By Nadia Martinez
12 May, 2007
As the controversy around Iraq
War architect Paul Wolfowitz’s uncertain future as president of
the World Bank intensifies, the financial institution is not only losing
supporters. It’s also losing victims. In Latin America, countries
are paying off their World Bank loans early, cutting off ties with the
Bank, and creating their own financing instruments to replace the world’s
oldest multilateral lending agency.
Unfortunately, the latest
corruption scandal involving questionable promotions and outrageous
salary increases for Wolfowitz’s girlfriend, Shaha Riza, is just
the tip of the iceberg when it comes to doubts about the World Bank’s
credibility, legitimacy and capacity to fulfill its stated mission of
eradicating world poverty.
Poor countries throughout
the world should follow Latin America’s lead and desert the planet’s
Breaking the Debt
Since its creation over 60
years ago, the World Bank has provided trillions of dollars in loans
to poor countries. In Latin America, in recent years World Bank financing
–though diminishing—accounts for about 20 percent of multilateral
lending, excluding loans to the private sector as well as political
insurance and guarantees extended by its private sector and insurance
arms. In addition to providing financial resources, the World Bank—along
with the International Monetary Fund (IMF)—took the lead in making
policy prescriptions to poor governments, which it ensures are adopted
by making them “conditions” for lending. Throughout the
developing world, debt seriously hinders countries’ abilities
to provide for the basic needs of their citizens, and imposed “conditionality”
interferes with governments’ rights to make sovereign decisions.
At the same time, persistent
poverty in Latin America has barely budged. A report by the Center for
Economic and Policy Research found that poverty and inequality in Latin
America increased between 1980 and 2005, when compared with the prior
20-year period. The United Nations’ Economic Commission on Latin
America drew similar conclusions. Their figures show that between 1960
and 1980, per capita income in Latin America experienced an 82 percent
increase in real terms, whereas between 1980 and 2000 it only grew by
As a result, there has been
a clear backlash to the disastrous financial failure of the neo-liberal,
“Washington Consensus” economic model, promoted and often
imposed by institutions such as the World Bank in the last two decades.
In 2006, presidential elections were held in 12 Latin American countries.
In six of them, the left-wing candidates won and in another four, left
parties made considerable progress. Economic policy was a dominant theme
in all of the election campaigns. Candidates who were critical of the
conservative, pro-business, free market economic policies of their predecessors
fared much better than supporters of the Washington-favored status quo.
For example, countries like
Argentina, Brazil, Ecuador and Venezuela have made efforts to break
themselves free from the debt chains that tie them to these financial
culprits. In April, Venezuela announced that it was paying off all its
outstanding debt with the World Bank—totaling $3.3 billion and
dating from before President Hugo Chavez took office in (1999)—five
years ahead of schedule. Venezuelan Minister of Finance Rodrigo Cabezas
said that because of this, “Venezuela is free ... and thank God,
neither today’s Venezuelans nor children yet to be born will owe
one single cent to those organizations.” Later that month, in
the wake of the Wolfowitz scandal, President Chavez declared that Venezuela
was withdrawing its membership in the World Bank and the International
Likewise, Argentina, Brazil
and Ecuador have paid off their debts to the World Bank’s sister
institution—the IMF—and others have expressed a desire to
do the same. Symbolically, Venezuela’s recent decision could help
strengthen the efforts of other developing countries seeking reform
at the World Bank by demonstrating to the institution that choosing
not to be part of it is a real option.
Persona Non Grata
At the same time that Venezuela
announced it would pull out of the World Bank and IMF, Ecuador expelled
the Bank’s representative in that country, declaring him persona
non grata . Ecuador’s new President, Rafael Correa, accused the
World Bank of blackmail, announcing that, “because a sovereign
country decided to reform a national law—for misbehaving—they
withheld the check.” He was referring to a $100 million loan that
was cancelled by the World Bank in 2005, when Correa was finance minister.
At the time, the matter ended with his resignation.
Ecuador is the second largest
oil exporter in Latin America, after Venezuela. Nearly 40 percent of
its export earnings and one-third of its income are derived from oil.
Yet, more than half of its 13 million inhabitants live in poverty. In
an attempt to address this imbalance, in 2005 Correa, then Minister
of Finance, urged Ecuador’s congress to modify a fund that was
established in 2002 at the behest of the International Monetary Fund
(IMF) to collect and distribute part of Ecuador’s oil revenue.
The fund was initially structured to allocate 70 percent of its resources
to service Ecuador’s foreign debt—debt to international
lenders including the World Bank. The remaining 30 percent was destined
toward stabilizing oil revenues (20 percent), and to improve health
and education (10 percent). The World Bank estimated that from 2003
to 2007, the Fund would be able to generate over $1.5 billion for foreign
Congressional reform of the
oil revenue fund increased the amount used for health and education
to 30 percent and consequently lowered that for debt repayment to 50
percent. The change was hardly a radical shift, as the largest portion
of the fund continued to go to Ecuador’s creditors. But that was
not acceptable to the World Bank, who responded to Ecuador’s action
by canceling the previously approved loan.
The World Bank’s arm-twisting
tactics aren’t new, and its motivation was clearly to ensure that
Ecuador continued to produce oil to generate resources to pay its debt.
Bringing development to the country, and its people out of poverty takes
a far second place. The World Bank has shown its true colors not only
in Ecuador but also in the rest of the poor, indebted and resource-rich
world. This was going on long before Wolfowitz’s misdeeds and
is a far more serious problem.
Correa has stated that his country reserves the right to bring official
charges against the World Bank for damages caused by the cancellation
of the $100 million loan. His government plans to look more closely
at World Bank loans taken out by previous administrations.
Bank of the South
The increasing frustration
with traditional multilateral financing options has led some governments
to begin thinking about alternatives to fulfill their financing needs,
while at the same time breaking their dependence on capital—and
influence—from the United States and Europe. At the same time
that the World Bank is suffering its most damaging scandal to date,
plans for an alternative regional bank are advancing quickly.
Earlier this year, Venezuela
and Argentina launched the new “Banco del Sur” (Bank of
the South), pledging more than $ 1 billion to get the institution up
and running in the next few months. Although the details are currently
being worked out (a 90-day deadline has been established to define some
basic operating rules) several other countries have agreed to join:
Brazil, Bolivia, Ecuador and Paraguay will also be founding members.
Additionally, Nicaragua, several Caribbean countries and even a few
Asian nations have expressed interest in participating in the new multilateral
The Bank of the South’s
creation underscores the severity of the disenchantment with the traditional
U.S.-dominated instruments for development finance. From the World Bank
to the Inter-American Development Bank (IDB) (which provides financing
exclusively in Latin America and the Caribbean), voting privileges are
based on financial contribution, which makes the U.S. Treasury the single
largest shareholder, bringing with it the largest share of the vote.
In the IDB, the U.S. not only “owns” a whopping 30 percent
of the vote, but it also holds veto power—an advantage to which
no other member is privy.
In a clear departure from
this undemocratic and paternalistic governance structure, Banco del
Sur promoters assure, as Cabezas has said, that in the new institution
“no one will be the sole owner.” Although not fully defined,
there has been indication that voting power will be based on financial
need, rather than monetary contribution or political weight. But beyond
the critical structural and political delineation, the real challenge
will be to create an institution that does not only look different than
its predecessors but that it actually thinks and acts differently. This
means that member countries will need to think long and hard about how
development will be defined and how it will best be achieved.
Beyond the Hypocrisy
Regardless of what happens
to Wolfowitz or his girlfriend, the World Bank will continue in its
downward spiraling crisis of legitimacy, at least in Latin America.
As countries are able to mobilize the necessary resources to free themselves
from financial obligations with the institution, they are likely to
make this a priority. So too, will they continue to collaborate in finding
new ways to solve the region’s poverty and other plights without
turning to the World Bank—but rather by devising innovative arrangements
such as bartering (i.e. oil for doctors, as in the case of Venezuela
and Cuba), and by catalyzing existing resources through the Bank of
the South and other regional institutions.
Nadia Martinez was born and raised in Panama. She co-directs
the Sustainable Energy and Economy
Network, a project of the Institute for Policy Studies
and is a contributor to Foreign
Policy In Focus.
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