The Heritage Foundation

Backgrounder #649 on Economy

May 23, 1988

May 23, 1988 | Backgrounder on Economy

World Bank Snookers U.S. Congress Again


(Archived document, may contain errors)

649 May23,1988 WORLD BANK SNOOKERS U.S. CONGRESS, AGAIN I NTRODUCTION This year Congress is being asked by the Reagan Administration to approve an extra $14 billion in cash and guarantees for the World Bank. This would be the United States contribution to the World Bank's $74.8 byon "general capital increase Thi s increase would nearly double the size of the Bank. Congress has good reason to view unfavorably this gargantuan increase in the Bank's size. As it is, Congress already is very concerned about the failure of World Bank lending to promote economic growth i n less developed countries (LDCs In addition, Congress has questioned whether World Bank lending serves other U.S. economic, political, and ethical interests. As a result, Congress, through explicit legislation, has directed the U.S. executive director at t he World Bank and other multilateral development banks to oppose loans, for example, to foreign industries that compete directly with U.S. enterprises or toxountries that abuse the human rights of their citizens? Yet all of Congress' efforts have failed t o stop such lending Ignoring U.S. Views. In the most recent five years for which data have been assembled U.S. fiscal years 1983-1987 all 73 loans of the World Bank Group which the U.S. has opposed, through either abstention or voting 'ho," nonetheless wer e approved by the Bank see table). These loans, which are contrary to U.S. interests, total over $5 billionh World Bank commitments; of this, the U.S. share is approximately $1 billion. Similarly, in the 1 Current capital stock of the

year old Internation al Bank for Reconstruction and Development (IBRD totals billion. The capital increase would boost subscribed capital to $171 billion. The general capital increase is for the IBRD, the main body in the World Bank" Group. The International Development Assoc i ation (IDA and the International Finance Corporation (IFC mates are funded separately explicitly targeted, such as the potential displacement of foreigq private capital or the inappropriate macro-economic policies of the recipient 2 In addition, the U.S. e xecutive director also frequently opposes loans out of concerns Congress has not 1978 to 1982 period, another 74 loans were approved over U.S. opposition. Countless other loans that the U.S. did support with its vote, moreover, have been contrary to susta inable economic development and private sector growth in the Third World.

U.S. Treasury officials argue that more money for the World Bank serves U.S. interests since America's influence at the Bank is substantial. The evidence contradicts this. Were this true, one would expect that at least a few loans opposed by. the U.S. would have been blocked. Instead, the World Bank consistently opposes U.S. interests as legislated by Congress. Until it can remedy this situation, Congress should question the wisdom o f giving 14 billion more in U.S. taxpayer funds and commitments to the World Bank A RECORD OF ECONOMIC FAILURES The World Bank was established in 1944 as a lender of last resort for the reconstruction of Europe after World War II. In the 1960s and 1970s, t h e Bank turned increasingly to LDCs in Latin America; Africa and Asia. Bank officials maintained that providing these governments with massive transfers of wealth from the industrial Western countries would produce economic growth and prosperity. In fact, World Bank loans and the policies that they supported promoted mainly wasteful, money-losing public works projects irresponsible LDC spending policies, and a trillion-dollar debt crisis in the Third World.

Congress understandably has been concerned about the ,World Bank's failed policies.

The Chairman of the House of Representatives Banking Subcommittee on International Development Institutions and Finance, Walter E. Fauntroy, the District of Columbia Democrat, recently observed of the Bank's policy loans that ''the track record has not been brilliant thus far and the Bank has been constrained to offer various explanations as to why so many of its adjustment programs have failed.'I3 A good.part-of this explanation lies in the fact that most Bank funds supp ort government projects and enterprises. This is true even of the new and presumably reformist "policy-based loans that are supposed to be made onlyif recipient countries alter their.economic policies.

Typical bank loans have gone to a Peruvian government gold mine, the Mexican state steel sector, the Hungarian government's railroad, the Indian government's coal mines petroleum finance for the government of Yugoslavia, and funds for rural collectives in the People's Republic of China SUBSIDIES FOR HUMAN RI G HTS ABUSERS Many Third World and all East bloc countries abuse the human rights of their citizens as a matter of national policy. As a means to uphold the principles of justice for which the U.S. stands, Congress in 1977 mandated that the U.S. executive d i rector at the World Bank as well as U.S. representatives at the other multilateral development banks, oppose loans to countries that violate human rights! Yet numerous World Bank loans, approved over U.S 3 Opening statement at the House Banking subcommitt e e's May 4' 1988 hearing on "A General Capital 4 International Financial Institutions Act of 1977, sec. 701(a) and (e Harkm amendment Increase for the World Bank: Policy Based Lending and the World Bank 2 opposition, provide considerable assistance to regi mes with notorious records of human rights violations. Example: the Marxist military government of Ethiopian dictator Mengistu Haile Mariam has received over 600 million in loans from the Bank since 19

79. During that period, over 4 million villagers were uprooted forcibly from their rural homes in eastern Ethiopia and relocated on collective farms? The government intends to have relocated nearly all of Ethiopia's 30 million rural dwellers by the mid-1990s. Very often villagers resist the move, and this is met with violence, beatings, rapes, and death Falling Teff Output. Still another Mengistu program this one launched in 1984 has forcibly resettled 600,000 northern Ethiopians in the south. The French relief organiza ion Doctors Without Borders, estimates that 100,OOO Ethiopians died during resettlement.

After an international outcry, the program was suspended during 1986 and 19

87. But Mengistu restarted the program,last December and intends to resettle another 300,000 people in 19

88. Last January, the World Bank approved another $70 million for Ethiopia over U.S. objections.

Aside from their brutality, Mengistu's programs also have been an economic disaster.

Production of teff, Ethiopia's main food grain, fell by 60 percent between 1975 and 1982 while reserves that might have forestalled famine evaporated? Some three million residents of Eritrea and Tigre provinces now face starvation for the second time in four years d Loans for Laos, Syria, Uganda. Similarly, in Laos, the government received a $15 m i llion World Bank loan in 1981, despite its detention of thousands of political prison rs in re-education" camps, where many have starved or been executed for trying to escape. 8 In Syria, President Hafez al-Assad's February 1982 massacre of 20,000 members of the banned Muslim Brotherhood in Hama was followed two months later by a $22 million World Bank loan.

Uganda in 1985 received two World Bank loans worth $34 million despite the lar ge-scale human rights violations under President A. Milton Obote. An Amnesty International report 5 According to Karl Zinsmeister, a specialist on Sub-Saharan Africa and adjunct research associate at the American Enterprise Institute: "In a typical operat i on, government troops arrive in anagricultural hamlet arrest the traditional chiefs, requisition all private property (crops, livestock, tools then force the locals to break down their huts. They are then force-marched, carrying pieces of their houses on t heir backs, to a new central location which] often lacks adequate water supplies and is usually far removed from old fields. Much previously cultivated land is neglected and abandoned as a result The old sites are bull-dozed See "All the Hungry People Rea son, June 1988, p. 25. 6 Citedinibid 7 &id. 8 Reportedly, 20 camps held 15,000 prisoners in 19

80. See "Country Reports on Human Rights Practices for 1983 report submitted by the U.S. Department of State to the House Foreign Affairs Committee and the Senat e Foreign Relations Committee, February 1984, p. 827 3 released that year charged that Ugandan government security forces had been involved in 9 mass detentions, routine torture, widespread abductions, and frequent killings of prisoners FINANCING SURPLUS C OMMODITIES While free trade and international competition help all countries, government subsidies to particular industries or sectors create economic distortions and unfairly harm more competitive enterprises, including American businesses. For this reas o n, Congress mandates that the U.S. executive director at the World Bank and other multilateral development banks oppose loans for Production of any commodity for export if the commodity is in surplus on world markets and the aid will cause substantial inj u ry to U.S. producers of the same, similar or competing commodities (often referred to as the "Obey amendment");1 Establishing or expanding production for export of palm.oi1; sugar, or citrus crops if the loans will injure U.S. producers of the same, simil ar, or competing agricultural commodities 11 Production of any copper commodity for expor or for the expansion or improvement ll of any copper mining, smelting, or refining capacity.

Yet World Bank funds have gone for these purposes. Example: Brazil receiv ed $155 million in April 1986 for expanded soybean production. Example: in the same month, Zaire received $110 million for its copper industry POLITICAL GROUNDS FOR OPPOSITION Congress requires the U.S. executive director to oppose World Bank loans for a v ariety of other reasons. Loans are to be opposed to countries that 9 See "Country Reports on Human Rights Practices for 1985 pp. 358-361 10 Foreign Assistance Appropriation Act of 1979, secs. 609-610, introduced by Representative David R. Obey 11 Internat ional Financial Institutions Act of 1977, sec. 901(a introduced by Representative Dawson Mathis 12 Supplemental Appropriations Act; 1985, sec. 501 and 502(c), introduced by Senator Jake Gam, the Utah the Wisconsin Democrat the Georgia Democrat.

Republican 4 Provide refuge to individuals committing acts of international aircraft hijacking;13 Expropriate investments owned by U.S. citizens, repudiate contracts with U.S citizens or impose discriminatory taxes which have a similar confiscatory effect, unless ar r angements for prompt, adequate, and effective compensation have been made or good faith negotiations are underway; 14 Failed, in the view of the President, to take adequate steps to prevent the illegal sale of narcotics or other controlled substances to U . S. government personnel stationed in that country or to prevent the illegal entry of such drugs from that country into the U.S.15 Yet Ethiopia, despite repeated expropriation of property, continues to receive loans. In addition, Syria has received over $1 4 5 million in Bank funds and South Yemen over $130 million since the State Department in 1979 listed them as supporting terrorism SEEKING EFFECTIVE LEGISLATION Senator Robert W. Kasten, the Wisconsin Republican, has sponsored recent legislation which requi r es that the Agency for International Development enhance its "early warning system" to anticipate the potential environmental impact of-World Bank and other multilateral development bank (MDB) loans well in advance of their approval. When adverse environm e ntal impact is found likely, the U.S. executive director at the appropriate MDB is to seek project changes to eliminate the problem.16 Tliis legislation attempts to head off environmentally destructive projects, rather than specifyingigrounds foE U.S oppo s ition at the time of votes on proposed loans to the World Bank and other MDBs with his Foreign Agricultural Investment Reform FAIR) bill. Similar to but stronger than the 1979 Obey amendment;FAIR would Senator Steve Symms, the Idaho Republican, has attemp t ed to .bring some accountability 13 International Financial Institutions Act of 1977, sec. 701(a) and (e introduced by then Representative Tom Harkin, the Iowa Democrat 14 IDA 111 Act of 1972, adding sec. 12'to the 1960 IDA Act introduced by Representativ e Henry B. Gonzalez the Texas Democrat; acceptance of a non-germane amendment mandated application to the JBRD as well 15 IDA 111 Act of 1972, adding sec. 13 to the 1960 IDA Act, introduced by Representative Charles B. Rangel the New York Democrat; accepta n ce of a non-germane amendment mandated application-to the .IBRD?aias; E well If the House now votes to reject Ronald Reagan's certification of Mexico, as the Senate did last April it will have only a symbolic effect. Since all loans opposed by the U.S. at tlieWorld Bank are nevertheless approved, there is no reason to believe that Mexico will be penalized in any way as a result of this action as included in the fiscal 1988 omnibus spending bill and replicated in authorizing legislation as well 16 Sec. 537 o f the Foreign Operations, Export Financing, and Related Programs Appropriations Act, of 1988 5 require the U.S. executive director at all MDBs to oppose loans for the production of commodities that are already in world over-supply, otherwise economically u nviable, or subsidized as defined by the General Agreement on Tariffs and Trade (GATT But if the World Bank or other MDB approves such assistance over U.S. opposition, the U.S Treasury is to request a statement of policy from the MDB and may not agree to a ny capital increase or replenishment until this is forth~oming FAIR also would mandate that U.S. paid-in contributions under any subsequent capital increase or replenishment for the World Bank or other MDBs would be that level to which the U.S. originally agreed minus a penalty for every commodity loan, as defined in the bill approved over U.S. opposition." There is a danger that the contribution requested from the U.S. would be inflated, anticipating such an automatic cut. Still, FAIR is an important atte m pt to hold the World Bank accountable. The bill has passed the Senate four times in recent years, but has yet to pass the House CONCLUSION Congressional requirements that the U.S. vote against proposed World Bank loans that harm U.S. economic, political, o r ethical interests have yielded nothing. Every U.S.-opposed loan since 1977 has been approved by the WorldlBank,.annually .sending hundreds of millions of dollars in scarce resources to governments that abuse human rights export terrorism, and pursue acc e lerated production of commodities already in'world over-supply. In addition, billions of dollars in US.-supported World Bank loans annually flood the treasuries of developing countries either to finance or bail out countless state-run enterprises that pri v ate capital for good reason would not touch Using U.S. Leverage. Now the World Bank is coming hat-in-hand to Congress for $14 billion in new cash and guarantees to expand further its questionable activities. The only real leverage U.S. lawmakers seem to h ave over the Bankis to deny such new resources; In light of past congressional impotence to influence Bank policy, a denial of new funds seems to be the only way for Congress to reassert its authority.

Me1anie.S Tammen Research Associate 17 The Treasury al so may not allow the letting of any instrument or note of credit by the institution either in the 18 The aggregate penalty is calculated by projectingthe U.S. share of the funding increase for example United States or denominated in U.S. dollars 18.75 per c ent for the current general capital increase into the total amount of such commodity assistance the Bank approved during the previous funding period. For example, had the legislation been in place at the time of the recently negotiated general capital inc r ease and the approved commodity loans, as defined by FAIR, in the previous period totaled $2 billion, the U.S. would have to subtract 18.75 percent of $2 billion or $375 million from its paid-in contributions 6 hl hl E E 3 2 0 0 z z d c3 2 8 E cp p 8 z 0 a m n a m 7 B.BX B B B B B B,B 2 2 22 22 2 22 2 g g gg gg n E gg s zo zo Y Q I aa aa 3 3 pp pp n a m 00 zz no aa mm aa aa a 00 0e 0 9 10 s R no n Egg aa a mmm mm m a 0 aa aa 00 0G 11 v w c Q I E E s I 9 v w E a E 1 a 3 e n 0 z Y 0 m c 0 0 3 f s I- 8 In I E 0 2 .a c 3 E a d a Ji 52 a 12 t 0 z 0 z a 2 s 0 c I 13

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