most of Jason’s critics have missed his point, that the World bank is supposedly committed to poverty reduction in developing countries, but instead acts as an agent for the further enrichment of corporations. Surely there is no need to insist on privatisation, etc. of public institutions as a condition of receiving World Bank loans? The loans could be used, via such public institutions, to help the country concerned developmentally, instead of creating private vehicles for private profits, with large amounts of such profit being repatriated to rich countries anyway.

      October 1, 2012 at 6:09 pm
    11. jack sparrow #

      Some very good comments, particularly Rejoice, on a very ideologically naive and one sided Thought. Here’s a Thought – those that put the most money into an enterprise control it. If you don’t like it, go elsewhere. The World Bank has been too soft, letting loans made with taxpayers money be siphoned off by a host of crooks, first and third world. Maybe the idea came from the Marshall Plan after WW2, but there the world was dealing with mostly honest and committed governments. Now they are not.

      October 2, 2012 at 7:56 am
    12. HD #

      Wow, this piece is full of economic howlers and folk economics. Then again, Mr. Hickel is no economist. Like jandr0 I find myself wanting to respond to almost ever paragraph.

      But just a few comments:

      (1) I thought David Harvey is a world famous Marxist. You felt it wasn’t important enough to mention?

      (2) As to your suggestions – remember who is borrowing/lending the money. In what financial/business world would you give all the power to the person/company borrowing your money? That said, I agree the WB/IMF need to seriously consider reform along more equitable lines, but it would hardly be normal to expect banks not to attach conditions to their loans or sovereign leaders to lend tax payer money without conditions / some form of accountability/influence over how it is spend. That would be extremely naive…

      (3) So let me get this right – trade protectionism, subsidies, bloated bureaucracies, inefficient/corrupt state enterprises are all good for a developing country? Why then are they in this mess in the first place? You are ignorant of the economic argument and fail to place things in their proper context. Go look at the institutional capacity in these developing countries – privatization is often the only solution to get these institution to function properly.

      cont….

      October 2, 2012 at 11:39 am
    13. HD #

      (4) I agree with comments that you should never get yourself in this situation in the first place (although there is much to say for colonialism and imperialism) and even to some extend agree with some of your criticisms of the WB/IMF elite/big business links and their agenda – with nuances.

      But, really I think this is cheap ideological point scoring mostly and misses some of the underlying problems in these countries. I hope more development studies types read Acemoglu & Robinson’s “Why Nations Fail”:

      http://whynationsfail.com/

      October 2, 2012 at 11:50 am
    14. J #

      Thanks for the informed article on the World Bank, I have read many criticisms of the Bank, and yours was quite detailed. As Maria stated though, (what a relief), the point of the article is that the Banks objective is poverty reduction, yet it has not been so successful in achieving this, for the reasons stated. If the Banks objective stated something else, like to foster economic growth etc., then the manner in which it operates would be more justifiable.
      It is one thing to criticise a corporation for not operating in a sustainable manner, but it must be another for an organisation such as the World Bank who’s main goal is to alleviate poverty. The African Development Bank operates in a similar manner, E.g. the funding of the Medupi Power Plant (which clearly will more so benefit industry in SA via more cheap electricity, as they are the biggest consumer! poor households use a negligible amount.) Also if this is suppose to help poor people through economic growth, well….all I have heard of lately in the last couple of years is mostly job losses. There may be numerous parties to blame for poverty, governments, non South African corporations and the development banks as well. Clearly some of there funding is not for poverty alleviation, so they should not state that it is, clear and simple. Bit off topic, but ya Jason, development banks should do what they simply claim to do, because they are upheld as leaders in reducing poverty.

      October 2, 2012 at 5:24 pm
    15. Juju Esq. #

      @HD

      “Then again, Mr. Hickel is no economist. Like jandr0 I find myself wanting to respond to almost ever paragraph.”

      And what are jandr0 ‘s economic qualifications other than trotting right wing think tank rhetoric?

      Obviously birds of a feather flock together.

      October 2, 2012 at 9:03 pm
    16. What an insightful and thought provoking article Jason! Thank you!

      I hope the IMF/World Bank takes heed and reforms this broken system that the genesis of much of the corruption we see in the developing world. Reforming these corrupt practices that gave rise to unbridled capitalism now firmly rejected by the rest of the world, is the only way forward.

      October 4, 2012 at 5:35 pm
    17. @Juju:
      You can learn more about Naomi Klein’s agitprop here:

      http://www.cato.org/publications/briefing-paper/klein-doctrine-rise-disaster-polemics

      October 12, 2012 at 1:46 pm
    18. Hola! I’ve been reading your web site for some time now and finally got the courage to go ahead and give you a shout out from Atascocita Texas! Just wanted to say keep up the great job!

      December 24, 2012 at 6:09 pm

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