Now that the World Banks civil war over its former President, Paul Wolfowitz, is over, attention may turn to a more substantial matter: the institutions future in a world with decreasing need of its financial services.
The World Banks own 2007 Global Development Finance (GDF) report, released in May, emphasizes the banks decreasing role: Net lending from the international financial institutions and other official sources in the Paris Club of creditors dropped starkly over the past two years, while private lending surged.
Many developing countries liberalization of capital controls, the report adds, has enabled private firms in these nations to access world capital-markets at unprecedented levels. Private borrowing accounted for more than 60 percent of total bank borrowing in these countries from 2002 to 2006. To do this, the report notes, these businesses must be willing to conform to the higher levels of transparency and reporting that is the expectation of participating in international capital markets.
The World Banks difficulty is that private capitals influx into developing nations is slowly marginalizing the Banks financial input into these nations development. As if recognizing this, the World Banks GDF report suggests that international financial institutions i.e., presumably, the Bank can continue to contribute by establishing clear and consistent rules for access to the financial markets of the industrial world.
Given the World Banks decidedly mixed record in addressing questions of corruption surrounding some projects it has funded, it does not seem especially qualified for such a role. Moreover, private organizations such as the London-based International Accounting Standards Board are already working towards realizing this goal.
Indeed, simply by participating in international private capital markets, companies quickly learn the rules already governing these exchanges, including transparency and adhering to International Financial Reporting Standards (IFRS).
It is precisely such rules that many developing-nation governments have customarily ignored when dealing with the World Bank. Unlike such governments, private companies from developing countries cannot hide behind national sovereignty when it comes to avoiding accountability for their misdeeds.
In an October 2006 lecture to an audience of clergy and diplomats at Romes Pontifical Urbaniana University, Lord Brian Griffiths, Vice-Chairman of Goldman Sachs International, noted that a country like China, which now easily accesses world capital markets, had little need of World Bank funds.
I also doubt, Griffiths added, loans are the most appropriate way to give help to very poor countries. In this light, Griffiths said, one might well ask if the World Bank has any meaningful role to play.
In historical terms, private capitals increasing role in international financial markets can be seen as a return to normalcy. The World Bank is actually somewhat of a historical novelty. When capitalism first emerged during Europes thirteenth-century commercial revolution, the biggest lenders of capital to individuals and states alike were private associations, including monasteries, Flemish merchants, and Northern Italian banking houses.
In Latin America, however, there is an alternative to both private equity and the World Bank when it comes to accessing capital. We might call this the Chavez option. It involves the transfer of funds from Hugo Chavezs oil-rich Venezuela to poorer Latin American nations also headed by populist-leftists. Thus far, President Chavez has offered approximately $1.5 billion (US) to Bolivia and $500 million to Ecuador.
In September 2006, he even suggested creating a Bank of the South as a socialist alternative to the IMF and World Bank. Unfortunately, this scheme is likely to produce even less-satisfactory results than many World Bank-funded projects. We can safely assume any funding from Chavezs Venezuela will not go to the private sector except those businesses unhealthily close to leftist governments. This would contradict the Venezuelan presidents objective of building socialism. Instead, most such payments are likely to be used by recipient-governments to fund the costs associated with state-directed development schemes and nationalizing privately-owned industries.
Historically-speaking, such projects success-rate is low, protected as they are from market-disciplines. They are also especially vulnerable to corruption from state officials.
Whatever occurs, it is unlikely to produce greater demand for World Bank funds. But, like all good bureaucracies, the World Bank has proved adept at creating new activities with marginal significance to its original purpose. Most recently, the World Bank hitched itself to the global-warming band-wagon as part of its quest for relevance. The Bank is seeking $250 million from the G8 nations to reward developing countries for avoiding deforestation.
Whatever one thinks of this goal, the rationale for the World Banks particular involvement seems tenuous. The fact an institution exists is not a reason to prolong its existence indefinitely. Perhaps its time to say, Adieu, World Bank.
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