May 20, 2020
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question comes from Francesca.
“I have really liked your podcast on the pandemic bonds, I had
read about these bonds maybe a month ago in The Economist. My
question after listening to the podcast on pandemic bonds was, who
controls the world bank? Well I know...the member countries, but
how could they screw it up so well? Thanks for keeping us update on
it. And keep up with your great work Thanks!”
In this episode – look at the world bank, what they do, who
controls it, who funds it and at the core – why does it have
problems
What is the world bank –
- The World Bank Group is a family of five international
organizations that make leveraged loans to developing countries. It
is the largest and most well-known development bank in the world
and is an observer at the United Nations Development Group. The
bank is headquartered in Washington, D.C. in the United States –
what makes up the group –
- the International Bank for Reconstruction and
Development (IBRD), established in 1945, which provides debt
financing on the basis of sovereign guarantees;
- the International Finance Corporation (IFC),
established in 1956, which provides various forms of financing
without sovereign guarantees, primarily to the private sector;
- the International Development Association (IDA),
established in 1960, which provides concessional financing
(interest-free loans or grants), usually with sovereign
guarantees;
- the International Centre for Settlement of Investment
Disputes (ICSID), established in 1965, which works with
governments to reduce investment risk;
- the Multilateral Investment Guarantee Agency (MIGA),
established in 1988, which provides insurance against certain types
of risk, including political risk, primarily to the private
sector.
- Not a bank in the ordinary sense, the World Bank Group is a
unique partnership, made up by 189 member countries – has two
goals: ending extreme poverty by 2030 and promoting shared
prosperity by lifting the bottom 40% in every country.
- The IMF and the World Bank were both created at
an international conference convened in Bretton Woods - 1944.
Who controls the World bank -
- The 189 member countries are technically shareholders – but
each country is represented by a Board of Governors – they are
the policymakers at the World Bank.
- Generally, the governors are member countries' ministers of
finance or ministers of development. They meet once a year at
the Annual Meetings of the Boards of Governors of the
World Bank Group and the IMF – sets the agenda for the year
–
- But The governors delegate specific duties to 25 Executive
Directors – they make up the board of directors at the world bank -
who work on-site at the Bank - five largest shareholders appoint an
executive director, while other member countries are represented by
elected executive directors - normally meet at least twice a week
to oversee the Bank's business, including approval of loans and
guarantees, new policies, the administrative budget, country
assistance strategies and borrowing and financial decisions.
- office is usually held by the country's minister of finance,
governor of its central bank, or a senior official of similar
rank
- The United States and the World Banks relationship - The US
Secretary of the Treasury sits on the World Bank’s Board of
Governors, the World Bank’s highest governing body – the US gets to
choose who is president as well- The World Bank is treated as an
“exempt issuer” under the US securities laws since 1949 in
recognition of its status as an international organization in which
the U.S. is the largest shareholder (with about 17%). The United
States’ membership in the World Bank was authorized by a federal
statute known as the Bretton Woods Agreements Act (22 U.S.C. 286 et
seq.).
- The other countries on the list – Japan (8%), China (5%),
Germany (4.3%) – UK and France tied for 5th (4%) – make up about
42% of voting rights
- But – some of the countries have higher voting rights with
other of the agencies – USA has around 23% voting rights its
private sector arm, the International Finance Corporation
(IFC)
- Statement: The World Bank looks forward to continuing to
provide support to US investors so that they may consider
supranationals when looking for safe investments – i.e. an
organization is an international group in which the power and
influence of member states transcend national boundaries or
interests to share in decision making
Who funds the world bank has - three main income streams - The
first derives from their lending operations, charging mainly the
borrowing countries; and the second from their income on
investments in financial markets. Additionally, the International
Development Association (IDA) receives contributions from
members
- Have replenishments every three years – Aus donated $345m (USD)
- $526m Aus –
- Denominations are in SDRs though in a lot of cases – in total
raised $23.5bn USD
- But they make most of their money through their investments or
assets – like most banks these are loans
But what plagues the world bank – and in a way controls it –
lack of transparency and corruption –
- The curse of any unaccountable massive organisation with
hundreds of billions of dollars at its finder tips
- What they do – at the core they provide Financial Products and
Services – but the private sector does well out of this – remember
the 5 agencies -
- One provides loans to governments for projects deemed
appropriate by the bank, one gives the money raised from member
countries to give to other countries – both of these can be spent
to hire the private sector, the other provides loans to the private
sector, one works with governments to reduce the risk to the
private sector and the other provides insurances against political
risks – again mainly to the private sector
- In their own words - These loans support a wide array of
investments in such areas as infrastructure, financial and private
sector development, agriculture, and environmental and natural
resource management.
- These loans are also made – In USD – or in SDRs - Make
austerity requirements to the receiving countries if they are
concessional loans –
- Practices even been criticised by their former Chief
Economist Joseph Stiglitz - that the so-called free
market reform policies in practice are often harmful
to economic development if implemented badly, too quickly
("shock therapy"), in the wrong sequence, or in very weak,
uncompetitive economies
- loan agreements can also force procurements of goods and
services at uncompetitive, non free-market, prices.
- Again – their aim is to help “the vulnerable in the poorest
countries.” But these very institutions are culpable of
accelerating the spread of poverty
- There was a frenzy of deregulation and poorly planned
privatization in third world countries – at the same time the World
Bank cut away both oversight of the private sector and social
safety nets for the poor beginning in the 1980s – most of the
progress towards their goals is reported back to them from the very
private companies that are implementing projects
- Even by 1998 – World Bank (and IMF) were presiding over a
spectacular financial collapse in East Asia, Russia and Brazil –
2001 - Argentina went bust and half of its people were suddenly
poor
- Defenders of the World Bank contend that no country is forced
to borrow its money – but the people don’t borrow the money – the
politicians do – and in already corrupt places – some of the money
is bound to go missing
- Academics in the West decide what is best for developing
countries -but when you listen to them the World Bank isn’t helping
enrich their lives – but those that they are in bed with – topic
the practices and how a lot of these projects don’t help as they
are promoted is a topic that takes a lot to unravel – do another
episode down the road on it - but there is no shortage of reports
of corruption and nepotism in their practices -
- One organisation - Government Accountability Project (GAP)
produced a 10-page investigative report focusing on corruption at
the World Bank
- focuses on extensive internal problems at the bank including
how “kickbacks, payoffs, bribery, embezzlement, and collusive
bidding plague bank-funded projects around the world.”
- The estimates are that more than 20% of the loans distributed
by the World Bank, or $4 billion annually, are associated with
corrupt practices
- Another paper – by three economists with previous ties to the
bank (Anderssen, Johannesen, and Rijkers) found that “aid
disbursements to highly aid-dependent countries coincide with sharp
increases in bank deposits in offshore financial centers
-associated with local officials steal a significant part of
development aid funds and hide that money in their personal
offshore accounts
- The paper studies a sample of the 22 most aid-dependent
countries, with average disbursements from the World Bank exceeding
2 percent of GDP: Findings - In quarters when a country receives
aid equivalent to 1 percent of GDP, its deposits in havens increase
by 3.4% relative to a country receiving no aid, but its deposits
held in non-haven financial centers remain constant. The
implied average leakage is around 7.5%:This means that for every
$100 of development aid, $7.50 apparently becomes corruption
profits, hidden in offshore financial centers.
- Ironically - The data the three authors use for their study all
comes from the BIS and from the World Bank. The development aid
that fuels corruption is actually money disbursed by two major
World Bank institutions: the International Development Association
and the Bank of Reconstruction and Development – other examples -
- One $600 million bank program was alleged to be corrupt as
early as 1995, but it took two years for the bank to look into the
issue at all, and another four years for the bank to officially
open an investigation. The bank found indications of widespread
theft involved with the program – got rid of a scapegoat and went
back to business as usual
- In 2019, the Congressional-Executive Commission on
China questioned the World Bank about a loan in Xinjiang,
China that was used to buy high-end security gear.
- There are a lot of good people working there – and im sure that
they are frustrated by the lack of leadership – but the culture is
the problem that makes matters worse -
- Staffers have traditionally been professionally rewarded for
ensuring that projects go through as planned, but not for reporting
corrupt practices – and when whistleblowers report corruption they
are often punished for doing so
- They were not allowed to inform affected governments or the
press, except under the most stringent constraints. If they do,
they risk deportation back to their home countries.
- It was a wistleblower who flipped the lid on one of the Bank’s
biggest black mark in history. This resulted in the resignation of
president Paul Wolfowitz in 2007 - who exposed his “cronyism,
favouritism, incompetence and improper political dealings”
- This had part to do with paying his girlfriend a large salary
scandal – but also showed revelations of coordinated support he
received from the Bank’s general counsel
- more recently Jim Yong Kim suspiciously resigned last year –
reason was to join a private-sector infrastructure investment
fund
- The bank adopted a “whistle-blower protection policy” last year
– but it hasn’t been taken up on as it can be a trap for staff
members – removes confidentiality and the investigative reports
remain within the organisation and be hidden
- Where does each stand in relation to these systemic problems
with corruption and who controls them - World Bank themselves are
without any real external oversight - impenetrable by the
legislatures of their member governments – they are massive
bureaucracies, coupled with immunities from national and
international laws –
- Neither Bank nor Fund officials can be subpoenaed by national
legislatures, nor can they be obliged to testify in court. No
government can demand internal documents from them. While each has
some disclosure policies, these often remain unimplemented because
the organizations cannot be sued. This is the stunning
contradiction of the G-20 action: the signatories declared, “the
era of bank secrecy is over,” but then dumped a trillion dollars of
public money into the most secretive financial institutions in the
world
- so they essentially control themselves – and those who are
chosen to be on the board – if anyone is pulling the strings behind
this – who knows – no way to request any of that information – even
for governments
- Given that government are giving away hundreds of billions of
dollars without any accounting for it – the results are not
surprising – but if an institution is going to collect public money
and the profit off it – it should be accountable to the public
- I don’t think it is incompetence that is the problem – but
corrupt unaccountable practices that are – that is how they can
screw up their prime objectives so well
Thank you for listening to today's episode. If you want to get
in contact you can do so here:
http://financeandfury.com.au/contact/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329392
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