BACK DOOR Newsletter on East Timor .........home ...... Sep news

" … it has proved difficult to prevent corruption and other problems in privatising monopolies … Advocates of privatisation may have overestimated the benefits of privatization and underestimated the costs, particularly the political costs of the process itself and the impediments it has posed to further reform" Joseph Stiglitz, head of World Bank’s Asia-Pacific branch
"The time has come to show that there is a critical mass of members of civil society who are questioning the projects and policies of the World Bank ... more people than just AID/WATCH are concerned about the bank and its activities." James Arvanitakis, Campaign Director of AID/WATCH
See also: BD: Financing Reconstruction in East Timor / Fundu Ba Rekonstrusaun Timor Loro Sa’e / Bantu uang: Rékonstruksi

The World Bank –
An overview and its impacts on
East Timor and Papua New Ginuea

By James Arvanitakis*

AID/WATCH: Monitoring the Development Dollar

Before we begin, I would like to give a short overview of AID/WATCH’s work. In essence AID/WATCH monitors the development dollar by highlighting the negative impacts of development projects. Our main focus is the impacts of official development in Asia, particularly the Mekong area, and the Pacific. We have an ongoing project of critiquing the Asian Development Bank, and have recently launched Timor Watch, a project that reviews the developments proposals and projects of East Timor. This project includes reviewing the World Bank proposals as well as projects being managed by non-government organisations.

The World Bank and International Monetary Fund

The 1944 Bretton Woods conference on the global financial system resulted in the creation of the World Bank and IMF. This was done to assist in financing the reconstruction of Europe devastated by World War II and to provide a mechanism for promoting international trade. Both institutions come under the broad United Nations (UN) umbrella as they have legal relationships with UN agencies, but remain otherwise autonomous bodies.

While the World Bank has 180 member nations and the IMF 81, these institutions are dominated by the major powers of the North. Contributions and the voting structure are calculated in proportion to a nation’s economic wealth. The G7 countries – Canada, France, Germany, Italy, Japan, the UK and the US – control 47 per cent of the Bank’s resources.

Members of the IMF can draw on its funds to support their currency when it is weak, borrow money to meet short-term foreign payment requirements, and receive loans. The third player is the WTO, which replaced the GATT. I will not discuss the WTO at all due to time restrictions.

The Goals

Despite the varying goals of the Bretton Woods trio, this author believes that it is possible to place their objectives under four broad headings**, which are to:

* assist in poverty reduction;
* promote currency and exchange rate stability;
* facilitate the expansion and balanced growth of international trade; and
* promote improved governance structures amongst all governments.
 

Reduction in poverty

Poverty reduction became the key goal of the World Bank in 1990 (www.worldbank.org) and the core focus of the IMF in 1999 (www.imf.org).

In assessing its own effectiveness in reducing poverty, the World Bank admitted that many of its projects had failed, and often aggravated the inequalities (World Bank 2000, p 17). In its "1999 Annual Report of Development Effectiveness", the Bank admitted that the majority of projects fail to demonstrate any sustained benefits in terms of poverty reduction. The report reviewed the performance of 28 nations that had borrowed from the Bank between 1981 and 1997. The following bleak conclusions which clearly show a decline in economic and human well-being drawn:

* In 40 per cent of the nations, per capita income either failed to grow or decreased;
* In 85 per cent of cases, per capita income grew by less than 1 per cent a year in the 1990s;
* In 25 per cent, the share of the population in absolute poverty increased;
* In 23 per cent, life expectancy of the general population declined;
* In 54 per cent, the people experienced stagnating per capita income, rising poverty, declining life expectancy, or a combination of these events;
* The percentage of savings as a percentage of GDP, a measure of long-term economic health of a nation (Todaro 1985), stagnated at less than 10 per cent or was declining.

The World Bank admitted these failings were due to the policies it had implemented and its inadequacies in assisting with the goal of poverty reduction. Only a fifth of its country strategies focused on equity and distribution, and there was a general failing to address the links between poverty and macro-economic policies such as trade and exchange rate policy (World Bank 2000, p. 18).

Joseph Stiglitz, former chief economist of the IMF, who stated that the economic policies of the World Bank and IMF "often make things worse – turning slowdowns into recessions and recessions into depressions… in essence, poverty is the result of these policies" (Stiglitz 2000).

The inability of the IMF and World Bank to effect poverty reduction was confirmed by the Institutional Financial Institutions Advisory Commission of the U.S. Congress (also known as the Meltzer Commission), which stated that these organisations are "irrelevant" to the goal of eradicating poverty (IFIAC 1999). The Commission went on to say that the IMF should cease lending to poor nations, as it aggravate the problem (ibid.).
 

Currency stability

Currency stability has always been central to the goals of the IMF and World Bank. Until 1973, this goal was largely achieved by a fixed exchange rate system, restraining the flow of capital. The floating of the US dollar in 1973 saw these restrictions disappear, and exchange rates and capital flows became subject to market forces. Most trading nations have now implemented floating currencies.

The currency and capital markets of today are completely different from those in 1973. Many now describe the current system as "casino capitalism", as speculators attempt quick profits by gambling around the clock on the direction of exchange rates or interest rates. Speculation now estimated to represent 97.5 per cent of the US$1.5 trillion traded per day or US$548 trillion per annum.

Instability is now endemic in the currency and capital markets. This is caused by technology allowing massive amounts of capital to move in and out of nations in microseconds, decreasing government controls and new financial derivatives. There emerges the potential for previously unimaginable financial instability

National economies and local currencies are now subject to the volatile nature of markets through speculation and world capital movements. Fund managers and individuals, have the power to threaten central banks. Speculators and traders benefit from this, as they have a greater chance of realising profits during periods of currency instability.

The promotion by the World Bank and IMF of economic liberalisation and the free market "mantra", combined with the WTO reducing financial investment restrictions aggravates. The World Bank and IMF have promoted economic liberalisation by requiring borrowing nations to implement SAPs before loans are advanced. SAPs include the removal of trading restrictions and government regulation in an attempt to attract investors.

The removal of exchange rate controls has promoted speculation by transferring the control of currencies to market forces. Under such conditions, currencies are at the mercy of speculators, who move massive amounts of capital in and out of economies with profit the only driver. The Meltzer Commission criticised the IMF for being an agent that institutionalises currency instability rather than promoting stability.

Both the Russian and Asian financial crises provide strong evidence of the role of IMF and World Bank as agents of instability. The Asian crisis began in 1997, with Asia as a whole, excluding China, experiencing negative growth in 1998. The collapse of Asian currencies and economies was bought on by massive capital outflows that are often inherent in the economic liberalisation models promoted by the World Bank, IMF and WTO. Again the systemic failure of the Bretton Woods trio was evident at the time of the currency crisis. The solutions offered by the trio basically required greater liberalisation, was one of the key causes of the crisis itself.
 

Stability and trade balance

Economic globalisation and international trade are not balanced phenomena, leading to the more economically powerful nations of the North disproportionately gaining at the expense of the South. The World Bank’s promotion of the free market mantra that leads to such systemic inequity. There has been a failure to bring stability and balance to trade, particularly for those nations that seek assistance when attempting to alleviate poverty. To illustrate the point that trade is uneven, Jordan (1994) cites World Bank and OECD studies that under GATT, world trade would add $213 billion in income, but sub-Saharan Africa would be $2.6 billion worse off.
 

Corruption and improved governance

Although "governance" is a somewhat difficult term to define, the World Bank defines it as more accountable, responsible and transparent government (www.worldbank.org). Central to this definition is the absence of corruption. Once seen as a political problem and outside their purview, fighting corruption is now central to the aims of both the World Bank and IMF. Both have now introduced strategies that stress anti-corruption in the design of economic reforms, and press for strengthened "governance" and public sector management (ibid.).

Despite this rhetoric, both the IMF and World Bank processes appear to lead to major corruption. Although these institutions have not been directly implicated, the SAPs they promote have resulted in many corrupt practices (CornerHouse 2000).

This is illustrated by reviewing the consequences of the privatisation programs supported by the IMF and World Bank. Driven by the free market "mantra", SAPs have promoted the privatisation of state enterprises. Privatisation is a component of 70 per cent of structural adjustment loans made by the World Bank.

In many instances, the results appear damning of both the World Bank and IMF. The promotion of corruption by World Bank and IMF policies was confirmed by the head of World Bank’s Asia-Pacific branch, who stated that infrastructure privatisation had become a "horror story" due to a high level of corruption. Further, Joseph Stiglitz (1998), made the following admission:

"… it has proved difficult to prevent corruption and other problems in privatising monopolies … Advocates of privatisation may have overestimated the benefits of privatization and underestimated the costs, particularly the political costs of the process itself and the impediments it has posed to further reform".

One reason for this appears to be in the demands made by the Bank and IMF on processes that recipient nations must adopt, which include inflexible and unrealistic deadlines that do not allow for the establishment of a workable framework for regulation, a fact acknowledged by an IMF review team, that noted the privatisation process begins before the appropriate legal framework is implemented or state-laws passed. The results are a lack of transparent and open bidding processes, an absence of an appropriate legal framework to prevent insider trading, as well as a lack of preparation in selling the enterprise – all deficiencies that are key to corruption flourishing.

It appears that the World Bank cannot deny that its policies assist the process of corruption, and in essence fail in their goal for better governance. Secrecy is valued over transparency and accountability , and economic expansion ahead of community development. This establishes a framework for corrupt practices.
 

The World Bank and environmental management … has it succeeded?

The World Bank is the largest source of funds for development projects. It has been severely criticised for funding projects that have resulted in ecological disasters causing pollution and deforestation, requiring export agriculture rather than domestic food production, and forcing resettlement of indigenous peoples.

In recognition, the current World Bank president James D. Wolfensohn, announced a reorganisation plan to improve the Bank’s effectiveness – the fifth major attempt to reorganise and redirect the Bank in a decade. The proposal aimed to increase the success rate of projects from below 50 per cent to 75 per cent by introducing environmental standards, focusing on nations that are relatively stable and have a record of using aid effectively, moving away from construction, and increasing partnerships between the Bank and private investors.

Critics of the World Bank argue that the promised reforms have had little impact in moving projects towards environmental sustainability (50 Years is Enough www.50years.org). The new standards only apply to specific projects, not SAPs. This means that almost 70 per cent of the developments funded by the Bank are not included in these standards.

Another attempt to "green" the World Bank came in the form of establishing the Global Environment Facility (GEF). The World Bank in conjunction with UN agencies, established the GEF in November 1990. It was originally set up to finance projects and training programs leading to positive environmental outcomes and guiding global funds into environmental technologies. Although some transfer of technology has occurred, Rich (2000, p.202) notes that this has been limited.

The administration of the GEF has a number of flaws, particularly as it relies on environmental impact assessments undertaken by the borrowing country. There is also only a limited requirement to consult the local, affected population (ibid.). In addition, the amount of money flowing through the GEF is simply dwarfed by the "other" projects funded by the World Bank (Porter and Brown 1996).
 

Structural adjustment programs (SAPs)

The IFIs also promulgate economic globalisation by forcing strict SAPs on borrowing nations (Bello 2000). At the core of SAPs is the opening up of the national economy to global market forces, privatisation of public assets and a focus on export orientated growth rather than food security (Khor 2000).

Amongst other things, SAPs require borrowing governments to safeguard the value of investments (ibid.). This is undertaken by prioritising a low inflation environment ahead of other economic aims, often through the use of interest rate policy. Improved interest rate differentials act to entice the inflow of international capital.

The use of interest rate policy can, of course, lead to protection of assets by limiting economic activity. The human and environmental consequences of higher interest rates can be substantial, as debt increases and unemployment rises. The selling of publicly owned and environmental assets becomes a priority to meet debts and counter the effects of high interest rates. If a government wants to reverse such impacts by decreasing interest rates, falling interest rate differentials and possible rising inflation***, may cause capital to disappear and increase exchange rate volatility.

Capital mobility to allow creditors to freely enter and exit a country with minimal risk is another requirement of SAPs (Khor 2000). This further places the stability of the currency at the mercy of speculators.

SAPs also focus economies towards export orientated primary markets. The environmental consequences of this are discussed in section 3.2.3. The additional impact for low-income nations is the reliance on primary produce markets that over time have been experiencing declining terms of trade. The IFIs must take partial responsibility for this decline, for it is they who direct economies to invest in primary products that have become over supplied.

In partial recognition of these issues, the IMF and World Bank introduced social safely net components into the SAPs in the 1980s. The aim is to cushion the negative blows of economic liberalisation through private sector investments in a wide range of areas, including environmental conservation. In contradiction to these stated aims however, is that the nations economy is further liberalised due to a reliance on private sector investment in these public arena.

SAPS often include resettlement of people. It has been estimated that 3.2 million people are being resettled by on-going bank projects is from the following publication. There is a note accompanying the figure, which states the following: The World Bank does not keep accurate track of the numbers of people displaced each year by Bank-financed projects, nor has it kept track of people who are continuing to suffer from the consequences of failed resettlement. According to a World Bank Inventory of Projects Involving Involuntary Resettlement dated October 4, 1999, the Bank is supporting 223 active projects that are involuntarily displacing 2,634,877 people. However, a similar Inventory dated May 13, 1999 put the numberof people affected by projects involving involuntary resettlement at 3,160,000. Maninder Gill, Coordinator of Resettlement Thematic Group at the World Bank, has estimated that a further 500,000 people are affected by "voluntary" resettlement and that 90% of voluntary resettlement is taking place in China.
 

The World Bank and PNG

There have been a number of structural adjustment loans in PNG, imposed since 1989. In 1995, there was a second one imposed, that saw the World Bank pledge an additional $325 million. The lastest loan is also worth about $300 million.

PNG remains one of Australia’s biggest recipience of aid. With all this money, what are the result. In a recent World Bank survey, the following points were made:

Interest rates 23 per cent.

Inflation 14 per cent.

Unemployment 36 per cent.

Corruption endemic.

Only a third of children is at primary school and only half the population is literate.

Central bank viability is threatened.

Top of the world table in violent crime.

The World Bank concludes in its recent report on Papua New Guinea, its tone uniquely blunt: "Most firms view the State as an opponent of business ... the country has experienced an almost complete failure of governance."

After 12 years of SAP, the PNG economy is failing in all catagories. But who is to blame. Well, in all the reviews that discuss the inability of various governments to manage PNG, there is a one fact that continually gets ommitted – that the World Bank has funded a number of disasters that have lead to excessive debt burdens, corruption and the selling of assets.

Over the years, SAPs PNG have resulted in some of the following:

* Repealing of minimal wages act
* Abolition of prices controls on basic food stuffs
* Introduction of higher fees for public health
* Privatisation of state owned enterprises… including the government owned banking corporation

The World Bank has stated clearly that its programs have failed. Klaus Rohland, the bank's PNG country director, stated "there are no quick fixes, with the last structural adjustment program only five years ago failed - had "a checkered record of compliance and implementation". I am not sure if our friend Klause was talking about the Bank or the government.

This made it hard to process such a program through the bank's board once more. "With so many nations starting to behave, in governance terms, it's increasingly difficult to convince bank shareholders to spend money on a non-performing country."

Despite the failues, the World Bank refuses to acknowledge that it is responsible for the above statistics. After all, was it not the Bank that implemented these policies that lacked accountability and transperancy. So, what solution does the Bank offer, more of the same. But what will more of the same bring? The answer quite simply is, more of the same.

So to summarise what this all means, I will quote Kuman Bomai, one of the student activists who organised the protests:

".The students are petitioning the government to remove the IMF and WB out of the country. This comes about as a result of the IMF..WB's instruction to the government of PNG to sell off the Papua New Guinea Banking Corporation (BNGBC) which is the only bank owned by the Nationals… Over the past three years our water supply and Electricity were sold in the hope to bail the country out of the economic crisis. However, the economy of the country has never been impproved and on the contrary kept deteroriating. And now they have instructed the government to sell off the PNGBC, and to be follwed by the only nationaly owned Air-line, the Air New Guinea."

A day after we received this email, Police trained as part of Australia’s aid budget to PNG shot and killed peaceful protesters.
 

The Soup Kitchen

On the 1 August 2001, there is an opportunity to show the World Bank that such policies are not acceptable. James Wolfensohn is coming to town to speak at a business leaders dinner. You can spend $250 to eat with Wolfensohn, or join us out the front for a free soup kitchen.

Aidwatch and many other ngos have met with Wolfensohn in the past to discuss these issues. the time has come to show that there is a critical mass of members of civil society who are questioning the projects and policies of the world bank, which is why a letter and soup kitchen is so important - it shows that more people than just aidwatch are concerned about the bank and its activities. The time has come to move beyond dialogue towards showing our strength and its important that he sees this not just in borrowing countries.

So, please take a brochure and attend the Soup Kitchen and the teach in… it is part of the process for us to make a statement. Thank you


* James Arvanitakis is the Campaign Director of AID/WATCH, a community based organisation that "monitors the development dollar". James is currently undertaking his PhD, were he is investigating alternative forms of economic development. James has been a campaigner for a number of years, following an epiphany that saw him resign from his position within the banking and finance sector.

** The high level goals of these three organisations are very similar and are often used interchangeably, particularly of the World Bank and IMF. The supporting authors (Siebert, 1999 and Gilpin, 1999) do little to discriminate between these organisations.

*** The concept of inflationary perceptions is also an important element here, but is beyond the scope of this thesis.


Bahasa Indonesia:
AID/WATCH   Monitor dan Kampanye atas dampak dampak sosial dan Lingkungan dari Bantuan Pembangunan Australia  Updated July 21
Profil Organisasi:
Latar Depan: AID/WATCH adalah sebuah organisasi berbasiskan pada masyarakat, tidak mengambil untung, melakukan kampanye atas keterlibatan Australia dalam bantuan luar negri dan proyek proyek, program dan kebijakan pembangunan.
Sewaktu kami memonitor Dolar pembangunan, kami bekerja untuk memastikan bahwa uang bantuan tersebut menjangkau individu, masyarakat dan lingkungan yang tepat.
AID/WATCH bekerja sama dengan organisasi dan masyarakat di negara negara berkembang, yang kebanyakan berada di daerah Asia Pacifik, dimana masyarakat terkena dampak yang merugikan dari aktifitas proyek pembangunan Australia.
Hal ini bisa terjadi melalui program program bantuan bilateral, Bank bank pembangunan multilateral dimana Australia berkontribusi, seperti World Bank, IMF, ADB dan perusahaan perusahaan Australia termasuk EFIC (ECA) yang dimiliki oleh pemerintah Australia.
Aliran dari uang bantuan bisa jadi sangat positif terutama dalam program program kesehatan dan pemulihan darurat (emergency).
Profil Organisasi AID/WATCH: http://www.aidwatch.org.au/timor/indo_profile.html
Timor Watch: Menyadari besarnya peran Australia pada pembangunan di East Timor maka AID/WATCH telah memulai kampanye 'Timor Watch' yang akan bekerja sama dengan Organisasi kemasyarakatan lokal untuk memonitor peran dari dana bantuan dan agen pembangunan dalam proses pembangunan kembali East Timor.
TIMOR WATCH: June 20 2001: http://www.aidwatch.org.au/timor/twindex.html
Informasi Lebih Lanjut: Untuk informasi lebih lanjut silahkan melakukan kontak dengan AID/WATCH di:
Kontak Person: Bahasa Indonesia: Yoga Sofyar (Campaigner) Bahasa Inggris: James Arvanitakis (Director); Tim Anderson (Campaigner); Melanie Gillbank (Campaigner).
Telp: +61 2 9387 5210  Fax: +61 2 9386 1497  Alamat Pos: PO Box 652, Woollahra NSW 2025, AUSTRALIA
Email: aidwatch@mpx.com.au  Homepage: http://www.aidwatch.org.au

English:
AID/WATCH   Monitoring the Development Dollar  Updated July 14
AID/WATCH is a community-based, not for profit, activist group that campaigns on Australian involvement in overseas aid and development projects, programs and policies. AID/WATCH works with partners in low-income countries, including East Timor, where people are adversely affected by Australian development activities. This may occur through bilateral aid programs, multilateral development banks and Australian corporations. AID/WATCH also aims to inform the Australian community of how their aid dollar is being spent and what impact it is having, believing that increased awareness of the reality of international aid will lead to aid programs that truly benefit the local population.
Purpose: To support people and communities in low-income countries to determine their own development futures; to ensure that aid money reaches the right people, communities and their environments, and that aid projects are implemented with stringent environmental, ethical, social and cultural guidelines
Telephone from within Australia: (02) 9387-5210  Telephone from overseas: +61 2 9387 5210  PO Box 652, Woollahra NSW 2025, AUSTRALIA
Email: aidwatch@mpx.com.au  Homepage: http://www.aidwatch.org.au
The World Bank in East Timor: July 5 2001: http://www.aidwatch.org.au/timor/wb_et.html
TIMOR WATCH: June 20 2001: http://www.aidwatch.org.au/timor/twindex.html
AID/WATCH items added to BACK DOOR prior to June 2001: http://www.pcug.org.au/~wildwood/aidwatchbackdoor.htm


See also:
BD: Financing Reconstruction in East Timor / Fundu Ba Rekonstrusaun Timor Loro Sa’e / Bantu uang: Rékonstruksi - A collection of recent reports and articles


BACK DOOR Newsletter on East Timor .........home ...... Sep news
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