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Development banking in transition : sustainable development and the World Bank Crompton, Linda C. 1993

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to the required standardDEVELOPMENT BANKING IN TRANSITION:SUSTAINABLE DEVELOPMENT AND THE WORLD BANKbyLINDA C. CROMPTONB.A., Simon Fraser University, 1987A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF ARTSinTHE FACULTY OF GRADUATE STUDIESDepartment of Political ScienceWe accept this thesis as conformingTHE UNIVERSITY OF BRITISH COLUMBIAAugust 1993© Linda C. Crompton, 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department ofThe University of British ColumbiaVancouver, CanadaDate ^Atf /-1,) c-)5DE-6 (2/88)ABSTRACTIn recent years, the World Bank, the biggest international development lender in theworld, has paid considerable attention to the issue of sustainability in its lending activity,publishing many reports on its progress. Nonetheless, private criticism over its decision-making and international resistance to many of its development projects continues togrow. The current public furore over the Bank's decision to continue funding the SardarSarovar Dam project in India's Narmada Valley, despite a condemnatory report which theBank itself commissioned, is only the most recent illustration of this contradiction. Thisthesis explores the background to this dilemma for the World Bank, in an attempt toexplain this contradiction and suggest the direction for its remedy.Beginning with a discussion of the term "sustainable development", the first chapterconcludes that, while a precise definition is still lacking, certain fundamental principleshave emerged from the debate which can be considered to form the essence of a workingdefinition. These principles effectively give voice to the call for a more contemporarydevelopment theory, for a more meaningful system of measuring human welfare thanprovided by gross national product (GNP) statistics, and for recognition of the importanceof local control of resources and freedom from debt in maintaining self-sufficiency anda decent standard of living.Given these basic tenets, the discussion then turns to a brief historical review of theiieconomic conditions leading to the formation of the World Bank in an attempt tounderstand its original mandate. This then forms the basis for appreciating the evolutionof that mandate as the World Bank responded to changing international economicconditions, then later, the debt crisis of the early 1980's and environmental pressurestoward the end of that decade.The operation of that mandate, the Bank's lending policies and practices, are the nextfocus of discussion. Turning first to the project lending which has always represented themajority of disbursements, the thesis highlights both the rationale behind the energy andforestry loans which form the backbone of the lending programme, and the documentedweaknesses of schemes like the Tropical Forestry Action Plan. The need to ensure debtrepayment following the oil price crisis of the late 1980's led to the emergence of"structural adjustment" programmes, the effects of which conclude the discussion of thechanging face of World Bank lending.In the final section the thesis delineates the various pressures on the World Bank todaywhich challenge its ability to deliver on its mandate. These pressures range fromincreasing public criticism of the human consequences of large development projects, tothe growing unpopularity of investments requiring large capital outlays and long waits forreturns, and include the potential exposure of the World Bank to the emerging lenderliability issue. None of these challenges seem likely to diminish in the near future.To deal with these challenges effectively, the thesis concludes, the World Bank must goiiibeyond developing strategic responses to them. It must begin, instead, to examine itsimplicitly Western view of progress which assumes an industrial "route to advancement"and an instrumentalist approach to nature. Rather than advocating the continuous andrapid conversion of natural resources to tradeable goods in order to create a "permanent"wealth to improve living standards, the Bank must pay attention to the growing wealth ofdata illustrating the human misery and environmental degradation that are the result.Sustainable development cannot be an "add on" to present World Bank operations, butmust rather redefine the entire context in which the organization functions. Unless anduntil this occurs, the World Bank, with its public commitment to the alleviation of povertyand ecological responsibility, will face growing evidence of its failure to meet thosecommitments.ivTABLE OF CONTENTSINTRODUCTION ^  1CHAPTER 1: THE CONCEPT OF SUSTAINABILITY ^  5The Bias of Development ^  9New System of Measurement  13Local Control and Self-Sufficiency ^  15CHAPTER 2: THE EVOLUTION OF THE WORLD BANK^ 19The Problem of Debt ^  23Banking on the Environment  28CHAPTER 3: PROJECT LENDING IN PRACTICE ^  33Energy Lending ^  35Forestry Lending  37CHAPTER 4: THE DYNAMICS OF POLICY-BASED LENDING. ^ 41CHAPTER 5: CHALLENGES AND CONTRADICTIONS ^ 47Global Economic Pressures ^  47The Growth of Poverty  49Lender Liability ^  51Growing Criticism  54Organizational Structure ^  56CONCLUSIONS ^  58ENDNOTES  61BIBLIOGRAPHY ^  63vINTRODUCTIONIt has now been twenty years since the first United Nations Conference on theHuman Environment was held in Stockholm to establish the rights of the humanfamily to a healthy and productive environment. The attendance of most of theworld's government leaders at the most recent U.N. Earth Summit Conferenceat Rio de Janeiro, held in June 1992, and the heavy publicity it received are onlythe most recent evidence that the social, economic and environmental problemsidentified two decades ago are now recognized world wide as threatening to thevery survival of that human family.A new field of intellectual enquiry is beginning to emerge as a result of theongoing and global search for a solution to the problems which threatenhumankind's common future - the study of "sustainable development". Originallypredicted to be only the fad of the moment, sustainable development has insteadproven itself as enduring and vital, broadening from a dedicated focus to includeall economic, political and ecological disciplines.The conferences, courses and published materials that have proliferated on thesubject as its seriousness becomes increasingly apparent have brought anunderstanding of the concept of sustainability much closer. Out of the discussionand analysis certain basic principles have emerged which, despite considerable1variations and different emphasis, all call attention to human, rather thanmonetary, values, and which are common to most "alternative" scholars ofeconomic/ecological issues. These principles, for the most part, can be said tobe quite contradictory to the historical approach which the institutions andgovernment agencies of the industrialized world have taken to humandevelopment. The traditional approach - encourage trade which promotesgrowth, growth will be good for the environment, a sound environment will helpgrowth which will encourage more trade - (Daly, 1992:4) largely ignores theenvironmental and social consequences of most development projects andpolicies. The emerging principles of sustainability, on the other hand, whichpromote the value of human development and biodiversity, local control andownership and new methods of evaluating and measuring "progress", contendthat only a revolutionary change in our understanding of the relationship betweenhuman economic activity, the ecosystem and our perception of the nature ofhuman progress can resolve the deepening global crises (Korten, 1991:158).Despite the growing empirical evidence which supports the logic of theseprinciples of sustainability, defenders of the neo-classical development approachcontinue to resist the challenge to the efficacy of export-driven, market-orientedsolutions to the problems facing the less developed countries (L.D.C.'s). For thisreason, despite the effort expended and resources dedicated, little progress hasbeen made in implementing the principles which would move world developmentin a sustainable direction. Maurice Strong commented on the lack of headway on2this issue at the close of the Rio conference. "I am not a doomsayer by nature",he told reporters, "but the world is on a course that leads to tragedy" (Abramson,1992:4).This thesis will examine that phenomenon, arguing that the traditional economicapproach to development as understood and practised by the dominant providerof multilateral development finance - the World Bank - is fundamentallyinconsistent with the principles of sustainable development. Representative of astill-pervasive view of poverty and environmental degradation as problems ofunder-production and over- population, the Bank continues to try to bring itsoperations in line with the dictates of sustainability without effectively confrontingthe underlying beliefs, systems and dominant values which govern itsdecision-making. Nor has it yet dealt with an internal organizational structure andproject evaluation process which puts it at odds with an emerginggrassroots/community oriented, decentralized model. Consequently, despiteconsiderable allocation of resources, the World Bank is increasingly the target ofinternational criticism as well as member government pressure for betterperformance.The difficulties being experienced by the world's largest lender are illustrative ofthe challenges being faced by all development agencies and institutions born ofa particular economic paradigm, the tenets of which now advocate globalintegration in an urgent search for macroeconomic stability. But the next3paradigm, with sustainability as its base, is already unfolding and will continue tomount primary challenges to "old order" institutions like the World Bank as itevolves.4CHAPTER 1: THE CONCEPT OF SUSTAINABILITYThe past decade has seen the term sustainable development go from an obscureexpression understood only by deep ecologists, to popular jargon, common toevery speech, conference or written word on any subject related to developmentor the environment. Despite the appearance of widespread acceptance andunderstanding, a survey of the literature reveals a considerable lack ofconsistency in interpretation. This has perhaps contributed to the generalacceptance of the term by the political mainstream, and the difficulty intranscending superficial policy-making in this area. For sustainable developmentto have a long term, fundamental impact, this ambiguity must be eliminated infavour of a set of non-contradictory principles which set out clearly the nature ofthe relationship between development, poverty and environmental degradationand the manner in which that relationship must be changed.While the concept of sustainability originated long before the dawning ofenvironmental awareness', the first documented use of the term sustainabledevelopment appears in a document entitled "World Conservation Strategy",prepared by the International Union for the Conservation of Nature and NaturalResources in 1980 (Lele, 1919:613). At that time, use of the phrase was limitedto the "conservation of living resources", with no reference to economic, political,cultural or population issues. This reflects the original conception of the5"sustainability" idea in the context of renewable resources, a definition which Lelerefers to as "ecological sustainability":"the existence of the ecological conditions necessary tosupport human life at a specified level of well-being throughfuture generations" (1991:609).Redclift then makes the connection to issues of development:"(sustainable development) means a definition of developmentwhich recognizes that the limits of sustainability havestructural as well as natural origins" (1989:199).This idea was given greater specificity by the widely publicized definition of theWorld Commission on Environment and Development in their 1987 publication"Our Common Future":"Sustainable development is development that meets theneeds of the present without compromising the ability of futuregenerations to meet their own needs (WCED, 1987:43).In their 1992 sequel to "The Limits to Growth", Donella and Dennis Meadows andJorgen Randers simplify the definition even further in "Beyond the Limits":"A sustainable society is one that can persist overgenerations, one that is far-seeing enough, flexible enough,and wise enough not to undermine either its physical or itssocial systems of support" (1992:209).All of these definitions, or variations of their ideas, appear with such frequency6in publications of all major world aid and world development organizations thatthey seem to reflect a common understanding of meaning. Used in this way,sustainable development increasingly appears as another mainstream form ofrationalizing continued economic growth rather than as a challenge to theorthodox economic paradigm.World Bank senior economist Herman Daly is critical of such generalinterpretations of the term. Nowhere in the mainstream literature, he charges, isa distinction made between "growth" and "development". This is a vital distinctionto make and yet the two terms are often used interchangeably:"Growth should refer to quantitative expansion in the scale ofphysical dimensions of the economic system, whiledevelopment should refer to the qualitative change of aphysically nong rowing economic system in dynamicequilibrium with the environment " (Daly & Cobb, 1989:71).Some of the confusion in the terminology, Daly argues, stems from therecommendations and discussion in the widely read "Our Common Future", whichrationalizes:"more rapid economic growth in both industrial and developingcountries" so that a "five to ten fold increase in world industrialoutput can be anticipated by the time world populationstabilizes some time in the next century" (WCED, 1987:213).This linking of the concept of sustainability to large scale revitalization of industrialactivity and economic growth has contributed to a superficial characterization of7the problems of ecological and social degradation which denies the real problems- a fundamentally inequitable world economic order, unrestrained andunsustainable patterns of consumption and accumulation in the North andprejudicial development models being perpetrated on the South.A working definition which attempts to address this historical linkage is putforward by Costanza:"sustainable development is a relationship between dynamichuman economic systems and larger dynamic but normallyslower-changing ecological systems in which 1. human lifecan continue indefinitely, 2. human individuals can flourishand 3. human cultures can develop; but in which effects ofhuman activities remain within bounds so as not to destroythe diversity, complexity and function of the ecological lifesupport system" (Costanza, 1991:8).Costanza emphasizes the importance of examining the socio-ecologicalimplications of current economic policy; otherwise, he argues, solutions willcontinue to be sought within the current economic growth paradigm.For "alternative" development thinkers like Costanza (1991), Goodland (1987),Daly (1989) and others, the need to confront these implications has becomeurgent; for, regardless of intentions:"no amount of ethical axiology, or legal, policy andtechnological engineering is going to solve problems that aremisunderstood. A lot of work in changing beliefs andbehaviours is necessary before sustainable development is8really meaningful" 2 .Much of that work involves confronting the mechanistic world view and sets ofbeliefs that have become embedded in mainstream development thinking.THE BIAS OF DEVELOPMENTThe term "development" was first given its contemporary interpretation inJanuary, 1949, by then President Harry Truman during his inaugural speechbefore Congress (Sachs, 1990:42). Truman spoke of the non-Western regionsof the world as "underdeveloped", and needing assistance to achieve "a higherstandard of living", which was the responsibility of the "advanced" nations toprovide. For the first time, the world was defined in economic terms, and thesupremacy of the Western productivist model was simply assumed. The degreeof "civilization" of a culture was no longer to be measured in terms of languageor artistic/architectural achievement or even culture in the main; rather, the levelof production had become the determining factor.Truman's remarks were at the same time giving voice to the ambitions of aUnited States which had emerged from the Second World War as the dominantworld power. By defining most of the world as in need of "economicdevelopment", a combination of foreign investment and aid was then prescribed •as the route to greater prosperity and a higher standard of living through9industrial activity and production. This view, as it emerged, necessitated thecreation of organizations and agencies to design and implement economicdevelopment models. Thus institutions like the United Nations and the WorldBank implicitly contained the perspective of the world's most powerful nation, theUnited States.Sachs explains:"..the hegemony of the West was logically included in theproclamation of development. It is no coincidence that thepreamble of the U.N. Charter (" We, the peoples of the UnitedNations..." ) echoes the Constitution of the U.S. ("We, thepeople of the United States..."). To talk about developmentmeans nothing more than projecting the American model ofsociety onto the rest of the world" (Sachs, 1990:44).As other political analysts have drawn out, implicit in this world vision is adominant position for the United States in the global economy, and certainassumptions about the role that the industrialised nations would have incontrolling the flows of capital, trade and technology to the developing world. Inthis manner, the solution to the spate of economic, health, population andeducation problems of the lesser developed countries also met the capital growthrequirements of the West - continuous expansion and the creation of newmarkets.Continuous growth equates to growth without limitations, as if the flows of energyand material necessary to keep the economy moving, what Meadows and10and material necessary to keep the economy moving, what Meadows andRanders refer to as "throughput", can continue forever. This approach results in:"exponential growth, which is the driving force causing thehuman economy to approach the physical limits of the earth"(Meadows & Randers, 1992:14).Unlike linear growth, in which the amount of increase is constant in a given timeperiod, exponential growth increases in proportion to what is already there. Whenthe concept of exponential growth is applied to capital formation, in which it isstructurally inherent, the result is a rising level of materials and energy consumedas economic throughput. As Daly (1992) points out, this ignores the more realisticconception of the economic system as a subset of the wider ecological system- which is closed and finite.The production of something, in other words, involves the inversion, consumptionand destruction of other things3. Production therefore must be understood ASconsumption, not as its opposite, which is the traditional economic viewpoint.Nowhere in that conventional viewIs there recognition that sustainability requires that growthmust not exceed the capacity of the larger system toregenerate resources and absorb wastes at sustainable ratesand without disrupting other vital natural services, such asphotosynthesis, nitrogen fixation, etc". (Daly, 1992:13).This is described by Rees (1989) as explained by the Second Law ofThermodynamics, which states that:11"in any closed, isolated system, available energy and matterare continuously and irrevocably degraded to the unavailablestate" 4 .Rees concludes that since the global economy operates within what isessentially, a closed system, this Second Law (known as the Entropy law) is infact the ultimate regulator of economic activity, and that:"sustainable development must be development thatminimizes resource use and the increase in global entropy"(1989).Rees also makes the point that the continual consumption of ecological resourcessuch as forests, fish stocks and soil fertility will eventually exhaust thoseresources if not only the annual production of the ecosphere (the "interest") isconsumed but the standing stock ("the capital") is eroded. For some time the keyindicators have signalled that both the interest and the ecological capital arebeing consumed under current practices, which Rees views as the " inevitableconsequence of exponential material growth in a finite environment."The first principle of sustainable development then, is to recognize the Westernbias implicit in the approach taken to development so far, and to redesign theprocess so as to take into account the limitations placed onproduction/consumption by the larger eco-system.12NEW SYSTEM OF MEASUREMENTSince the early 1980's, national and multilateral institutions and regulatory bodieshave experienced a rising awareness that current national accounting systemsdo not adequately evaluate natural or human resources. This has led to therealization that development strategies which are reliant upon standard incomeaccounting techniques may not result in sustainable development (Lutz andMunasinghe, 1991:19). Attention is now turning to better understanding the valueof these resources, and incorporating that value into measurement systems.The current United Nations System of National Accounts (SNA), for example, hasno effective means of accounting for environmental resources or negativeimpacts of industry on human settlements. Forests are valued as harvestabletimber, rather than in terms of habitat, recreation or aesthetic worth. Fish stocksare evaluated as potential catch, and soil fertility as the worth of future yield. TheSNA, originally published in 1968, is still heavily reliant upon the Gross NationalProduct (GNP) measure, originally a means of emphasizing and measuringpost-war production activity. Never intended as a total measure of health orwelfare, or even wealth, it is still used as the primary indicator by developmentagencies around the world, including the World Bank, despite continuing attemptsto mitigate its use since 1983 (1991:20) 5 .Having alternative measurement indicators in operation is one of the most13important principles of sustainable development; indicators which would notdistort the development process away from human development and welfare(Daly 1992). The South Commission Report in their 1990 study of thedevelopment record of the South, emphasized the delusion of equating GNPgrowth with true human-oriented development:"Not only the growth of the national product but what isproduced, how and at what social and environmental cost, bywhom and for whom - all this is relevant to people-centreddevelopment and should be taken into account" (Report of theSouth Commission, 1990:13).According to Lester Brown (1990 State of the World Report), the contention thatGNP growth, and hence economic growth, is positively correlated withimprovements in living conditions and standards is fundamentally incorrect. Brownobserves that the four decades since the 1950's have seen unprecedented levelsof global economic growth, accompanied by equally unprecedented levels ofincrease in numbers of the absolute poor and levels of environmental destruction(Goodland & Ledec, 1987:167). Daly goes further to suggest that the impetus foreconomic growth in less developed countries is usually foreign investment, whereexpected rates of return on investment or equity often demand environmental orsocial concessions not in the interest of the host country's people. In fact, Dalypoints out that an alternative approach to development would dictate the oppositeof foreign investment - local control and ownership of resources. Local controlwould, in turn, facilitate a more sustainable use of both renewable andnon-renewable resources than present designed-for-export policies allow. 614LOCAL CONTROL AND SELF-SUFFICIENCYAlong with re-designing the approach to development and the measures to beused to gauge success, is the related issue of examining the level at whichdevelopment should take place. There is now considerable literature whichpresents the argument that community economic development, i.e., developmentat the level of the local economy, will be the driving force of the future, eventhough the pattern of economic development throughout the world to date hasbeen the reverse.Local self-reliance has long been discussed in terms of conservation and wiseuse of resources (Sachs, 1990:333), but is currently enjoying a rebirth of interest.The environmental movement and many Third World non-governmentalorganizations (N.G.O.'s) have focused attention on the negative consequencesof being dependent on the investment activity of other countries for prosperity,and the idea of returning control of an economic future to communities and awayfrom foreign owners holds promise for the balancing of social responsibility withenterprise.A locally focused economic order increases the possibilities for citizens toparticipate in decision-making, an opportunity they are denied when resourcesand jobs are controlled by another country's government or a transnational15corporation (Daly & Cobb, 1989:173). A local model is better suited to takinghuman priorities and natural limits into account, as well as meeting anotherprerequisite for sustainable development - self sufficiency. As Korten explains:"There is a broad consensus among alternative thinkers thatdecentralization and local accountability must be the keyfeatures of a sustainable eco-economy. This means that thelarger global economy must be divided into a system ofinterrelated local economies that are for the most partself-reliant" (Korten, 1990:184).Daly and Cobb emphasize the importance of this point:"There can be no effective national economy if a peoplecannot feed themselves and otherwise meet their essentialneeds. Hence a national economy for community will be arelatively self-sufficient economy" (Daly & Cobb, 1989:173).The current practice of some development agencies of encouraging developingcountries to grow crops for export rather than local food production is one of thefactors which can be blamed for the decline in food production growth, as well assoil erosion and other environmental degradation (Goodman and Ledec,1987:31).At the moment, the enormous burden of debt repayment has locked Third Worldcountries securely into the international market system, where crops for exportare often a necessity. Self-reliance, especially with respect to basic needs -food, clean water, housing and basic social services can only be achieved whenless developed countries are free from the crippling yoke of debt that threatens16to dictate a future that resembles the past. The fact that these countries arecapable of feeding themselves has been well documented for several d9cades,but foreign aid and investment forces actively work against this possibility (Lappe,Collins and Kinley, 1980).For less developed countries to become self-sustaining dictates that advancedindustrial countries must do the same and restructure their economies to nolonger rely on the cheap labour, goods and resources provided by the countriesof the South. A recognition will have to occur that, rather than underdevelopmentbeing at the root of poverty and hardship in the South, consumption andaccumulation patterns in the North are central to the problem.Foreign investment is one of the mechanisms the North has devised to maintainthese patterns, along with international trade and monetary structures. But if ThirdWorld countries are to achieve a degree of self-control over their economies andthus the standard of living of their populations, a decentralized system of localcontrol and ownership must be the fundamental direction, not the wholesaleadvocacy of global economic integration that industry and national governmentsare currently pursuing. Local ownership and self-sufficiency as well as freedomfrom debt and dependency are essential if problems of over-population, povertyand environmental pollution are to be successfully overcome by the countries ofthe South.17In summary, the minimum conditions for achieving sustainability would appear toinclude:• a revitalized and redirected approach to development on the part of theinstitutions and agencies of the industrialised countries• a new system of measurement with indicators of human health and wellbeing, and which takes environmental factors into account• a mechanism for ensuring self-sufficiency, particularly in the ability toprovide sufficient food, drinking water and energy for communities in boththe North and the South• a system which facilitates local control and ownership of resources, toensure sustainable use of both renewable and non-renewable resources• relief from the crippling effects of debts on countries of the South.These principles are particularly important for global institutions like the WorldBank, which directly affects economic policy, and indirectly the environmental andsocial consequences of those policies in the developing world. Let us now turnto an examination of the operations and philosophy of the Bank in light of thesetenets of sustainability.18CHAPTER 2: THE EVOLUTION OF THE WORLD BANKTo appreciate the dilemma faced by the World Bank today demands an examination ofthe circumstances under which it was formed and the role it was originally intended toplay.Established in 1945 as the International Bank for Reconstruction and Development afterthe 1944 Bretton Woods Conference, the World Bank's original mandate had beentwofold. Initially it was to co-ordinate the funding that would be required to repair wardamage in Europe following the war, and then it was expected to turn its attention tomaking development loans "to develop the resources and productive capacity of theworld, with special emphasis to the less developed countries" (Mason & Asher, 1973:1).Capital would be provided primarily from private sources guaranteed by the Bank,mainly from the United States, and from selling its own securities on capital markets.The International Monetary Fund (I.M.F.), established at the same time, would assistwith balance of payment lending and with the removal of impediments to internationaltrade such as import quotas, barriers and tariffs. Three large regional banks were latercreated specifically to focus on the special needs and problems of Africa (AfricanDevelopment Bank) Asia (Asian Development Bank) and Central and South America(Inter-American Development Bank) together forming the World Bank Group.Almost from the beginning, the anticipated mission for the Bank had to be adjusted as19the postwar period took shape. Initial reconstruction needs were much greater thanimagined, with the U.K. borrowing $5 billion from the U.S. and Canada directly on agovernment to government basis; and the funding needed to rebuild inventories andimport basic necessities like foodstuff and fuel being provided by the United Statesdirectly through the Marshall Plan.Within a fairly short period of time, the Marshall Plan in fact effectively took over mostof the reconstruction lending required for all of Europe. With the arrival of EugeneBlack as President in 1949, the World Bank moved more definitively in the directionof lending to developing countries.In the early days, the Bank permitted no bad debts, charged standard commercial interestrates and demanded prompt repayment (Sampson, 1981:88). Loans were made on aproject basis either to facilitate foreign investment in a particular country or to createthe infrastructure necessary for such investment, generally considered to be low-risktype loans. This conservative approach was important to establish the reputation andfinancial integrity of the Bank, and would allow it to maximize its leveraging potentialas it gained legitimacy.The problem of lending to less creditworthy but politically important countries like Indiawas dealt with in 1960 with the creation of the International Development Agency(I.D.A.) as part of the World Bank Group. This institution made "soft" loans, wherenormal lending ratios and requirements are adjusted to take into consideration the special20circumstances of the borrower, often with interest rates as generous as three or fourpercent per year, to be repaid over as long an amortization period as fifty years.Nineteen advanced industrial countries, led by the United States, lent huge sums ofmoney in this manner, in the process accomplishing the dual objective of assisting withthe increasing liquidity problem of these multilateral banks, and effectively relieving theWorld Bank of any "charitable" obligations (Sampson, 1981:90).By the end of the sixties however, many of the high expectations for Third Worldlending and aid programs were fading. In 1967, then Bank President George Woodsproposed a twenty year assessment of aid and lending programs, and a commission wasformed under the chairmanship of Lester Pearson to "propose policies which will workbetter in the future" (Sampson, 1981:98).Their report, "Partners in Development" concluded that, while the rate of growth ingross domestic product (GDP) of the developing countries had outstripped thatexperienced by the developed world through the 1950's and 1960's, that in fact thepoverty level was rising and the gap between the rich and poor countries was stillwidening. Too much aid, it reported, had gone astray and too much had been spent onindustry while agriculture had been neglected. The report emphasized the benefits ofprivate enterprise, and predicted a time when capital markets and direct investmentwould take over most development. In the meantime, what was needed was expandedworld trade:21"The richer countries must reduce their import duties, help tofinance "buffer Stocks" of commodities, and abolish their quotasfor manufactures from the Third World" (Sampson, 1981:100).After MacNamara assumed the presidency in 1968, the World Bank picked up many ofthese ideas, becoming almost as much of a development agency as it was a Bank andmoving deeply into Third World development lending throughout the 1970's. AlthoughMacNamara understood the paradoxes that were leading to greater impoverishment inthe Third World, and delivered an apparently stinging speech at the U.N. Conferenceon the environment in Stockholm in 1972 in which he attacked the "endlessly spirallingconsumer economy of the richer nations" (Sampson, 1981:272) his analysis of theenduring problem of poverty paralleled that of the Pearson report. The answer was tobe found in the "low productivity element" of the poor. More resources must be put intoincreasing productivity levels. Return on capital was still the paramount measure; whilemuch more money was spent on education, for example, it was not to be used to finance"any education project that is not directly related to economic growth" (Sampson,1981:274).These policies were adhered to throughout the 1970's, but with no improvement in eitherthe alleviation of poverty, to which the Bank was apparently now dedicated, or levelsof economic growth. Over the next two decades these problems only deepened, and werejoined by an additional issue of global importance — the environmental crisis. Theseserious developments over time made clear the inadequacy of Bank policy and triggereda series of major internal changes in an attempt to meet these new challenges.22THE PROBLEM OF DEBTA significant part of the immobility of the less developed countries in effectivelyhandling the social and environmental problems facing them now is the seriousindebtedness that they labour under. The recently published World Debt Tables for1991-1992 put out by the World Bank, reported a total external debt of all developingcountries at the end of 1991 at $1.35 trillion (U.S.), essentially unchanged from a yearearlier. Then World Bank Vice President and Chief Economist Lawrence Summersintroduced the tables with the vague comment:"...the debt problem muddled along in 1991, with progress in someareas but regress in others" (Economic Review, 1991:130).This kind of accompanying commentary, kept on the level of description, ignores themoderate economic success in the 1960's and early 1970's enjoyed by many Third Worldcountries, and is silent on the factors which lead up to the debt crisis.These factors included the creation of a Eurodollar market which effectively freedinternational financial institutions of regulatory restraints; the OPEC governmentsdepositing of oil revenues into Eurodollar assets; the resulting liquidity crisis of1973-1974 which necessitated new loan markets; the subsequent granting of loans toL.D.C.'s at extremely low but floating interest rates; the subsequent combination ofmonetary contraction and fiscal expansion on the part of the U.S. government which had23the effect of pushing interest rates domestically up to 8% (the equivalent of 20% forsome Third World countries); the election circa 1980 of neo—conservative governmentsin several industrialised countries (UK, USA, FRG) with objectives of putting monetaristdoctrine in place as quickly as possible.The first indication of the possible depths of the crisis became evident on August 12,1982 when Mexico's minister of finance Jesus Silva Herzog contacted the chairman ofthe U.S. Federal Reserve Board and the head of the IMF to advise them of Mexico'sinability to meet the $11 billion interest payment due on its foreign debt by the end ofthat year (Steinberg, 1989:75). This event is retroactively recognized as signalling thebeginning of the debt crisis. "The world was different after that", Mr. Herzog said later,of the chain of events which followed.'Given the percentage of shareholder equity tied up in U.S. commercial bank loans toMexico, to allow Mexico's default could have triggered the collapse of the U.S. bankingsystem. Instead, the near disaster in Mexico was averted at the last moment by a "bailout" cash infusion from the IMF and the US Federal Reserve in return for the Mexicangovernment agreeing to certain conditions — sharp cuts in real wages, elimination ofsubsidies for basic goods and the reduction of public spending to ensure the domesticgovernment would be in a position to honour its debt payment obligations (Sampson,1989:76). But the fact that the debt crisis occurred when it did appears to have come asa surprise to all of the multilateral lending institutions, including the World Bank.24In fact, as late as 1977, then President of the Bank MacNamara made the argument ina speech in Washington that the recent significant growth in commercial lending todeveloping countries did not make a debt crisis "inevitable", and that it could no doubtbe "staved off" if it threatened to develop, but that a larger threat loomed in theunmatched excess liquidity of the American commercial banks which must be dealt withimmediately (Mosley, Harrigan and Toye, 1991:22).It took three more years before MacNamara in his 1980 Presidential address agreed thatwhat happened had:"represented a permanent change in the world economy, not atemporary phenomenon,...hence the need for developing countriesto structurally adjust their economies" (Mosley, Harrigan and Toye,1991:23).Not only did the Bank fail to anticipate the consequences of excessive borrowing andescalating interest rates on a poor country like Mexico, it insisted along with the IMF,that the remedy lay in "structural adjustment to the new reality" on the part of theMexican government. As a result, the imposed currency devaluation to improve thebalance of trade caused rapid inflation, and reduction of various government subsidiesbankrupted hundreds of Mexican companies and threw thousands of people out of work.Imports were slashed so dramatically that Mexico ended up running a trade surplus forthe year; yet between 1982 and the end of 1988 its $80 billion debt grew even largerto $110 billion, despite $50 billion in payments to creditors and declining indicators ofsocial, physical and environmental health (Steinberg, 1989:79).25Recent assessments of the debt crisis and the effectiveness of the structural adjustmentmeasures taken by the Bank have generally been quite critical of this approach to theproblem, citing the benefits being enjoyed by the industrialised countries as a result ofthe misery of the Third World countries. In particular the 1990 Report of the SouthCommission noted:"Between 1983 and 1987, the net transfer of resources(new loans less capital repayments and interestpayments) associated with World Bank lending was almostinsignificant. It turned negative for the first time in 1986,with the Bank receiving from developing countries more than itwas lending" (Report of the South Commission, 1990:231).In its recommendations, the Commission calls for a depoliticization of the operations ofinstitutions like the World Bank, and the removal of ideology from its lending decisions.The Bank's assessment of the causes of the crisis and the effects of changes in lendingpolicies differ quite significantly. The 1991 World Development Report presents the debtcrisis experienced in the Third World as being related to imprudent spending decisionsof their governments:"a debt problem that would be transmitted worldwide unfolded inthe 1970's as many developing countries borrowed to increaseconsumption, invest in doubtful projects, and finance imported oil(which was then subsidized)" (World Development Report,1991:18).This could only be corrected by, among other actions like debt relief, debt—servicereduction — "the implementation of comprehensive adjustment programs" (World26Development Report, 1991:9).Not only did the World Bank interpretation of the debt crisis differ from the"alternative" viewpoint that domestic policies undertaken by the less developed countrieswere a minor factor and the macroeconomic linkages between them and the OECDcountries a major one, but the Bank also, perhaps not surprisingly, continues to see thesolution differently. Even when considering the possibility of reducing the excessivedebt burden to the L.D.C.'s, it advocates the continuation of lending to facilitate thepromotion of international export and trade. Specifically, the 1991 Development Report's"Priorities for Action" recommends that the developing countries need to:"Open economies to international trade and investment — This callsfor far fewer nontariff restrictions on trade and investments,substantially lower tariffs, and a decisive move away fromdiscretionary forms of control" (World Development Report,1991:11).For critics like Herman Daly, this perspective does not hold much potential for findingfuture solutions;"While advocacy of debt reduction is good, it is distressingthat the system of deregulated international commerce (free trade)that gase rise to these unrepayable, unsustainable debts is socritically embraced as the key to future "sustainable" development"(Daly, 1991:4).27BANKING ON THE ENVIRONMENTAnother major issue that has confronted the Bank in recent years has been the growingcriticism of Bank financed ecological debacles.'In October, 1989, a hearing took place in the U.S. Congress to hear testimony from bothdonor and borrower countries involved with the World Bank, concerning allegedviolation of the Bank's own environmental and social policies in the Sardar Sarovar damin north central India. Just prior to the hearing, more than 60,000 people had protestedagainst any further construction at the dam site — the largest development project protestin the history of India (Rich,1990:306).The protest and subsequent hearing came two years after a public declaration of"greening" by then President Barber Conable, and was therefore a surprise and adisappointment to many Congressmen who had believed the Bank was makingsubstantial improvements to its environmental record. Sardar Sarovar was only the mostrecent in a long series of controversial, environmentally damaging projects connectedto the World Bank through the 1970's and 1980's. As a consequence, the Bank came torepresent the negative aspects of development, with bank officials continuing to justifyprojects on the basis of economic benefits irrespective of environmental and social costs.The importance of these criticisms was finally acknowledged in May of 1987, when28Conable announced an intended new direction for the Bank. At a speech in Washington,D.C., Conable conceded that the Bank may have been "a part of the problem in thepast", but it was now about to become a "strong force in finding solutions for thefuture" (Sarokin and Schulkin, 1991:12).Subsequent bank publications reinforced this message with statements like "the bank hashad to change while environmental issues have not been ignored altogether in the past,we have not given them sufficient attention" (Sarolin and Schulkin, 1991:13). On theAmerican public affairs program '60 Minutes' which featured the Polonoroeste projectin Northern Brazil, Conable expressed the view that the project had indeed been a"sobering example of an environmental project which went wrong", and that the Bankhad "misread the human, institutional and physical realities of the jungle and thefrontier" (Adams, 1991:30).One of the first outcomes of Conable's 1987 "going green" speech was the hiring ofadditional environmentally trained employees and consultants to staff the Departmentof Environmental Affairs, which had been comprised of a single environmental advisorsince 1969. By 1990, the number of environmental staff had increased tenfold. Inaddition to more hiring, the manner in which projects were to be assessed from anenvironmental standpoint was revised, and a new action plan was created. Staff werenow to prepare environmental issues papers and discussion documents identifyingenvironmental problems of various projects in developing countries (Rich, 1990:307),and designing approaches to address the underlying causes. Where appropriate,29environmental action plans were then to be undertaken in conjunction with localgovernments, attempting to integrate environmental considerations into nationaleconomic and social development plans and raise public awareness of the issues.More complex sectoral problems were to be the focus of major studies, sometimes ona regional basis. This was the case in the "Capital Cities Clean—Up Project for the AsianRegion", and projects like the "Environmental Program for the Mediterranean"undertaken in conjunction with the European Investment Bank (Warford & Partow,1989:6). As part of the reform process, Conable also committed the Bank to consultingmore closely with local groups, including environmental activists and representatives ofaboriginal peoples, in all countries of proposed World Bank projects.As well as hiring more staff and devising a new assessment process, more money wasto be spent to finance a much greater proportion of environmentally beneficial projectsthan had been done in the past. During 1988, the Bank's Board of Directors approvedmore than 100 projects, representing 35% of the total, containing importantenvironmental considerations, and 60% of all agricultural sector projects approved alsocontained environmental elements (Conable, 1989:5). Support for "free standing"environmental projects such as an environmental protection and research loan to Brazilwere anticipated to cost more than $1.3 billion from 1990-1993. Funding to carry outthese new initiatives has not been an issue; the Bank heavily lobbied its major donorsduring the late 1980's for more capital, resulting in a cash infusion in excess of $75billion. This has enabled the Bank to increase its annual lending, at least in theory, by3050% throughout the mid 1990's (Rich, 1990:318).The extensive re-structuring and re-allocation of resources that accompanied Conable'spublic commitment to address the environmental and social consequences of fundedprojects more adequately has met with some positive results. The general trend of thepast two decades of World Bank association with harmful environmental and social sideeffects of development has not, however, substantively abated. In some cases - therecent critical report of the Sardar Sarovar project, the well-publicized proposed ThreeGorges Dam project in China and links to rainforest destruction projects in the Amazonas well as the contentious Tucurai Dam project in Brazil-the Bank's image has lostground in spite of its efforts.Despite the apparent environmental bias, however, the Bank's efforts are effectivelyconfined to the same philosphical framework of its inception almost 50 years ago. TheBank's 1991 World Development Report, "The Challenge of Development", presents itsconclusions after more than four decades of development experience:"that accelerated economic growth and integration of the worldeconomy are the keys to human progress" (Korten, 1991:163).Only through economic growth can the necessary resources for investment inenvironmental protection be generated, it states, and the key to overcoming poverty isto increase the incomes of the rich to create more demand for the products of the poor.The market continues to be seen as the key to that growth, and the Bank calls on31governments"to complete the integration of their national economies into theglobal economy, invest more in social and physicalinfrastructure, and allow international market forces to playthemselves out without government interference" (Korten,1991:169).32CHAPTER 3: PROJECT LENDING IN PRACTICEFor the World Bank, large scale infrastructure loans have long been the lending vehicleof choice; firstly, because much of the funding leveraged from other commercial lendersis raised on the assumption that the Bank will put up the funds required to facilitate theinvestment (Dixon, Talbot and Le Moigne, 1989:178).Secondly, the constant pressureon the Bank to place high volume loans on the books is more easily alleviated bymulti—million dollar hydro—electric projects, for example, than several smaller scaleloans. In addition, many of the large infrastructure loans are multi—purpose, or can beseen to be providing a range of benefits.In the case of hydroelectric power production,for example, dam construction not only meets that need but can also assist with floodcontrol, provide drinking water and irrigation systems and improve navigation.The Bank's early lending for large irrigation, railway, road, telecommunication and steelprojects proceeded primarily on the basis of highly subjective estimates of gross benefitscompared with expected costs, and few detailed land use studies or impact assessments.For the most part, little attempt was made to standardize the methodology betweenprojects, and assessment was made on the basis of expected value of gross benefit incomparison to expected gross costs over the anticipated life of the project, with theresulting average annual net benefit related to the proposed volume of investment(Mason & Asher, 1973:241). Nor was any effort made to determine the present valueof benefit or costs at different points in time in the future. Certainly for the first33twenty—five years of project lending, scant attention was given to environmental orsocial costs, and the "discounted cash flow" technique of estimating anticipated returnswas not used at all until the 1960's. More recently, particularly since 1987, the Bank hasattempted to integrate environmental and social factors into traditional economicassessments; however, the rough valuations that take place through the cost/benefitapproach are still the most common valuation method used by all major lenders,including the World Bank (Stein and Johnson, 1979:18).A major weakness in the cost/benefit approach is that it strongly favours projects withshort term benefits and long term costs, even though those same projects almostinevitably result in negative environmental and/or social effects. This can be seen in theinherent preference which cost/benefit analysis demonstrates for example, for large scalehydro—electric projects.The requisite high investment but low operating costs make themattractive to World bank lenders; the reverse of low investment but high operating costsassociated with thermal plant alternatives have meant they have often simply not beeninvestigated by the Bank as a serious possibility (Mason & Asher, 1973:237). Theabundance and low per unit cost of energy provided by these huge dams attractsenergy—intensive industry like steel production, petrochemical and heavy machineryproduction to an area, and the anticipated monetary benefit appears as part of theeconomic justification for the project. The resulting environmental degradation, oftenpermanent as is the case with rainforest destruction; the monetary and social cost ofdislocation of indiginous peoples; the irrationality of producing low per—unit cost energywhen governments around the world are trying to reduce energy consumption, and the34loss of control over the rate of power production or usage on the part of the hostcountry's citizenry are not usually considered as "measurables" and simply left out onany cost—benefit calculation. 9The high number of hydroelectric dam and forest extraction programme loans in theBank's current portfolio, according to its own development reports, reflect the Bank'senduring assumption about the relationship between these types of projects andeconomic development and the prerequisites for a higher standard of living, utilizingindustrialised country criteria as a measurement.ENERGY LENDINGThe long established patterns of energy lending at the Bank, have, therefore, almostalways centered on the provision of low unit cost, highgrade electrical energy to supplyindustrial demand and centralized urban requirements. Rural needs, until recently, wereeither ignored or relegated to secondary status. The downsides of the mega damapproach — disruption of indiginous populations, loss of forest land, threat to wildlifeand tropical vegetation, increased sedimentation and salinization of soil, erosion,proliferation of water—borne diseases like schistosomiasis, etc. have been minimized inorder to rationalize proceeding with construction, even against the recommendations ofthe Bank's own advisors.35In an analysis of several dam projects funded by the Bank within a ten year period,Dixon, Talbot and Le Moigne conclude:"the most important single issue in the Bank's entire dam projectprocess is the determination of whether the dam should be built inthe first place. Decisions are based on economic justification;however, it is not evident that the basis for that economicdetermination includes an economic analysis of environmentalfactors which can affect the sustainability, costs and benefits of theproject... environmental considerations are brought in too late tohave adequate impact on the design of the project.... consistency inapplication is still lacking; until recently a high percentage of damsstill received little recorded environmental consideration. (Dixon,Talbot & Le Moigne, 1989:10).In analyzing the weaknesses in the Bank's process for project assessment, Mason andAsher (1973)point out the near impossibility of any "arms length" business relationshipbetween the potential borrower and the Bank, due to the latter's understandable concernthat it is going to be repaid.In the process of assessing creditworthiness of the potentialborrower, Bank staff offer assistance with the preparation of the loan application wherenecessary. This leads to provision of advice on the particular project, and informationconcerning the kind of specific data the Bank requires in approving such applications— in general, helping to "shape" the project. Particularly because of the inevitable longdelays between project inception and loan funding, bank staff often come to know thedetails of a particular project very well, and often end up presenting the application toother staff as part of the assessment team.Examples of this weakness in the Bank's analytical process include the Sobradinko Damon the San Francisco River in Brazil,36" work—up documents reveal that ecological reconnaisancefollowed the loan and did not begin until after construction hadcommenced...the results of the study were added to the loanagreement after the fact" (Stein and Johnson, 1979:98).This shortcoming is borne out by the remarks of Bradford Morse and Thomas Berger,in charge of the Independent Review Commission on the Sardar Sarovar project.Remarking on the failings of the appraisal process used, they commented:"the Bank's first in—depth attempt to evaluate the social impacts ofthe project came after the appraisal was completed and it was clearthat the project would proceed" (Report of the Independent ReviewCommission, 1992:43)and that"the history of the environmental aspects of the Sardar Sarovar isa history of non—compliance; there is no comprehensive impactstatement...this work should have been done by others before theProject was approved" (Report of the Independent ReviewCommission, 1992:xxi, in Letter to President).FORESTRY LENDINGSimilarily, the Bank's preference for large scale projects has resulted in a high ratio offorestry project loans — $727 million was spent on forestry investment between 1983and 1987; that figure was doubled for the period 1988-1992 (Rich, 1990:309). Thefoundation for the World Bank approach on forestry is set out in a publication entitled37"Tropical Forests, A Call To Action", written together with the United NationsDevelopment Programme, the World Resources Institute and the Food and AgricultureOrganization in 1985. The action plan articulated in this document, later to beformalized as the "TFAP", states the Bank's view:"many of the solutions to deforestation must come from outside theforestry sector...the Bank's emphasis is on helping countriesstrengthen their abilities to manage their forest resources" (WorldBank Publications, 1989:29).The lack of local consultation and involvement resulting in this approach has led tocharges that the Bank is simply furthering the interests of large, foreign owned forestrycompanies which will only accelerate deforestation and related problems. Critics of theTFAP have referred to it as a "lumbering Frankenstein" (Adams, 1991:310), which ismobilizing billions of dollars for tropical forestry projects around the world. EvenPrince Charles was critical of British involvement with the TFAP, referring to theprogramme in February of 1990 as "little more than a plan to chop down trees" (Rich,1990:310).An example of the consequences of this approach to lending can be found in the $23million World Bank scheme that will assist in road construction through and around106,000 hectares of pristine rainforest in Guinea, two thirds of which is to be openedup for timber production (Rich, 1990:310). Another TFAP project sponsored by theBank in north—east Thailand is setting up commercial timber plantations of eucalyptustrees, but is criticized by Thai villagers because of the damage to soil and water, and38the fact that forest dwellers will be pushed off their communal lands and deeper into theforests. Ghana has received substantial financial support for its timber industry from theWorld Bank in the past, and its forests are now being cut at more than double thesustainable rate by the World Bank's own estimates. Moreover, under the TFAP budgetfor Ghana, logging tenders must be at least 10,000 hectares in size and are granted tothe highest bidder, indirectly ensuring that this rate of cut does not decline (Leggett,1990:452). Yet another TFAP program supported by the World Bank intends to makeCameroon the largest forest product exporter in Africa by the end of the decade. Tofacilitate this, a major road to the sea will be built to open up for timber extractionfourteen million hectares of pristine tropical forest in the southeast (Leggett, 1990:454).Those who stand to profit by this approach to non-renewable resource extraction -multinational corporations, foreign commercial lenders, host country firms and hostgovernments - will no doubt continue to exert pressure for continued Bank support forthese types of projects. And pressure from within the Bank itself to build up large loanportfolios and move large sums of money mitigates against conservation and resourcemanagement-type projects. The direct commercial benefits of wood and wood productscannot be realized when forestry loans contain social and environmental objectives, andthe benefits derived from a more selective or cautious approach are broadly disbursedto an entire region or even country, rather than to the tree growers. As well, goodmanagement practices may restrain a host government's ability to grant specialconcessions to extracting companies, often a rich source of funds for a government(Stein and Johnson, 1979:118). Indeed, attempts which have been made to encourage39host governments to take a more long-term approach on forestry issues have often metwith great resistance, financial hardship dictating short term gains over long terminvestment.The importance of tropical forests as a carbon dioxide "sink" to offset the globalwarming impact of greenhouse gases and on the biological diversity issue is gainingattention; the involvement of Western countries in tropical deforestation was a majoritem on the agenda at the 1992 Earth Summit Conference in Rio de Janeiro. The WorldBank has, it seems, now admitted that its past lending policies have sometimes harmedtropical forests, and committed in June 1991, to stop all financing of commerciallogging in virgin rainforest. The controversial TFAP, as a result of the negativepublicity received by the Bank concerning its involvement with the plan, has beenrevised and its objectives redrafted. According to World Bank spokesmen, the newguidelines will end the confusion that has existed in the past between encouragingforestry and encouraging forest conservation.40CHAPTER 4: THE DYNAMICS OF POLICY—BASED LENDINGSome of the strongest and most widely publicized criticism of the Bank's operations inrecent years has centered on its shift to policy—based lending, referred to by the Bankas "structural adjustment lending"."Structural adjustment" is the term given to the set of macroeconomic policies advocatedby the Bank for the achievement of development. These policies are linked togetherand, according to Bank policy, to be implemented simultaneously. These aresummarized in the Bank's 1992 World Development Report:• domestic policies which curb spending, raise revenues, control borrowing andmoney supply, and maintain a competitive currency;• promotion of small—scale efficiency by freeing prices, deregulating markets,abolishing licencing systems and similar barriers to market entry, safeguardingproperty rights and investing in infrastructure;• liberalization of trade by ending protection for domestic industry, openingnational markets to imports and foreign investments, and removing restraints onexports;• making the necessary social investments that the market system will not providein essential social services such as primary education and health care (WorldDevelopment Report, 1992:x).41While these policies are described in the 1992 Report as part of the "emergingconsensus " on how development can be achieved in the current highly competitiveglobal economy, conditional World Bank lending is not new; many of the project loansof the 1960's contained some degree of mandatory policy change requirement, such asa revision to power rate structure to accompany a hydropower loan, where the Bank'slenders felt it necessary to ensure debt servicing (Mosley, Harrigan and Toye, 1991:27).The move in this direction was solidified by the introduction of "programme lending",which specifically separated "investment funds" from "general support funds" (such asassistance with a deficit balance of payments debt). This type of loan often made thefulfillment of particular conditions mandatory for full funding of the loan, and whilethey were primarily sectoral in nature, did on occasion broaden to includemacroeconomic concessions.The move to Structural and Sectoral Assistance Loans (SALS) came in the early 1980'safter the second oil shock of 1979. The Bank had been slow to recognize the severityof the global debt crisis, and was ill prepared for the sudden and rapid deterioration ofseveral less developed countries' current accounts that resulted from oil price hikes andU.S. fiscal and monetary policy. It also found itself"facing a situation in which new commercial bank lending todeveloping countries suddenly almost ceased while the interest rateon existing debt rose dramatically. Net transfers to developingcountries reached zero by mid 1983, and reverse transfers fromdeveloping countries reached $30 billion by 1987, the same yearthat the Bank began for the first time to receive more in financialinflows from developing countries than it was able to lend to them( Mosley, Harrigan and Toye, 1991:47). 1042The macroeconomic policies of many L.D.C. governments were in disarray as well, asa general result of the unforeseen high costs of debt service now imposed on them. Thisoccurred at a time when World Bank relations with developing countries wasoverwhelmingly project—based (Mosley, Harrigan and Toye, 1991:28), typically withfive year development cycles to run. The resultant price instability made it much moredifficult for the Bank to identify and appraise viable projects to support; in addition, thefinancial hardship for L.D.C. governments made domestic support of World Bankprojects difficult or impossible, and the important ongoing maintenance of projects wasfrequently neglected as a result."Given these conditions, the management of the World Bank concluded that if loans werenot to dry up completely, a new type of development plan was necessary despite thereluctance of the Executive Board to move in this direction.The World Bank Annual Report for 1988 explained that "SALS were needed to assistcountries to undertake a program of adjustment to meet an existing or to avoid animpending, balance of payments crisis" (World Bank Annual Report, 1988:22) but wenton to predict that this type of lending would be limited to ten percent or less of the totalloan portfolio. The deepening financial crisis, however, led to a rapidly increasingutilization of structural adjustment lending as a means of convincing more Lessdevelopped countries' governments to change their economic policies, and had reached30% of total lending by 1990 (Mosley, Harrigan & Toye, 1991:63).43Structural adjustment lending, then, became much more widely used in the Bank as aresult of the urgency of financial pressures expressed by commercial lenders. Politicalpressure was applied too from major shareholders, particularly the United States, to lendfor non—economic reasons. A clear example of this was the major loan grantedArgentina in 1988, despite that country's 41.25 billion debt to both U.S. commercialbanks and other World Bank loans (Harrigan and Mosley, 1989:48). In spite of theBank's reluctance to advance further funds, it did so on the urgings of then U.S.Treasury Secretary Baker, who was concerned about potential "turbulence in theSouthern cone" during the upcoming U.S. Presidential election (Harrigan and Mosley,1989:60).A consequence of this kind of high risk lending, due to the requirement of portfoliobalance, is that the Bank must lend more to low risk, low indebtedness countries likeIndia, Thailand and Botswana. This has led to criticism of a different sort; that theBank has become involved with and supportive of authoritarian regimes with poorhuman rights records.One quarter of the Bank's loans in 1979, for example, were allocated to fourgovernments generally recognized as violators of human rights — Brazil, Indonesia,South Korea and the Philippines (Lappe, 1980:31). During the 70's decade, fourcountries that had suffered either military takeovers or the imposition of martial lawreceived a sevenfold increase in World Bank lending — Uruguay, Chile, the Philippinesand Argentina. Zaire, which had received more than $468 million from the World Bank44in various forms by mid 1979, stands as a good example of this problem. Despiteenormous mineral wealth; 90 percent of the total population is classified as poor and areunderfed; the per capita supply of protein is among the lowest in the world and infantmortality rates, at 160 per 1000 births, are among the highest in the world (Lappe,1980:34). 12 Following the massacre of 700-1000 anti—government villagers in a 1978uprising, the World Bank, with U.S. support, granted the "moderate" Mobutu regimeanother project loan to rehabilitate oil—palme plantations managed by UnileverCorporation and two Belgian multinationals (Lappe, 1980:32). World Bank support ofthe South Korean government has also been criticized —"the south Korean government is a dictatorship bent onmodernization which has succeeded in spreading the social costs ofadjusting to a position in a world economy through repressivepolitical mechanisms " (Altvater, 1991:7).The Bank has persisted in rationalizing the need for this type of approach, despite thedocumented negative impact on the citizens of less developed countries receiving theseloans, on the basis that the conditions were necessary to improve the balance ofpayments, and accelerate the growth of exports and hence GDP. But analysts of thesepolicies and their consequences have generally conceded them to be largelyunsuccessful.A study done in 1991 by two World Bank advisors found"a disappointing impact....on GDP growth rates, and an alarmingtrend in terms of effect on investment and hence possibly futuregrowth a favourable impact in terms of the balance of payments45and current account, brought about by the stimulation of exportsand curbing of imports, but this contrasts sharply with theexpectations of Bank disturbing signs that the adverseeffects on GDP growth will persist for years to come" (Mosley,Harrigan and Toye, 1989:64)."In addition, the Canadian House of Commons Standing Committee on External Affairsand International trade commented in 1990 on the effectiveness of Bank policies inGhana such that:"even after five or six years of active structural adjustmentprograms, the country has not progressed very far in the recoveryprocess, which we would call the move back into a sustainablegrowth scenario" (House of Commons Standing Committee Report,1990:43)This suggested that the World Bank may itself be reviewing the "wisdom" of thestructural adjustment approach, following its announcement in 1990 of a shift backtoward its traditional emphasis on long—term project funding.Faced with growing criticism over the impact, both intentional and unintentional, of thistype of lending, plus the evidence that it has been largely a failure on the purelyeconomic front, the World Bank has begun to retract from the structural adjustmentarena, announcing in 1990 that the next decade would see a reduction in the 30% oftotal loans it had been making in this manner. Given the pressures on the Bank,however, the element of conditionality is not likely to disappear altogether.46CHAPTER 5: CHALLENGES AND CONTRADICTIONSGLOBAL ECONOMIC PRESSURESWhile the World Bank continues to publicize the progress it is making on various socialand environmental issues, and detractors continue to point out the shortcomings anderrors of their operations, there seems to be agreement that the future is likely to bringincreasing pressures on the institution, representative as it is of an economic orderbesieged.One of the most obvious and urgent of those pressures originates from the difficultiesbeing encountered by that economic order at the moment. Growth rates, seen as criticalto this perspective, have begun to slow amongst the advanced industrial countries; evennations thought to be somewhat immune to the vagaries of the marketplace, such asJapan, are experiencing recessionary conditions. Economists in Britain are now referringto the recession in that country as a "slump", and the German Bundesbank has foundit necessary to raise interest rates to a sixty one year high in order to protect its exports.Corporate profitability almost everywhere in the world is on the decline, and businessbankruptcies are at the highest level since the Great Depression of 1929. Financialinstitutions have redefined the notion of "risk" as a result of large scale collapses suchas the Robert Maxwell and the Olympia and York empires, and the Savings and Loandebacle in the United States continues to place an enormous strain on the resources of47the Federal Reserve Board in that country.The slowing world economy has been worsened by the unimproved indebtedness of theless developed countries, which has steadily decreased the purchasing power of thosecountries. Markets for advanced industrial countries' products are correspondinglyreduced, causing the loss of more than 1.6 million jobs in the U.S. alone in 1986according to the Joint Economic Commission of Congress (Steinberg, 1989:79).Shrinking markets cause exporting countries to take refuge in ever more protectionistmeasures, which was confirmed by the findings of the U.N. sponsored study oftwenty—four industrial countries in 1991. Twenty were found to be more protectionistthan they were ten years ago (U.N. Human Development Report 1992:68).For World Bank members, the tightening financial marketplace imparts many morerestrictive conditions on foreign lending. Projects will be scrutinized much moreseriously for flaws or indications that return on investment may be in jeopardy, and riskswill be carefully examined. Several World Bank projects have already become victimsof this new financial reality, and in fact the entire "mega" project approach favouredby the Bank may be threatened, due to the heavy capital outlays they require and thelengthy period of return on investment.48THE GROWTH OF POVERTYArguably, a principal consequence of the historical World Bank approach todevelopment is the steady deepening of a dependency relationship between the Northand the South.The Bank's first turn toward addressing issues of poverty was in the early 1970's underMacNamara, who had become preoccupied with causes and possible solutions to povertyand population issues. This mandate has persisted, and the Bank's approach to theproblem has been relatively consistent through the years.In the days of MacNamara, the conclusions about the causes of poverty were reflectedin the policies of the Bank — that people were poor because they were insufficientlyproductive. The 1990 World Development Report published by the Bank reflected theresurgence of concern over the plight of much of the World's population by detailinga strategy to alleviate poverty which echoes this sentiment, oulining policies which will"promote the productive use of the poor's most abundant asset — labour" (WorldDevelopment Report, 1990:3).The 1991 Report reiterates this theme that the poor must produce more, and emphasizesthe route to improve that productivity —49* market is the key to growth* integration into the global economy is essential* sound strategies are export-led* the door must be open to imports and foreign capitalPoverty, according to the World Bank, is related to environmental issues in that the poor"overtax the sustaining ability of their already impoverished environments, breedingmore poverty, etc." (World Development Report, 1991:5).This directly conflicts with the view of sustainable development theorists. The WorldCommission on Economic Development's 1987 publication "Our Common Future", forexample, presents considerable evidence of the built-in inequity of the internationaltrade and investment system, and the connection between dependence on that system andthe endurance of poverty. As Korten argues:"the pressures, for example, on non-industrial countries to increasetheir exports of primary commodities under export-leddevelopment strategies have increased environmental stress anddepressed international commodity prices. The more prices aredepressed, the worse the terms of trade the country faces, and thegreater the pressure to export still more simply to maintainestablished levels of foreign exchange earnings. The only certainbeneficiaries are the transnational corporations that dominate theinternational commodity trade (Korten, 1991:170).This same criticism of the Bank view is levelled by Robert Goodland in "Building onBruntland":50"While many nice things can be said about liberalizing and thusincreasing trade, the structure of trade, as we know it at present, isa curse from the perspective of sustainable development because ofthe drive for efficient resource use in the presence of significantenvironmental externalities and other market imperfections. Theonly resolution to this dilemma is to require full cost pricing ofresources which, in a regime of free trade, would cause countrieswhich practiced this to lose out to those which did not" (Korten,1991:168).Even the World Bank's own reports admit their policies have had no impact to date onthe eradication of poverty ideal. And in the final analysis:"equating pollution to poverty introduces definitional confusion inan intent to divert resources from one priority to another. Wecannot avoid the truth that sound development is totally dependenton a sustaining environment" (Stein and Johnson, 1979:15).LENDER LIABILITYLender liability for financial institutions encompasses two issues. The first is that ofcredit risk that might result in an inability to repay the debt to the lender if the borrowerhas incurred expensive environmental clean—up costs, or where the value of propertypreviously pledged as security against a loan is degraded as a result of environmentaldamage. The second category is direct liability risk, where the lender becomes directlyliable for the cost of the clean—up.51The emergence of lender liability increases the credit risk associated with loans madeto potentially polluting enterprises; it also raises questions about business previouslyconsidered low—risk. While loan analysts are generally experienced in assessing riskagainst the value of a loan, in the case of environmental damage there are often noprecedents to assist in such valuation.Many banks in Europe, Canada and the United States have already implemented policiesand practices designed to encourage greater environmental responsibility on the part ofborrowers, but this has not to date made them immune to third party liabilityprosecution in the event of loan default of a polluter.In the United States, the Comprehensive Environmental Response, Compensation andLiability Act of 1980 (CERCLA), and its later amendment, the Hazardous SubstanceResponse Trust Fund (known as "Superfund") were not designed as equitable legislation,but intended to identify "responsible parties" to pay clean—up costs of environmentaldamage. Lenders have not traditionally considered themselves "responsible parties", butin the landmark case of U.S. vs. Maryland Bank and Trust Co. (632 F.Supp. 573 (S.Md. 1986) a financial institution was held liable for the first time for the costs ofcleaning up hazardous waste contamination of property to which they assumed title aftera loan default (Karlsson, Understanding Site Assessments, p.42).Subsequent cases such as the PanAmericana de Bienes y Servicios vs. Northern BadgerOil and Gas Co. (1991) (W.W.R. 577) in Canada, where the Alberta Court of Appeal52set the legal rights of a secured creditor behind that of the environmental requirementfor clean-up; or the case of Kemtec Petrochemical Corporation case in Quebec, Canada,where five financial institutions "lent a total of $64.7 million and collected only 15%of that amount after bankruptcy proceedings threatened to involve them in a costlyclean-up" (McKenna, 1991:B16), are causing concern among lenders around the world.As a consequence, analytical tools are being developed in banking institutions includingthe World Bank, to augment the traditional performance measurements used in loanappraisal. Innovations such as the index of pollution intensity and future regulatoryexposures, usually calculated as the volume of toxic emissions divided by revenues, arebeing developed by the U.S. Investor Response Research Centre, and the re-design ofloan application forms, the increasing use of technical consultants to prepare reports onthe state of a property and more frequent insistence on environmental audits are allbecoming more common.The other probable side effect, already voiced by banking associations like the CanadianBankers Association, is an increasing restriction of credit access to certain types ofindustry, obviously resource extraction industries in particular." The possibility forenvironmental damage is automatically assessed in North American lending review now,and unless governments comply with financial institutions' demand for protection fromlegal action, spokespeople from the industry are predicting a much greater reluctance tofund this type of loan in the future.53This issue has the possibility of being a serious one for the World Bank, where so muchof the lending is allocated to facilitating resource extraction either directly or indirectly.The possibility of being held liable, or even partially liable, for pollution, rainforestdestruction or other forms of environmental degradation may prove to be a deterrentboth for the World Bank itself and the commercial banks of its members in makingwhat were previously thought of as "low risk" loans.GROWING CRITICISMAs well as the potential heavy costs that may result from the lender liability issue, theWorld Bank's mega—projects also stand to incur growing public condemnation andcriticism as a result of its support and involvement in some of these projects. The NamChoan Project in Thailand and the Silent Valley project in India were both halted bypublic pressure after the environmental costs became known. More recently, the SardarSarovar dam project on the Narmada River in Gujarat state in India, which woulddisplace more than 100,000 people to construct 150 medium—sized dams and 3000 smallones at a cost of more than $11 billion has come in for such heavy criticism that aspecial study was commissioned by the Bank's Executive Director. The study, headedby American Bradford Morse and Canadian Thomas Berger, was completed in June of1992, concluding that the negative consequences of the construction were such that the54project should not proceed. The fact that the World Bank commissioned an independentreview of this project, to which they apparently provided full access of information, isto be commended, and is perhaps proof of the degree to which it feels it must respondand open its decision—making process to public scrutiny.But public scrutiny can be extremely damaging, as the World Bank discovered inFebruary of 1992 when an internal memorandum, written by then Chief EconomistLawrence Summers, was leaked to The Economist and subsequently published. Thedocument matter—of—factly measured the cost of health—damaging pollution in terms ofthe value of the life lost or severely compromised, reasoning that since lives in lowwage countries were worth less, a rational decision would locate polluting companiesthere. Mr. Summer's strongly worded statements, such as:"I think the economic logic behind dumping a load of toxic wastein the lowest—wage country is impeccable, and we should face upto that....I've always thought that under—populated countries inAfrica are vastly under—polluted....while production is mobile, theconsumption of pretty air is a non—tradable shouldn't the WorldBank be encouraging more migration of the dirty industries to theL.D.C.'s?" ( The Economist, February 8/92:66).caused the magazine to receive a flood of angry protest letters in response. Despite hastydisclaimers by the World Bank denying that these statements represented Bank positionor policy, critics of the Bank's operations claim the memo represented exactly that. Ata time when the Bank is already under heavy fire for their continued involvement inenvironmentally risky projects, this kind of publicity only worsens its public image.55ORGANIZATIONAL STRUCTUREAccording to Bank critics, at a time when the World Bank needs grassroots public inputand involvement more than ever, it is functioning with a structure reminiscent of the1950's corporation - heavily administrative and hierarchical, with poor communicationand a lack of accountability on the part of the Bank's senior management, as well as adifference in style and philosophy on the part of the Executive Board and themanagement team.' The ever-present pressure to move money quickly continues totilt the balance in favour of large scale projects, and the loan review process continuesto lag behind public awareness and desire for participation.Like the IMF, the World Bank is run by a 20 member board to which each membercountry delegates a governor and a vice-governor. The fact that these delegatesrepresent, almost in entirety, the rich, industrialised countries is increasingly a subjectof criticism, particularly from non-governmental organisations. Not only is thedeveloping country often not at the table where decisions are being made about itsfuture, they charge, but the highly centralized nature of the Bank's operations makeswide and unrestricted access to current information about local ecological and socialconditions quite unlikely (Rich, 1990:319).The final decision with regard to problems arising from international agreements restswith the Board of Governors, meaning that interpretations are made by the industrialized56countries with two thirds of the votes. With regard to this structural inequity, nothinghas substantively changed since 1971, when the then finance minister of Indiacommented in a speech to the Bank Group:"There is a feeling among millions of people in the developingworld that the kind of partnership we have so far secured throughour international economic institutions is a grossly unequal one...theinternational institutions we created in the wake of the SecondWorld War, such as the World Bank and the InternationalMonetary Fund, reflected a philsophy which appears totally out ofdate today to most countries which have had very little to say inthe shaping of those institutions...the big powers who won thewar..reserved for themselves a predominant position in thegoverning bodies of the international institutions." (Reid, 1973:22).Certainly the issue of American influence also continues to appear with regularity incriticism of Bank decision-making. The fact that the President of the Bank is appointedby the Board from a nomination by the President of the United States makes the issueof non-partisanship a fairly obvious one, although in general the intensity of theAmerican influence has probably been diminishing since the 1960's (Reid, 1973:19).Nevertheless, the World Bank is often associated with U.S. policy-making. 16 Giventhe negative image of the U.S. on many high profile social and environmental issues,such as the official position on greenhouse gas emission reductions at the Rioconference, the association is for the most part not a positive one.57CONCLUSIONSUntil the beginning of the 1970's decade, no one involved in what was known as "ThirdWorld Development" questioned the basic assumption that the industrial developmentmodel that had been so "successful" in the "advanced, northern economies" was the oneto follow. Partially because the anticipated expansion of markets was something theFirst World required, and partially because there was little to challenge the efficacy ofthe industrial development model, development institutions proceeded to adhere to theconservative economic theories which had created them.Because development finance institutions tend to be conservative, they are also slow torespond to changing circumstances and new ideas. Signs that trickle-down and othertheories of the same ilk were not working should have been obvious by the lateseventies, if not earlier. By the time the debt crisis erupted into full bloom, seriousquestions should have been asked about the applicability of this model to the lessdeveloped countries. Instead, twenty years later the World Bank still clings to itsnotions about the Third World having been left out of the development process and thisbeing responsible for the declining standard of living in those parts of the world.By now, alternative development theory dictates, the conclusion should be obvious —that problems of poverty, over-population and environmental degradation are not relatedto under-development of the less developed countries, but to over-development of the58advanced industrial nations. It is the wasteful and exploitative consumption andaccumulation patterns of the North which are largely responsible for the plight of thepeople of the South, and until this basic fact is recognized and admitted, the erroneousbelief that it is possible for the whole world to emulate the standard of living in the richindustrialised world, persists.As McKibben concludes in "The End of Nature" —"We live at a radical moment in history, when the essentialcharacter of the world is changing" (McKibben, 1989:101).The World Bank is in many ways at the centre of the sustainable development issue.It has also undergone many major changes since its inception, and seen severaltransformations in its purpose and mandate. As Escott Reid described it:"the history of the past twenty five years indicates that the WorldBank is a vigorous organism, capable of healthy growth andadaptation to change" (Reid, 1973:138).Since then the pace of change, certainly on the environmental front, has increaseddramatically.The challenges posed by the dictates of truly sustainable development are formidable,and in many cases directly contradict the dominant philosophy that still prevails at theWorld Bank. Unless the conventional approach to development can be transformed bythe application of ecological economics to meet these challenges, then that institution59will no doubt see its pivotal role in world development eclipsed. But the possibility alsoexists for the World Bank to lead the way in deciding that we will go no further alongon the economic development path, in following that imperative toward endless andinhuman growth.60ENDNOTES1. The ecology—economy interface was broached by theorists like Pigou as early as1912 — see Principles and Methods of Industrial Peace,  MacMillan, London,1912, and Economics of Welfare, MacMillan, London, 1962 — but the underlyingideas can be traced back to writings of nineteenth century philosophers.2. This quote, from Rees, W. "The Ecological Meaning of Environment—EconomyIntegration" appeared originally in Drengson, A. "Protecting the Environment,Protecting Ourselves: Reflections on the Philosophical Dimension" in R. Bradleyand S. Duguid (eds.), Environmental Ethics, Vol.II, Simon Fraser University,Vancouver, 1989.3. For a discussion of the limiting nature of non—genetic factors such as resourcematerials and different forms of energy, and the importance of these limitationsin attaining a genetic potential see Boulding, K. "What Do We Want To Sustain?Environmentalism and Human Evaluations" in Costanza, R., EcologicalEconomics, pp. 22-31.4. See Georgescu—Roegen, N., "The Steady—State and Ecological Salvation: AThermo—dynamic Analysis", in Bioscience 27, No.4, 1977, pp.266-270.5. For a full discussion of the limitations of G.N.P. as a measure, see Herman Daly'sessay in the World Bank's Environment Department working paper"Environmentally Sustainable Economic Development: Building on Bruntland",July 1991, 85 pp.6. For a more detailed discussion of alternative indicators of human progress thanstrictly economic ones, see "The Indicators Crisis", Chapter 6, in Henderson, H.,Paradigms in Progress,  Knowledge Systems Inc., Indiana, 1991.7. Mexico, it soon became apparent, was only the tip of the iceberg; by the middleof the decade more than 70 developing countries were in serious debt difficulties.Africa, for example, has gone from a $5.8 billion debt in 1970 to more than$143.7 billion by 1990. House of Commons Standing Committee on ExternalAffairs and International Trade, June 1990, pp. 7-12.8. In fact this discontent with the Bank's lending activities resulted in the publicationin September 1987, of a booklet entitled "Financing Ecological Destruction: TheWorld Bank and the International Monetary Fund" by 28 environmental andindiginous peoples' groups, presented at the World Bank's Annual GeneralMeeting that year.9.^In addition, since the technological opportunity for energy efficiency is stilllargely ignored by the Bank, many of its projects vastly overestimate future61energy requirements, establishing efficiency level targets that were, in some case,reached many years ago.Even though studies commissioned by the Bank itselfhave indicated that between one third and one half of the new demand forelectricity in countries like Brazil and India through the year 2000 could beprovided through energy conservation and end—use efficiency, the proportion ofWorld Bank conservation and efficiency loans represents on average less than 2%of all energy and industry loans.10. The World Bank Annual Report for 1988 calculates World Bank net transfersduring that year from loans to Africa, Asia, Europe, Latin America and theCaribbean to total $711 million (U.S.)11. For a more detailed discussion of the problem of linking project aid allocationsto general indicators of economic performance see Mosley,P., Harrigan, J. andToye, J., Aid and Power — The World Bank and Policy—Based Lending,Routledge, London, 1991, pp. 29-32.12. For a comprehensive examination of the political economy of Zaire and itshistorical relationship with the World Bank see Gran, G. (ed.), Zaire: ThePolicitcal Economy of Under—Development,  Praeger Press, New York, 1979.13. For a fuller discussion of the strong adverse effects of adjustment as a whole ondistributional and social welfare indicators, see Cornia, G., Jolly. R. and Stewart,F., Adjustment with a Human Face: Protecting the Vulnerable and PromotingGrowth, Clarendon Press, Oxford, 1987, referred to in Harrigan and Mosley,1989.14. For an explanation of the issues as perceived by the banking industry and adiscussion of the implications of current Canadian law and U.S. legislativeapproaches to environmental liability, see the Canadian Bankers Associationposition paper, "Sustainable Capital: The Effect of Environmental Liability inCanada on Borrowers, Lenders and Investors", November 1991.15. One of the frequent criticism of Bank operations centers around its restriction ofaccess to information concerning its activities. This is sometimes taken toextremes, as when the U.S. Executive Director Patrick Coady requested in early1990 a draft appraisal report for a forestry loan proposed for the Ivory Coast,from bank staff. The request was denied. See Rich, B., "The Emperors's NewClothes", p. 316.16. 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