Date: 05-03-2001

This article on development banks by East-West Center researcher Allen Clark appeared in The Honolulu Advertiser on April 15.

HONOLULU -- Despite a decrease in the number of people living in poverty, the gap between the poor and rich is growing dramatically. Poverty is the catalyst for social unrest, yet the voice of the world's 1.3 billion poor is seldom heard in deciding development projects that will have great impact on their lives. Indeed, this has been one of the common concerns of protesters gathered at meetings of international trade organizations and lending institutions such as the World Trade Organization, the World Bank and the Asian Development Bank.

Other major demands of protesters have included a call for transparency in the operations of such institutions; and consideration of the social, cultural and economic impacts of their funded projects, as well as the economic reforms demanded of recipient countries. In other words, the outside community wanted to know if the WTO and development banks really understood and cared about the impact of their actions.

Protests like the 1999 demonstration against the WTO in Seattle have indeed cast a spotlight on the projects and operations of such institutions. The Asian Development Bank will no doubt be under the same microscope during its meeting here May 7-11.

Based on their own analyses, many of the programs and policies of the development banks are seriously flawed and not responsive to the changes in the world during the last decade. A self-audit by the World Bank showed a 55-60 percent failure rate to achieve sustainable results from its projects. As would be expected, failure rates of such programs vary among individual banks. In fact, according to a study by the U.S. Congress in 1998, the ADB showed a much lower 25-30 percent failure rate. Still, the overall results are unacceptable. It must be noted, however, that the development banks are commonly referred to as the "lenders of last resort" for many programs -- a fact that partially, but not completely, accounts for these poor results.

Because of such performance, two schools of thought have emerged with respect to development banks: one that would abolish altogether such organizations, and another that would construct much improved and significantly different ones. Despite their many "warts," there are no viable alternatives to fill the role of these lending institutions, so there must be a major restructuring instead.

Before one can realistically challenge and change these institutions, it is important to understand the complex process by which their policies and programs are derived. Besides the World Bank Group (that includes the World Bank and the International Finance Corp.) and ADB, the major international and regional multilateral lending institutions are the International Monetary Fund, the Inter-American Development Bank, the African Development Bank and the European Bank for Reconstruction and Development. These banks are unlike their counterparts in the private sector: they do not have measurable "bottom" lines; they are limited in their ability to "pick and choose" the projects they fund; and their stockholder nations cannot realistically leave if performance is unacceptable.

There are three overriding groups that largely determine a development bank's policy and programs: donor nations that set broad guidelines, some even project-specific, on how and for what purposes their contributions can be used; recipient countries that develop national programs to be funded, often with the assistance of bank personnel; and the respective boards of the banks. Normally the Board of Directors for the regional development banks are individuals, 75 percent of whom are elected from member countries within the region, and 25 percent from member countries outside the region. The boards approve all policies and lending programs.

In essence, the development banks have the difficult task of trying to "serve two masters" -- the recipient country and the donor nations - and they are often in conflict with each other over what should be funded. The result is that programs often represent a less than optimal compromise.

A major deficiency in the decision process is the lack of direct input into policy and programs by the people most impacted in the project areas. This is particularly true in poverty-alleviation programs. Although designed to include the voices of multiple stakeholders, in particular those in the impacted areas, this activity is normally minimal when developing projects. This leads to the major cause of failure for bank programs: unanticipated impacts such as relocation of people in reservoir areas of dams, large-scale migration of workers for infrastructure projects, and illegal logging and narcotics trade in impacted areas.

Poor governance is another reason for high failure rates. Studies by the World Bank in Africa have shown, not surprisingly, that only when the government is committed to reform do development programs lead to economic growth and poverty alleviation. Therefore, there is a need for development banks to more carefully evaluate the commitment of borrowing governments and to discriminate among nations when lending. Unfortunately, such discrimination is virtually impossible, except in rare cases, given the structure of development banks.

The development banks have also been faced with a decade of very rapid change, particularly in the size and structure of the global economy. Private capital flows now dwarf loans from these lending institutions. Private-sector investment, however, has tended to go to projects with high profitability -- often the result of corruption, unfairly low labor costs, lenient environmental standards, and low social costs for health and education. Another important change in the world's economic structure has been the movement of the centrally planned economies of the former Soviet Union, Eastern Europe, China and Indochina (Cambodia, the Lao Peoples Democratic Republic and Vietnam) toward "free markets." The adoption of this strategy, however, has been painful and difficult. In most of these countries, with the notable exception of China, these changes forced millions more into poverty. To a large extent, the world looked to the development banks and their programs to resolve these problems. What they found in many cases was that the banks' existing policies and programs did not meet the needs of the changing world. Indeed, rather than resolving critical environmental and social problems, they were contributing to them. Often this resulted from a lack of institution-building and adequate funding to mitigate social and environmental damage stemming from projects. This occurred in many programs in the Central Asian republics.

However, the dramatic increase in poverty and inequality of the last decade are more the result of failed economic policies, continued bad national governance and increased corruption rather than programs of the development banks. Nevertheless, the lending institutions are the most visible, and their policies and programs are most often called into question.

Social and economic inequality within and among nations also results in large part because governments are not sharing the benefits of development programs with local communities. This can be accomplished through revenue-sharing between national and local governments, or by earmarking a percentage of profits for the local governments. These programs are difficult to implement and enforce and are further complicated by sovereignty issues. But without such activities, the inequalities of development will continue to be compounded.

It is important to emphasize that loans from the world's development banks last year, although still substantial, totaled about $100 billion -- less than 10 percent of direct foreign investment by transnational corporations. This statistic alone raises the question of who should bear the greater responsibility in ensuring that development projects provide for poverty alleviation: the international and regional development banks or the private sector. In most cases, private investment is held less accountable. There is a clear need to establish better accountability for both large and small transnational corporations. Many of the smaller corporations have the most egregious records for exploiting the poor, and the private sector must at least be held to the same standard as those in place for the development banks.

Nevertheless, development banks require a significant realignment of their policies and programs to meet the needs of the changing world. Those living in poverty are disenfranchised from participating in development decisions that directly impact their lives. A larger voice must be given to them with the help of non-governmental organizations and community action groups. And the banks must address the bias of donor countries, such as Japan's preference for funding physical infrastructure projects that often have the highest social and environmental costs. Banks also must address poor governance in the recipient nations and the lack of transparent decisions by their boards.

Finally, development banks and governments themselves have only in recent years started paying attention to the issue of poverty alleviation. This has largely resulted from the realization that the global community will no longer allow the world's economy to be built on the backs of the 1.3 billion people, primarily women and children, that live on less than a dollar a day.

Allen Clark is a specialist on nation-building and governance at the East-West Center. He can be reached at 944-7509 or
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