Global Policy Forum

By Nadia Martinez *

As the controversy around Iraq War architect Paul Wolfowitz's uncertain future as president of the World Bank intensifies, the financial institution is not only losing supporters. It's also losing victims. In Latin America, countries are paying off their World Bank loans early, cutting off ties with the Bank, and creating their own financing instruments to replace the world's oldest multilateral lending agency. Unfortunately, the latest corruption scandal involving questionable promotions and outrageous salary increases for Wolfowitz's girlfriend, Shaha Riza, is just the tip of the iceberg when it comes to doubts about the World Bank's credibility, legitimacy and capacity to fulfill its stated mission of eradicating world poverty. Poor countries throughout the world should follow Latin America's lead and desert the planet's biggest hypocrite.

Breaking the Debt Ties

Since its creation over 60 years ago, the World Bank has provided trillions of dollars in loans to poor countries. In Latin America, in recent years World Bank financing –though diminishing—accounts for about 20 percent of multilateral lending, excluding loans to the private sector as well as political insurance and guarantees extended by its private sector and insurance arms. In addition to providing financial resources, the World Bank—along with the International Monetary Fund (IMF)—took the lead in making policy prescriptions to poor governments, which it ensures are adopted by making them "conditions" for lending. Throughout the developing world, debt seriously hinders countries' abilities to provide for the basic needs of their citizens, and imposed "conditionality" interferes with governments' rights to make sovereign decisions.

At the same time, persistent poverty in Latin America has barely budged. A report by the Center for Economic and Policy Research found that poverty and inequality in Latin America increased between 1980 and 2005, when compared with the prior 20-year period. The United Nations' Economic Commission on Latin America drew similar conclusions. Their figures show that between 1960 and 1980, per capita income in Latin America experienced an 82 percent increase in real terms, whereas between 1980 and 2000 it only grew by 9 percent.

As a result, there has been a clear backlash to the disastrous financial failure of the neo-liberal, "Washington Consensus" economic model, promoted and often imposed by institutions such as the World Bank in the last two decades. In 2006, presidential elections were held in 12 Latin American countries. In six of them, the left-wing candidates won and in another four, left parties made considerable progress. Economic policy was a dominant theme in all of the election campaigns. Candidates who were critical of the conservative, pro-business, free market economic policies of their predecessors fared much better than supporters of the Washington-favored status quo.

For example, countries like Argentina, Brazil, Ecuador and Venezuela have made efforts to break themselves free from the debt chains that tie them to these financial culprits. In April, Venezuela announced that it was paying off all its outstanding debt with the World Bank—totaling $3.3 billion and dating from before President Hugo Chavez took office in (1999)—five years ahead of schedule. Venezuelan Minister of Finance Rodrigo Cabezas said that because of this, "Venezuela is free ... and thank God, neither today's Venezuelans nor children yet to be born will owe one single cent to those organizations." Later that month, in the wake of the Wolfowitz scandal, President Chavez declared that Venezuela was withdrawing its membership in the World Bank and the International Monetary Fund.

Likewise, Argentina, Brazil and Ecuador have paid off their debts to the World Bank's sister institution—the IMF—and others have expressed a desire to do the same. Symbolically, Venezuela's recent decision could help strengthen the efforts of other developing countries seeking reform at the World Bank by demonstrating to the institution that choosing not to be part of it is a real option.

Persona Non Grata

At the same time that Venezuela announced it would pull out of the World Bank and IMF, Ecuador expelled the Bank's representative in that country, declaring him persona non grata . Ecuador's new President, Rafael Correa, accused the World Bank of blackmail, announcing that, "because a sovereign country decided to reform a national law—for misbehaving—they withheld the check." He was referring to a $100 million loan that was cancelled by the World Bank in 2005, when Correa was finance minister. At the time, the matter ended with his resignation.

Ecuador is the second largest oil exporter in Latin America, after Venezuela. Nearly 40 percent of its export earnings and one-third of its income are derived from oil. Yet, more than half of its 13 million inhabitants live in poverty. In an attempt to address this imbalance, in 2005 Correa, then Minister of Finance, urged Ecuador's congress to modify a fund that was established in 2002 at the behest of the International Monetary Fund (IMF) to collect and distribute part of Ecuador's oil revenue. The fund was initially structured to allocate 70 percent of its resources to service Ecuador's foreign debt—debt to international lenders including the World Bank. The remaining 30 percent was destined toward stabilizing oil revenues (20 percent), and to improve health and education (10 percent). The World Bank estimated that from 2003 to 2007, the Fund would be able to generate over $1.5 billion for foreign debt payment.

Congressional reform of the oil revenue fund increased the amount used for health and education to 30 percent and consequently lowered that for debt repayment to 50 percent. The change was hardly a radical shift, as the largest portion of the fund continued to go to Ecuador's creditors. But that was not acceptable to the World Bank, who responded to Ecuador's action by canceling the previously approved loan.

The World Bank's arm-twisting tactics aren't new, and its motivation was clearly to ensure that Ecuador continued to produce oil to generate resources to pay its debt. Bringing development to the country, and its people out of poverty takes a far second place. The World Bank has shown its true colors not only in Ecuador but also in the rest of the poor, indebted and resource-rich world. This was going on long before Wolfowitz's misdeeds and is a far more serious problem. Meanwhile, Ecuador's Correa has stated that his country reserves the right to bring official charges against the World Bank for damages caused by the cancellation of the $100 million loan. His government plans to look more closely at World Bank loans taken out by previous administrations.

Bank of the South

The increasing frustration with traditional multilateral financing options has led some governments to begin thinking about alternatives to fulfill their financing needs, while at the same time breaking their dependence on capital—and influence—from the United States and Europe. At the same time that the World Bank is suffering its most damaging scandal to date, plans for an alternative regional bank are advancing quickly.

Earlier this year, Venezuela and Argentina launched the new "Banco del Sur" (Bank of the South), pledging more than $ 1 billion to get the institution up and running in the next few months. Although the details are currently being worked out (a 90-day deadline has been established to define some basic operating rules) several other countries have agreed to join: Brazil, Bolivia, Ecuador and Paraguay will also be founding members. Additionally, Nicaragua, several Caribbean countries and even a few Asian nations have expressed interest in participating in the new multilateral institution.

The Bank of the South's creation underscores the severity of the disenchantment with the traditional U.S.-dominated instruments for development finance. From the World Bank to the Inter-American Development Bank (IDB) (which provides financing exclusively in Latin America and the Caribbean), voting privileges are based on financial contribution, which makes the U.S. Treasury the single largest shareholder, bringing with it the largest share of the vote. In the IDB, the U.S. not only "owns" a whopping 30 percent of the vote, but it also holds veto power—an advantage to which no other member is privy.

In a clear departure from this undemocratic and paternalistic governance structure, Banco del Sur promoters assure, as Cabezas has said, that in the new institution "no one will be the sole owner." Although not fully defined, there has been indication that voting power will be based on financial need, rather than monetary contribution or political weight. But beyond the critical structural and political delineation, the real challenge will be to create an institution that does not only look different than its predecessors but that it actually thinks and acts differently. This means that member countries will need to think long and hard about how development will be defined and how it will best be achieved.

Beyond the Hypocrisy

Regardless of what happens to Wolfowitz or his girlfriend, the World Bank will continue in its downward spiraling crisis of legitimacy, at least in Latin America. As countries are able to mobilize the necessary resources to free themselves from financial obligations with the institution, they are likely to make this a priority. So too, will they continue to collaborate in finding new ways to solve the region's poverty and other plights without turning to the World Bank—but rather by devising innovative arrangements such as bartering (i.e. oil for doctors, as in the case of Venezuela and Cuba), and by catalyzing existing resources through the Bank of the South and other regional institutions.

About the Author: Nadia Martinez was born and raised in Panama. She co-directs the Sustainable Energy and Economy Network, a project of the Institute for Policy Studies and is a contributor to Foreign Policy In Focus.