The World Bank and the post-Washington Consensus in Vietnam and Indonesia

Inheritance of Loss

Susan Engel

• Publisher: Taylor & Francis
• Year: 2012
• Print ISBN: 9780415547437
• eBook ISBN: 9781135214708
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

This book explores the history, structure and current operations of the World Bank, which despite being the largest development organisation and the largest development research body in the world with tremendous direct and indirect influence on developing economies, has rarely received the critical attention its importance merits. The book's unique contribution is twofold: it provides an original analysis of the interaction between economic theory, political practice and the Bank's development praxis as well as two detailed, grounded studies of the Bank's lending practices.

The book starts with a detailed examination of the development theory and practice of the World Bank from its Keynesian origins to the current shift through the Washington Consensus to the so-called post-Washington Consensus. The second part is a detailed analysis of the Bank's lending practices in two countries, Vietnam and Indonesia. The case studies extensively utilise World Bank sources —analysing the Project Appraisal Documents for some 113 loans. They also draw on the secondary literature and on interviews with World Bank staff, government officials, academics and NGOs in both countries. The case studies enable the development of empirically-based conclusions regarding the impact of Bank policies on the economic and social development of two important Southeast Asian nations making possible an assessment of the extent to which the rhetoric of the post-Washington Consensus has been incorporated into the Bank's lending practices.

This book will be of interest to both advanced undergraduate and graduate students as well as specialist audiences in the fields of international political economy, development, international organizations and Southeast Asian Studies.

Part I

The World Bank, its History, Structure and Operations

1 Introduction

This project attempts to analyse the extent and nature of the shift of the World Bank from the so-called Washington Consensus to the post-Washington Consensus (PWC). It does so by evaluating the shift in the Bank’s underlying development discourse, as embodied in its statements, reports and operational guidelines from its origins through to recent events. It then goes a step further by examining actual lending practices in two case studies, Vietnam and Indonesia. These detailed studies, which conclude in 2004, make it possible to present empirically based conclusions about the extent to which the shift in rhetoric to the PWC has been incorporated into lending practices, thus providing insights into its lending discourse more generally. This is a particularly pertinent task given that the economic turmoil, which started in 2007, has prompted questioning of economic thought in general and neoliberalism in particular. Even Alan Greenspan, former chairman of the US Federal Reserve, has questioned his previous iron faith in markets: ‘[t]he whole intellectual edifice’ he said ‘collapsed in the summer of last year’ (Anon 2008).

This kind of questioning should extend to the policies and practices of the World Bank. While the current World Bank President Robert Zoellick acknowledged that the global financial crisis is a ‘manmade catastrophe’, the Bank response to the crisis seems to involve little more than expanded financing. This was its response to the debt crisis, which broke out in 1982 – a response which only ultimately added to many developing countries debt problems. In line with the project’s Gramscian inspiration, the analysis of the form and content of the Bank’s modus operandi is undertaken with the aim of challenging mainstream development discourse and more broadly the dominant global financial hegemony, which the Bank both reflects and propagates.

This project sits at the intersection of Development Studies and International Political Economy (IPE) and is informed by a critical IPE approach that was pioneered in studying the World Bank by scholars such as Susan George, Walden Bello and Robert Wade. It is Robert Cox’s work though, which introduced the work of the Italian Marxist Antonio Gramsci to IPE, that shapes the theoretical and political position of this book. Gramsci analysed the creation of specific forms of hegemony by dominant social forces and Cox applied this approach to the international sphere. My interpretation and reading of Gramsci is framed by critical IPE literature and its ambition to supersede positivist international relations scholarship. Gramsci’s work has been the subject of many interpretive debates and it is beyond the scope of this book to engage fully in these or in a comprehensive account of his work. The purpose of clarifying Gramsci here is not to articulate a universal Gramscian frame-work; rather it is to explore concepts and ideas that are useful for understanding and analysing the forms and operations of IPE today (Morton 2003; Rupert 1998).

I will return to the neo-Gramscian approach and concept of hegemony a little later in the introduction. However, first let me briefly introduce the World Bank and examine why it is such an interesting and important organisation to study.

What is the World Bank?

What we now refer to as the World Bank Group, started with one small, conservative banking institution – the International Bank for Reconstruction and Development (IBRD), which was established through the Bretton Woods agreements of 1944. The World Bank became a group in 1956 with the formation of the International Finance Corporation (IFC) and was further expanded with the creation of the International Development Association (IDA) in 1960; the International Centre for the Settlement of Investment Disputes (ICSID) in 1966; and the Multilateral Investment Guarantee Agency (MIGA) in 1988.¹ However, as the World Bank Group itself states, the term ‘World Bank’ refers only to the IBRD and the IDA – the Bank’s two development lending arms, which are the focus of this book.

The IBRD and IDA were each established with their own Articles of Agreement but they operate as a single entity – they share the same staff, headquarters and president, who is always an American. A country must be a member of IBRD to be a member of IDA, as it must be a member of the International Monetary Fund (IMF) to be a member of the IBRD. The Board of Governors and Executive Directors of the IBRD are ex officio those of the IDA, so long as the members of each are also members of the IDA. The 24 Executive Directors of the IBRD comprise five appointees from the countries with the five largest shareholdings and 19 Directors elected by the remaining Governors. This means that the largest shareholders in the IBRD automatically have Directors in the IDA, regardless of their level of subscription. In both organisations, voting is based on the number of shares or the level of subscription. In the case of appointed Directors, they are able to cast the number of votes held by the member who appointed them and, in the case of elected Directors, the number of votes that were cast for them in their election.

The Bank is a ‘specialized agency’ of the United Nations (UN), as per Articles 57 and 63 of the UN Charter. Article 63 of the Charter gives the Economic and Social Council (ECOSOC) primary responsibility for coordinating specialised agencies. However, even under the highly decentralised and ‘somewhat vague co-ordinating authority’ (Taylor 2000: 102) of ECOSOC, the Bretton Woods institutions are ‘rather “special” specialized agencies’ in that they function autonomously from the direction and control of UN officials (Mason and Asher 1973: 58). This relationship is discussed further in Chapter 2, which examines the establishment of the IBRD.

The principal difference between the IDA and IBRD is that IDA provides zero interest loans (called credits) to the poorest of countries, defined in 2007 as those with a per capita income of less than $1,025, whereas the IBRD provides loans to middle income and credit-worthy poorer countries at current market rates. IDA loans generally are over longer terms (now 20, 35 or 40 years), have a 10-year grace period, and attract a three-quarters of a per cent annual service charge. IBRD loans are shorter terms (generally a maximum of 25 years), have only a five- or seven-year grace period and attract market-based interest rates, calculated at a small premium over the London Interbank Offered Rate, which can range from half a per cent to over 10 per cent. The IBRD raises most of its funds from international financial markets, while the IDA requires regular replenishments from governments in developed countries as well as receiving profits transferred from the IBRD. In the 10 years to 2004, IBRD lending averaged 67 per cent of total new commitments, through the range varied from 55 to 75 per cent (World Bank 2004u: 29, 1999c).

Why the World Bank?

Since the 1980s, the Bank has been at the centre of a new neoliberal global intellectual hegemony in development theory and practice. As an international organisation, it had credibility and a veil of independence that made is useful for promoting the interests of international, particularly US capital, over a number of decades (Bello 1994: 32–34; Ritzen 2005: 99–101). US support for the Bank may also be seen as part of its attack on the agenda of such UN development agencies as the UN Development Program and the UN Population Fund, which had historically pursued a more radical development agenda (Gosovic 2000: 454). These UN agencies approached development as not merely catch up by developing economies but transformation of global economic and political structures, requiring some contribution from the West. By contrast, despite its dedication and rededication to poverty eradication on a number of occasions since the 1970s, the Bank has remained a conservative and mainstream lender whose theory and practices support the current world and especially US neoliberal hegemony.

The World Bank is the largest and most powerful global development agency. In 2007, it added its 185th member and had offices in over 100 countries. Its development-lending arms – the International Bank for Reconstruction and Development (IBRD) and the International Development Agency (IDA) – have cumulatively lent $590.2 billion to the end of the 2006 financial year (World Bank 2006b).² In the 2004 financial year, the last year of the case studies in this book – it committed $20.1 billion in new loans and it disbursed just over $17 billion in loans and $3.28 billion from trust funds (World Bank 2004u: i, 112). Co-financing of its loans by other bi- or multilateral development agencies further expands its influence. The Bank’s $20.3 billion was equivalent to 7.3 per cent of foreign direct investment (FDI) flows to developing countries in 2004, which amounted to $275 billion (United Nations Conference on Trade and Development 2006: 300). However, over 46 per cent of FDI flows to so-called ‘developing countries’ went to just five recipients: China, Hong Kong, Mexico, Brazil and Singapore. If you deduct these flows, FDI to developing countries was $128.7 billion and Bank assistance equalled 15.6 per cent of their total value. Bank disbursements to its 47 African borrowers in 2004 were equivalent to 26.8 per cent of the value of FDI flows to these countries (United Nations Conference on Trade and Development 2006: 299–300; World Bank 2004u: 29).

The relative significance of the Bank’s lending operations in purely financial terms has ebbed and flowed over the years but it remains at the forefront of investment decisions guiding the priorities of private investors. The Doing Business series of flagship publications, which started in 2004, have been ‘most influential’ and only added to the Bank’s relevance to the private sector (Banerjee et al. 2006). This capacity to impact on private capital markets may be of greater consequence than the dollars the Bank lends. Moreover, the authoritativeness of the Bank’s analysis and model of development have only increased over the last two decades. This is because as well as offering loans and grants, the Bank provides technical assistance and advice; mobilises economic survey missions; undertakes sectoral surveys; and organises consultative groups of major donors to review the progress of particular countries development programs and policies. As Graham Harrison (2004: 129) states its involvement in countries is ‘more profound and intimate’ than any component of its program indicates; it proactively shapes ‘the methods by which government policy is made and executed; it funds administrative reform to build up new techniques of administration … [and] it aggressively shapes the discursive limits of the “politics of the possible”’.

The Bank is the largest development research organisation in the world and probably the largest development training organisation in the world. The Bank has a larger research and analytical capacity than many of the developing countries it lends to. Through the World Bank Institute, it trains around 47,000 financial and development specialists per year. The main targets of its training programmes are developing country government officials and its own staff, though in more recent years the Institute has broadened its reach to include staff from non-governmental organisations (NGOs), journalists, academics and other development specialists; they even train parliamentarians, secondary school teachers and children. In 1996, it set about intensifying its research strengths through the Knowledge Bank initiative, which includes a massive web presence. The Bank’s research capacity is many times larger than any university research department, indeed it is far greater than the research capacities of many of the nations it services. According to Nicholas Stern and Francisco Ferreira (1997: 593), by the early 1990s it had several hundred people working full-time on research and many more who spend part of their time on research activities.³ It is not only the main source of research for its own staff, but for other development agencies and multilateral banks and for the World Trade Organization, which initially had only limited research capacity.

The Bank uses its research selectively to promote a particular view of development. This was highlighted in a recent Bank-commissioned review of its research by a group of prominent economists (Banerjee et al. 2006). The review highlighted the way that the Bank promoted and extensively used research by David Dollar and Aart Kray on the relationship between growth, openness and poverty reduction, which essentially argues that countries (across time and space) that are open to trade and have ‘sound’ policy settings have achieved better poverty reduction. The review by prominent economists found that:

much of this line of research appears to have such deep flaws that, at present, the results cannot be regarded as remotely reliable ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of Illustrations
• Acknowledgements
• List of Abbreviations
• Part I: The World Bank, its history, structure and operations
• Part II: The World Bank in Vietnam and Indonesia
• Notes
• Bibiliography
• Index