Adjusting the Poor

excerpted from the book

When Corporations Rule the World

by David C. Korten

published by Kumarian Press, 1995

In the flurry of global institution building that followed World War II, the spotlight of public attention was focused on the United Nations (UN), which was to be inclusive of all countries, each with an equal voice- at least in its General Assembly. Delegates to the UN are public figures, and debates are open to public view and often heated. Yet the General Assembly has little real power. The real ability to act is vested in the Security Council, in which each of the major powers maintains the right of veto. Judging from its governance structures, it must be concluded that the UN was created primarily to function as a forum for debate.

In contrast, three other multilateral institutions were created with relatively little fanfare to operate outside the public eye-the International Bank for Reconstruction and Development (commonly known as the World Bank), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT). These three agencies are commonly referred to as the Bretton Woods institutions, in tribute to a meeting of representatives of forty-four nations who gathered in Bretton Woods, New Hampshire, July 1 - 22, 1944, to reach agreement on an institutional framework for the post-World War II global economy. The public purpose of what became known as the Bretton Woods system was to unite the world in a web of economic prosperity and interdependence that would preclude nations' taking up arms. Another purpose in the eyes of its architects was to create an open world economy unified under U.S. leadership that would ensure unchallenged U.S. access to the world's markets and raw materials. Two of the Bretton Woods institutions- the IMF and the World Bank-were actually created at the Bretton Woods meeting. The GATT was created at a subsequent international meeting.

Although formally designated as "special agencies" of the UN, the Bretton Woods institutions function nearly autonomously from it Their governance and administrative processes are secret-carefully shielded from public scrutiny and democratic debate. Indeed, the internal operating processes of the World Bank are so secretive that access to many of its most important documents relating to country plans, strategies, and priorities is denied to even its own governing executive directors. In the World Bank and the IMF, the big national powers have both veto power over certain decisions and voting shares in proportion to their shares of the subscribed capital-ensuring their ability to set and control the agenda.

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In their roles as international debt collectors, the World Bank and the IMF have become increasingly intrusive in dictating the public policies of indebted countries and undermining progress toward democratic governance and public accountability. As Jonathan Cahn argues in the Harvard Human Rights Journal:

"The World Bank must be regarded as a governance institution, exercising power through its financial leverage to legislate entire legal regimens and even to alter the constitutional structure of borrowing nations. Bank-approved consultants often rewrite a country's trade policy, fiscal policies, civil service requirements, labor laws, health care arrangements, environmental regulations, energy policy, resettlement requirements, procurement rules, and budgetary policy." In its governance role, the World Bank-a global bureaucracy-is making decisions for people to whom it is not accountable that would normally be the responsibility of elected legislative bodies. The very process of the borrowing that created the indebtedness that gave the World Bank and the IMF the power to dictate the policies of borrowing countries represented an egregious assault on the principles of democratic accountability. Loan agreements, whether with the World Bank, the IMF, other official lending institutions, or commercial banks, are routinely negotiated in secret between banking officials and a handful of government officials-who in many instances are themselves unelected and unaccountable to the people on whose behalf they are obligating the national treasury to foreign lenders. Even in democracies, the borrowing procedures generally bypass the normal appropriation processes of democratically elected legislative bodies. Thus, government agencies are able to increase their own budgets without legislative approval, even though the legislative body will have to come up with the revenues to cover repayment. Foreign loans also enable governments to increase current expenditures without the need to raise current taxes-a feature that is especially popular with wealthy decision makers. The same officials who approve the loans often benefit directly through participation in contracts and "commissions" from grateful contractors. The system creates a powerful incentive to over borrow.

In effect, those officials who sign foreign loan agreements are obligating the people of the country to future financial obligations completely outside of any process of public review and consent. This becomes especially egregious when, as has happened to millions of people in Bank client countries, the loan-funded projects displace the poor from homes and lands, pollute their waters, cut down their forests, and destroy their fisheries. Then, adding insult to injury, when the bills come due, the poor are told that their social services and wages l must be cut to repay the country's loan obligations.

The Corporate Connection

Although it seeks to create an image of serving the poor and their borrowing governments, the World Bank is primarily a creature of the transnational financial system. The Bank's direct financial links to the transnational corporate sector on both the borrowing and the lending ends of its operation have received far too little attention. Technically, the Bank is owned by its member governments, which contribute its paid-in capital; this was only $10.53 billion, as of 1993. In addition member governments have pledged $155 billion that can be called by

the Bank if needed to meet its financial obligations. The paid-in capital and the pledges are not actually loaned out. They secure the Bank's extensive borrowing operations in the international financial markets, where it raises the funds that are then re-lent to governments at more favorable rates than they could obtain by borrowing directly.

Although the Bank lends to governments, its projects normally involve large procurement contracts with transnational construction firms, large consulting firms, and procurement contractors. These firms are one of the Bank's most powerful political constituencies. The area of Bank operations that is watched most closely by the Bank's executive directors-representatives of its shareholder governments- is the procurement process. Each director wants to ensure that the countries he or she represents are getting at least their fair share of procurement contracts. The U.S. Treasury Department is quite up front in its appeals to the corporate interest in supporting funding replenishments for the Bank. Treasury officials point out that for every $1 the U.S. government contributes to the World Bank, more than $2 comes back to U.S. exporters in procurement contracts. As Treasury Secretary Lloyd Bentsen assured Congress in 1994, "The dollars we have sent abroad through the development banks come back home in increased U.S. exports and more U.S. jobs."

The sole function of one arm of the World Bank, the International Finance Corporation, is to make government-guaranteed loans on favorable terms to private investors whose projects are too risky to qualify for commercial bank financing. It accounts for 10 to 12 percent of total World Bank lending. The potentials for abuse are even greater than with the Bank's core lending programs. To date, the Bank has kept the International Finance Corporation so far out of the public eye that it is seldom mentioned, even by Bank critics. However, given its own ideological belief in free-market forces, it seems difficult for the Bank to justify a major operation devoted to using publicly guaranteed funds to finance large private ventures that are so risky that commercial banks will not fund them.

If the Poor Mattered

When the formation of the World Bank was proposed, Republican Senator Robert Taft emerged as a formidable opponent. His argument, made in 1945, reveals a significant insight into why foreign aid based on large financial flows is a deeply flawed idea:

"I think we overestimate the value of American money and American aid to other nations. No people can make over another people. Every nation must solve its own problems, and whatever we do can only be of slight assistance to help it over its most severe problems.... A nation that comes to rely on gifts and loans from others is too likely to postpone the essential, tough measures necessary for its own salvation.

Taft maintained that the major beneficiaries would be Wall Street investment bankers: "it is almost a subsidy to the business of investment bankers, and will also undoubtedly increase the business to be done by the larger banks. Subsequent events have substantially affirmed Taft's argument.

Properly understood, development is a process by which people increase their human, institutional, and technical capacities to produce the goods and services needed to achieve sustainable improvements in their quality of life using the resources available to them. Many of us call such a process people-centered development-not only because it benefits people but also because it is centered in people. It is especially important to involve the poor and excluded, thus allowing them to meet their own needs through their own productive efforts. A small amount of help from abroad can be very useful in a people-centered development process, but too much foreign funding can prevent real development and even break down the existing capabilities of a people to sustain themselves.

Debates about import-substitution versus export-led development rarely acknowledge the people-centered alternative. Both start from the top, focusing on the production of more of the things that people who are already well-off want to buy. Poor people seldom buy imported goods. Their needs are met by simple locally produced goods. When a country seeks to replace imports with domestic production, it usually means producing at home more of the goods that those who are relatively well-off buy from abroad. When a country seeks to increase its exports, it generally means gearing domestic productive capability to producing things for relatively well-off foreigners. In theory, either strategy will produce more jobs for poor people so that they can participate m the money economy. But usually the jobs these strategies provide are too few and too poorly compensated to eliminate poverty. Either strategy can, and in all too many instances does, displace local production of the things that poor people use in order to produce more of the things that wealthier people want-even depriving the poor of their basic means of livelihood, such as when the lands of small farmers are taken over by estates producing for export.

Let's reduce the problem to its basics. Poverty-generally defined as a lack of adequate money-is not the issue. It is the deprivation associated with a lack of money that is the problem-the lack of access to adequate food, clothing, shelter, and other essentials of a decent life. This simple fact suggests a people-centered alternative to both the import-substitution and export-led development models: pursuing policies that create opportunities for people who are experiencing deprivation to produce the things that they need to have a better life.

This is, in many respects, what Japan, Korea, and Taiwan did. Each made significant investments to achieve a high level of adult literacy and basic education, carried out radical land reform to create a thriving rural economy based on small farm production, and supported the development of rural industries that produced things needed by small farm families. These became the foundation of larger industries. The development of these countries was equity-led, not export-led- contrary to the historical revisionism of corporate libertarians. Only after these countries had developed broad-based domestic economies did they become major exporters in the international economy.

From the standpoint of transnational corporate capital and the World Bank, a people-centered development strategy presents a major problem. Since it creates very little demand for imports, it also creates little demand for foreign loans. Furthermore, it favors local ownership of assets and thus provides few profit opportunities for transnational corporations.

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If measured by contributions to improving the lives of people or strengthening the institutions of democratic governance, the World Bank and the IMF have been disastrous failures-imposing an enormous burden on the world's poor and seriously impeding their development. In terms of fulfilling the mandates set for them by their original architects-advancing economic globalization under the domination of the economically powerful-they both have been a resounding success. In addition, the IMF was highly successful in averting, at least temporarily, a global financial crisis on terms favorable to the Northern commercial banks. Together, the Bank and the IMF have helped build powerful political constituencies aligned with corporate libertarianism, weakened the democratic accountability of Southern governments, usurped the functions of democratically elected officials, and removed most consequential legal and institutional barriers to the recolonization of Southern economies by transnational capital. They have arguably done more harm to more people than any other pair of nonmilitary institutions in human history.

When Corporations Rule the World