The Wall Street Journal
Copyright (c) 1987, Dow Jones & Co., Inc.
Wednesday, September 23, 1987
World Bank Confidentially Damns Itself
By James Bovard

The World Bank is preparing to ask the U.S. for an
additional $10 billion in cash and guarantees to expand its
lending. The bank claims that it must boost its lending in
order to encourage market-oriented reforms in Third World
countries. But the bank's own confidential reports reveal
that its structural-adjustment program has been a dismal

World Bank President Barber Conable and other bank
officials are now preaching a private-sector gospel,
stressing that the private sector is the key to economic
growth and a strong future. They are right on this score --
and it is good that someone at the bank finally recognizes
the true source of economic growth.

But every time the bank loudly praises the private sector,
it silently damns its own record. The bank financed and
approved the massive expansion of government power throughout
the Third World. A 1987 World Bank study by Keith Marsden and
Therese Belot implied that World Bank aid and other foreign
aid was a major culprit in the nationalization of African
economies: "Foreign loans have reinforced the heavy public
sector bias of African investments."

The bank's flagship structural-adjustment lending (SAL)
program was launched in 1980 to encourage policy reform. SALs
have allowed the bank to greatly increase its loans in the

But, SALs are often used to perpetuate government control
rather to induce pro-market reforms. A 1986 confidential
study surveyed 10 countries that received SALs and concluded
that only two countries substantially reduced their budget
deficits. The report noted that "not infrequently," World
Bank officers were more interested in preparing new loans
than in supervising the structural-adjustment process.

What have SALs gone for? In the Ivory Coast, the SAL was
used to pay the debts of floundering government enterprises.
In Senegal, the SAL bankrolled the budgets of
government-owned agricultural companies. In Pakistan, bank
aid was used to "rationalize" state-owned companies, but
auditors concluded that efficiency had not been increased and
that the companies are still inefficient and losing money.

The 1986 report noted, "Under most of the 15 SALs in the
10 countries, restrictions placed on the use of SAL funds
were minimal." It appears that most of the money was used to
conduct business as usual, thus perpetuating government
waste. The World Bank encourages recipient governments to
spend SALs for export subsidies -- which only perpetuates
distortions in the domestic economy.

The bank has a very generous measure of success of its
SALs. The bank officially judged Bolivia "to have complied
with the spirit of the Loan Agreement" in the early 1980s,
though bank auditors disagreed, concluding that the SAL "was
unsuccessful; reforms were minimal and short-lived."

The SALs' timid efforts to require reform are often
defeated because governments can easily acquire foreign aid
elsewhere. The 1986 bank report noted: "The availability of
alternative financial sources, often without strict
conditionality [including other loans from the World Bank],
reduces the need for the bank to provide a SAL. . . . In
Jamaica and Senegal, availability of substantial foreign aid
led governments to decide initially that it was not necessary
to devalue or to substantially reduce budget deficits."

A 1985 confidential bank report by leading development
expert Elliot Berg and consultant Alan Batchelder concluded:
"The SAL's seemingly hard and all-encompassing conditionality
is largely illusory . . . the Bank must shrink from the
ultimate sanction, cancellation. Cessation of disbursements
is too strong a response by the Bank to banal acts of
non-performance. In the one case where it was done (Senegal)
the SAL was replaced by new [World Bank] credits."

SALs often neglect key problems because of World Bank fear
of offending the recipient government. One bank official who
has worked extensively with SALs complained that the Mexican
structural adjustment loan made no mention of imposing limits
on corruption or on capital flight -- two of Mexico's biggest
problems. The bank reportedly did not even push Mexico to
install a decent auditing system to control graft.

Yugoslavia received a $275 million structural-adjustment
loan in 1983 to improve "the efficiency and competitiveness
of the economy." But the Yugoslavian economy today is a
shambles, with hyperinflation, high unemployment and
oppressive debt. A 1987 World Bank report concluded that
"real interest rates are still negative, and the intended
reforms related to financial discipline, investment criteria
and foreign exchange and credit allocation are not yet in

Most bank project loans also fail to spur reform. A 1985
bank audit report concluded that, though most recipient
governments promise to make reforms when borrowing bank
money, the promised reforms are rarely made, and that "a
typical reaction by the Bank" to noncompliance has been to
conclude that additional loans are necessary to further
encourage policy reform.

The bank recently gave Jamaica $34 million to reform its
government sugar estates, the latest in a series of loans
since 1978. The bank's press release claimed, "Since the
early 1980s, the government has been implementing a major
rationalization of the state-owned sugar industry as part of
its broader economic adjustment effort in order to make it
financially viable." Yet, a 1985 confidential World Bank
report on Jamaica concluded, "Despite major effort, little
progress has been made at improving management of the
government's sugar estates."

Some foreign-aid advocates imply that a wave of
privatization is sweeping the Third World. But a recent 1987
bank study on privatization "found few instances of formal
liquidations in the 28 countries reviewed. . . . Sales of
large numbers of enterprises are also few, occurring in only
two countries, Chile and Bangladesh."

The bank cannot force governments to reform because the
bank is often more eager to lend than Third World governments
are to borrow. A 1987 bank audit report concluded that some
bank projects suffered from "an unseemly pressure to lend,"
and that Third World governments have been pressured by bank
officers to borrow money for projects that later turned out
to be fiascos.

As more and more countries receive SALs, the bank will
likely be able to find a few success stories. Thailand and
Turkey received SALs after they had begun pro-market reforms.
But the vast majority of SAL recipients continue to have
self-defeating economic policies before, during, and after
their SALs.

As the 1985 Berg-Batchelder study concluded: "Why don't
governments change the policies that are holding back their
development? . . . What has money got to do with all this
anyway? Why do external donors have to pay money to induce
LDC governments to do things that we (and presumably they)
believe will make them better off?"

The vast majority of pro-market reforms do not require
foreign cash to implement. If governments would only respect
the lives and property of their citizens, allow people to
start their own businesses, and roll back bureaucratic
control, then countries could boost their living standards
without boosting their debt load.

If the bank is serious about providing capital only to
countries following productive economic policies, how can it
justify giving a single dollar to Ethiopia? The bank recently
lent Ethiopia $14 million for, among other things,
"institutional development of the Ministry of Agriculture."
But the ministry is heavily involved in the government's
murderous villagization program, whereby the Marxist rulers
are trying to force 33 million peasants (three-quarters of
the population) to move their homes and live in
government-supervised villages. This is economic development?

If the U.S. does pledge an additional $10 billion for the
bank, one of the major beneficiaries could be the Soviet
Union, which is currently seeking access to bank-subsidized
loans. Barber Conable stated last fall that he would be
"happy" to consider Soviet membership, and Undersecretary of
State John Whitehead said in March that the U.S. "would like
to see the Soviet Union become a member of" the World Bank,
the IMF and GATT.

Has the World Bank helped the Third World? Some countries
have benefited -- but most of the long-term aid recipients
have ended up with heavy debt loads, swollen public sectors
and overvalued exchange rates. Instead of spurring reform,
most aid has simply allowed governments to perpetuate their

If the bank has not straightened out Third World economic
policies after handing out over a hundred billion dollars,
why should we trust it with more money?