The World Bank

A Critical Primer

By Eric Toussaint, Elizabeth Anne, Vicki Briault, Bertrand Declercq, Sushovan Dhar, Judith Harris, Raghu Krishnan, Marie Lagatta, Christine Pagnoulle, Véronique Renard, Gillian Sloane-Seale, Diren Valayden, Sylvain Dropsy

Pluto Press

Copyright © 2008 Eric Toussaint
All rights reserved.
ISBN: 978-0-7453-2713-6

Contents

Acknowledgements, viii,
About this book, ix,
Abbreviations, xiii,
Terminology, xv,
Introduction, 1,
1 The creation of the Bretton Woods institutions, 9,
2 The first years of the World Bank (1946–62), 17,
3 Difficult beginnings between the UN and the World Bank, 30,
4 The post-1945 context – the Marshall Plan and US bilateral aid, 36,
5 A Bank under the influence, 43,
6 World Bank and IMF support of dictatorships, 61,
7 The World Bank and the Philippines (1946–90), 73,
8 The World Bank’s support of the dictatorship in Turkey, 78,
9 The World Bank in Indonesia – a textbook case of intervention, 82,
10 The World Bank’s theories of development, 94,
11 South Korea: the miracle unmasked, 105,
12 The debt trap, 127,
13 The World Bank saw the debt crisis looming, 142,
14 The Mexican debt crisis and the World Bank, 151,
15 The World Bank and the IMF: the creditors’ bailiffs, 160,
16 Presidents Barber Conable and Lewis Preston (1986–95), 180,
17 James Wolfensohn switches on the charm (1995–2005), 185,
18 Debates in Washington at the start of the twenty-first century, 193,
19 The World Bank’s accounts, 205,
20 Paul Wolfowitz, tenth World Bank president, 210,
21 Structural adjustment and the Washington Consensus: are they things of the past?, 214,
22 The World Bank and respect for human rights, 222,
23 Time to put an end to World Bank impunity, 237,
24 An indictment of the World Bank, 241,
Appendix: The World Bank Group fact sheet, 245,
Afterword, 253,
Glossary, 261,
Notes to the text, 271,
Bibliography, 304,
Index, 310,

CHAPTER 1

The Creation of the Bretton Woods Institutions

The United States government began to plan for the creation of international financial institutions as early as 1941, not only to prevent a recurrence of economic crises such as the crash of 1929, but also to ensure world leadership in the post-war era. The World Bank and the International Monetary Fund saw the light of day at the Bretton Woods Conference of 1944 held in Bretton Woods, New Hampshire. Initially, the Roosevelt administration was in favour of creating strong institutions capable of imposing rules on the private financial sector, including Wall Street. But noticing the hostility of the banking world, Roosevelt backed down. Indeed, the distribution of votes within the World Bank and the International Monetary Fund clearly illustrates the will of certain major powers to exert domination over the rest of the world.

IN THE BEGINNING

It was in 1941, the year the United States entered the Second World War, that discussions were initiated concerning the international institutions to be set up once this major conflict was over. In May 1942, the chief international economist at the US Treasury, Harry White, presented Franklin Roosevelt with a blueprint entitled Plan for a United and Associated Nations Stabilization Fund and a Bank for Reconstruction and Development of the United Nations. One of its objectives was to convince the allied nations currently at war with the Axis powers (Germany, Italy, Japan) that once peace was established, certain systems would need to be adopted to prevent the world economy entering a depression similar to that of the 1930s. Between 1941 and July 1944, when the Bretton Woods Conference assembled, several of the proposals contained in the initial plan were abandoned. But one of them came to fruition: the creation of the IMF (International Monetary Fund) and the IBRD (International Bank for Reconstruction and Development), better known as the World Bank.

To understand fully the roles attributed to these two institutions, we must go back to the late 1920s and the 1930s. The severe economic depression that gripped the United States during this period had a profound effect on world capitalism in general. One of the consequences was that in 1931 Germany ceased repaying its war debt to France, Belgium, Italy and Great Britain. In a domino effect, these countries stopped repayment of their external debt to the United States. As for the latter, it drastically reduced capital exports in 1928 and even more in 1931. At the same time, it cut down on imports. The result was that the flow of dollars from the United States to the rest of the world dried up, and countries with debts to the world’s leading power did not have the dollars to pay it back. Nor did they have the dollars they needed to buy North American products. The machinery of world capitalism was grinding to a halt. Competitive devaluations followed as each country attempted to win market share at the expense of the others. The developed capitalist world was caught in a downward spiral.

In 1932, John Maynard Keynes made this ironic remark about the attitude of the United States:

The rest of the world owes them money. They will not take payment in goods; they will not take it in bonds; they have already all the gold there is. The puzzle which they have set to the rest of the world admits logically of only one solution, namely, that some way must be found of doing without their exports.

One of the conclusions drawn by the United States government under Franklin Roosevelt (US President from 1933 to 1945) was that a great creditor nation must make currency available to debtor countries to be used for repayment of their debt. Another, bolder conclusion was that in certain cases, it was preferable to offer donations instead of loans if a state wanted its exporting industries to gain maximum and lasting profit. This question will be dealt with later in chapter 4 on the Marshall Plan for the reconstruction of Europe (1948–51).

Let us take a closer look at the 1930s before going on to discuss the creation of the Bretton Woods institutions during the Second World War.

CREATION OF THE EXPORT-IMPORT BANK OF WASHINGTON (1934)

The Export-Import Bank of Washington (the US public agency for export credit, later called Eximbank) was created in 1934 to protect and promote US exporters. It guaranteed US exports and at the same time granted long-term credit to foreign buyers for the purchase of US goods and services. Each dollar lent had to be spent on merchandise produced in the United States. The Export-Import Bank released funds only on receipt of proof of shipment of goods abroad. At the start, the total amount of loans granted by the bank was a modest one: US$60 million in the first five years. But the volume of loans increased rapidly from then on. In 1940, the bank’s lending capacity was $200 million, and in 1945 it had reached $3,500 million. During its first years of operation, the Export-Import Bank targeted Latin America and the Caribbean, China and Finland, a reflection not only of the economic but also of the geostrategic interests at stake.

CREATION OF THE INTER-AMERICAN BANK (1940)

In 1940, another financial instrument was created: the Inter-American Bank. This was an inter-state bank founded on US initiative in the context of the Pan-American Union (the ancestor of the Organization of American States (OAS)). The original members included Bolivia, Brazil, the Dominican Republic, Ecuador, Mexico, Nicaragua, Paraguay and the United States. In some respects this bank was the forerunner of the World Bank, which came into being four years later.

The main architect on the US side was a fervent partisan of public intervention in the economy, an advocate of the New Deal: Emilio Collado, number two in the Department of State. He played a prominent role in the discussions leading up to the Bretton Woods Conference, and in 1944 was appointed US first executive director of the World Bank. The Department of State was not the only player involved in the launch of the Inter-American Bank. The US Treasury was also represented in the persons of Henry Morgenthau and his assistant, Harry White.

Four basic reasons led the Roosevelt administration to approve the creation of the Inter-American Bank.

First, the government realized that it must not only lend money to foreign buyers of US products, but that it must also buy exports from those to whom it wished to sell its goods. Nazi Germany, with its dominance over part of Europe, was in the process of buying goods from, and investing in, Latin America. The establishment of the Inter-American Bank would tighten the bonds between the United States and all its Southern neighbours.

Second, Washington considered that it could not count on the US private financial sector to lend capital to countries south of the Rio Grande when 14 Latin American countries were in partial or total default on payment of their external debt. In Washington’s view, the big US banks were responsible for the 1929 crisis and its continuing effects. The creation of a public agency would enable the government to take serious action.

Third, to convince the governments of Latin America to actively engage in reinforced relations with the United States, they must be offered an instrument, which, officially at least, pursued objectives not directly answerable to the United States. A.A. Berle, deputy secretary of the Department of State, put it plainly:

In the past, movements of capital have been regarded as, frankly, imperialist. They usually led later to difficulties of one sort and another. The other country did not like to pay; the interests built up were frequently supposed to be tyrannous. We are still liquidating many of the nineteenth-century messes which were occasioned by the somewhat violent and not too enlightened moves of capital.

Fourth, a bank had to be set up in which the borrowing countries played a part and had a voice. The reasoning was very simple: if borrowers were to repay their debts, they had better be part of the bank. The same principle was applied when planning the creation of the World Bank and the IMF.

As regards the distribution of votes within the Inter-American Bank, the criteria used were subsequently to be adopted by the World Bank and the IMF. The ‘one country, one vote’ principle was rejected in favour of a voting system based on the economic weight of a country (in this case, export volume).

The system implied an extra bonus for Latin American countries: the existence of a multilateral banking institution would protect them from strong-arm tactics on the part of creditors anxious to recover their funds. After all, it was not so very long ago that the United States and other powerful creditors had recourse either to military intervention or to direct control on customs and tax administration of indebted countries in order to recover what they claimed as their due.

It should be noted that the firm attitude of a large number of Latin American countries (14 in all, including Brazil, Mexico, Colombia, Chile, Peru and Bolivia), which had decided to discontinue, either totally or partially, repayment of their external debt, scored a resounding victory. Three positive results ensued: their economic growth was higher than that in countries that continued to repay the debt; they won back a significant degree of autonomy vis-à-vis the rich countries; and, far from being excluded from sources of financing, they were wooed by various governments in the North eager to offer them public financing. An instructive lesson in the advantages of standing one’s ground.

DISCUSSIONS WITH THE ROOSEVELT ADMINISTRATION

As of 1942, the Roosevelt administration pursued discussions concerning the economic and financial order to be established after the war. A number of ideas were regularly tabled on the subject of debt and capital movements: it was considered advisable to set up a number of public, multilateral institutions, which, to counteract the risky nature of private international investments, would provide public capital. These institutions should ‘police international investment by private capital, so as to provide judicial and arbitral facilities for settlements of disputes between creditor and debtor, and to remove the danger of the use by creditor countries of their claims as a basis for illegitimate political or military or economic demands’ (excerpt from a memorandum of the Council on Foreign Relations dated 1 April 1942).

AN AMBITIOUS PROJECT PROPOSED BY HARRY WHITE

As mentioned above, in 1941 Harry White at the Treasury was already preparing the groundwork for a plan to set up two major multilateral institutions. Franklin Roosevelt received a first draft in May 1942 based on the premise that before the war ended, it would be necessary to set up an Exchange Rate Stabilization Fund (the future International Monetary Fund) and an international bank to provide capital. White explained: ‘Two separate, though linked agencies would be better than one, since one agency dealing with both tasks would have too much power and would run the risk of greater errors of judgment.’ The Fund and the Bank would bring together all nations, starting with the Allies. The relative weight of each member nation would be a function of its economic weight. Borrower countries would belong to the Bank, as this would motivate them to repay their loans. The two institutions would favour policies designed to ensure full employment.

The Fund would work to stabilize exchange rates, bring about a gradual discontinuance of exchange controls and the end of export subsidies. As for the Bank, it would provide capital for the reconstruction of the countries affected by the war and for the development of backward regions; it would help stabilize commodity prices. The Bank would lend money from its own capital and have its own currency: the unitas.

Harry White’s ambitious project was drastically cut down to size in the years to come. Wall Street and the Republican Party were particularly hostile to several fundamental aspects of the White plan. They wanted nothing to do with two strong public institutions designed to regulate the flow of private capital, and which would in fact be in competition with them. Franklin Roosevelt decided to come to terms with them, with the result that in 1945, Congress eventually ratified, by a large majority, the Bretton Woods agreements of July 1944. The concessions made by Roosevelt were generous to the point of changing the nature of the original plan. Yet Wall Street effectively withheld its support of the Bank and the Fund until 1947.

Among the original proposals10 withdrawn before the Bretton Woods conference were:

• The creation of a currency specific to the Bank. As we have seen, Harry White proposed calling it the unitas. John Maynard Keynes had meanwhile made a similar proposal, the bancor, which was no more successful.

• The Bank’s use of its own capital when making loans. It was finally decided that the Bank would borrow the capital it needed to make loans from the private banking sector.

• The stabilization of commodity prices.

The two most influential countries in discussions with the US about the adoption of a final proposal were Great Britain and the USSR. Great Britain demanded privileged terms from Washington. For Churchill, any negotiation between Washington and London must be bilateral and secret. Washington preferred to negotiate with all the Allies separately, on the divide-and-rule principle.

It seems that Franklin Roosevelt, seconded by Harry White and Henry Morgenthau (Secretary of the Treasury), genuinely wished to guarantee Soviet Russia’s participation in the establishment of the Bank and the Fund. In January 1944 Morgenthau publicly disclosed that two Soviet delegates had arrived in Washington to discuss the creation of these two institutions.

THE GEOPOLITICAL AND GEOSTRATEGIC DIMENSION

Between 1 and 22 July 1944, the United Nations Monetary and Financial Conference, better known as the Bretton Woods Conference, was attended by representatives from 44 countries.

The United States delegation was headed by Henry Morgenthau and Harry White, the British delegation by Lord John Maynard Keynes. These two delegations directed the work of the conference.

The Soviets were also in attendance. As a result of bargaining between Washington, Moscow and London, the USSR was to obtain third place in terms of voting rights, whereas it had wanted second place. Finally, Moscow did not ratify the final agreements and in 1947, at the UN General Assembly, denounced the Bretton Woods institutions as ‘branches of Wall Street’. For the Soviet representative, the World Bank was ‘subordinated to political purposes which make it the instrument of one great power’.

The distribution of votes clearly reflected US and British dominance over the two institutions and painted a telling picture of the balance of power in the Allied camp (not counting the USSR) immediately after the war. In 1947, these two countries together had almost 50 per cent of the votes (34.23 per cent for the United States and 14.17 per cent for the United Kingdom on 30 August 1947).

(Continues…)Excerpted from The World Bank by Eric Toussaint, Elizabeth Anne, Vicki Briault, Bertrand Declercq, Sushovan Dhar, Judith Harris, Raghu Krishnan, Marie Lagatta, Christine Pagnoulle, Véronique Renard, Gillian Sloane-Seale, Diren Valayden, Sylvain Dropsy. Copyright © 2008 Eric Toussaint. Excerpted by permission of Pluto Press.
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