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The World Bank Needs Critical Reforms Before It's Allowed to Saddle the Developing World with more Debt

by Brady Yauch

Since the early 90s the amount of loans from the World Bank to the developing world—particularly Africa—have either declined or stagnated.

The World Bank—down on its luck after years of neglect and criticism—is using the tag-team duo of the Great Recession and Global Warming to once again make its presence felt on the international development scene. The ramifications of such a revival should not be ignored, as billions of citizens in the developing world may once again find themselves straddled with crippling levels of debt—debt that their irresponsible leaders have taken upon themselves to graciously accept.

After decades of fierce criticism from opponents, the Bank was forced to watch as its reach and prestige in the developing world began to fade in the 90s and into this decade. In its place came private investment and new money from emerging powers in the Middle East and China. In fact, many believed the World Bank's decision two years ago to team up with China on infrastructure projects in Africa was merely a way to avoid competing with the Asian powerhouse for influence on the continent. A competition that most believe the Bank—with its abysmal track record—would lose.

With the World Bank's status in the developing world beginning to slip, so too did its ability to shovel money out of the door. Since the early 90s the amount of loans from the Bank to the developing world—particularly Africa—have either declined or stagnated, while at the same time many of the economies in the developing world have been able to post blistering economic gains.

In fact, some of the most destitute areas in the world, such as Sub-Sahara Africa, have posted stronger GDP growth over the past decade than the G7. And yet they were able to do so relying less on the help of the Bank, and instead, raising more revenue from taxation and other internal measures, as well as assistance from other aid agencies.

Take the African continent as an example.

Many economies on the continent have been posting GDP growth of 6% or 7% annually. And stock-market returns over the past three years have been, in some cases, astounding: 47% in Zambia, 67% in Mauritius and 155% in Malawi. Are donor countries aware that these countries were able to post such stunning economic growth figures, even as the amount of cash from multilateral institutions like the World Bank continued to fall?

Almost a decade of shrinking debt accumulation and strong economic growth by countries in Africa, particularly in Sub-Sahara Africa, may soon be for nothing if the countries are again saddled with an insurmountable level of debt. But this is exactly what is happening, as World Bank president Robert Zoellick embarks on fund-raising tours across the developed world. At meetings in Turkey he claimed that if donor countries don't increase their funding levels, the Bank may soon run out of money.

The catastrophes being used by Zoellick and company to excuse the Bank's new-found rigor are climate change and "the Great Recession." Gone are the days, it seems, when emerging economies would look to the private sector for money in order to finance development projects. With the billions of dollars of easy money being pumped out of the World Bank, why would they?

And the sum of money is staggering—even though it doesn't compare with the stimulus packages announced by governments in the developed world over the past year. For the 2009 fiscal year that ended in June, the World Bank said it doled out a record $13 billion through its International Development Association (IDA)—about $2 billion more than last year. Through its International Bank for Reconstruction and Development (IBRD), the bank expects to loan about $33 billion—almost triple last year's total.

This money is “good money” if you buy the Bank's PR campaign that the developing world will get the short end of the environmental and economic stick. But there is every reason to believe that both of these crises are being used to create an atmosphere of chaos, in which the Bank can step in and act as the knight in shining armor.

In its recent report, the Bank admitted that disasters can provide what it calls “focusing events” that can be used to implement rapid policy change. It cited examples such as the 2003 heat wave in Europe, Hurricane Katrina and this year's wildfires in Australia as the types of occurrences that can be used to increase climate change awareness. The kicker: in the developing world these events can be used to implement policy changes that would be unpopular in “normal times.”

And if these climate change policies are implemented, the Bank is going to need more money—astronomically more money. In the report, it said climate change mitigation measures for developing countries would cost $400 billion a year over the next 20 years. Current development assistance amounts to a (measly) $100 billion a year.

Pumping an additional $300 billion a year into the developing world will only lead to an insurmountable level of debt for its residents. It's only a matter of time until developing countries begin defaulting on these loans. Expect to hear cries of yet another debt crisis.

In the wake of the financial crisis, the language from the Bank was no different. Because of the crisis, the Bank claims, an additional 90 million residents in the developing world will be pushed into poverty. In order to deal with this problem, the Bank set up a crisis lending facility, which poured money into the coffers of governments across the developing world, yet did so without the strings-attached policy that has been forced on it after years of corruption and allegations of waste.

The World Bank helped create a massive debt crisis in the 1980s and 1990s. If it's left to its own devices, it will, yet again, pile a crippling level of debt on the developing world.

The World Bank helped create a massive debt crisis in the 1980s and 1990s. If it's left to its own devices, it will, yet again, pile a crippling level of debt on the developing world. The Bank is back on the radar—there's no doubt about that. Only this time it's using the twin crises of climate change and the Great Recession to bait governments to join its feeding frenzy.

But hopefully things won't be so easy this time around for the Bank. U.S. Treasury Secretary Tim Geithner recently said that the World Bank would have to pursue some “critical reforms," including greater public disclosure of its activities, before the United States would consider handing over the cash. That, at least, would be a start.

Brady Yauch is a research consultant for Probe International, an international aid watchdog. He holds a master's degree in cultural politics from the University of Edinburgh and has worked as a business reporter as well as a freelance writer. His work has been published in the Washington Post and China Daily, among others. Visit his blog.

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This story was published on October 15, 2009.