Home >> Global Organizations >> World Bank and IMF  Email  Print World Bank Policies: Pros and Cons Gina-Marie Cheeseman - 9/17/2007 Created in 1944 during a conference in Bretton Woods, New Hampshire, the World Bank according to its website, helps developing countries worldwide with “financial and technical assistance” by providing “low interest loans, interest free credits and grants to developing countries for education, health, infrastructure, communications, and many other purposes.” The World Bank’s mission is to “help reduce poverty.”
The World Bank consists of two organizations:
* International Bank for Reconstruction and Development (IBRD)
Founded in 1944, the purpose of the IBRD is financing reconstruction projects for war-ravaged countries with poor credit. Financed by subscriptions of its 185 members countries and money borrowed from international markets, the Bank in turn lends its money at a low rate to governments. IBRD lends primarily to “mid-middle-income developing countries,” and in 1994 was “funded at about $17 billion.”
Eligibility for IBRD loans requires governments to be in compliance with the Bank’s Structural Adjustment Programs (SAPs), which have the aim of reducing government budget deficits through decreasing government spending.
* International Development Association (IDA)
Established in 1960, the IDA provides no interest loans and grants to the world’s poorest governments. The IDA provides funding for programs that “boost economic growth, reduce inequalities, and improve people’s living conditions,” according to the World Bank’s website. The IDA provides one of the biggest sources of funding for the poorest countries in the world (which total 82 countries, 39 of which are in Africa).
IDA loans are interest-free and countries have 25 to 40 years to repay, plus a 10-year grace period. IDA loans and grants have totaled $161 billion since 1960, with an average of $7-9 billion in recent years, with about 50 percent going to Africa.
The policies of the World Bank draw both criticism and praise. The remainder of this article will focus on the pros and cons of four important World Bank policies: structural adjustment policies (SAPs), gender development policies, foreign direct investment, and Heavily Indebted Poor Countries (HIPC) Initiative.
Structural Adjustment Policies
Structural Adjustment Policies (SAPs) are conditions countries must meet in order to obtain World Bank loans. Eligibility for IBRD and IDA loans requires governments to be in compliance with the Bank’s Structural Adjustment Programs (SAPs), which have the aim of reducing government budget deficits through decreasing government spending.
Among the conditions are increasing exports, devaluing overvalued currencies, trade liberalization, balancing budgets, price controls, privatization, and fighting corruption.
According to Gerry Nkombo Muuka, associate professor of management and assistant dean of the College of Business and Public Affairs at Murray State University in Kentucky, the overall objective of SAPs is “to increase an economy's outward orientation (or exports), to reduce both rural and urban poverty, and ultimately to induce, in the economy in question, a high and sustainable rate of economic growth.”
Carol Welch, coordinator of the U.S. efforts for the United Nations' Millennium Campaign, says SAPs “require recipient countries to change their economic policies, generally to encourage greater economic deregulation (“liberalization”) of trade, investment, and finances.” Welch says the basis of SAPs is a “narrow economic model that perpetuates poverty, inequality, and environmental degradation.”
Criticism is leveled at the conditions of trade liberalization and privatization of government functions. Walden Bello, executive director of Focus on the Global South, and professor of sociology and public administration at the University of the Philippines, is wary of market forces determining the prices of agricultural produce. Allowing the market to determine prices has led to “reduced applications, lower yields and reduced investment in agriculture” in many countries, Bello claims.
Muuka counters the criticism leveled against SAPs by stating that “the Bank has a right to safeguard the resources transferred to them by member governments.” Although the conditions of SAPs are controversial, “it is hard to deny that those who provide assistance and loans can legitimately take an active interest in the design of the recipient country’s policies.”
Muuka further defends SAPs by stating that they increase the possibilities of expanding production, and increase export earnings which “alleviates the foreign exchange constraint to growth.” He argues that the conditions of SAPs “aim at making exports more attractive on the world market, thereby providing exporters with some incentive to export more.”
Gender Development Policies
According to the World Bank’s Operational Policy statement the main objective of its gender development policies is to “reduce poverty and enhance economic growth, human well-being, and development effectiveness by addressing the gender disparities and inequalities that are barriers to development…assisting member countries in formulating and implementing their gender and development goals.”
The former president of the Philippines, Gloria Macapagal cites the four principles of the World Bank strategy for implementing its gender development policies:
1. Mainstreaming, which means that the Bank is committed to analyzing the likely effects of proposed actions on women and men in all analytical and project work rather than addressing issues that affect women through women-only projects.
2. Sectoral focus on expanding girls' education, improving women's health, increasing women's participation in the labor force, expanding women's options in agriculture, and providing financial services to women.
3. Focus on countries with the greatest gap between men and women.
4. Country Strategy, which means that plans for dealing with gender issues are included in country assistance strategy (CAS) papers.
“The World Bank has in the past made significant, timely contributions to the development of commitment to more effective promotion of equality between women and men” says Carolyn Hannan, the director for the UN’s Division for the Advancement of Women. Hannan believes the World Bank’s recent focus on “developing the necessary institutional change…is a very positive development.”
Hannan comments on the significance of the World Bank’s report titled “Engendering Development,” stating that it “made a significant input because of the rigorous analytical work, backed up by strong statistical data, and the endorsement at high level in the Bank.”
Nasreen Khundker, professor of economics at the University of Dhaka in Bangladesh criticizes the World Bank’s gender development policies because the “pattern of growth supported or initiated by the Bank…frequently exacerbates social inequalities.” She cites privatization and the closure of State-owned enterprises as leading to “widespread unemployment” of men and women.
Christa Wichterich, a member of Women in Development Europe which focuses on development and women’s rights, supports Khundker’s assessments, stating that the report “Engendering Development” does not mention the “complex causes of poverty which keep women, in addition to their unpaid work, in marginalized, low paid, precarious, and insecure jobs.” She characterizes the report’s action plan as being “one-dimensional” and placing markets above the potential of women. “This one-dimensionality and blindness to economic alternatives makes the Bank´s concept of gender equality in global markets a smart version of the dogma of competition and growth with the market-totalitarian message underlying: There is no alternative!”
Ann Whitehead, a professor at the University of Sussex in Britain who writes on gender issues, comments, “The mechanisms for making different parts of the Bank accountable for working on gender issues have no bite, no sanctions; it is all a matter of staff members’ individual interests.”
“The World Bank has made progress in integrating gender issues into its operations, especially in health and education,” Helene Carlsson, Gender Specialist for the World Bank, points out. The World Bank has lent over $3.4 billion for girls’ education programs. Carlsson also points out that the Trust Fund for Gender Mainstreaming in the World Bank provides support for “numerous path-breaking endeavors, including: engendering post-conflict reconstruction in the Congo, work on gender and law dimensions of HIV/AIDS in Sub-Saharan Africa, and the creation of a sex-disaggregated statistical database for the entire Latin America and Caribbean region.”
Foreign Direct Investment
The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to promote foreign investment into economies. MIGA offers political risk insurance to investors and lenders. Over $16 billion has been provided by MIGA for over 850 guarantees to support investment projects in 95 countries. MIGA’s portfolio is currently $4.8 billion. MIGA’s website states, “As a member of the World Bank Group, MIGA's mission is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives.”
Foreign direct investment has increased globally over the last 20 years. Sandy Kyaw, Oxford University professor of economics and strategy states, “A distinctive feature of the world economy in recent decades has been the growth of foreign direct investment, or investment by multinational firms in foreign countries in order to control assets and manage production activities in those countries.”
Foreign direct investment increases growth in two ways, according to Kyaw. First, by attracting more domestic investment it “increases total investment.” Second, foreign direct investment is “more productive than domestic investment” because more advanced technology interacts with “the host country’s human capital.” It is the increased access to advanced technology which “contributes to productivity growth… through market transactions such as joint ventures, licensing, and goods trade.”
Kyaw also states foreign direct investment adds “to investible resources and capital formation… it is also a means of transferring production technology, skills, innovative capacity, and organizational and managerial practices between locations, as well as of accessing international marketing networks.” By promoting competition in the market place it improves overall growth.
James Petras, former Professor of Sociology at Binghamton University in New York, and an adviser to the landless and jobless in Brazil and Argentina, characterizes the reliance on foreign direct investment as a “risky, costly, and limiting development strategy.” He criticizes foreign direct investment and “technological transfers,” stating that multinationals who invest in countries “usually charge subsidiaries excess royalty fees, service and management costs, to artificially or fraudulently lower profits and taxes to local governments.” Petras claims that 80% of the research and development that multinationals do is not carried out in the field, or host country, but “out in the main office.”
However, Dani Rodrik, professor of political economy at Harvard University, believes that “multinational corporations can promote the transfer of technology, with possible spillovers to the rest of the host economy or domestic firms.”
Heavily Indebted Poor Countries (HIPC) Initiative
The Heavily Indebted Poor Countries (HIPC) Initiative was created in 1996. HIPC is an agreement between creditors “designed to help the poorest, most heavily indebted countries escape from unsustainable debt,” as David Ricksecker, a professor for the University of Iowa Center for International Finance and Development states.
Poor countries owe a combined debt of over $2 trillion to rich countries. Poor countries are enabled by HIPC to focus on “building the policy and institutional foundation for sustainable development and poverty reduction.” It reduces, and not just refinances, debt. Poverty reduction is included in HIPC, as are fiscal and monetary performance, as measurements of a country’s commitment to reform.
HIPC is open to the poorest countries that meet the following requirements:
1. Eligibility for assistance from the World Bank’s International Development Association.
2. Have such high debt that they cannot sustain it even after applying debt relief devices.
3. A track reform of trying to reduce poverty and building economic growth.
There are two stages to HIPC. First, a there is a three-year period where a country works the World Bank to “establish a record of implementing economic reforms and poverty reducing policies,” according to Ricksecker. After the three-year period it is determined whether the country’s debt situation is sustainable. Second, if it is determined it is not sustainable a “package of debt relief is prepared and committed to be creditors.” Countries have to put structural reforms in place before HIPC debt relief goes into effect.
The Operations Evaluation Department of the World Bank released a review of the HIPC initiative in 2003. The report concluded that the initiative “has been a catalyst for far-reaching changes in the processes surrounding development assistance, reflecting the coming of age of a new authorizing environment with the active participation of civil society.” The report also found that HIPC is “highly relevant in addressing a key obstacle to growth and poverty reduction facing many poor countries,” and is likely “to achieve its original fundamental goal—to provide some of the poorest countries with much-needed relief by reducing their debt stocks and debt service burdens.”
Focus on the Global South, a non-governmental organization which provides analysis on globalization, points out the problems with the HIPC initiative. They claim the biggest problem with the initiative is that “it will provide lasting relief from debt for the highly indebted countries of the south” because its aim is not canceling debts, but making sure they will be repaid.
Matthew Martin, who worked with the HIPC Debt Strategy and Analysis Capacity-Building Program, both praises and criticizes the HIPC initiative. He credits the initiative with making “major progress in obliging most creditors to provide relief…most are providing a large amount and participating in the initiative.” However, he criticizes the “current design of HIPC” because it “does not maximize its contribution to poverty reduction spending.”
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