Wall Street Journal
Tuesday, June 21, 1988
World Bank Unit's Lip Service to Private Sector
By James Bovard
Treasury Secretary James Baker lauds the International
Finance Corporation, the private-sector affiliate of the
World Bank, as "the flagship of the private sector in the
Third World." The World Bank is lobbying Congress for an
additional $14 billion U.S. commitment to expand World Bank
lending, and the IFC is seen as a model for what an expanded
World Bank could do. But many, if not most, IFC loans go to
government-controlled enterprises and the IFC has a growing
enthusiasm for investing in Communist countries.
According to Sir William Ryrie, the IFC's chief executive
officer under titular head Barber Conable, "The main
initiative and drive and the bulk of the capital required
[for IFC investments] must come from the private sector."
Yet, the IFC invested $17 million in an automobile plant in
China in 1985 where the only private-sector involvement was a
stake of less than 10% held by Peugeot. Private foreign
investment in China has nosedived in very recent years due to
increased Chinese government restrictions on foreign
investors. Yet, according to Toerstein Stephansen, director
of the IFC's Asian/Pacific branch, "Money is available and we
can, each year, provide up to $100 million in investment to
projects in China."
The largest recipient of IFC loans is Yugoslavia, with
almost $400 million in such aid. Yet Yugoslavia's private
sector has fallen, according to Radio Free Europe, from 27%
of gross national product in 1962 to 5% in 1986.
The IFC has invested heavily in the Yugoslavian banking
system, and thus is likely eventually to show losses from
last year's banking collapse, as well as from the nation's
inflation rate of as much as 200%. (Until recently,
Yugoslavian government controls held interest rates on loans
at rates far below the inflation rate).
Despite the IFC's purported commitment to private
enterprise, it recently invested $3.2 million to help set up
a new government-controlled bank in Hungary to make loans to
state-owned enterprises and cooperatives -- and this at a
time when the Hungarian government levied heavy new taxes on
the limited private enterprises that do exist.
The IFC is eager to begin lending to Poland, as a March 24
confidential project analysis sent to the chairman of the
IFC's Investment Committee shows. In it, Douglas Gustafson,
the IFC's director of investment for Europe and the Middle
East, says of a proposed $18 million loan to a Polish fruit
and vegetable cooperative:
"Given the continuing uncertainties about how and when the
IMF may [give aid to Poland,] there is a real danger that the
Polish authorities may become frustrated with the
international financial institutions. IFC has the possibility
to act as a bridge during this interim period, by providing a
relatively small loan and demonstrating the good intent of
the World Bank Group. . . . A fast, early investment by IFC
would have enormous effect on IFC's standing in Poland, would
demonstrate IFC to be a flexible, responsible institution and
would increase the number of investment possibilities in the
pipeline. IFC would achieve a great deal of good will by an
The World Bank wants to be loved by its bankrupt Communist
borrowers -- and also wants to maximize the "investment
possibilities" for increased World Bank handouts and growth.
Poland has a $40 billion debt that it will never repay -- yet
the World Bank is worried about winning Poland's "good will."
To maintain an appearance of private-sector orientation,
IFC loans are prohibited from being guaranteed by
governments. Yet, the Polish loan would be guaranteed by Bank
Handlowy, which is fully owned by the Polish Ministry of
Finance. The IFC skirts this requirement by claiming that
Bank Handlowy is a "commercial bank," and notes in the
project analysis: "This approach is similar to that adopted
in Yugoslavia and Hungary." The investment is justified
partly on the analysis of the borrower's net worth, which the
IFC calculates based on an exchange rate of 175 zlotys to the
dollar -- even though the black-market exchange rate in
Poland is roughly 1,300 to the dollar.
Outside of the East Bloc, many IFC projects look like
international versions of Urban Development Action Grants,
funding activities that could occur regardless of IFC
handouts. The IFC chipped in $6 million for a Ramada
Renaissance Hotel in Grenada, $7 million for a Sheraton Hotel
in Fiji, $3.6 million for the expansion of an
Intercontinental Hotel in Kenya. As with UDAGs, projects
often are justified by the number of "jobs created." An IFC
press release claimed that a $28 million IFC-supported P.T.
Bali Holiday Village resort in Indonesia would create "some
300 direct jobs." But, since the average Indonesian
per-capita income is $550, spending almost $90,000 per new
job is not quite a bargain.
IFC loans often simply underwrite partnerships between
multinational corporations and Third World governments. The
IFC lent $9 million to Yemen Hunt Oil Co. in 1985 to build a
refinery, in a project that also received a $20 million
guarantee from the U.S. Overseas Private Investment
Corporation. Hunt Oil Co. has been in partnership with the
Yemen Arab Republic since 1981 -- and it is hard to see how
providing an IFC cash injection long after the partnership
began achieved anything.
The IFC claims that 41 of its 92 investments last year
were in companies that were entirely private-sector. Yet,
many of the companies the IFC claims are completely private
have an extensive government role. In Zambia, the IFC says
Zambia Cashew Co. and the Gwembe Valley Development Co. are
completely private, but according to Cecilia Momeka of the
Zambian Embassy in Washington, the government owns 51% of
every corporation in the country. In Togo, the IFC claims
that an $850,000 loan went to a private steel mill, but the
mill actually is owned by the government and leased for 10
years to a private individual. Moreover, as part of the
leasing agreement, Togo promised to keep a 41% tariff on
In Argentina, the IFC claims that loans went to three
totally private entities in Argentina, but the Argentine
government owns stock in all three. In Ghana, the IFC claims
an oil-exploration program it is helping is private, but the
Ghanaian government owns substantial shares in the
corporation. And in China, the IFC claims that China
Investment Co. is completely private-but the company will be
investing in joint projects between the government of China
and foreign investors, which the Chinese government will
largely control. In Zimbabwe, the IFC lent $10 million to udc
Ltd., a Zimbabwean finance organization, for lending to
Zimbabwean businesses. The IFC classifies this project as
strictly private-sector. However, every loan that udc Ltd.
makes must first be approved by Zimbabwe's Ministry of
Industry and Technology or Ministry of Trade and Commerce.
Some IFC loans may actually increase political control
over the economy. The IFC has provided five loans to the
Panafrican Paper Mills in Kenya since 1970. As part of the
Kenyan government's contributions to helping the
public-private entity, it sharply increased tariffs on
imported paper. The results looked good on Panafrican's
balance sheets but clobbered the Kenyan people with higher
The IFC's 1985-89 five-year plan calls for a 7% annual
increase in loan-investment volume, currently at $1.1
billion. To meet its growth targets, the IFC is planning to
increase its investments in South Korea at a time when the
private sector is doing just fine on its own. South Korea has
already attracted a flood of foreign private investment
without the IFC, and the IFC is in Korea largely to boost its
loan and equity investments and to snare easy profits.
The IFC, along with the World Bank in general, is based on
the idea that a handout provides a stronger incentive than
sheer necessity to adopt sound economic policies. Many
economists in recipient countries disagree.
Martin Tardos, director of the Hungarian Academy of
Science's Institute of Economics, notes: "The World Bank
money has made life easier for the Hungarian government and
made it possible to avoid deep market-oriented change. The
World Bank was not setting conditions for real changes and it
accepted the rhetoric for the reality." In Poland, private
citizens have vast dollar reserves saved up in their
mattresses. Yet because they have no security for their
investments, they don't invest in Polish companies, as Jan
Vanous of Planecon Consultants in Washington observes. It is
absurd to inject dollars into a country when its own people
have no faith in the economic system.
The IFC, like the World Bank in general, has failed in its
effort to buy economic reform from Third World and Eastern
European politicians. Necessity is still the best incentive
for sound economic reform. Insofar as the World Bank reduces
the pressure of necessity without securing real reform, it
has betrayed the citizens of the Third World and East Europe.
The Wall Street Journal
Copyright (c) 1988, Dow Jones & Co., Inc.
Thursday, September 29, 1988
Letters to the Editor: International Finance Corp.'s Role
In his June 21 editorial-page article, James Bovard seeks
to portray the International Finance Corp. (and the World
Bank) as a prop to Communist governments and state-owned
enterprises. Regrettably, the article contains errors and
distortions. More significantly, it misconstrues the aims and
objectives of the IFC.
Among the errors, for example, is the statement that
"many, if not most, IFC loans go to government-controlled
enterprises." In fact, in the past three fiscal years, 92% of
all IFC investments were made in projects where the local
government was less than a majority. Fifty-nine percent had
no government involvement at all. Not only is this in keeping
with the IFC's mandate to invest in the private sector but
demonstrates its reluctance to participate in enterprises
where the host country has a majority or controlling stake.
Further, the author claims that the Argentine government
has a stake in three companies to which the IFC made recent
loans. Over the past three years the IFC has approved
transactions in 16 Argentine ventures, for a total amount of
just over $250 million; only in one of these ventures is
there any state ownership. He criticizes a loan to a
manufacturing joint venture between Peugeot and Chinese state
authorities, federal and provincial, because the Peugeot
stake was less than 10%. In fact, Peugeot holds 22% in this
venture and the IFC 8%. Moreover, as part of the arrangements
for the IFC investment, the governmental shareholders have
committed to divesting 10% of their holding to the Chinese
public; this last is part of the movement toward encouraging
domestic private share ownership. In the case of Zambia, he
quotes an embassy official confirming that the government
owns 51% of every corporation. This is simply not the case.
In the two ventures cited, Zambia Cashew Co. and Gwembe
Valley Development Co., the percentage of state ownership is
45% and 14%, respectively.
The IFC was created to support private-sector development
and over the past three decades has consistently assisted
private companies in the developing world by investing
capital, technical expertise and international experience.
There is a movement toward freer markets and market-driven
solutions for economic growth both in developing countries
and Eastern Europe. In Hungary, until recently, there was a
state monopoly in banking where the National Bank of Hungary
was both the central bank and the only commercial bank. The
IFC's assistance in establishing and investing in Unicbank
was a major step forward because it began the breakup of this
monolithic state system and opened Hungarian banking to
foreign investors from Germany and Austria.
As a part of its mandate, the IFC invests in areas where
economic and political uncertainty make others reluctant to
invest alone. Commercial-bank lending in Latin America and
Africa, for example, has virtually ceased. Yet the IFC has
been able to put together sound investments in both
continents and in the past two years we have made more than
100 investments in projects costing about $5 billion.
The world is not perfect but we are living at a time when
the private sector is being given the scope it should always
have had in many developing countries. The IFC is in the
vanguard of this process.
International Finance Corp.