Poverty Reduction or Pork?

Although less well known as a multilateral government agency than the United Nations, the World Bank still has many of the same problems. The World Bank has remained considerably corrupt, perpetuating inside procurement deals, exorbitant salaries, and fund embezzlement, according to witnesses testifying before the Senate Subcommittee on Security and International Trade and Finance recently.

“In truth, have we gotten enough poverty reduction bang for the development buck?” Karen Lissakers of the Revenue Watch Institute asks. “I think it’s pretty obvious the answer is no.” Lissakers served as executive director of the International Monetary Fund (IMF), the Bank’s sister institution, during the Clinton years.

As her testimony shows, criticism of the World Bank has spread well beyond conservative think tanks. “I know in the past, at least—I don’t know if it’s still true—career paths were really determined by your ability to push loans out the door,” Lissakers remembers. “That was the most concrete measure.”

In recent years, the World Bank has lost its ability to compete with private investors, suffering a net loss of $300 million in fiscal year 2006. The Bank’s current loans are backed not by profits, but by interest accruing on approximately $40 billion in assets retained from more profitable years. Much of this capital comes from member-nation’s original contributions to the Bank.

One likely reason for the World Bank’s dearth of profits is its penchant for granting zero interest loans— grants by any other name—to middle-income countries such as China and India. The World Bank sends 80% of its loans to 12 middle-income countries, including Turkey, Mexico, Brazil, and China. It sends only 10% of its loans to Africa.

Adam Lerrick, visiting scholar at the American Enterprise Institute (AEI), estimates that between $100 billion and $500 billion in World Bank funds intended for African development have been smuggled into offshore accounts. A repeat witness before the subcommittee, Lerrick argues that the World Bank faces insurmountable problems in Africa, because “if you actually enforce these anti-corruption standards, there will be no destination in Africa to ship the money to.”

At the same time, “The bank is desperate to maintain the illusion of relevance to emerging countries that no longer need its money and no longer want its advice,” claims Lerrick.

Criticism of the IMF and World Bank’s opaque decision-making process and unaccountable procurement practices abound. The September 2006 Global Transparency Initiative (GTI) Transparency Scorecard acknowledges that the World Bank has made significant strides toward transparency over the last 15 years by regularly releasing financial documents, but expresses concern over the Bank’s willingness to exercise wide discretion over what information becomes publicly available.

“It is simply no longer acceptable that—to put it crudely—a few rich white guys should decide in a closed room who heads an institution with. . .more than 180 shareholder governments, and then simply present the person, take it or leave it, which is what has been the case,” Lissakers argues. At the World Bank, the United States retains its historical right to unilaterally appoint the organization’s President.

The hearing’s witnesses also questioned the IMF and World Bank’s ability to reduce poverty, a key goal for both of these institutions. Dr. Daniel Tarullo, Professor of Law at Georgetown University, presented the Subcommittee with a list of possible IMF reforms, including “outcome-oriented lending” and “systematic program evaluation[s]” which would expose whether current programs were reaching their intended goals.

Despite these criticisms, Ms. Diane Willkens, President and CEO of Development Finance International, argues that the World Bank still provides an essential multilateral function by supplying middle-income countries with loans for projects that the private sector will not fund. These pro-poor loans are often used for public-service projects such as education and AIDS treatment. The World Bank promotes pro-poor programs which “private markets wouldn’t touch” due to their lack of “profitable return[s]” argues Willkens.

Lerrick rebuffs Ms. Willkens’ misunderstanding of “the type of project the World Bank Funds,” because, he asserts, “Any pro-poor program the Bank will fund, the private markets will fund.” Private financiers calculate profits using interest rates regardless of project outcomes.

Despite endemic problems within the World Bank and IMF, Willkens retains high hopes for the continued importance of a “multilateral institution. . .advancing sound and sustainable economic development, and alleviating poverty in the developing world.” Other experts are not so positive. “If the bank stopped lending tomorrow to its major borrowers, no one would notice,” quips Lerrick.

Bethany Stotts is an intern with the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.