Friday, May 18, 2007

Reasons to Reform the World Bank

Trial by media can be a very effective tool for uncovering information valuable to the public. Paul Wolfowitz, who has suffered a short media trial, insisted he was only following his directors’ sketchy advice, but now he's resigning under pressure. The scandal has eclipsed all the Bank's other efforts, and rendered Wolfowitz unable to lead effectively, which was his argument as to why he should stay in the first place. I must ask why the President of the United States has the role of choosing the President of the World Bank, an international organization? Its Board of Directors are not any better at confirming presidents than the President is at choosing them. If you think it might be fair that Europe chooses the President of the IMF, then, what president does Africa pick?

The World Bank is for free trade and shock therapy. This doesn't work for a number of reasons, but not because trading doesn't work. It de-emphasizes the role of the state in favor of various structural adjustment programs, so why isn't it working? I've compiled a list of reasons:

1) "Shock therapy" means the Bank demands a sudden release of price controls and currency control devices. This needs to be more gradual, economist Joseph Stiglitz has argued. The Bank also urges a sudden withdrawal of state subsidies, and immediate trade liberalization. Economist Jeffrey Sachs is the foremost proponent of this kind of policy. Shock Therapy hasn't work in most of the countries, most notably Russia, which experience a 3000% increase in its poverty rate.

2) If a country is experiencing a heavy border conflicts or ethnic wars, economic liberalization is not the foremost concern for the inhabitants. That is to say, if the country does not already have a stable democracy, stable at least to some extent, then economic reform will not help. Economic reform helps stable democracies become more democratic, I believe. But it doesn't help dictatorships, such as in Africa, become more democratic than they already are (are not.)

3) Influence from the United States. The Bank needs to be free, totally free, from political influence. The Bank urges developing countries to sever their business connections from the government, so why doesn't the Bank sever its own to the US government? The Bank has been shown to favor its "cronies" and others in the government who have that kitchen-room ability to be close to the Bank's policymakers, like Paul Wolfowitz.

4) The traditional "crowding out" argument usually refers to the problem of when a government buys up too many goods and services and crowds out the private investment and economy. The government becomes the sole purchaser, and the private organizations become, as they say, crowded out. This argument is not that the Bank crowds out private lending, but that it crowds out national sovereignty. The bank takes control of the nation and compromises its sovereignty by lending money in return for laws and policies that the bank would like to see. This is the anti-thesis of national self-determination, even if those laws and policies are conducive to peace and trade.

5) The risk involved in these loans is shifted from failing developing country banks to the World Bank. The risk is shifted from the private lenders to the American public, who ultimately back the World Bank. This is like a form of parasitism. If developing countries default on their loans, then Americans pay for it out of their reserves. I appreciate the Bank's generosity, however, it appears that a bank that takes on any such risk should be risking its own capital, not someone else's. This gives the Bank more room, but less incentive not to fail.

6) Debt accumulation. The borrower countries, in order to obtain the currencies to repay the loans, must sell to the rich countries more than they buy from them. However, the rich countries want to be net exporters, not importers. This generates “the transfer problem”, often the only way of repaying loans is to engage in other loans, resulting in an accumulation of debts.

7) Modeling. As a condition of the credit, the Bank offers advice on how countries should manage their finances, make their laws, provide services, and conduct themselves in the international market. The Bank has great power of persuasion, because if it decides to ostracize a borrower, other major international powers will follow the lead.

8) By excessive lending, the Bank has added to its own power and depleted that of its borrowers, generating a blatant inconsistency with its stated mission.

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