MM -- July/August 1994

The Multinational Monitor

July/August 1994

The World Bank: Fifty Years is Enough!

Table of Contents


Troubled Waters: World Bank Disasters Along Kenya’s Tana River

by Korinna Horta

Slush Funds, Corrupt Consultants and Bidding for Bank Business

by Pratap Chatterjee

A Financial House of Cards

by Patricia Adams


Behind the Lines

Editorial: Fifty Years Is Enough!

The Front

Interview: In Defense of the Bank

An Interview with the World Bank’s Armeane Choksi

Economics: The Myth of the Chilean Miracle

by Stephanie Rosenfeld

Book Notes: Battling the Bank and IMF

Names in the News



The Milk Mob

Aaron Freeman’s excellent article "Monkeying with Milk" (Multinational Monitor, June 1994) explained why so many consumers and farmers are outraged over Monsanto’s collusion with the U.S. government in forcing recombinant bovine growth hormone (rBGH) into our milk supply. It should also be noted that Food and Drug Administration (FDA) did not require two full years of human health testing on rBGH - as their protocol stipulates for drugs of this kind - but settled for 90 days; also in violation of their protocol, FDA did not require Monsanto to provide a residue test.

Regarding the National Association of State Departments of Agriculture (NASDA) and its support of rBGH: a NASDA meeting in Chicago last spring featured a training session for rBGH "spokespersons," sponsored by Monsanto. When NASDA met in Spring Green, Wisconsin, in July 1994 for golfing, boat rides and banqueting, the largest corporate sponsor was Monsanto, followed by other NASDA-regulated businesses. (Wisconsin Secretary of Agriculture Alan Tracy was recently named NASDA President.) The matter was referred to the Wisconsin Ethics Board.

rBGH also has the backing of the monopolistic dairy processing industry, which is happy to have an oversupply of cheap milk subsidized by farmers and taxpayers. The Milk Mob [including the International Dairy Foods Association and the Grocery Manufacturers of America] sued Vermont over its mandatory labeling law, and other states considering mandatory labeling were threatened with similar lawsuits. Threats have also been made to various media for running anti-rBGH ads, though the Milk Mob’s hired flacks have succeeded in filling newspapers and farm magazines with editorials and articles heralding the benefits of injecting cows with synthetic hormones.

Many will remember when the U.S. Department of Agriculture (USDA) and related agencies began promoting DDT and other pesticides and herbicides following World War Two, in the blind belief that chemical intensive farming would be good for everyone. Since then we have lost most of our topsoil, most of our clean water, most of our rural communities and most of our farmers. Now our government is promoting biotechnology, which offers more of the same.

Just as many unions were disappointed when the Clinton Administration proved no friend of labor, so were small- and medium-sized farmers dismayed to find multinational agribusiness and chemical company lobbyists blocking access to the White House and USDA.

And now we have NAFTA, and waiting in the wings is the new GATT - trade pacts that legitimize the exploitation of working people on such a grand scale that even national governments will be required to relinquish much of their sovereignty to a world trade organization, operating in secret. Anyone can guess whose interests they will represent.

It’s simple economics: Those at the top want more and they want those at the bottom to give it to them; and until we outlaw PAC money and policy implementation via revolving doors, our government is only too happy to oblige with the necessary laws and regulations.

John Kinsman, President

Family Farm Defenders

LaValle, Wisconsin

Behind the Lines

Labor Strikes Back in Turkey

APPROXIMATELY ONE MILLION WORKERS throughout Turkey staged a one-day strike on July 20, 1994 to protest the government’s economic austerity package, according to Reuters news reports. The strike took place despite official warnings from Turkish Prime Minister Tansu Ciller that participation in strike actions was illegal and that high level officials would prevent workers from joining the strike.

Turkish labor unions oppose the wage freezes, price hikes, investment cuts and a privatization drive that came with the April 5 austerity plan, say the reports.

"Garbage is not being collected and the post offices are generally not functioning," Burham Metin, a municipality spokesperson told Reuters. It was also noted that ferryboats and some public buses were not operating.

The Turkish Medical Association also joined the strike, but maintained emergency, oncology and child services. And although Turkish law bans strikes in the civil service, many government workers also joined the strike.

Most demonstrations "ended without incidents as the police did not intervene," according to Nevzat Kiraç, assistant to the general secretary of the Ankara-based Human Rights Foundation of Turkey.

"However," he adds, "a group of 500 people marching in the Gülsuyu quarter of Istanbul were dispersed and beaten by the police." Eighteen people were detained and several were wounded, and houses and cars were damaged. Demonstrators in Kartal Cevizli and Istanbul Bakirköy also clashed with police, Kiraç says.

"This is only the first step if the government continues with the austerity package and does not fulfill its promise to democratize and lift restrictions on trade union activities," Yildirim Koc, of the largest labor confederation Turk-Is told Reuters. The Ciller government has promised to adjust workers’ 1994 wages in line with inflation, which was running at 116 percent in June.

The Turkish Embassy did not respond to questions regarding the strikes, but a spokesperson says the Turkish government will forge ahead with the austerity plan. "The government has signed a stand-by agreement with the [International Monetary Fund]," he says. "The government cannot deviate from the agreement [because] we would be unable to get credit."

Post-NAFTA Labor Abuses

IN THE FIRST TEST of the North American Free Trade Agreement (NAFTA) labor side agreement, the U.S. National Administrative Office (NAO) has decided to hold hearings on complaints that General Electric and Honeywell have violated international labor law in Mexico . The hearings are scheduled for September 12, 1994, and will be held in Washington, D.C.

The International Brotherhood of Teamsters and the United Electrical, Radio and Machine Workers of America (UE) filed the first complaints under the NAFTA labor side agreement in February 1994. The UE filed on behalf of nine GE workers who were fired at the company’s Compania Armadora motor plant in Juarez, Mexico and the Teamsters filed for similar abuses at a Honeywell plant in Chihuahua. The workers were union organizers, and the UE accused GE of firing the workers for their union activities.

Critics have denounced the NAO for limiting testimony to only 10 minutes, prohibiting television and radio coverage of the hearings and holding the hearings in Washington, D.C., rather than El Paso, Texas, closer to where the violations took place. "[T]he logistical and financial hardship of traveling to Washington, especially for workers, will no doubt render participation impossible in most circumstances," notes an August 12 letter from 60 members of Congress to Labor Secretary Robert Reich.

The NAO, in an August 10 letter to President Bill Clinton, defended the venue of the hearings, arguing, "Our personnel and resources are here. The operations and focus of the NAO and the North American Agreement on Labor Cooperation are primarily national and international in scope. Accordingly, we believe it is appropriate that the hearing be in our capital." The 10-minute limit on testimony was put in place "because [the NAO] thought it prudent and appropriate that the public be on notice that time is not unlimited," the letter states.

In addition to obstructing union organizing efforts, workers at the 1,200-employee GE plant have described violations that include failure to pay proper overtime, failure to give light work to pregnant women and failure to properly ventilate work areas or provide adequate protective equipment. They also charged the Mexican government with failure to enforce its labor laws [see After NAFTA: Worker Rights," Multinational Monitor, January/February 1994 ].

GE disclaims any role in the hearings. "The hearings do not involve GE," says GE spokesperson Charles Welch. "The hearings are about labor law enforcement in Mexico." Moreover, he added, "The matters alleged in this complaint took place before the side agreement went into effect. ... There is a legitimate question as to the appropriateness of this review ... under NAFTA."

On August 1, 1994, STIMAHCS, a metal workers union affiliated with Mexico’s independent labor federation, the Frente Autentico del Trabajo (FAT), submitted a formal letter requesting union recognition to GE in Juarez. The union advised GE that workers at the company’s CASA plant had formed a union and wanted to negotiate a contract.

Workers at the GE plant set a strike date of August 24 in order to win union recognition; in response, GE agreed to allow the first secret ballot election in Mexican labor history.

While STIMAHCS lost the election, workers allege that GE illegally promised to restore benefits and increase wages if STIMAHCS lost, and threatened a closure of the plant if workers voted for the union. GE also held meetings with workers for many hours until the eve of the election.

"The vast majority of the workers at [the plant] supported the union at the time of the election agreement," says STIMAHCS General Secretary Benedicto Martinez. "However, GE’s illegal campaign tactics of threats and bribes destroyed any possibility of a fair vote. Companies that do business in Mexico must be required to respect our laws."

"We are outraged by GE’s blatantly illegal actions," says Amy R. Newell, UE General Secretary- Treasurer. Newell adds that the UE will help STIMAHCS document these violations for presentation at the NAO hearings.

GE’s Welch denies that the company violated Mexican or U.S. labor laws, or that it threatened to close the plant in Juarez in the days leading up to the election.

Of Bull and Bonds

MERRILL LYNCH & CO. , the world’s largest investment bank, has been suspended from doing business with the state of Illinois following a July 1994 report by the International Brotherhood of Teamsters on the company’s questionable bond-underwriting practices.

The city of St. Louis has passed a resolution urging reform at Merrill Lynch, and several other cities are considering similar resolutions. The state treasurer in Minnesota has also endorsed a suspension of financial operations with the company.

The Teamsters report, "The Bull in the Glass House: The Case for Reform at Merrill Lynch," alleges "a string of public scandals," including:

o the company’s involvement in an alleged interest-peddling scandal with the Massachusetts Water Resources Authority, leading to the banning of the company from financial positions with state agencies that issue bonds;

o allegations of improper activities involving the New Jersey Turnpike Authority and other bond agencies around the United States; and

o a record high payment of $5 million to settle a claim with a Lebanese investor who alleged Merrill Lynch mishandled his money.

The Teamsters initiated a corporate campaign against Merrill Lynch because of the company’s interest in the Pony Express courier company. Merrill Lynch is the principle investor in, and has a significant presence on the board of Borg-Warner Security Corp., the parent company of Pony Express. The union’s report documents poor wages, failure to bargain in good faith with workers and illegal race, age and gender discrimination against Pony Express employees.

Merrill Lynch has referred to the Teamsters campaign as "misdirected." "Merrill Lynch does not manage Pony Express," says a company spokesperson who asked not to be named. "One of Merrill Lynch’s affiliates, Merrill Lynch Capital Partners, has, with other investors, an investment interest in the parent of Pony Express. However, Merrill Lynch has no authority or responsibility for the day-to-day management of the company."

But Teamsters National Coordinator for Corporate Affairs Bart Naylor disagrees. "Three Merrill Lynch employees are among nine members of the board of directors. They own 47 percent of the stock. They can have as much control of the company as they want to," he says. The Teamsters message to Merrill Lynch, he says, is: "You own Pony Express. Reform it."

Bad Chemistry at EPA

AN INTERNAL U.S. Environmental Protection Agency (EPA) memorandum charges that an EPA investigation into allegations that Monsanto falsified scientific studies on the carcinogenicity of dioxin was itself fraudulent.

The memo, written by EPA employee William Sanjour, examined a criminal investigation that resulted from court cases of Vietnam War veterans who were sprayed with Agent Orange, a defoliant containing small amounts of dioxin, while serving in Vietnam and who later contracted cancer. The veterans were attempting to obtain compensation from Monsanto and other chemical companies which produced Agent Orange.

The veterans’ case was largely thwarted in 1984 because of a lack of scientific evidence and Monsanto-sponsored studies which showed no increase in cancer among human subjects exposed to dioxin (studies that were later contradicted by EPA studies of the carcinogenicity of dioxin to humans).

But in February 1990, EPA chemist Dr. Cate Jenkins wrote to the EPA Science Advisory Board that there was evidence that the Monsanto studies were fraudulent and that, had they been done properly, they would have shown the connection between dioxin and cancer in humans. This led to a criminal investigation in August 1990 of Monsanto .

But, according to Sanjour, instead of investigating Monsanto, the EPA "investigated and illegally harassed the whistleblower, Cate Jenkins." The memo states that, within days of the initiation of the investigation, Jenkins’ "job duties were withdrawn without warning. She was not given any assignments from August 30, 1990 until she was reassigned on April 8, 1992 to a job which was primarily administrative or clerical." Jenkins, who holds a Ph.D. in chemistry, filed a complaint with the Department of Labor, which reinstated her, but not until after two appeals by the EPA (the most recent by current EPA Chief Administrator Carol Browner).

The Monsanto investigation was quietly halted in August 1992 without determining if the studies were fraudulent or not. "However," wrote Sanjour, "the investigation itself and the basis for closing the investigation were fraudulent."

"[D]id Monsanto manipulate their studies in order to play down the danger of dioxin so as to reduce their liability to the Vietnam veterans?" the memo asks. "Are top EPA officials more concerned with protecting their employment prospects with the industries they regulate than in protecting human health and the environment? And, are EPA law enforcement officials being used as an internal KGB to silence dissent?"

Monsanto "denies globally the implications in the memo," states Monsanto’s Director of Environmental Communications Gary Barton. He alleges that the memo contained "misstatements and innuendo" about the company and maintains that Monsanto "never manipulated any scientific studies [and] cooperated fully" with the EPA.

The EPA did not respond to requests for comment on the memo.

- Aaron Freeman

Editorial: Fifty Years is Enough!


There is no need for additional studies, reports, task forces, independent commissions of review, country case studies or project investigations.

The World Bank is a bureaucratic monster, spreading mayhem and misery wherever it directs its attention.

It should be shut down.

Since its formation 50 years ago, the World Bank has compiled a calamitous record. The Bank has displayed a penchant for megaprojects, a nearly religious faith in technocratic fixes to social and ecological problems, an unflappable commitment to centralized control over both specific development projects and broader development plans and a zeal for secrecy. Concomitantly, it has evidenced a disdain for local, democratic participation in project planning and control over the development process, a contempt for the poor and marginalized (and particularly for indigenous peoples) whose lives it is supposed to improve, and a phobia of small-scale development projects.

The result: a seemingly endless list of infamous World Bank-created or -assisted catastrophes. Among the most celebrated: massive relocation ("transmigration") schemes in Indonesia that exacerbate tensions on rainforest ecosystems and impoverish tens of thousands of people; massive hydroelectric dams in India that dislocate hundreds of thousands of the nation’s poorest people; and road-building projects in Brazil that speed up forest destruction. And for each of the most famous debacles, there are countless others that have received less international attention.

The World Bank’s entrance into the macroeconomic planning field in the early 1980s opened yet another front of World Bank-induced suffering. In response to the debt crisis it helped create, the World Bank imposed on Third World countries "structural adjustment programs" designed to liberalize their economies, opening them to multinational corporate investment and orienting them to production for export.

The result: the impoverishment of hundreds of millions, the contraction of many Third World economies and the destruction of the economic base from which Third World countries could hope to build autonomous societies.

Internal studies confirm that the World Bank’s record is horrendous, even on its own terms. A June 1992 World Bank report concluded that less than 20 percent of its structural adjustment technical assistance loans to Africa are substantially effective. And the 1992 Wappenhans report found that Bank staff determined more than one-third of the Bank’s 1991 projects to be failures.

On the heels of these and other internal critiques, and celebrating its fiftieth anniversary this year, the World Bank is now engaged in one of its periodic exercises in public relations-oriented self- criticism.

The World Bank’s consistent pattern is to acknowledge the truth of its critics’ longstanding complaints (while simultaneously denying that the problems are or were as systemic as critics allege); to make small gestures toward addressing their concerns; and then to simply dismiss all subsequent criticisms as based on the record of the "old" Bank, not the "new and improved" one.

After being played too many times, however, this cynical song of self-promotion and self- preservation becomes old. It is no longer plausible to deny that the World Bank is rotten at its core.

The question becomes: what to do?

The Fifty Years Is Enough Campaign, a coalition of environmental and development non- governmental organizations formed to protest the activities of the World Bank, is calling for a series of far-reaching reforms which would make the World Bank less secretive and more accountable, and would force it to undertake fewer and smaller projects and to involve local populations in project development and implementation. Were these reforms to be enacted, the World Bank would be transformed into an entirely new institution.

But the odds of achieving the Campaign’s agenda are slim. "Fixing" the World Bank would require it to operate in contravention of powerful multinational corporate interests. It would have to abandon the structural adjustment advocacy which has proved so valuable to global corporations, and to advance a democratic and ecologically sustainable development agenda that would, in the long run, pose a direct threat to multinationals’ current prerogatives.

Prospects for shutting the World Bank down, however, are brighter. Many ideologically- motivated right-wing forces, for reasons generally unrelated to those of environmental and development critics, maintain a deep antipathy to the World Bank. A tacit alliance between the Right and progressive organizations could succeed in depriving the World Bank of the industrialized country funding on which it depends, and in phasing the World Bank out of existence.

While this course of action may cause some transitional difficulties, it would contribute to freeing Third World countries from foreign interference and control, and begin to provide them the space they need to develop more sustainable and self-reliant economies.

The Front

Aristide Banks on Austerity

THE ARISTIDE GOVERNMENT of Haiti has agreed to a structural readjustment plan which adapts the economic approach favored by the World Bank and International Monetary Fund (IMF). The plan appears to veer away from the more populist line President Jean-Bertrand Aristide took before being ousted in a 1991 army coup. Entitled the "Strategy of Social and Economic Reconstruction," it was presented in August 1994 by Aristide advisers Leslie Voltaire and Leslie Delatour to a Paris donor meeting held in World Bank offices.

Under the August 22 plan, obtained by the Multinational Monitor from diplomatic sources, Haiti commits to eliminate the jobs of half of its civil servants, massively privatize public services, "drastic[ally]" slash tariffs and import restrictions, eschew price and foreign exchange controls, grant "emergency" aid to the export sector, enforce an "open foreign investment policy," create special corporate business courts "where the judges are more aware of the implications of their decisions for economic efficiency," rewrite its corporate laws, "limit the scope of state activity" and regulation, and diminish the power of President Aristide’s executive branch in favor of the more conservative Parliament. In return, Haiti is to receive $770 million in financing, $80 million of which goes immediately to clear up debt owed to international financial institutions. Compliance with the plan is to be closely monitored by missions from the World Bank, the IMF and the Inter-American Development Bank (IDB).

Though the plan talks in general terms about investing in public works and "education and health for the neediest," it then admits that due to the planned elimination of much of the State’s tariff revenue, "the very depressed status of the economy, the improbability of a short term quick rebounding of the economy and the likely sorry state of tax administration forbid optimism with respect to the immediate prospects for domestic resource mobilization."

Anticipating the shock of its "comprehensive reform program," the plan says it will be "essential" to create a "social safety net" over the next 18 months. It does not specify how that net will be assembled or how the government will be able to afford it.

The presentation of the plan comes as Aristide is under growing pressure to cooperate with Clinton administration plans for an armed occupation of Haiti. The Haitian government economic plan includes a discussion of the revamping of the Haitian armed forces, a matter to be closely coordinated with the U.S. Pentagon.

A World Bank release says the plan received "broad support" at the Paris meeting, which was attended by representatives of the United States, Japan , European countries , Argentina , Korea , as well as various international financial institutions and UN agencies. It says the financing would proceed "soon after" President Aristide returns to Haiti and the "constitutional crisis" is resolved, and after the IMF has certified that the plan is based on "a sound macroeconomic framework."

Axel Peuker, a World Bank Haiti desk officer, says Aristide’s advisers "did consult with relevant donors" as the plan was being written, and the final product was "well received." He added that "there is this tension between the public image of Aristide" and the "rather conservative approach, financial and otherwise" adopted by his Ministers when his government was still in Haiti. Peuker noted that the new plan "goes a step farther in this direction."

Asked about the fact that the plan seems to have abandoned Aristide’s past efforts to substantially increase the Haitian minimum wage, Peuker dismissed it as a "non-issue," saying "you just don’t regulate that in a country like Haiti where the government’s enforcement capacity is nil." He says the same applies to Aristide’s old attempts to create and enforce a Haitian social security pension system: "It’s not on the agenda."

Peuker contends that since Haiti lacks the kind of subsidies for basic goods that the IMF and World Bank usually target for elimination, the structural adjustment in Haiti "is not going to hurt the poor to the extent it has in other countries."

Peuker says that the plan would hurt the poor "to some extent," mainly in terms of the massive cutbacks in public sector employment. He contends the new plan’s free-trade changes would be a boon for the "more open, enlightened, business class," adding that "this will mean a chance to make Haiti interesting for foreign investors, and not just because it’s a low-wage country," but also because of new economic benefits and the prospect of more "political stability."

When asked for comment, Chavannes Jean-Baptiste, a prominent Haitian peasant leader who is also a member of Aristide’s cabinet, responded that he had not been consulted about the plan and had not yet been able to obtain a copy. He says that though his portfolio in the cabinet includes rural development and agrarian reform, "I don’t know anything about this document." When read excerpts from the plan, Jean-Baptiste said, "This is the plan of the World Bank and the IMF. It’s the same plan they’ve always offered for years, what they used to call ‘The American Plan.’"

- Allan Nairn


Haiti’s Strategy of Social and Economic Reconstruction

What follows is a slightly condensed version of the Haitian economic plan presented in Paris:

1. Background. The fundamental objective of the government is to substantially transform the nature of the Haitian state as the prerequisite for a sustainable development anchored on social justice and the implementation of an irreversible democratic order. The Government is profoundly convinced of the necessity to shift the social balance of power away from the executive branch, where too much has traditionally been concentrated, towards Civil Society and local government, which so far has been too enfeebled to provide an effective counterweight to the encroachment of the executive. The empowerment of several components of Civil Society (political parties, labor unions, grass roots organizations, cooperatives, community groups) and local government is the main object of state reform. The Government also believes that a vibrant, private sector with an open foreign investment policy is vital for long term growth. A sound macroeconomic policy eschewing foreign exchange controls, price controls and other policy-induced distortions will be the required environment for such a private sector. Such a transformation must:

o Meet the basic needs and fully mobilize the human potential of the people of Haiti;

o Demilitarize public life and establish the supremacy of legitimate civilian control over the military;

o Establish an independent judiciary:

o Strengthen the institutional capabilities of Parliament, other autonomous institutions (such as unions, business associations, peasant associations, women’s groups) and local governments to enable them to play a constructive and informed role in policy debates, formulation and implementation...;

o Limit the scope of state activity, and concentrate it on the mission of defining the enabling milieu for private initiative and productive investments;

o Reduce the involvement of the central government in the commercial production of goods and services;

o Redefine the relationship and the distribution of political authority between the central government and local authorities;

o Improve the quality of public administration.

2. ... The Government wants to commit the future so as to insure the long-term continuation of pledges taken today. ... It is thus necessary to articulate clear, bold, and explicit commitments and to start implementing them as quickly as possible. To successfully complete the task, the Government plans to have recourse to the resources of Civil Society and especially the private sector, grassroots organizations, cooperatives, and non-governmental organizations, for both the design and the execution of the relevant programs and economic and social policies.

3. To reinforce credibility, the Government must move fast on a broad front of policy reforms that will signal the Government’s commitment to a bold course of action. To this end the Government will request a visit by a Joint Mission of the IMF/IDB/World Bank within the first days of the return of the constitutional authorities. In the wake of the Joint Mission, the Government will send to the IMG Managing Director a Letter of Intent no later than ten (10) working days following the departure of the IMF mission. It will also forward to the President of the World Bank a Development Policy Letter to support an adjustment operation no later than twenty (20) working days after the departure of the Bank’s Mission. The clearance of the accumulated arrears to the International Financial Institutions [IFIs] represents the first step to the resumption of normal business with the IFIs. The Government will contribute US$13 million to expedite the process. The Government urges Haiti’s friends and partners to take quick action to complete the process no later than thirty (30) days after the return of the constitutional authorities.

4. Army and Police Reforms. The key feature of the new democratic order must be the professionalization of the Armed Forces. The Government will reduce the current apparatus to a small (no more than 1,500 officers and men) professional force based outside of the Port au Prince metropolitan area. ... The new force shall not incorporate any member past or present of paramilitary groups or individuals who have committed human rights violations.

5. Law enforcement will be carried out by a newly created police force. While some functions ... will be kept under the centralized control of the Minister of Justice, the basic law enforcement functions shall be progressively transferred to the responsibility of the Commune. The creation of this new decentralized police force will be costly as there is no current infrastructure designed for the protection of citizens in the great bulk of the population centers.

6. Judiciary and Parliamentary Reform. The blatant disregard for the rule of law remains at the root of our country’s problem; both human and property rights are inadequately protected. Thus, the second cornerstone for both a peaceful democratic society and a prosperous economy is represented by the establishment of an independent Judiciary that is able to fairly arbitrate conflicts among the members of society, and provide adequate protections for private sector activity, property rights, and fundamental human rights. ... Most of the basic economic laws (i.e. Code de Commerce, Code Civil, etc.) are old, obsolete, and need to be revamped. The establishment of specialized economic and commercial courts is required to both unclog the normal civil courts, and also to create a specialized legal system where the judges are more aware of the implications of their decisions for economic efficiency. ...

7. Parliament has a critical role to play in the modernization of both the economy and society. It has been severely emasculated in the recent crisis, yet it remains an essential component in any reform aiming at curbing the powers of the executive branch. The bulk of the economic reforms must be enacted through laws; yet Parliament is not equipped to deal effectively with these complex issues. The improvement of transparency and a greater degree of public agent accountability depend on the organizational capability of Parliament and the Superior Court of Accounts. ...

8. Reform of The State: The state sector needs to be modernized. The civil service needs to be reduced while the average level of professional competence needs to be improved. The goal is to have a smaller, more performing instrument. The objective is to secure the voluntary departure of about half of the 45,000 civil servants. To reach this goal, a generous severance package will be offered. ... In addition, all arrears on the wages of the public employees must be settled.

9. The reform of the civil service is just one of the components of the contemplated reform. The scope and content of government activity also need to be redefined with a view of moving away from tedious micro management towards a more strategic approach. The smaller civil service must concentrate its energy on a more limited number of objectives. It should refrain from excessive regulation and focus on broad policy questions. Service delivery and the associated resources will be gradually delegated to local authorities. Extensive use will be made of grassroots organizations, the private sector or qualified [non- governmental organizations (NGOs)]. ...

10. The renovated state must focus on an economic strategy centered on the energy and initiative of Civil Society, especially the private sector, both national and foreign. This implies a rigorous macroeconomic framework anchored on programs supported by international financial institutions. Given the extent of the damages brought about by the current crisis, it would be unrealistic to anticipate a quick reaction by private investors. As a result of the turmoil of the last three years, the private sector is virtually bankrupt and thus requires emergency assistance, especially for the export sector. Yet, the solid and appropriate policy determinants of long-term growth should be put in place. Haiti is a small, open economy; it should not be a ghetto; it needs to export to prosper. ...

11. As far as the trade regime is concerned, the remaining quantitative restrictions to imports will be immediately abrogated and the tariff removed except for the following products: rice, corn, beans, sorghum. For these products the tariff level will be cut in half immediately. For a very limited number of sensitive products, a transitory adjustment period not exceeding seven years might be provided. Such a tariff policy will have significant benefits in that:

o Contraband and associated corruption will be eliminated;

o The cost of living will be reduced, especially for food;

o The competitiveness of exports will be enhanced;

o It will establish a level playing field for all economic agents;

o It will curb the powers of domestic monopolists.

12. Such a tariff posture has three main implications.

o Such a policy will obviously require serious adjustment assistance to the productive sectors such as industry and agriculture. In particular, special effort will be required for the benefit of basic grains and rice producing areas.

As regards rice, policies with respect to proper water management, revamping of the irrigation and drainage systems, adequate support services to farmers (fertilizer, improved seeds, pesticides, tools and implements, extension services) and the suitable levels of rural financial services and resources will have to be implemented. In view of the political sensitivity of the rice sector, the legislation incorporating the tariff reforms would be introduced concurrently with the implementation of the rice sector support package.

o The correction of the trade regime distortions constitutes a necessary but not sufficient condition for a resumption of export performance. To reactivate the export sector, obliterated by the embargo, Haiti will request that its North American trade partners provide maximum favorable treatment with respect to quantitative restrictions and tariffs (including on the value added by the assembly sector) in the next 10 years.

o The drastic reduction of tariffs will place an added burden on the need to improve domestic tax collection. The very depressed status of the economy, the improbability of a short-term quick rebounding of the economy and the likely sorry state of tax administration forbid optimism with respect to the immediate prospects for domestic resource mobilization. However, it is essential to rebuild tax collection capabilities for both social equity and medium term economic stability. Priority will be on the TCA, property taxes, personal and corporate income taxes.

13. Democratization of Asset Ownership. The control of substantial productive assets by the state has proven to be a major economic and social catastrophe. Such control has imposed serious economic and financial costs on the rest of the economy because of mismanagement. The control over these assets has also been a major political problem because of the associated opportunities for corruption. The desire for control of the state apparatus by the country’s illegitimate rulers has not been divorced from the wish to quickly accumulate wealth through the capture of publicly owned companies. The consolidation of a democratic social order compels the Government to dispose of these assets.

14. A comprehensive divestiture needs to be accompanied by the implementation of the appropriate regulatory framework and antitrust legislation. The lack of financial markets constrains the proper valuation of the state-owned enterprises and will handicap the divestiture process. Furthermore, such a divestiture must be implemented in a way that will prevent increased concentration of wealth within the country. Consequently the transfer of ownership will be done to a category of proprietors. The Government will seek out foreign investors, domestic savers from the professional categories and the members of the Haitian diaspora. Additionally, arrangement must be made to ultimately transfer part of the ownership to traditionally excluded segments of society, with particular attention given to the families of the victims of the recent political turmoil. The practical modalities of such transfers are not yet specified but the Government will explore such alternatives as: a variant of the Czech Republic’s program; a modification of the Bolivian Capitalization Law; and the use of the International Finance Corporation (IFC) to temporarily warehouse these shares until they can be properly transferred to the designated target groups.

Last, the required reform of the retirement and social security system will expand the opportunity to widen the ranks of financial asset owners. To further strengthen the redistributive objectives, the Government will invest half of the proceeds from the divestiture into infrastructure investments in the poorest areas and low-cost urban and rural housing. The other half will be invested in a permanent trust fund whose annual proceeds will be used to subsidize education and health for the rural poor.

15. Reducing the Immediate Effects of the Embargo. The embargo has had widespread negative economic and social consequences. ... To stabilize the volatile political situation, it is imperative not to wait for the resumption of Haitian exports to rebuild short-term import capacity. Too long a waiting period can have fatal social consequences. The prices of the critical products must be rapidly deflated through the release of stocks to be constituted prior to the return of the constitutional authorities. The distribution of these products will be handled through established appropriate commercial channels.

16. As regards medium-term social policy, the Government will intervene with programs in education and health for the neediest. The Government believes economic progress and growth call for an educated and healthy population, and a flexible labor force that can quickly adjust to changes in economic conditions, As a major priority, it will invest in basic education for the poor, the rural segment of the population, with a special attention to young women’s schooling and an adult literacy program. Basic health care and population policy are also required for a healthier and more educated work force. ...

17. To initiate the recovery process the Government will endeavor to implement the projections identified by the multi agency task force of 1993. The assessments and cost estimates will need to be updated as the conditions on the ground have deteriorated. In view of the comprehensive reform program to be implemented it will be essential to create over the next 18 months a social safety net through income generating activities all over the country. Thus the Government believes that a self-standing major public works program needs to be implemented.

18. Financing Requirements. Given the magnitude of the emergency confronting the country, the Government estimates the amounts of financial resources to be committed at about US$800 million for the next 12 to 15 months. This excludes the cost associated with the maintenance of the civilian and military peace keepers. The allocation of the indicative financing is as follows: Governance US$175 million; Arrears Clearance US$80 million; Budgetary Assistance US$175 million; EERP and Ongoing Projects US$250 million; Humanitarian Assistance US$90 million.

Gene Wars

NAIROBI - Several government delegates at a Biodiversity Convention meeting held here in late-June 1994 expressed concern over reports that the World Bank was attempting to take control of the Consultative Group on International Agricultural Research (CGIAR) and its valuable gene banks.

At a session of the Intergovernmental Committee of the Biodiversity Convention (ICCBD), delegates from India , Malaysia , Sweden and the Philippines spoke up against the reported bid of the World Bank to take over the management of the CGIAR system and the process of determining the ownership and control of the genetic materials stored in agricultural research institutes linked to CGIAR.

"We are concerned about a dawn raid by the World Bank to take over control of the gene banks," said Ambassador Ting Wen Lian of Malaysia, who noted that the failure of the Biodiversity Convention to cover genetic materials stored in agricultural gene banks constituted a serious weakness.

"If these reports are true, it would compromise the basis on which the materials were collected from developing countries," she added. "We allowed them to be taken in good faith, for the benefit of science and enhancing crop productivity. We are extremely concerned because through the [UN ’s Food and Agriculture Organization (FAO)] we are involved in a process to bring these ex-situ resources within the control of an intergovernmental framework. We hope this process will be allowed to continue."

The Bank’s reported attempt to take over the CGIAR was the most controversial topic of the Convention meeting. Reports of this issue had been published in a paper prepared by the Rural Advancement Fund International, GRAIN and the Third World Network, in the bulletin Eco (circulated at the Convention), as well as in an article in the Financial Times of London.

The issue dominated corridor conversation during the first several days of the Convention meeting, and was first raised in an open meeting by Third World Network Director Martin Khor.

The genetic collections under the CGIAR system are worth billions of dollars, and could be used as an innovative financial instrument for implementing biodiversity programs, Khor said. It is thus important to recognize the rights of developing countries to the assets and to a fair share of the stream of financial benefits derived from the use of these genetic materials, he contended.

He said nongovernmental organizations were extremely concerned about reports of the World Bank’s recent move to take control of the CGIAR institutions’ genetic collections, which account for 40 percent of the total worldwide unique collections of agricultural genetic materials.

This move was apparently made at the CGIAR meeting in Delhi at the end of May. According to reports, the Bank offered to forgive the CGIAR’s $5.6 million debts, to raise its annual grant by some $5 million and provide up to $20 million of new funds to match other donor funds.

In turn, the CGIAR would, for the first time, create a steering committee and a finance committee, both of which the Bank would chair. The Bank would also consult the World Trade Organization regarding the General Agreement on Tariffs and Trade provisions on intellectual property rights and CGIAR’s germplasm. The Bank would also take the lead in dealing with the status of control and ownership of CGIAR’s genetic resources, thus displacing the role played until now by the FAO.

This, said Khor, would be a "good bargain" for the Bank, noting that the stream of benefits from CSIAR’s genetic materials is invaluable. For instance, increased productivity due to using improved varieties made possible by the genetic materials is worth $500 million annually in the U.S. wheat sector alone.

Khor added that the Bank’s move would put a serious obstacle in the way of negotiations between the FAO, governments and the CGIAR’s agricultural research centers to place their genetic collections under the trusteeship of a democratic intergovernmental mechanism such as the Commission on Plant Genetic Resources, and later within the Biodiversity Convention.

"We fear that control over these valuable assets would be diverted instead to the Bank," said Khor. "Our concern is that the Bank’s decision-making and governance structures are under Northern governmental domination. The genetic materials were collected from Southern countries and should rightfully be under their control. This would be more likely if the collections come under the purview and trusteeship of a democratic one-country, one-vote intergovernmental organ."

He requested that the World Bank respond to the allegation that it was increasing its control of the CGIAR; what measures would be taken to ensure full representation of developing countries in the governance of the CGIAR system and its genetic materials; how the equitable sharing of benefits from use of these materials would be arranged; and whether the FAO negotiations with CGIAR institutions would be allowed to continue.

In the discussion that followed Khor’s presentation, the Philippines delegation chief said there was a "sheer injustice" in the situation where biological materials collected before the Biodiversity Convention came into force were excluded from its purview. "I have a list of 26 commercially useful biological materials collected by Northern agencies from the Philippines, and they are excluded from the Biodiversity Convention," he said.

He gave two examples of materials found in soil samples collected from the Philippines by multinational companies which were subsequently found to contain valuable anti-tumor, anti-bacterial properties and patented. "Even countries from which these materials originated are now thus prohibited from sharing the benefits of these materials. In light of this basic injustice, our countries are concerned that due redress be made."

A senior Swedish official agreed that it was an injustice that the Convention did not cover biological materials collected prior its coming into force. This realization prompted Sweden, together with other countries, to support an initiative, approved by the governments in the FAO Conference, to negotiate with the CGIAR centers to place their genetic materials under the trusteeship of the FAO. Ultimately, under this plan, the materials in gene banks would come under democratic intergovernmental governance, through a protocol under the Biodiversity Convention.

"I am thus hopeful that through this process, the collections will be in good hands," the Swedish official concluded.

- Third World Network

Ruining a River

A CENTURY OF MINING and decades of clearcutting has taken its toll on Western Nevada’s once pristine Blackfoot River. Once a world-class trout stream and the subject of Norman McLean’s classic novel A River Runs Through It, the river has been transformed into a muddy concoction of heavy metals and silt flowing west from the Continental Divide into the Clark Fork River just east of Missoula, Montana.

There are virtually no fish in the river now and the Blackfoot drainage has been so badly denuded by Wall Street robber barons that when Robert Redford came to Montana to produce the recent movie based on McLean’s novel, he chose to film on the Gallatin River instead. In April 1992, American Rivers listed the Blackfoot among the 10 most endangered rivers in the United States, noting that the river may not be able to withstand another industry onslaught. It now appears this day of reckoning is just around the bend.

In 1989, while Champion International was busy clearcutting the lower Blackfoot to feed its newly retooled mill at Bonner, Montana, mining firms began exploring for gold east of Lincoln, Montana, near the headwaters of the river. The two companies, Phelps Dodge and Canyon Resources , formed the Seven-Up Pete Venture, later renamed the McDonald Gold Project. By 1992, it had become apparent that the project site contained 8.2 million ounces of gold. If the project is given the go-ahead, it will be the largest gold mine in North America, and one with potentially dire ecological consequences.

"A century of mining, grazing and logging have all but destroyed [the Blackfoot] river," says Dan Funsch, outreach director for the Missoula-based Alliance for the Wild Rockies. "Now, for a few lousy wedding rings, the McDonald Gold Project wants to finish it off."

Enter Echo Bay

With gold prices on the rise and mounting opposition from environmentalists and sports enthusiasts, Phelps Dodge Mining Company announced in June 1994 that it will sell its 72 percent majority share in the McDonald Gold Project for $150 million. Under the proposed deal, Canyon Resources Corporation would increase its share of the mine from 28 percent to 45 percent and Echo Bay Mining , a notorious Canadian gold mining company, would become the majority owner and operator of the McDonald Gold Project.

The McDonald Gold Project will employ cyanide heap leaching to recover the gold. In this process, a cyanide solution is sprayed over heaps of extracted ore. Gold settles at the bottom of the solution onto a heap leach pad and the toxified ore is hauled to a waste site. The process became popular in the mid-1970s and has resulted in a gold mining boom in Montana and elsewhere, since it is much cheaper and faster than other methods of gold mining. The environmental consequences are also much more nefarious.

The project plans call for creating an open pit a square mile wide and 1,400 feet deep which would not be reclaimed. As a result, the pit will eventually fill with runoff containing 33 different elements, many of which will be highly toxic metals. Since the water table in the area is as high as 300 feet below the surface of the ground, many fear this toxic soup could easily contaminate the area’s drinking water. The mine is located where Landers Fork, an important bull trout spawning stream, and the Blackfoot meet. Any leaks under the leaching pad could dump cyanide into the groundwater supply or into the river itself.

Company representatives deny the cyanide heap leaching process is environmentally harmful. Contends Cheryl Martin, director of investor relations at Canyon Resources Corporation, "We feel that we can build a permittable mine that will not impact the [Blackfoot] river in any way." Rick Lambert, McDonald Gold Project chief engineer for Phelps Dodge, says, "You have to understand the geological situation. Here we have an oxide deposit since there is primarily gold. In Butte where there’s been problems with acid water, the deposit is sulfide since its mostly copper. Spraying cyanide over gold is like pouring salt into water. The only problems that could occur are if cyanide reacts with other gases." An Echo Bay Mining representative declined to comment on the mine, stating, "I cannot speak for a mine that we do not own."

Environmentalists fear other detrimental consequences of the mine. They note with concern that the mining project, which is expected to last 12 years, will produce 400 million tons of cyanide laden waste ore which will be piled near Landers Fork near Highway 200.

Some environmentalists believe that the project is actually the first stage of a grand plan by the mining industry. The mining companies will apparently be designing their facilities to accommodate more ore than they intend to extract at the McDonald Gold Project. And geological evidence points to incredible mineral wealth in the entire Upper Blackfoot Valley.

Independent film maker and mining industry critic Gene Bernofsky of Missoula thinks Montana may be entering another round of mineral colonization. Bernofsky recently won acclaim for "A River Cries," which chronicles the Blackfoot’s demise and the proposed mine. He says Montana may be heading toward a heyday for global mining firms comparable to the early 1900s, when the Rockefeller-controlled and viciously anti-union Anaconda Company created what is now the biggest Superfund site in the nation near Missoula, Montana. "Echo Bay aspires to go down in history next to the Anaconda Company. We aspire to keep them out of Montana," he says.

The Baucus connection

The McDonald Gold Project covers 44 square miles of state and private lands. The private land is owned by Sieben Ranch Corporation, which is the largest sheep ranch in Montana and has been owned since 1896 by the Baucus family. Montana’s Democratic Senator Max Baucus holds between $250,000 and $500,000 in stock in Sieben Ranch.

Whether Baucus has a financial interest in the success of the McDonald Gold Project is unclear. Curt Rich, a Baucus administrative aide who specializes in natural resources policy, says he knows of no royalties or lease agreements. "Siebens is run by Max’s brother. Max does not get involved in management decisions of the corporation," says Rich, who failed to follow up on a promise to research the financial agreement between Siebens and the McDonald Gold Project and then contact Multinational Monitor.

- Dean Henderson


Troubled Waters: World Bank Disasters Along Kenya ’s Tana River

by Korinna Horta

BURA, KENYA - THE WORLD BANK ’S fiftieth anniversary has been marked by a barrage of eco-friendly and community-friendly statements by Bank officials and publicity documents. But a journey along Kenya’s Tana River paints a different picture of Bank-funded projects.

The Tana River is one of many Third World regions where Bank-funded projects have led to severe and long-term ecological and social damage. The Tana, Kenya’s longest river, has its source in the forested highlands north of Nairobi. The river first heads north, where it is fed by many tributaries from Mount Kenya and the Nyambeni range, then turns east and traverses the low-lying regions of Kenya’s eastern and coastal provinces on its way to the Indian Ocean.

During its 300-mile journey, the Tana bears witness to a Bank-funded energy project, an agricultural project and one of the new generation of so-called environmental projects. The project furthest upstream is the Kiambere hydro-electric dam. Some 240 miles downstream, the Tana passes the Bura Irrigation project, followed 50 miles further downstream by a project intended to protect biodiversity.

The upstream projects have an impact on the downstream project areas, although one would not be able to tell from World Bank documents. Since each project belongs to a different branch of the Bank - the Energy and Agriculture Divisions and the Global Environment Facility - there is little coordination between them. "This is a very large bureaucracy. Different people are brought in under different contexts. There was no systematic machinery in place," says Rafik Hirbi, a water resources expert at the Bank. "But this is changing now," he contends.

The very goal of the downstream "environmental" project - protection of a forest ecosystem that shelters two rare primate species - is threatened by both upstream projects. Yet World Bank documents claim that it is indigenous villagers who are a threat to the monkeys and that the villagers need to be relocated. The villagers have so far lived peacefully with the monkeys, but this may change if they feel that the monkeys’ protection comes at their expense. For the villagers, it is a question of life and death. And the history of the two Bank-funded upstream projects suggests they are right to fear for their survival.

The Kiambere dam

A roadblock stops all vehicles as the main road through Kenya’s lush green central highlands gives way to the newly paved road leading to the Kiambere dam. The guards demand to see official authorization from Kenya’s Tana and Athi Rivers Development Authority (Tarda), Kenya’s project executing agency, before letting anyone pass. Controls are tight and the guards are suspicious of cars that do not belong to the government. But salaries are low, and the guards are willing to accept some cash in lieu of an official document.

Construction began in 1985 on a dam designed to create 140 megawatts of electric power. But water in the reservoir appears to be dangerously low even during the peak of the rainy season. Bank officials claim that the project is fully operational, but information on how recent droughts have affected dam output is difficult to obtain, since Bank policy bars such critical information from being released to the public. Among the documents deemed confidential is a detailed internal Bank evaluation of the Kiambere dam completed in 1993.

An immediately evident problem, however, is the fate of the people who once farmed the fertile valley and were forced to leave when the dam reservoir was filled. The World Bank requested that Tarda conduct an environmental impact assessment (EIA) as a precondition for Bank financing. Apparently, however, the Bank did not provide Tarda with a copy of its policy on involuntary resettlement established in 1980. Instead, Tarda was only given some general outdated terms of reference, written in 1972, to guide the EIA process.

Tarda submitted the draft EIA to the World Bank in 1983. The Bank’s sociological advisors demanded that the resettlement issues be addressed in a timely and fair fashion, but the Bank’s Energy Division, which was immediately responsible for the project, opted not to press Tarda. "Throughout the 1980s, there were very few people at the Bank who cared about the social and environmental impacts of Bank projects," says Robert Tillman, an official in the Bank’s Africa Region Environment Division.

This may explain why it took the Bank three years to respond to the EIA presented by Tarda and verify how many people would be resettled and how much they would be compensated. A social survey of the area was only carried out when dam construction was virtually completed. "By that time, despite best efforts, it was no longer possible to trace the people who were being displaced and to reconstruct who actually bore the costs," says one Bank official who asked not to be named.

Michael Cernea, the Bank’s senior adviser for social policy and sociology, blames the Kenyan government rather than the Bank for resettlement problems. "This is a case where you had the borrower misleading the Bank by providing inadequate information. The borrower is cheating on his own people and diminishing the benefits of the project because appropriate measures to mitigate problems are not being taken."

Regardless of the Bank’s level of responsibility, the damage to the local population was severe. A confidential 1989 internal World Bank memorandum noted the number of people displaced by the dam was 6,000, six times the original estimate. Important provisions were ignored. There was no resettlement plan, no timetables and no evaluation of the adequacy of compensation. "There is nothing that could explain why this happened. Somebody just dropped the ball," says Tillman.

The displaced villagers went from poor to destitute. A priest from the Kiambere area says, "People here were just told that they had to leave; no alternatives were given to them. They continue to suffer." People lost their land, access to water and pasture for their cattle. Threatened by hunger, many found refuge in surrounding villages, vastly increasing pressures on the land. Reduced fallow periods for arable land and overgrazing of pastures created environmental stress. As a result, people in the communities that absorbed the displaced population also became poorer.

The dam’s electrical transmission lines pass over nearby villages, but not a single volt helps improve the lives of local people. "We are the cheap providers of electricity" says a farmer made landless by the dam.

The Kiambere situation is by no means unusual. The World Bank’s recent report, "Resettlement and Development - The Bankwide Review of Projects Involving Involuntary Resettlement 1986-1993," concludes that violations of its own resettlement policy are common in most Bank projects involving forced relocation. The review mentions Kiambere in two sentences, concluding that families displaced by the Kiambere lost 82 percent of their money-equivalent income (which includes, for example, crops grown for household consumption) due to resettlement.

The Bura irrigation project

Downstream from the Kiambere dam, the Bura irrigation project is an unmitigated disaster, the result of remarkably poor planning and institutionalized conflicts of interest.

The Bura irrigation project, which the Bank funded in the 1980s, was to irrigate about 35,000 acres to grow cotton and maize at an estimated cost of $98 million. According to the Bank’s 1990 Project Performance Audit Report, the area actually irrigated peaked at just about 6,000 acres, while costs shot up to $108 million and social and environmental project components had been canceled. In a country where per capita income is only about $350 per year, the project spent an incredible $55,000 for every settler on the project site. Yet today, these settlers and their families suffer abject poverty and drought and famine are a daily reality. The project has also led to the destruction of evergreen floodplain forests, which were rich in plant and animal species.

The area is now reminiscent of a ghost town. Huge water towers stand abandoned in the scrubby landscape; irrigation canals stretch across tens of miles, overgrown with thorny vegetation; and a fenced- in vehicle parking lot contains dozens of rusting Land Rovers and large farm machinery. Housing units built for mid-level project staff as well as the villas for the resident managers stand abandoned, dilapidated and looted. Only people with nowhere left to go remain on the project site. They are a community of about 20,000 former herders who sold their cattle, and farmers who left more fertile areas of the country for the promise of irrigated agricultural land.

Water is a severe problem in the Bura project. Today the only source of water in the area is a murky irrigation reservoir that serves both people and cattle. Large plastic canisters filled with the brownish water from the reservoir are strapped to children’s foreheads as they wind their way under a torching sun through thorny scrubs to their homes. Their mothers spend much of the day walking through shadeless heat searching for firewood. Food must be supplied by the United Nations World Food Program. Malnutrition and disease are rampant, especially among the children. The Bura project initially planned to build 20 village health units and various health centers, but these were canceled.

The settlers in the Bura project come from different parts of Kenya, but share the common fate of being dependent on food hand-outs. Most cannot afford to send their children to school and basic medical care is beyond their reach. "My children are sick, but there is no medicine here," says a woman settler. "There is even not enough animal dung here to repair our houses," she adds, pointing at gaping holes in the mud walls of her house..

Although project managers knew that settlers would need fuel to meet their cooking needs, the project did not address the question. No woodlots were planted early on to provide fuelwood. Settlers had no choice but to plunder the riverine forest, the only green strip of land in this arid region. The forests and wildlife protection component of the Bura Irrigation project never got off the ground, and deforestation ensued.

Much of the money for the Bura project was borrowed from the World Bank on non-con- cessional terms and will have to be repaid at high interest rates. The Bura project will be a drag on the Kenyan economy for years to come and the debt will have to be repaid in hard currency, adding pressure to increase exports to generate foreign exchange. More country’s resources will be diverted to activities such as flower production for European markets, while several million Kenyans risk becoming victims of drought and famine.

"Bura is an example of a classically idiotic project," says Thayer Scudder, an anthropologist at the California Institute of Technology who works as a consultant on water projects. "At one point, 50 percent of the Kenyan government’s funds for [rural] development were wasted on Bura." The World Bank’s 1990 Project Performance Audit Report, a leaked confidential document, indicates that project managers should have been aware of problems and halted the project early on. Technical studies on the lack of suitable soils for irrigation in the area existed but were not taken seriously. Project managers, rushing to get the ill-prepared project approved by the Bank’s Board of Directors, downplayed the risks and vastly underestimated its costs.

The Tana River Primate Reserve

The dirt road from the Bura project toward the coast is in relatively good condition. The road runs through semi-arid land that, unlike many roadsides in Africa, is strangely uninhabited. There are no houses at the roadside and except for the occasional Orma pastoralist in search of pasture for his herd of white, long-horned Zebu cattle, there is no movement along the road.

But moving off the road several miles toward the Tana river, the infertile desert landscape changes into lush forest, the abundant rich soil fertilized by Tana River silt deposits. This is where the Pokomo people, a minority ethnic group of about 50,000 people, live. The area is also home to two rare and endangered primate species, the Crested Mangabey and the Red Colobus. It is these two primate species that are to be protected under the World Bank’s biodiversity protection project.

The Tana River Primate Reserve project, which began in 1992, is funded with a grant from the Global Environment Facility (GEF). The GEF is run by the World Bank with the junior participation of the United Nations Development Program and the United Nations Environment Program. At the Rio Earth Summit, on the condition that it be reformed, the GEF was chosen as the interim mechanism to fund projects under the Climate Treaty and the Biodiversity Convention. A restructuring of the GEF has taken place, but the changes were cosmetic, and the World Bank remains firmly in control. Hence, it is not surprising that GEF projects suffer from many of the same flaws as those of its parent organization.

World Bank documents on the Tana River GEF project indicate that Bank consultants and staff believe that the conservation of the forest ecosystem where the monkeys live is not compatible with the continued presence of local people in the area. A precondition for the project is that access of Pokomo villagers to the fields and trees in the area be curtailed.

Yet, Pokomo oral history says the Pokomo themselves brought the Mangabey and Red Colobus to the banks of the Tana River when they migrated there from central Africa more than 600 years ago. Over the centuries they have lived in harmony with the primates. Independent researchers, such as W.O. Ochiago, of the Institute of Primate Research at the National Museums of Kenya, confirm the Pokomos’ claim. The primates are actually more numerous near the villages than in abandoned forest lands, and it was the local people who called the attention of researchers to the monkeys in the first place.

Maintaining access to their fields and trees is a question of life and death for the Pokomo. The villagers are already noticing a decline in the agricultural productivity of their land, which many attribute to the will of divine powers. A more likely explanation is that the Kiambere and other upstream dams which are regulating the river flow have led to reduced flooding of the river plains.

The villagers are still able to grow enough food for themselves and even to produce a surplus of mangoes and bananas which they sell. But, within view of the inhospitable arid land just a short distance away from the river, the Pokomo fear losing their livelihoods if they lose access to the fertile land on the river bank, the huge mango trees and the forest itself, which provides nuts, vines, medicinal plants and many other products that are crucial to the Pokomo.

"We will be reduced to beggars if they interfere with our farming," says a village elder. "We Pokomo are farmers. We have never killed wildlife, but if you beat me because of wildlife, then I will kill the wildlife, because it has become my problem."

The East African Wildlife Society, a Kenyan non-governmental organization which has been active in the project area for almost 20 years, has helped draw international attention to the local struggle against the project. "This has been a project of non-consultation, non-involvement, non-coordination and non-communication with the local communities and local leadership," says Dr. Nehemiah Rotich, director of the organization. "The GEF project goals are sound. We have to protect the forest and the monkeys. It is only the approach taken that was wrong." Rotich suggests that a project to help deal with the threat would be welcome at this stage and the villagers are ready to cooperate if they would be properly consulted and involved in the project. Their relocation is not necessary and they should be compensated for any losses that they would incur voluntarily, he says.

As Pokomo opposition to the project solidified, and soon after a May 8, 1993 Kenya Times article headlined "Residents Reject World Bank Plan," the project was suspended. Pokomo hostility to the project is now such that foreign researchers are being warned to stay away from the recently abandoned research station at project site. Although poaching is not a problem in the area, the Kenya Wildlife Service, the parastatal agency in charge of implementing the GEF project, visits the area with heavily armed guards.

Despite World Bank rhetoric about involving local communities in its project, the Tana GEF project is a story of the creation of unnecessary tension and fear that did nothing to foster the cooperation needed to protect a unique ecosystem.

Why do things continue to go wrong?

Asked about the Bank’s unimpressive social and environmental record, a spokesperson in the Bank’s External Relations Department, who asked not to be named, explains, "We cannot take responsibility for every project in the past. National governments, local governments and the private sector all are involved." While this is certainly true, it fails to recognize that most of these projects would not be undertaken at all were it not for World Bank support.

The Bank recognizes that some of its projects have led to environmental problems in days gone by, but claims that new environmental policies and guidelines have turned the Bank into a responsible environmental citizen. Bank President Lewis T. Preston announced in July 1994 that the Bank has committed about $5 billion to projects addressing environmental problems.

The problems with Bank projects now, claim some Bank representatives, lie not with the Bank, but with Third World countries where the projects are carried out. According to Andrew Steer, the newly- appointed head of the Bank’s Environment Department, "Implementation of environmental projects in developing countries continues to be difficult because of a lack of technical and administrative capacity and the absence of a[n environmental] constituency." The Tana River projects, however, show that the Bank’s progress on social and environmental fronts has largely been confined to a theoretical level that has little relevance for its operations on the ground.

Environmental impact assessments - as in the case of the Kiambere dam - are of dubious value if they are treated as a mere formality which serves to legitimize projects that are questionable on environmental, social and frequently even economic grounds. Well-intentioned policies, such as the World Bank policy on involuntary resettlement, may as well be non-existent if their provisions are systematically ignored in Bank operations.

The Bank’s internal evaluation of the Bura Irrigation project points out that there is a great potential for conflict of interest and absence of objectivity when the same staff members are in charge of both preparing and appraising a project. Frequently, the same staff members also supervise the projects. There continue to be virtually no systematic checks and balances to ensure that projects involving hundreds of millions of dollars are not converted into the fiefdoms of vested interests within the Bank.

Community participation and consultations with non-governmental organizations have become the slogan of the day, especially in the context of projects funded under the Global Environment Facility. Yet, as the resistance of the local people in the Tana Primate Reserve project shows, Bank operations have made little headway in becoming more participatory.

The underlying causes for these costly failures lie within the World Bank’s incentive structure, which rewards those members of the Bank’s staff who lend the most amount of money. In 1992, Bank President Lewis T. Preston charged a special task force headed by former vice-president Willi Wapenhans, a 30-year veteran of the institution, with examining the Bank’s multi-billion-dollar loan portfolio. The outcome, known as the Wapenhans report, documents in detail how the Bank’s "pervasive" preoccupation with the rapid approval of new loans has created a focus on moving money rather than paying attention to the on-the-ground impact of its projects. This puts well-intentioned and competent World Bank staff who are dedicated to the Bank’s stated goals of poverty alleviation and protection of the environment at a definite disadvantage, since there is a built-in bias against small-scale, long-term endeavors that emphasize community participation and local knowledge in managing natural resources.

The Bank’s predilection for large-scale, capital-intensive projects closely matches the interests of top government officials in most borrowing countries, as huge investments help feed political patronage systems and large procurement contracts may offer opportunities to siphon off funds that cannot be found in small-scale, labor-intensive projects.

An important step that the Bank must take to make good on its environmental and social claims is to release its staff from the pressure to move money quickly and reward them on the basis of the long- term beneficial impacts of their projects. Unfortunately, as the Bank expands into the former communist countries and into the new field of so-called environmental projects, there has been little movement in this direction.


Slush Funds, Corrupt Consultants and Bidding for Bank Business

by Pratap Chatterjee

In March 1993, a team of British consultants from Environmental Resources Management (ERM) traveled to the Narmada Valley in India to conduct a study of the potential social and environmental impact of the controversial Sardar Sarovar hydroelectric dam project and its accompanying mass resettlement plan.

The consultants returned to describe the "public health benefits," and "opportunities for environmental improvement provided" by the project.

The team spent most of its time at an office hundreds of miles away from the site, visited the dam site once and never bothered to visit the resettlement areas. According to Patrick McCully of the Berkeley- based International Rivers Network, one member of the team claimed that she did not see any trees on her visit to the site, and therefore concluded that the environmental impact of the dam would be minimal.

In June 1994, another team of British consultants, from Agrisystems Overseas, traveled to Phrae province in Thailand to study the impact of the Kaeng Sua Ten dam and the opportunities for local participation in its planning. The consultants refused to tell villagers who they were working for, but subsequent research by English support groups revealed who had hired them and for what purpose. To the surprise of the team, when it called a meeting with the local government, 5,000 enraged villagers turned out to protest. Later that day, a group of 200 villagers stopped the team’s jeep, pulled the consultants out and beat them and damaged the vehicle, according to local newspapers.

The governments of India and Thailand were seeking World Bank funding for the Narmada and the Kaeng Sua Ten projects. The consultants were paid out of trust funds administered by the Bank, but set up by donor governments, whose purpose is often to further the interests of donor country corporations. This interest frequently conflicts with the interests of the communities in which development projects are being conducted. But it is donor countries that dictate the funds’ terms.

McCully says that the ERM mission was an attempt to discredit the independent fact-finding mission, paid for by the Bank, which condemned the Narmada project for its lack of environmental assessments and adequate resettlement plans. "The government knew that consultants would not criticize the project - because consultants do not criticize projects. If they did, their extremely lucrative contracts would soon dry up," he says.

In the case of the Kaeng Sua Ten project, the money for the British consultants was provided by the Japanese government. "We were asked to help the government do an improved assessment of an old project that was first assessed in 1985 to include the participation of the people. But if the people don’t want to participate, there’s nothing we can do about that," says Yves Wong, the Bank’s task manager for the project.

Donor country trust funds supplied $41 million in 1993 to pay for consultants, often from the same donor countries where the money originated. Money from these funds, which unlike Bank loans does not have to be paid back, has been growing rapidly, mushrooming by 39 percent in 1993 alone. It constitutes more than one-third of the Bank’s $103 million spent on consultants.

One reason for the sudden explosion in these funds is the fact that companies based in the donor countries have been facing a drop-off in development project contracts. Until 1988, the industrialized countries in the Organization for Economic Cooperation and Development (OECD) received 87 percent of all contracts from the Bank’s main lending arm, the International Bank for Reconstruction and Development (IBRD). OECD countries also won 82 percent of all contracts from the Bank’s soft-loan arm, the International Development Agency. By 1993, these figures dropped to 71 percent and 62 percent respectively, as stiff competition emerged from contractors in developing countries.

Winning contracts

A May 1994 U.S. Treasury study shows that U.S. companies won $2.7 billion in World Bank contracts last year for the $1.5 billion that the government donated to multilateral banks. The authors say that the estimates are crude and represent perhaps 40 percent of the total value of contracts the United States won from multilateral banks because not all World Bank contracts are identified by country of origin.

The big winners include Newmont Mining of Colorado, which landed $110 million in contracts last year from the multilateral banks; General Motors and its subsidiaries, which won $98 million in contracts; McDermott of Louisiana with $79 million; Caterpillar with $65 million; the Chicago-based Ameritech with $60 million; Coca- Cola with $57 million; General Electric with $55 million; Chevron Chemicals with $22 million and Time-Warner with $20 million. Other major contractors included 3M , Bankers Trust , Cargill , Dupont , Exxon , Ford , Harvard University , Monsanto , Mack Trucks and Union Carbide .

The information flow

The main source of information on upcoming contracts for companies is their country embassy in Washington, D.C. The British embassy, for example, has an office to find out about projects before they are mentioned in official publications and to pass the information back to the Department of Trade and Industry in London.

"It’s easy enough," says Chips Westwood, who is in charge of the British operation. "All country departments of the Bank have five-year plans of the projects that they would like to fund, and by keeping in touch with [the country departments], it is possible to get this information."

Bank staff are not allowed to give information about upcoming or currently available contracts directly to companies at any stage of the process. Officially, the information can only be obtained from the borrower government.

In fact, once a World Bank project has been appraised and a report published, copies are provided to members of the Bank board of executive directors. Many of these government representatives ship these reports to their home countries or to their embassies in the borrower countries, where they put them in trade or commerce libraries for corporate representatives to peruse.

In the United States, the Department of Commerce maintains a library which makes the reports available for overnight borrowing. Reports often arrive before they are approved, in contravention of the Bank’s own guidelines. In every U.S. state capital, there is an office to assist potential contractors, and in embassies such as those in Jakarta, Indonesia, lists of projects in the country for which external finance is available are provided and updated regularly. Regular perusal of such reports can give companies the upper hand in bidding for contracts.

The inside track

The trust funds enable donor governments to skew project contract awards in favor of companies from their country. Unlike the contracting process, which is officially competitive, the consultants are hired at the discretion of the task manager in charge of the loan at the Bank. In order to select a consultant, task managers can access an internal roster of experts, called Data on Consulting Services, that is available to all Bank staff. Any consultant can get on to this list for three years provided they meet certain minimum standards set by the Bank.

But World Bank recruitment staff say that their service is not the usual way to find consultants. "A lot of it is word-of-mouth," says one Bank staff member in the department. Consultants exist aplenty. The problem is finding the money to pay them - and this is where the trust funds come in.

Multinational Monitor obtained Bank documents outlining how the trust fund money is supposed to be spent. The documents reveal that donor country trust funds frequently stipulate that their money can only be used to hire consultants from their country. Of the 25 consultancy funds listed in a 1991 World Bank handbook, every single one was tied to buying services from the donor country, although some countries - notably Canada, Scandinavian countries and the Netherlands, also permit for the hiring of qualified consultants from developing countries. Some countries, like Sweden, stipulate that local consultants can only be hired in conjunction with donor country consultants.

Some of the funds are very restrictive and specifically tied to promoting new industries in donor countries - two major areas for most donor countries being environmental services and services to Eastern Europe. Seven countries - Australia, Britain, France, India, Japan, New Zealand and Switzerland - require that final approval for hiring consultants be given by the donor in question, not Bank management. Some funds actually promote specific consultants. For example, the Korean fund provides World Bank task managers with a list of Korean consultants who are eligible for the fund.

While untied funds have been added in recent years - notably from Switzerland and Japan - they differ from the tied funds more in appearance than reality. For example, most Japanese aid officially is untied, but in practice, nearly all of it goes to Japanese companies.

While it is difficult to measure the benefits of the trust funds to donor countries, one crude way of estimating the benefits is to compare the value of contracts awarded to various countries that have substantial donor trust funds.

Some OECD countries that now maintain trust funds won more contracts in 1993 than they have averaged in the past 48 years. Among these winners are Denmark , Finland , the Netherlands , New Zealand , Norway , Portugal and Switzerland .

On the other hand, Belgium , Canada , Italy , Japan , the United Kingdom and the United States have been less successful in recent years. But as the biggest contractors in the past, their recovery is likely to be slow.

Of the four developing countries that put money into trust funds, the return on the trust fund investments has been very good for three - Brazil , India and South Korea - while the other - Pakistan - has not yet reaped the benefits of its investment.

Bank managers believe the consultant trust funds play a positive role because they help both recipients and donors. "Two principal forces drive the Consultant Trust Fund Program: the Bank’s need for outside expertise in addition to its own; and the Bank’s developmental and commercial interests," says the trust fund handbook.

But critics such as Willi Wapenhans, a retired Bank vice president who authored a 1992 internal review of the Bank’s operations, say that these funds have introduced ethical conflicts into Bank work, due to a lack of independent review. "The direct involvement with staff, consultants and trust fund personnel under the Bank’s direction in project and program design threatens the institution’s ability to assess with disinterest the merits of a financing proposal," he says.

The Bank is aware of these problems. One year ago, it formed a team under George West, an adviser from the Bank’s controller’s office, to investigate the trust funds. The results of the West team’s investigation have not been made public, but sources in the Bank confirm that task managers have been using the trust fund money for a variety of illegitimate purposes. These range from giving contracts to friends to siphoning money off to use for other projects and pushing pet projects by directly raising money from donors.

West told Multinational Monitor that he did not find many examples of direct abuse, but that he found cases of managers approaching donors to raise money for projects that they wanted to promote, in contravention of Bank rules. "There’s an awful lot of variety in the way the funds are used. Some are justified and some are not. We have made a number of suggestions to Bank management and we are consulting with donors. If they say, ‘Hell, no, you guys are crazy,’ that’s OK. But I don’t think that will happen," he says.

West says his investigation did not look at what percentage of the appraisal costs was made up of the donor country-tied consultancies, nor did he compile a tally of contractors and consultants to check for a trend of abusing the funds to provide contracts for fellow nationals.

One task manager reports, on condition of anonymity, that he gave a contract to a friend in India whom he knew was not competent but then forced his friend to hire foreign staff with the necessary skills to bring the project up to par. Another Bank staffer says that he discovered that one U.S.-based consultant, who was being paid by a trust fund, was using a fake address to win a contract reserved for developing countries.


Getting information on the trust funds is difficult for non-consultants. Three telephone queries to the Bank’s public relations department yielded no substantive information. Alan Dratell, a Bank spokesperson, says that the trust funds "are not a news story," and refuses to give any information. Queries to the British embassy in Washington, D.C. yielded an angry response from Chips Westwood. "I don’t see why information about money spent on British consultants should be published. This has nothing to do with the developing world, just to help the Bank to move ahead," she says.

Activists disagree. "I think the Bank must be held responsible for creating this sort of conflict. [At the Kaeng Sua Ten dam site,] 15 villagers have had warrants issued for their arrest. Without its political meddling, these things would not happen," says Larry Lohmann, a U.S. activist who has worked with Thai non-governmental organizations and villagers confronting unsustainable development projects.

"Consultants like this are just prostitutes who take their clients’ money and do what they know the client will like. They have no professional accountability to anyone other than their paymasters," says McCully. In the Narmada situation, he says the consultants were clearly incompetent. "They went there in March, well into the dry season, when the deciduous trees of the area have lost their leaves. It would be like a tropical forest dweller visiting an English oak wood in December and thinking that the trees were all dead," he says.

Likewise, he says the consultants’ acceptance of government claims of adequate plans for resettlement in the Narmada project are naive at best. Official figures in 1985 showed that 33,000 families would have to be resettled. More current government figures, however, show that the reservoir will displace about 200,000 people and the entire project may affect as many as 1.2 million people. Many of those who have been resettled have returned to their old villages because the quality of the land they were given was so poor. New land allocated this year is already occupied by other people, so land conflicts may take place if new people move in.

Monitoring for the future

It is hard to say if this will change in the future. Trends point to a major increase in the use of trust funds, and the Bank is trying to make them more accountable. However, it would seem that the Bank’s efforts are aimed more at making the use of the funds more efficient than at rooting out conflicts of interest. If West’s investigation foreshadows Bank efforts at reform, then the trust fund abuses are likely to continue indefinitely.


A Financial House of Cards

by Patricia Adams

IN JUNE 1993, just three months after it dramatically ended its disbursements to the controversial Sardar Sarovar dam in India, the World Bank assembled a massive loan package for the Indian government. Worth $2.3 billion, the loans had all the markings of a political payoff.

The Sardar Sarovar dam had become an albatross around the World Bank’s neck: an independent review of the project revealed the dam would perform poorly and impoverish some 240,000 people who would be moved to accommodate it. Public outrage in India over the World Bank’s support for the megaproject led to a "Quit India" campaign - a revival of Gandhi’s campaign against British colonial rule - to expel the World Bank. International outrage, meanwhile, was beginning to threaten the World Bank’s bid for an $18 billion capital fix from the Western countries which periodically refill its coffers. Both Finland and Canada cut their contributions to the Bank, and the U.S. Congress - the World Bank’s biggest benefactor - was threatening to withhold its hefty 20 percent share of the World Bank’s budget.

But the Bank could not walk away from the project without offending the Indian government. Wounded by a balance of payments crisis and public opposition to its economic reform package, the Indian government was also furious over what it perceived as meddling in its sovereign affairs by foreign environmentalists and the World Bank over Sardar Sarovar. In a daring game of financial brinkmanship, the Indian government threatened to default on its World Bank debts if the Bank withdrew its support for the dam. As the World Bank’s biggest borrower, the Indian government had the Bank over a barrel. An Indian default on its World Bank debts would put 15 percent of the Bank’s entire portfolio in the limbo of nonaccrual status, threatening the Bank with its first annual loss.

The World Bank capitulated. To appease its critics, it cancelled the remaining $170 million in disbursements for Sardar Sarovar; to please its client state, it offered more than 10 times as much, not allocated to specific projects with their potential for embarrassment, but to be spent at the discretion of the Indian government.

Indulgent benefactors

Buckling under international pressure seems uncharacteristic for the Bank, viewed by many as the world’s most unflappable financier. With a reputation for imposing discipline on its borrowers, and for cool- headed, unsentimental economic analysis and an unshakable triple-A credit rating, the World Bank has always seemed the most prudent of financial institutions.

It is a reputation that the World Bank carefully cultivates. In its Information Statement (a prospectus for potential purchasers of its bonds), the World Bank reassures investors that it "does not make loans which, in its opinion, cannot be justified on economic grounds." It boasts that it "has never written off any of its outstanding loans," nor will it reschedule its loans the way other, by implication less adroit, financiers do. The World Bank also regularly points out that because of its "preferred creditor status" it always gets paid back first, before all other creditors.

All these factors contribute to the Bank’s blue-chip status. But no factor matches the pledges by rich country members to repay bondholders should the Bank’s Third World borrowers default. It is because of these pledges that even failed World Bank loans do not tarnish the Bank’s credit rating.

Money-losing loans, as it turns out, have been the order of the day.

The first outside, independent assessment of a World Bank project ever done - which was for India’s Sardar Sarovar dam - documented institutionalized deception, incompetence and negligence. Engineering studies to determine the dam’s viability were never completed, the review found. The review team also rejected the argument that Sardar Sarovar might be an isolated example, stating that "the problems besetting the Sardar Sarovar Projects are more the rule than the exception to resettlement operations supported by the Bank in India."

India’s problem projects were, in turn, only a hint of even bigger problems. Just months after the release of the damning Sardar Sarovar report, an internal report commissioned by Bank President Lewis Preston to investigate project quality was leaked to the public. It revealed that the problems plaguing the Sardar Sarovar project were Bank-wide.

Prepared by high-ranking World Bank official Willi Wapenhans, this report found that more than one-third of the Bank’s $140 billion in projects were failing. Worse still, deterioration of the Bank’s loan portfolio was "steady and pervasive."

"There is reason to be concerned!" declared Mr. Wapenhans in a June 1992 presentation to members of the Bank’s Board of Executive Directors. "The portfolio is under pressure," and "this pressure is not temporary; it is attributable to deep-rooted problems," he explained in his report.

Among them, Wapenhans found the World Bank staff to have a "systematic and growing bias in favor of optimistic rate of return expectations at appraisal." He found that the Bank operated as an "approval culture" in which "staff perceive appraisals as marketing devices for securing loan approval (and achieving personal recognition)." "Appraisal," observed Wapenhans with dismay, "becomes advocacy."

What critics had long suspected was now confirmed at the Bank’s most senior level - the World Bank’s books had been cooked to make unsustainable projects appear viable. Contrary to its claims, instead of detached economics calling the shots, bureaucrats and borrowers out to build empires viewed all Bank projects through rose-colored glasses.

Moreover, the Bank seemed no better at implementing projects than appraising them: Wapenhans discovered borrowers’ non-compliance with legal loan covenants, especially financial covenants, to be "gross" and "overwhelming." Of the water-supply projects financed by the Bank between 1967 and 1989, for example, only 25 percent of the borrowers complied with their financial covenants.

Guaranteeing bad loans

Despite this rash of bad news about its mismanaged projects, the World Bank’s triple-A credit rating remains unscathed. The Bank claims the credit rating agencies are satisfied that the Bank will do better in future. "The shift in the Bank’s procedures [in response to the Wapenhans Report] has been thoroughly discussed with the ratings agencies and was well received by them as evidence of the Bank’s efforts to improve the quality of its services on an on-going basis," says Ellen Tillier, a World Bank spokesperson.

But any other bank with such a disastrous portfolio would see its credit rating slashed and its investors flee. The World Bank is unlike any other bank, however. Rather than being governed by market discipline and exercising investment prowess, the World Bank is propped up by state guarantees and disguised government bailouts.

Because all Bank loans are guaranteed by borrowing governments which pay them back out of general government revenues (instead of from project profits), the World Bank need not ensure that its loans are invested in economically viable endeavors. "With such a setup," says longtime Bank critic Bruce Rich in his recent book Mortgaging the Earth, "it makes no difference whether the projects the Bank lends for are well managed or mismanaged, or whether some or all of the money disappears." Hapless Third World taxpayers are the first ones to take the hit for disastrous investments.

Meanwhile, tax revenues from rich countries are routinely used to disguise the fact that the World Bank, with the riskiest loan portfolio in the world, is a financial house of cards that could crumble at the slightest tremor. A 1992 investigation of the Bank by the Canadian Auditor General (a parliamentary watchdog over government expenditures) debunked the Bank’s claim that it never reschedules debt and that its Triple-A credit status is the result of some inherent financial integrity in the Bank.

Maintaining the preferred creditor status of the multilateral development banks - the linchpin in their triple-A credit ratings - "is not cost free to countries like Canada," explained the Auditor General. Nor is it "based on a formal or legal subordination of the debts owed other creditors to the debts owed to the banks." Rather, the Auditor explained, it is based "on informal factors, like the willingness of the development banks to maintain a positive cash flow to their borrowing countries."

Without a "positive cash flow" - to allow Third World debtors to receive more in new loans than they must pay back - many Third World countries would be unable to repay the World Bank. To ensure the Third World gets enough new money to make these debt payments, the World Bank provides structural-adjustment loans - immediate loans for unspecified expenditures, made to help a borrowing country reform its economy. Reform through these loans generally results in export-oriented growth strategies at the expense of poor and working people and the environment. Through these round-trip loans, Third World borrowers get deeper into debt and the Bank becomes increasingly vulnerable to its high-risk debtors.

A 1992 confidential report to the Bank’s Board of Executive Directors recognized the problem. "The quality of the portfolio has deteriorated significantly," it warned. "Almost half of the projected increase in Bank exposure is to countries that are currently considered to be high risk," and "it is possible that a few of today’s high risk countries could slide into nonaccrual over the next few years." The Bank admits the problem has not gone away. "Development lending is risky, and there is the chance that the Bank’s borrowers will face payment difficulties," Tillier says. Should this occur, she adds, the Bank could manage the risk by maintaining a high level of reserves and suspending its present practice of waiving some of its loan charges to certain countries.

However, it would only take one large debtor, like India, or a handful of smaller debtors to default on their loan repayments for the unthinkable to happen: the Bank would have to start calling on its reserves (funds authorized by member countries) to meet its obligations to its bondholders. But that might set off a chain reaction, undermining the Bank’s shaky foundation. Member countries would likely be called upon for additional funds. But taxpayers in member countries might well resist bailing out boondoggles, dragging down the Bank’s credit rating. The cost to the Bank of borrowing money would increase, and its Third World borrowers would begin to question the wisdom of more borrowing - and the wisdom of repaying their Bank loans. The Bank’s entire financial stability would be put at risk.

Bailing out the Bank

The Canadian Auditor General observed that donor countries have been maintaining the Bank’s preferred creditor status by offering debt relief "indirectly" through the Paris Club.

The Paris Club is a regular meeting of lending and borrowing nations, hosted by the French finance ministry, to renegotiate Third World debts to government lenders. While the Bank does not participate in those negotiations, its rich country members protect the Bank by directing their own lending institutions (aid agencies such as the U.S. Agency for International Development and export credit agencies such as the U.S. Export-Import Bank) to reschedule or forgive their Third World debts first. The Paris Club reschedulings have thus become an important safety valve protecting the World Bank.

Sometimes the Bank requires a more overt rescue to avoid a downward spiral triggered by one large borrower defaulting. Since the World Bank’s financial facade does not admit to the existence of round-trip loans to get chronic debtors out of arrears, the Bank’s rich members do the job instead. In 1990, a "support group" of creditor countries, worried that the mounting arrears of various small borrowers would weaken the credibility of the World Bank and the International Monetary Fund (IMF), pooled millions of dollars to pay off Guyana’s arrears to the World Bank and IMF, thus restoring Guyana’s good standing with the two institutions through a package of loans, grants and debt rescheduling. Similar packages have been marshaled since: France recently gave a grant to cover Cameroon’s debt service arrears to the World Bank while last year the United States and Japan gave a bridging loan to Peru to clear its World Bank arrears.

Third World debtors have "often been supported through bilateral and multilateral programs to enable them to service their debts with the World Bank," said Canada’s Auditor General, suggesting that a taxpayer bailout has been quietly operating to keep a financial crisis from the World Bank’s doorstep. But, he added, "One must ask whether these flows can be maintained indefinitely."

For now, the Bank’s priority is to keep money flowing to its Third World debtors at higher volumes than the debt repayments it receives, thereby providing debtors with the wherewithal to repay old World Bank debts.

But maintaining a positive net flow of funds requires ever more funds from increasingly reluctant rich countries, especially given that they are still on call to pay back some $100 billion to Bank bondholders should Third World countries default.

The risk of a World Bank bailout led Canada’s Auditor General to urge the G-7 countries, which are collectively liable for $70 billion of the World Bank’s $100 billion debts, to conduct an independent review of the World Bank’s financial situation. Such a review would likely reveal the fragility of the Bank’s finances. When wealthy countries tire of endlessly pledging more money to the Bank’s Third World debtors to induce payment of old debts, the Bank’s preferred creditor status will collapse like a house of cards, threatening its triple-A credit rating and exposing its operations as a kind of global Ponzi scheme dependent on uninformed taxpayers to keep it going.


True Confessions of the World Bank

MORE THAN ONE-THIRD OF WORLD BANK PROJECTS completed in 1991 were judged failures by the Bank’s own staff, a dramatic 150 percent rise in failures over the last 10 years, according to an internal review by Willi Wapenhans, a former vice president of the Bank.

A follow-up survey, which has yet to be published, shows that more than 60 percent of the audits of all Bank projects are not received on time, making them "inconsequential for project management purposes." One-fifth of these audits have qualified, adverse or disclaimers of opinion, meaning the auditors believe that either additional information is required before the audit can be signed, the audit is misleading or there is insufficient information for the auditor to judge the audit, respectively.

The Bank’s four affiliates lend out $23 billion a year to developing countries in Asia, Africa and Latin America, as well as the countries of the former Soviet bloc, making it the world’s largest funder of development projects.

Wapenhans submitted his draft recommendations in late 1992, after reviewing approximately 1,800 Bank projects in 113 countries representing Bank loans of $138 billion.

Wapenhans noted that 37.5 percent of the projects completed in 1991 were deemed failures, up from 15 percent in 1981 and 30.5 percent in 1989. Bank staff also said that 30 percent of projects in their fourth or fifth year of implementation in 1991 had major problems. The worst affected sectors were water supply and sanitation, where 43 percent of the projects were said to have major problems, and the agriculture sector, where 42 percent were reported to have problems.

Geographically, the African region had the most problems, with some countries having success rates as low as 17.2 percent. The Wapenhans report says that, far from being isolated phenomona, such problems were spreading. "Traditionally strong performing sectors are now affected too: in 1991, telecommunications ([with a failure rate of] 18 percent), power (22 percent), industry (17 percent) and technical assistance (27 percent). New areas of lending also encountered major problems: poverty (28 percent), environment (30 percent) and private and public sector reform (23 percent)."

The report concludes, "The portfolio is under pressure. This pressure is not temporary; it is attributable to deep rooted problems which must be diagnosed and resolved. The cost of tolerating continued poor performance is highest not for the Bank, but for its borrowers." In a candid evalution of the Bank’s lending procedures, Wapenhans said that many of these problems stemmed from the fact that the Bank did "little to ascertain actual flow of benefits or to evaluate the sustainability of the projects during their operational phase." Project completion reports tended to be written shortly after the last loan disbursement, before there was an opportunity to assess the actual results of the project.

The borrower’s revolt

A meeting with representatives from half of the borrowing countries in May 1992 provided some startling comments on the Bank. Wapenhans recorded over 400 pages of anonymous testimony which slammed the Bank for ignoring local views in favor of policy mandated from Bank headquarters. One borrower said that Bank staff insisted on as many conditions as possible, some of which reflected insensitivity about the political realities of the country and sometimes even conflicted with fiscal policy set by the structural adjustment policy changes required by the Bank and its sister organization, the International Monetary Fund.

The borrowers accused the Bank staff of being high-handed and insensitive, insisting on designing projects according to its policies at the time instead of consulting with the borrowers and local people. One borrower said that Bank staff "take a negotiating position, not a consulting position - they know what they want from the outset and aren’t open to hearing what the country has to say." Another representative said that they felt "psychologically pressured" to take or leave the Bank’s loan offer, leaving the country to choose between no money or agreeing to conditions that it could not honor. Another complained that the Bank "changes its wisdom with the passage of time. We saw the Bank talking about import substitution in the sixties, then export substitution, then social problems and then the environment."

One borrower asserted that the high rate of Bank failure was due to the increased complexity of meeting Bank requirements. "There is a consultant who has prepared it, a mission which has appraised it, a Board which has sanctioned it, and there are supervision missions which are watching its progress. [But] unless the borrower is committed, the project will not be implemented."

The borrowers agreed that the Bank staff appeared driven more by pressure to lend than a desire for successful project implementation.

Bank staff often insist on using international consultants to prepare projects, the borrowers charged, resulting in poor quality suggestions because the consultants "from New York or London" have no experience in the project countries. The borrowers said that the Bank often rejects local consultants and local suppliers because the terms of its open competitive bidding give the advantage to big international corporations. The reliance on foreign contractors, they said, slows project implementation and then results in the proliferation of infrastructure and technologies that are not easily repaired or supported locally.

Responding to failure

The Wapenhans review triggered alarms at all levels of the Bank. It provoked especially sharp reactions from the Bank directors, including the Netherlands’ Evelyn Herfkens, Scandinavia’s Jorunn Maehlum, the Patrick Coady from the United States and Germany’s Fritz Fischer. A series of high-level meetings were convened by the directors with the Bank’s management in November and December of 1992, where several directors floated the idea of an independent unit to monitor Bank projects and stem the failures.

One follow-up review was conducted by the Financial Reporting and Auditing Task (FRAT) Force, headed by George Russell, a financial adviser in the Bank’s central and operational accounting division, to find out what happens to Bank funds once they are doled out.

Russell discovered that more than 60 percent of Bank project audits are not received within the grace period of four to nine months after the end of each fiscal year of the projects to be audited. More than 90 percent of the reports are received within two years but 7 percent of them are not received at all. Russell’s report blames poor accounting standards in the borrowing countries, lack of experienced staff and "unduly burdensome" reporting requirements.

In addition, Russell’s team reported that "the format of the [financial] information received often does not allow for (i) comparison with staff appraisal reports (ii) linkage of physical achievements with project expenditures and (iii) reconciliation with Bank disbursement records."

FRAT points out that the Bank also needs to upgrade its own technical staff. "Financial statements frequently are not reviewed or are reviewed by staff without the necessary skills to identify significant problems and to take appropriate action," says the report. Interviews with members of the team also revealed that in many countries, particularly in Africa, government auditors who have to review the projects have little or no training on how to prepare proper financial statements.

"Nobody was reading the auditing requirements because they were too complex," says Bank President Lewis Preston. "Our accounting and legal departments are now working together to try and simplify them."

The task force report also cited several other factors that have affected performance. It noted that problems increased with the number of co-financiers, such as private banks and bilateral aid (the Bank’s total portfolio of 1,800 projects is collectively worth $360 billion, of which it provides $138 billion). Swings in the world economic environment such as declining terms of trade for borrowing countries, rising international and inflation rates, declining capital inflows and volatility of petroleum prices closely correlated with the failure rate of projects, as did problems within the project country.

In an analysis of the success rate for major country portfolios, a number of countries had a success rate of less than two-thirds for completed projects - Bangladesh (66 percent), Philippines (65.8 percent), Algeria (58.3 percent), Mexico (56 percent), Brazil (55.9 percent), Kenya (48.2 percent), Tanzania (34.8 percent), Nigeria (26.3 percent) and Uganda (17.2 percent).

The task force recommended that the Bank place greater emphasis on managing projects at a country-by-country level, as opposed to the current system of global sector management which ignores the reality of local factors and the impact of other local Bank projects. It said that local "ownership" of projects should be stressed, and the emphasis should be shifted from loan approval to performance and the impact of the project.

Another immediate action by the Bank was to prepare a suitable response to the Wapenhans report. In July 1993, Acting President Ernest Stern issued a new plan entitled "Getting Results: The World Bank’s Agenda for Development Effectiveness," which he said switched the focus of the Bank to the implementation and monitoring of development projects, as opposed to the past emphasis on the granting of credits, with little or no follow-up. "It is a recognition that we know we can do better and that we are determined to do so," Stern told reporters at a press conference.

The new plan took up the Wapenhans recommendation to change the administrative dynamic of the Bank, allowing the Bank to oversee all of its operations in a given country as a whole, instead of isolating each individual project. The Bank also promised to pay more attention to the quality and viability of new projects, ensuring they are consistent with the needs and abilities of the target communities, while encouraging increased participation of local entities, including non-governmental organizations.

"These actions will help to accelerate a cultural change within the Bank, a shift from treating new lending per se as the overriding priority, to an increased focus on the impact of the entirety of our operations. [But] we should all recognize that development is a risky business. No one achieves a 100 percent success rate. No one should realistically expect one," Stern said.

But while the plan did seek to improve the loan management system of the Bank, it paid only lip service to other Wapenhans recommendations such as the need to consult with local people about their needs. While it defined development as "reducing poverty and improving people’s lives," the new plans to include the poor in its work amounted to a single paragraph in the 23-page report which simply said that the World Bank was carrying out new experiments that aimed to strengthen staff training programs to involve the poor.

-Pratap Chatterjee


In Defence of the Bank

An interview with Armeane Choksi

Armeane Choksi is vice-president for human resources development and operations policy at the World Bank.

Multinational Monitor: What are the responsibilities of the office on human resources development and operations policy?

Choksi: Human resources development at the Bank, unlike in the American corporate culture, is not about personnel policies. Human resources development is directed towards the social sectors (health, education, nutrition and population) - issues concerning the quality of life of people in developing countries.

The operations policy side sets the Bank’s policies in different areas. We are responsible for implementing the recommendations of the famous Wapenhans Report.

We are also responsible for overseeing the Bank’s visioning document, "Learning from the Past, Embracing the Future," which defines the direction the Bank will take in the coming years.

MM: What are the lessons from the past, and what changes are you looking to make in the future? What’s going to be different about the World Bank?

Choksi: We are trying to articulate a vision of where the Bank should be going over the next 10 to 15 years and highlight the unfinished development agenda that the world will need to focus on.

The vision document defines five of these areas:

The first deals with issues of economic reform - macroeconomic policy changes and structural adjustment policy changes to stimulate economic growth.

The second is the investment in people - the importance of basic education, health care, population policies and early childhood development.

The third area is protecting the environment. We believe this is absolutely crucial. We believe that you cannot have sustainable economic growth without due concern for natural resources.

The fourth area is stimulating private sector development. Many governments in the developing world are freeing up their economies to stimulate private sector growth, and this is an area on which the Bank will be placing a lot of emphasis, both in its operations and through the International Finance Corporation and the Multilateral Investment Guarantee Agency.

The final area is reorienting government - how to make governments more efficient, more focused. We are arguing for slimmer governments in many countries, focusing on those areas that the government can best place in the private sector, but not areas such as resource development and environment. The Bank will be emphasizing issues of transparency and accountability.

These are what we think are the five crucial unfinished development agendas that the Bank needs to follow up on. We will continue working in these fields and have a dialogue with governments in these areas.

To this end, we have articulated six guiding principles for the future:

The first is selectivity. Not every one of these five major development issues will be important in every country. We will have to have a unique focus in each country.

The second principle is partnership - partnership with the UN family, the International Monetary Fund (IMF ) and the regional development banks. We believe that the Bank cannot and should not be getting into every area. The Bank has certain strengths. There are limits to institutions such as the World Bank; we need to work together with all the different agencies in order to maximize our impact.

The third guiding principle is client orientation. The Bank will become increasingly more client-oriented, listening more to the needs of the client and responding more efficiently to the client’s concerns.

Fourth is results orientation. After the Wapenhans Report that he initiated, [World Bank President Lewis] Preston articulated very strongly that the Bank has to pay much more attention to results on the ground, not just to lending levels and commitments.

Cost effectiveness is the fifth principle. The Bank itself must demonstrate that it too is a cost-effective institution.

Finally, there is the issue of financial integrity. The World Bank borrows on the capital markets of the world. We have a very high credit rating on the capital market, and our operations and our policies must be such that that high credit rating is intact, because that high credit rating permits us to borrow at probably the cheapest rates, which we can, in turn, pass on to our member countries.

MM: What’s the lesson to be drawn from the Wapenhans Report? Is it enough to say that you’re going to be "results oriented" when one-third of the loans are failing?

Choksi: Let’s put the Wapenhans report in some perspective. We’ve had a lot of criticisms on the Wapenhans Report.

The first thing to keep in mind is that President Preston initiated the Wapenhans Report. It was an internal review of the Bank’s portfolio, a complete, open and clear state of affairs of the Bank’s situation. I think every institution needs to do this periodically, to take a good overall look at how its policies are functioning. In fact, this model has now been adopted by other regional development banks.

But it is not enough, I agree with you, simply to say "results orientation." The Wapenhans Report recommended specific actions. So, about a year ago, the Bank went back to its board, laying out what actions it would undertake over what time period.

If my memory serves me right, there were something like 84 actions we were going to undertake through the last fiscal year in order to implement the recommendations of the Wapenhans Report. Of those 84, 80 have been fully completed or substantially completed. With all these steps, we were trying to improve the quality of our portfolio, to have country portfolio performance reviews, to increase the quality of entry of the projects ahead of time, to have regular discussions and dialogues with governments, and to allocate greater resources to the supervision and the monitoring of the projects.

What we are trying to do is not just take these steps by themselves, but to change the culture of this institution. The culture of this institution has been, by and large over the last 20 years, very lending-oriented. Lending levels have been an important criteria for the Bank’s success, both internally and in the outside world.

What we’re trying to do with the follow-up to the Wapenhans Report, with the Next Steps action program that we have put in place, is to change the culture of this institution.

We want to first change the incentives. Staff are no longer rewarded simply for making loans. Staff are also being rewarded for not making loans when the conditions aren’t right. Secondly, we want to ensure that staff pay greater attention to, and they are rewarded for, following up on projects that are currently under implementation.

MM: What do you view as the biggest institutional weakness of the Bank?

Choksi: I think that the institution has had failings. Like others, we’ve made our share of mistakes. We’ve had them in projects that have been publicly criticized - the Polonoroeste project in Brazil, the Narmada project, and there are others.

One thing that I want you to be alerted to is that these projects were done 10 to 15 years ago. But we’ve made our mistakes known publicly. The Morse Commission that looked at the Narmada Project was a Bank exercise. The Wapenhans Report was a Bank exercise.

In particular, we have not focused enough on issues of implementation, particularly. The Wapenhans Report stated this very clearly. In some cases we had some design problems. In some cases, as the Narmada Project indicated, we did not follow some of our own procedures. In the Polonoroeste roadbuilding project, we did not fully appreciate or recognize the importance of environmental implications. Keeping in mind, of course, that at the time, the whole issue of environment was not high on the consciousness of the world. But that is not an excuse. The World Bank should have been more aware of it, and we’ve learned from our mistakes.

But development is risky. When we undertake a project, it has economic, social and political dimensions. We are getting into areas that are more complicated. It’s no longer "clean" engineering, to build a dam or a bridge. We are getting into issues of primary education, gender policies, issues of transparency, and government accountability. These have tremendous social and political ramifications, and we don’t have all the answers. We don’t know if any single individual or institution has all the answers. That is why we are emphasizing partnerships. Different groups will bring different issues to bear.

If we had a track record that was 100 percent successful in everything we did, I would criticize the institution for not taking enough risks.

MM: Do you think that there are any specific areas where the Bank evidences institutional weaknesses?

Choksi: One area that I think we have an institutional weaknesses in is the tremendous attention we placed on lending commitment levels. Since President Preston has come in, he has given a loud and clear signal to all management that staff will not be rewarded simply for pushing out loans.

Things have changed. There is, no doubt, room for improvement, but I can tell you if you look at our lending levels for last year, I think they’re around $14.5 billion, which is the lowest [International Bank for Reconstruction and Development] lending in a very long time.

The lending levels change for a variety of reasons. There is no longer the "go-go," lend-at-any- cost philosophy. It is wrong to lend to countries if the conditions aren’t right, or if the projects aren’t right, just to make a loan, because in the end, that loan has to be repaid back to us. I think that message is getting through, but it will take some time.

If something has been in this institutional culture for 20 years, you do not eradicate it overnight. It will take some time.

MM: How do you respond to the characterization of the 1980s as a "lost decade?"

Choksi: I think the 1980s, in some sense, was a lost decade; very much in Latin America, and certainly to some extent in Africa. But certainly not in East Asia. I think when the critics make these sort of comments, they tend to generalize, and in generalization, we tend to lose the specifics.

In Latin America, starting in the 1980s, there was a debt crisis. And that crisis led to a major economic overhaul of these countries. And that overhaul process was a lengthy and difficult one. GDP per capita fell, but eventually, toward the end of the 1980s, and starting in the early 1990s, things started turning around in most of Latin America. So, the 1980s was a lost decade for Latin America.

It was a lost decade in another sense as well. With all this tremendous focus on debt stabilization adjustment, they neglected investing in human resources; they neglected environmental problems; and they neglected basic infrastructure.

Now there is a realization within Latin American countries of these issues, and we are working with them on precisely these issues. If you were to speak with the regional vice president for Latin America, he will tell you that the big emphasis with Latin America now, since the debt problem is behind us, is on human resources, environment and basic infrastructure.

East Asia is the example where the "lost decade" characterization is not true. If you look at the growth rates of Malaysia, Indonesia (Indonesia has achieved a tremendous amount in poverty reduction as well as economic growth.), Thailand, not to mention Korea. I would not classify it as a lost decade for East Asia.

So, you have a mixed picture around the world.

MM: What do you think the development prospects are for Africa in the 1990s?

Choksi: There is no question that Africa will require perseverance and patience. Africa needs tremendous investment in human resources, basic health and education. The institutions are weak. Institutional development takes a very long time. It cannot be done overnight. As long as the human capital base remains weak, the implementation of policies and programs will also be weak.

We’ve done a study recently on [structural] adjustment in Africa indicating that those countries that have adjusted have done better than others that have not adjusted. But I think it’s still important to recognize that unless you tackle the fundamental problems of human capital and institutional weaknesses, the long-term prospects remain weak. This is where the attention of the African governments is going to be in the future.

It will take a long time. All the evidence we have seen, in every country, whether it’s in the prospering countries of East Asia or otherwise, show investments in human capital take a long time to pay off. You educate children today, and benefits come when they go to college, when they become counted as members of society. Institutions take a very long time to develop, strengthen and function effectively.

Africa probably has the weakest human capital and institutional base. To strengthen all of that will take some time. Clearly, the countries have to pursue economic reforms, but to maintain those reforms, to consolidate those reforms, to build on those reforms, the areas of human capital and institutional development will need to be put in place. And for that, the world needs patience and perseverance.

MM: The findings of the independent review of the Narmada project found that the resettlement problems in Narmada were "more the rule than the exception to resettlement operations supported by the Bank." How do you respond to this assessment?

Choksi: We’ve just done a full review of resettlement operations at the Bank. As a result of Narmada, we told our Board we would review every single resettlement operation. Not a sample, but every single one. This report was made public in June.

Yes, we do have some problems in resettlement. We have policies on resettlement that are difficult, but we are trying to implement them.

But the Bank’s involvement on resettlement accounts for only 2 to 3 percent of the total population that is displaced involuntarily as a result of all projects in the world - government projects, bilateral projects and Bank projects.

Secondly, in those cases where countries have followed the Bank’s policies effectively, the resettlement projects have been successful. Where they have not, they have not been successful.

Many countries, and many regional development banks and bilateral agencies, are following the Bank’s approach to resettlement. And I think this says something about the Bank. There are difficult issues when you are talking about resettling people; their livelihood gets taken away, but on the other hand, there are tremendous benefits to society. How do you compensate these people? These are very tough issues; and we have had successes and we have had failures. I think that report highlights, at one extreme, the Narmada situation, where we’re not successful; and at the other end, there’s China, where the Chinese are putting in place a national program for resettlement, and they have implemented it very effectively. The record is a mixed one, there is no question about it.

MM: One of the things that seems to link the projects on which the Bank is criticized is that they are pushed forward too fast. Do you think that is a fair criticism of how the Bank has operated in the past?

Choksi: I think it is, and I think that we could do a lot more than what we are doing at the moment. For example, we are consciously taking into account and making a special effort to bring in NGOs into Bank operations. To date, something like 30 percent of Bank projects have NGO involvement.

We are about to go to the president with a report which spells out how the Bank can be a more participatory Bank. Some of these points have been articulated in the vision paper.

We now do poverty assessments in individual countries, many of which are more participatory in nature. Our projects also seem to be more participatory in nature, but there is a hell of a lot of room for improvement.

MM: What is your response to Bruce Rich’s book, Mortgaging the Earth?

Choksi: I’ve dealt with Bruce Rich in the past on Brazil. He plays a lot of fast and loose with the facts. He has an agenda. It’s no longer a hidden agenda, it’s a very overt agenda. He is prepared to put out, in a very public form, his approach to what should be done to the Bank, which is essentially, to shut it down. His view is also very anti-development, in the sense that economic growth, the lives and living standards of the people, are put almost secondary to protecting the environment. The Bank has put out a formal response to Bruce Rich’s book.

Now, I think in some areas, some of the criticisms that he has made I think are right. But I think he goes much too far. There are other environmental NGOs who have been constructively critical; and, as a result, very helpful to this institution. His work has not been in that same vein.

MM: Rather than saying that he subordinates living standards to environmental protection, isn’t it more correct to say he has a different view of development, emphasizing community-building and the strengthening of civil society?

Choksi: I don’t think he understands the tradeoffs you make sometimes. Western Brazil is a classic case. Why was there environmental degradation down there? The main reason was poverty in the South. And people from the South moved to the North and the Northwest to find a better life. The government and the Bank were part of facilitating that process. We all made a mistake by not recognizing the environmental implications. By building that road, we caused complications on the environmental side.

But there were other elements in that project. We put in basic health and education facilities for those people who had moved out there. You cannot forcibly move these people back out again. Those elements were completely ignored in the criticisms that are made about Polonoroeste in Bruce Rich’s book. He does not seem to see the complexities of the situation. With him, development is more black and white. For me, they are shades of red.

MM: In late May, the U.S. Congress voted to suspend funding to the IMF, and to reduce funding to the World Bank. How do you respond to the specific criticism voiced in Congress about the secrecy surrounding Bank operations?

Choksi: Let me put this in a broader context.

Since Lou Preston took over the presidency in 1991, he has put in place what I call a quiet revolution. Much of it is not known, so let me put this on the table.

When he came in, he eliminated a layer of bureaucracy. He refocused the Bank on a crucial area of the world that was going to be important both politically and economically, the former Soviet Union and Eastern Europe. He created three new vice-presidencies, focusing on what he thought would be the crucial issues of the nineties and beyond: human resources, private sector development and environmentally sustainable development.

He put in place the Wapenhans Report and an inspection panel which will be effective August 1, which permits affected parties, as in Narmada, who feel that Bank policies and procedures have not been followed, to appeal directly to a group of experts.

He also put in place an open public disclosure policy. This policy says that all Bank documents - our appraisal reports, our economic reports, our operational policies, our policy papers, our sector reports - are publicly available after the Board approves them. We’ve set up a public information center.

There are only two things that we do not make public. One, information provided to us on a confidential basis by governments. We must respect that. We are owned by these governments, who provide us with confidential information affecting their economies and their politics. We can’t make that public if the governments don’t want us to.

Second, internal decision-making memoranda. These are not final memoranda, but internal parts of the decision-making process. We want to provide a free and open debate within this institution to address complex, difficult issues, to approach them from different angles. We don’t want people to feel that anything they write and say is going to be made available and you’ll see it in the press the next day. You know what that’s going to do. That’s going to kill discussion. That’s going to inhibit people from being open and honest about situations, and in the long run, it will damage our contribution to developing countries and the development process.

When critics say they want more, I want them to come and tell me, "What more do you want?" Many of them are going to tell you they want our confidential memoranda, the internal decision-making memoranda. This is unreasonable, because it will genuinely hamper the development process.

People will simply not be honest anymore. People will write things and say things with a view that this is going to be read outside.

MM: Hasn’t much of the criticism been focused on access to information related to the decision-making process as a whole?

Choksi: That’s right. The president said we should open it up. Our decisions are made public. And all the factual and technical analysis underlying those decisions is made available. People can get that documentation and say, "Look, your technical analysis was wrong," or whatever the case might be. That’s fine. We can debate that. But sometimes we come up with ideas that are completely off the wall. By opening up the decision-making process, you can inhibit debate and the free flow of ideas. I would not want that. I would want to encourage people to be adventurous and come up with off-the-wall ideas, rather than become stultified bureaucrats.

So you’re absolutely right. These people want our decision-making documents because they want to get involved in the decision-making process. But if they want to get involved in the decision-making process, they should join the World Bank.


The Myth of the Chilean Miracle

by Stephanie Rosenfeld

SANTIAGO, CHILE - A major labor demonstration here on July 11 brought an end to the long labor-government honeymoon since Chile’s 1990 transition to democracy. The demonstration, called by the CUT, Chile’s principal labor union confederation, was the largest since the massive rallies that accompanied the downfall of the Pinochet dictatorship in the late 1980s.

Since the transition to democracy, Chilean politics has been marked by a desire to maintain stability and consensus. While there have been a series of sectoral conflicts, this was the first broad-based labor protest.

The demonstrators demanded the restoration of labor rights stripped away during the 16-year dictatorship of General Augusto Pinochet. The 1973 military coup which brought Pinochet to power ended Chile’s experiment with the "democratic road to socialism," leaving President Salvador Allende dead in the bombed-out presidential palace.

Pinochet ushered in a very different experiment. A group of Chilean economists started applying the neoliberal economic model to Chile in the mid-1970s, years before the International Monetary Fund (IMF) and World Bank began forcing such policies on Chile’s neighbors. These economists came to be known as the "Chicago Boys," since many of them had studied at the University of Chicago under Milton Friedman.

The Chicago Boys claim their ideology is based on freedom, especially freedom from government intervention in the economy. Their reform program included selling off state-owned companies, lowering taxes and tariffs, "freeing" prices by eliminating government subsidies, and privatizing government social services such as health, education and social security [see "Pinochet’s Giveaway: Chile’s Privatization Experience," Multinational Monitor, May 1991].

These economic policies mainly benefitted big business, which enjoyed the virtual giveaway of profitable state enterprises and harsh repression of labor. The Pinochet regime banned political parties of the Left, and jailed, tortured, killed and exiled many union leaders and others opposed to the dictatorship. "People were in prison so the prices could be free," said historian Eduardo Galeano about similar reforms that took place in Uruguay.

Restructuring the economy was a key element of the dictatorship’s larger project to transform Chilean society and eliminate the possibility of another Allende-style government. The military and its civilian allies reworked the institutions of Chilean society, rewriting everything from labor laws to the Constitution and the rules of the electoral system.

Pinochet’s 1979 Labor Plan banned union confederations, prohibited unions from requiring members to pay dues and made it optional for companies to collectively bargain with unions that represent workers in more than one firm. It also encouraged the formation of competing unions and placed a 60-day limit on strikes, all in the name of increased "freedom" for workers and employers.

The 1980 Constitution created a "protected democracy," expanding the political role of the military, and skewing the electoral system to favor representatives of the Right and the military. It also specifies the "unremovability" of the commanders in chief of the armed forces, which allows General Pinochet to remain Commander in Chief of the Army through 1997.

Corporate socialism

In the late 1970s and early 1980s, the Chilean economy recovered from the recessionary shock of the neoliberal reforms, and began to grow at a moderate rate, enjoying brief fame as a neoliberal "miracle" economy. But much of the economic growth was based on foreign debt and financial speculation, and when the speculative bubble burst in 1982, Chile’s gross national product plunged 14 percent. Unemployment reached 30 percent, and Chile’s debt crisis sparked three years of national protests against General Pinochet and the Chicago Boys.

What made Chile’s debt crisis different from that of the rest of Latin America was that private companies, not the government, held most of most of Chile’s foreign debt. The fact that the government was not legally responsible for repayment could have been an important source of bargaining power as the government entered negotiations with the IMF over the conditions attached to new loans to help pay back the old. However, private interests took precedence over public good, and the Chilean government promised to back the private debt.

While both the IMF and the Chicago Boys preached free markets and disparaged state intervention in the economy, the IMF was happy to have the Chilean government bail out private debtors, if that meant guaranteed repayment of loans. Interestingly, Rolf Lüders, Pinochet’s minister of economy and finance who agreed to government backing of the loans, had only a few months earlier been an executive of one of Chile’s most indebted economic conglomerates, the Grupo Vial.

The IMF adjustment program was structured to protect the conglomerates and the international banks, at the expense of the country’s poor, argue Chilean economist Patricio Meller and others. One of the standard austerity measures proposed by the IMF is the elimination of government subsidies to basic goods and services. But when the IMF program was implemented in Chile, the Central Bank provided subsidies, or bailouts, to some 2,000 wealthy debtors, a sum equivalent to 4 percent of gross domestic product (GDP); it is not clear what rationale the IMF used to exclude these subsidies from the austerity adjustment program. At the same time, some 600,000 out-of-work Chileans received only 1.5 percent of GDP as an unemployment subsidy.

Ironically, although much of the neoliberal reform package that the IMF imposed on other countries in the wake of the debt crisis had already been implemented by the Chicago Boys in Chile, it did not prevent Chile from accumulating one of the highest per capita debts in South America.

From dictatorship to democracy

The 1990 transition to democracy marked the beginning of a period of political reform, with the new government run by a coalition of political parties dominated by the Christian Democratic Party in the political center, and including the center-left Party for Democracy and the Socialist Party. But the coalition, called the Concertación, has focused its reform efforts on the consolidation of electoral democracy, and the neoliberal economic policies of the Pinochet years remain largely intact.

Observers attribute the ongoing vitality of the neoliberal model to several factors, including the growth spurt the country has recently experienced. Authoritarian legacies of the dictatorship, such as the "designated" senators, who represent institutions such as the armed forces rather than electoral districts, play a decisive role in the legislature, tipping the scales against major reforms. The social movements, which had led the struggle for democracy during the darkest years of the dictatorship, have had little influence or bargaining power with the new government. Elite party politics marginalized organized labor, which had been decimated by years of repression and neoliberal economic restructuring, along with the women’s and other popular movements.

But perhaps the most important reason for the neoliberal model’s persistence is that the economic thinking of important sectors of the center-left opposition to the dictatorship and the neoliberals began to converge in some aspects in the 1980s. In broad strokes, both the Chicago Boys and the center-left agree that the market and the private sector should lead the development process. Both emphasize economic growth as the key to the elimination of poverty and reject government measures aimed at reducing inequality or which might risk causing inflation. Both agree that export growth is fundamental to Chile’s development, and therefore both support maintaining an open economy.

In economic policy, the Concertación has differed from the neoliberals mainly in its attention to poverty and social policy, increasing the government spending in these areas by some 30 to 40 percent over the levels at the end of the dictatorship.

The Concertación also rejects the neoliberal view of the state. In the Concertación’s view, the government should play an important role in regulating business and the market, as well as insuring a minimum level of welfare. Under President Patricio Aylwin, the government halted the rush of privatizations of state-owned firms, but did not review the privatizations that occurred during the dictatorship.

Paying the social costs

After the economic collapse and structural adjustment programs of the debt crisis period, the Chilean economy began to grow again in the mid-1980s, and it is now again being hailed as a "miracle." This time, the growth is more solidly based on natural resource exports, primarily fruit, forests, fish and copper. But severe poverty and income inequality persist.

In contrast to the dire predictions of the outgoing Pinochet regime, stability and growth were sustained during the Aylwin administration, which governed from 1990 to early 1994. Economic growth averaged 6.3 percent annually from 1990 to 1993, compared to 6.4 percent for the 1985 to 1989 period, the years of economic recovery from the debt crisis.

Official unemployment fell to a 20-year low at 4.5 percent in 1992, from 27 percent in 1982 and 5.7 percent in 1990. At the same time, the work week lengthened, with the average increasing from 48.5 hours per week in 1990 to 50.5 hours in 1992.

The Aylwin administration acknowledged the "social debt" owed to those who have yet to benefit from the economic "miracle," and made poverty alleviation a priority. The number of people officially defined as living in poverty dropped from 5 million to 4 million, in a country of 13 million, partly as a result of increases in the minimum wage and pensions and increased government expenditures on social services, and partly due to economic growth which decreased unemployment.

Nevertheless, poverty rates remain much worse than before the neoliberals took over national economic policy. From 1970 to the early 1990s, the percentage of households living below the poverty and indigence lines skyrocketed. In 1970, before Pinochet took power, 17 percent of Chilean household incomes were below the poverty line; by 1990, the rate had doubled, with 35 percent of the households living in poverty; and in 1992 it was still 33.5 percent. After 10 straight years of economic growth, income distribution figures show little improvement.

Poverty in Chile is caused not so much by unemployment as precarious employment and low wages. As a result of labor’s weak bargaining power, wage increases have continually lagged behind productivity gains. While the centrist and leftist political parties promoted "growth with equity" as an economic strategy during the 1960s and early 1970s, today "growth with stability" is the Concertación’s mantra.

The Concertación considers its reform of the labor legislation inherited from the dictatorship one of its major accomplishments. The government lifted the 60-day limit on strikes, and unions are now allowed to join in confederations. But the government denied organized labor’s principal demand, obligatory collective bargaining at the industry level, rather than at the firm level, and legal obstacles continue to impede efforts to rebuild the union movement. José Piñera, author of the 1979 Labor Plan, called the Plan a building that could not be burned down, and indeed the basic structure is still standing.

That organized labor has made such limited gains since the transition reflects in part the weakness of labor as a movement. Unions have only recently begun to rebuild at the base, and with mixed results. Between 1989 and 1991, workers formed thousands of new unions, but many other unions are no longer active. In 1993, 13.1 percent of the Chilean labor force was unionized, up from 9.8 percent in 1988, but a decline from 1991’s 14.5 percent membership level. Many of the new unions, fruit of the high hopes and enthusiasm of the transition period, have found that collective negotiations were not very successful. The bulk of firm-level unions, the only type of union with which employers must negotiate, have only 25 to 50 members, and correspondingly little power.

The Concertación’s strategy of elite negotiation and social demobilization has led to a stable transition period, yet one marked by few concessions from the Right or big business. While Chile under Aylwin saw some major strikes, especially by state and state-enterprise workers such as teachers, health workers and copper miners, on the whole, the Aylwin years were far more remarkable for their stability than for conflict.

As his term came to an end in March 1994, President Aylwin became more openly critical of the neoliberal economic model over which he had presided. At a celebration of International Women’s Day, Aylwin remarked, "There is no point in [free-market-based development] if the majority of human beings see it only on TV."

Book Notes

Battling the Bank and IMF

Mortgaging the Earth: The World Bank, Environmental Impoverishment, and the Crisis of Development

By Bruce Rich

Boston: Beacon Press, 1994

376 pp., $29.00

BRUCE RICH’S MASTERFUL MORTGAGING THE EARTH is a searing indictment of the World Bank and a profound challenge to the modern development theory it espouses and represents.

Drawing on knowledge accumulated from years of experience at the Environmental Defense Fund and on internal World Bank documents, Rich charts a string of development project disasters over which the Bank has presided, and he documents the social and environmental consequences of Bank lending for "structural adjustment" purposes.

The greatest strength of the book, however, is not its reporting but its historical, institutional and theoretical analysis.

The Bank, Rich shows, has been management dominated from its first years, when John McCloy accepted the post of Bank president on the condition that the Bank’s executive board (made up of representatives from member countries) play no more than a passive role in the institutional oversight and supervision.

The Bank has been driven to make ever-more loans, with ever-less care, by institutional dilemmas and a dangerous ideological predisposition, Rich argues. The end result is "an institutional culture of expansion."

The institutional problem the Bank has faced since its founding is what Rich calls "the specter of net negative transfers." A commercial bank makes a loan to a customer, and over time is paid back with interest. During the pay-back years, as the bank is taking in money from the borrower, it stays in business by making loans to other borrowers. The problem for the World Bank is that it is in the business of making loans to national governments, and therefore has a limited supply of customers. Over time, the developing country borrowers from the Bank must pay back more than the World Bank is lending - ultimately putting the Bank out of business. The only way to avoid this problem is to make more and more loans to the same governments, increasing the borrowing countries’ debt. And even this solution is unsatisfactory, because it only postpones the eventual day of reckoning.

The ideological impetus for expanding the Bank’s loan portfolio is a belief expressed by former Bank President Barber Conable in 1987: "A ... basic truth is that development cannot be halted, only directed. And the Bank cannot influence progress from the sidelines. It must be part of the action." The Bank has come to view itself as a global manager, guiding economic development around the world.

This global management perspective has had tragic consequences. To this world view, Rich ascribes the Bank’s unflinching support for megaprojects, its preference for centralized control over projects and societies and its consistent refusal to consult, involve or learn from the communities which are the purported beneficiaries of its efforts.

The World Bank, Rich claims, represents an inherently flawed way of "knowing and being in the world" which must be discarded if the planet is to survive. "It is a ceaseless quest for more intensive economic use of the earth’s space and time, a world conceived as an abstract expanse, which through the correct method can be controlled and manipulated."

Against the World Bank universe stands that of the indigenous peoples and Third World communities that are all too often the victims of Bank projects. "They are not opposed to all economic development; they desire it, but on different terms. Their world is locally rooted, grounded in the history, culture and cry for survival of threatened people and places. Their survival depends on their parts of the earth being conserved as Earth, as a functioning, stable ecosystem."

Rich does not argue for a return to Stone Age technologies. But he does argue that more emphasis should be placed on nurturing the growth and health of civil society, and less on economic growth; that attention should be paid to the scale of development projects, with a strong preference given to smaller, locally controlled efforts; and that reliance on high technology to solve social problems should be curtailed. Above all, he calls for "care - care as an attitude and a way of being in the world that saves the natural and human past, thereby securing a future of manifold possibilities. Such care ... bases social and economic practice on the dependence and interconnectedness of humans with ecosystems and social systems, and implies a less aggressive, more subtle and considered approach to human interventions in the biosphere."

One sign of the success of Mortgaging the Earth is the near-hysterical response it engendered from the World Bank. A 30-page "Setting the Record Straight" paper seeks to position the Bank as the defender of the Third World from the book’s "rich-country perspective." However, in substance and style, the paper serves to confirm rather than dispel many of Rich’s accusations. One notable example is the Bank’s attack by assertion on Rich’s well-documented claim that an emphasis on energy efficiency rather than energy megaprojects would satisfy much of the energy demand of the Third World at a lower financial, as well as social and ecological, cost.

Dark Victory: The United States,

Structural Adjustment and Global Poverty

By Walden Bellow with Shea Cunningham

and Bill Rau

London, Oakland and Amsterdam: Pluto Press with Food First and the Transnational Institute, 1994

148 pp., $12.95

WHERE MORTGAGING THE EARTH emphasizes the institutional flaws of the World Bank, Dark Victory seeks to put the adjustment policies which the International Monetary Fund (IMF) and World Bank have inflicted on broad swathes of the Third World in a broader geopolitical and economic context.

The central thesis of the provocative and accessible Dark Victory is that free market- oriented structural adjustment policies were only one part of a three-pronged Reaganite strategy to reestablish U.S. global economic hegemony.

The IMF- and World Bank-imposed structural adjustment policies served the goal of resubordinating the Third World to the dictates of the United States and other industrialized countries. The two-fold thrust of adjustment was to dismantle emerging Third World government apparatuses and to open Third World economies to foreign investors. Dismantling the state sector would silence the calls for a New International Economic Order which had been sounded in the 1970s, and undermine Third World nations’ ability to develop autonomous economies that might pose a competitive threat to U.S. industry. Opening up Third World economies served multinational corporate interests in obvious ways.

The second goal was to undercut the growing economic power of the Newly Industrializing Countries (NICs) of Asia, especially South Korea and Taiwan . To achieve this end, Bello and his co-authors argue, the United States aggressively employed a range of unilateral trade tools available under U.S. trade law, and sought to forge the General Agreement on Tariffs and Trade (GATT ) into a weapon designed to strengthen U.S. corporations and weaken NIC companies.

The third prong of the Reaganite agenda was to tear up the domestic New Deal "social contract" in order to cut the costs of doing business in the United States. This included breaking the power of labor unions on the one hand, and slashing government-run social programs on the other.

On its own terms, Bello and his co-authors conclude, the Reaganite offensive was successful in each of its main areas of concern.

In human terms, however, the offensive was a disaster of almost unprecedented scale. In a brief survey, Dark Victory documents the resulting suffering and impoverishment in both the Third World and the United States.

In surveying the contemporary scene and the available policy options, Bello and co-authors reference Rosa Luxemburg’s famous comment on the need to choose between socialism or barbarism. While noting as a preliminary matter the impossibility and undesirability of Third World countries reverting to the state-led capitalism of the post-World War II period or of industrialized countries copying the bureaucratic socialism of the Soviet Union, the authors insist Luxemburg’s question remains relevant.

Describing a more equitable, democratic and ecologically sustainable future, they write, "one cannot avoid describing a system of social relations that checks or restrains the devastating logic of capitalism - at least capitalism in its Anglo-American, free-market version - to sacrifice individual well-being, community, the environment, and even the long-term viability of the economy itself on the altar of short-term profitability." They conclude, "Whether one calls the alternative socialism, social democracy, democratic capitalism, or people-centered development is less important than its essence: the subordination of the market, of the institutions of production and distribution, to community."

50 Years is Enough: The Case Against the World Bank

and the International Monetary Fund

Edited by Kevin Danaher

Boston: South End Press, 1994

210 pp., $14.00

FIFTY YEARS IS ENOUGH IS A COLLECTION of short essays and interviews offering critical perspectives on the IMF and World Bank.

An excellent introduction for newcomers to IMF and World Bank issues, as well as a useful resource for those more familiar with the global financial institutions, Fifty Years is Enough manages to avoid the pitfall of repetition that traps many compilation books. Instead, the book succeeds in offering a diversity of perspectives.

An especially interesting essay by Muhammad Yunus, founder of the Grameen Bank, which makes micro loans to the poor in Bangladesh , serves as a preface to the book. Yunus suggests the 180- degree shift that the World Bank would need to make to truly become a bank of the poor. Yunus speaks with great credibility, for the Grameen Bank loans more than $30 million a month - in loans averaging less than $100 each - and maintains a repayment rate of more than 98 percent.

Perhaps the major difference between the World Bank and the Grameen Bank, Yumus writes, is their different conceptions of the poor. "Current conceptualizations of poverty provide no help in the alleviation of poverty," he warns. "These conceptualizations are based on the assertion that the poor are responsible for their poverty. ... Working with this conceptualization produces programs and projects intended to make the poor give up their ‘bad habits’ and acquire ‘necessary skills and attitudes.’"

By contrast, at the Grameen Bank, he writes, "We think of the poor differently. We think they are as capable and as enterprising as anybody else in the world. Circumstances just pushed them to the bottom of the heap. They work harder than anybody else. They have more skills than they get a chance to use. With a supportive environment, they can pull themselves out of the heap in no time."

Names in the News

Corporate Death Penalty

IN THE FIRST DEATH PENALTY CASE under the organizational sentencing guidelines, a corporation has agreed to a fine sufficient to divest the corporation of all of its net assets.

In November 1993, Farmingdale, New York-based American Precision Components Inc . and its owner, David D’Lorenzo, pleaded guilty in Philadelphia to two counts of wire fraud relating to a scheme to defraud government contractors by providing commercial grade fasteners, fittings and o-rings instead of parts which met government specifications.

The aerospace, aviation and military industries require fasteners, fittings and o-rings to meet certain rigid testing and other specifications for use in spacecraft, submarines and weapons systems.

The fasteners, fittings and o-rings supplied by American Precision were used in the space shuttle and Hubble space telescope support systems, the Kitty Hawk Aircraft Carrier and the Titan IV missile program.

D’Lorenzo forfeited $2.2 million, a 1992 Porsche 968 Convertible and a 1993 GMC Typhoon. He was sentenced in May 1994 to five years in prison.

American Precision, the corporate defendant, was previously convicted in 1988 in Maine for selling substandard parts to the Portsmouth Naval Shipyard.

In the current case, American Precision pleaded guilty to two counts of fraud and agreed to what has been called "the corporate death penalty" provision of the organizational sentencing guidelines. Because the company operated primarily by criminal means or for a criminal purpose, U.S. District Court Judge John P. Fullam in May set its fine at an amount sufficient to divest the corporation of all of its assets, in this case, $75,000, according to Assistant U.S. Attorney David Howard.

Federal officials charged that American Precision and D’Lorenzo defrauded hundreds of customers, including military and aerospace contractors, and the Federal Aviation Administration, out of approximately $3 million by selling them ordinary commercial fasteners and fittings when they had ordered parts that complied with rigid specifications. American Precision represented to its customers that it had an elaborate quality control system supervised by a quality control manager named Don Hastings. Federal officials said that no such procedure existed, and that there was no individual named Don Hastings.

During its search of American Precision, federal agents seized D’Lorenzo’s diary. The diary contained the following entry from July 31, 1989, during the period when the company was suspended from doing business directly with the government as a result of its first conviction: "Phones dead! Slow as shit! The government’s revenge. Well, I’ll get even with them!"

Lockheed Fugitive

A FEDERAL MAGISTRATE issued an arrest warrant in June 1994 for a former Lockheed Corp . executive after he failed to appear for arraignment on corruption and fraud charges tied to a $79 million aircraft sale to Egypt.

The warrant brands Suleiman Nassar as a fugitive from justice. U.S. officials say the government is expected to seek his extradition from Switzerland, where he is believed to be living.

Nassar was regional vice president for Lockheed Corp. International in Geneva in 1989 when the California-based defense contractor secured a contract from the Egypt ian government for the sale of three C-130 transport planes.

"His attorneys stated that he would surrender himself voluntarily at the arraignment, but he failed to show up," says John Davis, criminal branch chief at the U.S. Attorney’s Office in Atlanta.

Davis adds that Nassar’s absence is expected to spark an international manhunt for the retired executive.

The federal indictment alleges that the company through a number of high-level executives violated the Foreign Corrupt Practices Act, conspired to commit wire fraud and impeded Defense Department agencies.

Federal authorities allege the company illegally paid Egyptian Member of Parliament Leila Takla in exchange for her help in securing the C-130 contract from the Egyptian government.

Executives then allegedly made up false documents to conceal the identity of Takla, who was described in company records as a "consultant."

Attorneys for Lockheed Corp. entered a not guilty plea to charges handed down last week in a federal grand jury indictment against the company.

"The individuals in this case were indicted separately from the company and are represented by their own counsel," a spokesperson for Lockheed says, "Because of the expected length of this case, it would be inappropriate for the company to make any comment on their cases."

Busting the Fax Trust

AFTER A TWO-YEAR INVESTIGATION, the U.S. Justice Department and Canadian authorities announced the break up in July 1994 of a $120 million-a-year international cartel in the fax paper market.

Charges were filed in the United States and Canada against Mitsubishi Corporation , two subsidiaries and a former president of a U.S. subsidiary for their involvement in a price-fixing conspiracy that raised thermal fax paper prices by approximately 10 percent.

The defendants agreed to plead guilty and to pay criminal fines of more than $6 million.

The charges were filed against Kanzaki Specialty Papers Inc., and its former president, Kazuhiko Watanabe, who were charged with conspiring with Tokyo-based Mitsubishi Corporation, New York-based Mitsubishi International Corporation and others to fix and raise prices of thermal fax paper sold in North America in 1991 and 1992.

"Foreign firms that want to do business in the U.S. must take our antitrust laws seriously and must play by our rules of fair competition when setting prices to be paid by U.S. consumers," says Attorney General Janet Reno.

The Justice Department charged that the defendants and co-conspirators, through a series of meetings and telephone conversations, agreed to charge higher prices to fax customers in North America.

"This conspiracy primarily affected small businesses and home fax machine owners, since thermal paper is the most affordable for those users," says Anne Bingaman, assistant attorney general of the Antitrust Division.

Settling With Shiley

SHILEY INC. , AND ITS PARENT, Pfizer Inc. , charged with making false statements to obtain federal approval to market a fatal mechanical heart valve, will pay the federal government a $10.75 million federal claims settlement.

Federal officials charged that Shiley, to obtain FDA approval to market the Bjork-Shiley Convexo-Concave mechanical heart valve (C/C valve), made unsubstantiated claims during the application process that the valve caused less blood-clotting than other valves on the market. Federal officials said that the advantage is much smaller than Shiley represented. In addition, Shiley failed to provide the FDA with all the information it possessed concerning fractures of valves during life-testing.

In a 1990 report, FDA medical device experts found that "Shiley Inc. has engaged in a continuing scheme to interrupt, deflect, and misdirect FDA’s regulation of the Shiley Convexo-Concave heart valve."

Finally, the government contends that Shiley’s manufacturing process was considerably flawed. On numerous occasions, valves were rebuilt or rewelded an excessive number of times, and cracked valve struts were polished, rather than rewelded. In addition, the employee identification numbers listed on cards attached to the bags containing the reworked valves were in many instances falsified, federal officials charged.

The $10.75 million civil penalty settles the government claims under the federal False Claims Act. Shiley and Pfizer also will pay for all qualifying medical costs that federal agencies such as the Department of Health and Human Services and the Department of Veterans Affairs could incur in the elective replacement or fracture of certain C/C valves.

"Shiley made false claims to the FDA to get its heart valve approved," says FDA Commissioner David Kessler. "This case shows once again that the FDA will not tolerate deceptive practices that endanger people’s lives."

But the Justice Department came under heated criticism from Dr. Sidney Wolfe, director of Public Citizen’s Health Research Group, who charges that the company and responsible executives should have been criminally prosecuted.

Wolfe says that the Justice Department action "falls far short of what should have been done." Wolfe says that "there are approximately 900 people now dead because of this device which arguably would never have been marketed if the [Food and Drug Administration (FDA)] had not been misled during the approval process."

"For this multibillion company to get off with a $10 plus million dollar civil penalty and for the responsible officials to escape jail sentences for the tragic loss of so many lives is inexcusable," Wolfe says.

In a letter to Kessler in June 1994, Dr. Wolfe pointed out that Shiley "expressly directed the valve’s chief designer, Dr. Viking Bjork, to withhold evidence of valve fractures and not to publish his data."

"The government’s conduct here sends a strong, but inexcusable signal that future corporate criminals have little to fear," Wolfe says. "As long as there is no jail sentence for any of the people in a company responsible for over 900 deaths, other companies will breathe a massive sigh of relief."

"Shiley‘s primary concern is the welfare of the people using our products," Shiley spokesperson Bob Fauteux says. "This action is an effort to resolve the issues surrounding the C/C valve."

A company statement announced that the settlement is "expected to have no material adverse financial effect on Pfizer."

Sweet Deal for Marietta

DEPARTMENT OF DEFENSE Secretary William Perry and his top Deputy John Deutch made an "unprecedented agreement" last year to reimburse Martin Marietta at least $60 million in taxpayer money as part of a major acquisition of a rival company, Newsday reported in June 1994.

Perry and Deutch are former employees of Martin Marietta. According to Newsday, Perry and Deutch obtained waivers of ethics regulations against dealing with former employers while implementing the deal.

Newsday reported that under the deal, the Pentagon granted Marietta unprecedented approval for reimbursement of expenses related to the $208 million acquisition of the Space Systems Division of General Dynamics.

The Pentagon’s Board of Contract Appeals ruled in April 1993 against Defense contractors attempting to get money from the federal government for acquisition fees.

But Perry and Deutch approved the agreement anyway in July 1993, without the usual notification of Congress or the public through the Federal Register, Newsday said. The Pentagon told Newsday that the decision was only a clarification of existing policies and did not need to be reported.

According to Newsday, the Pentagon acted to reimburse Marietta after the company’s chairman, Norman Augustine, complained about Pentagon regulations regarding reimbursement of acquisition expenses. Only a month later, Deutch approved the deal and reversed previous interpretations of the regulations to allow the Pentagon to cover acquisition expenses.

In 1992, Marietta was a client of Perry’s consulting firm, Technology Strategies Alliances (TSA). Also in 1992, Deutch was listed as a member of Marietta’s advisory board and was paid $42,500 in consulting fees. Deutch was an adviser to Marietta for nine years.

- Ben Lilliston



50 Years Is Enough

1025 Vermont Avenue, NW, Suite 300

Washington, DC 20005

International Month of Action

c/o Christian Aid

P.O. Box 100

London SE1 7RT


European Network on Debt and Development (EURODAD)

Square Ambiorix 10

B-1040 Brussels



P.O. Box 652

Wollahra 2025


Bank Information Center

2025 I Street, NW, Suite 522

Washington, DC 20006

The Bretton Woods Committee

1990 M Street, NW, Suite 450

Washington, DC 20036

Probe International

225 Brunswick Avenue

Toronto, ON M5S 2M6


Environmental Defense Fund

1875 Connecticut Avenue, NW

Washington, DC 20009

Development GAP

927 15th Street, NW, 4th Floor

Washington, DC 20005

International Rivers Network

1847 Berkeley Way

Berkeley, CA 94703

Third World Network

87 Cantonment Road

10250 Penang


Institute for Agriculture

and Trade Policy

1313 5th Street, WE, Suite 303

Minneapolis, MN 55414-1546

Institute for Policy Studies

1601 Connecticut Avenue, NW

Washington, DC 20009

Institute for Food and

Development Policy (Food First)

398 60th Street

Oakland, CA 94618

International Liaison Office for

President Jean-Bertrand Aristide

P.O. Box 25535

Washington, DC 20007

Washington Office on Haiti

110 Maryland Avenue, NE

Suite 310

Washington, DC 20002

Peasant Movement of Papay

25 West Street, 2nd Floor

Boston, MA 02111

International Brotherhood

of Teamsters

25 Louisiana Avenue, NW

Washington, DC 20001

United Electrical, Radio and

Machine Workers of America (UE)

2400 Oliver Building

535 Smithfield Street

Pittsburgh, PA 15222

Global Response

P.O. Box 7490

Boulder, CO 80306-7490

Public Citizen

2000 P Street, NW

Washington, DC 20036

The World Bank

1818 H Street, NW

Washington, DC 20433


Odious Debts: Loose Lending,

Corruption and the Third World’s

Environmental Legacy

By Patricia Adams

Toronto: Earthscan, 1991

The Other Side of the Story:

The Real Impact of World Bank and IMF Structural Adjustment Programs

Washington, DC:

Development GAP, 1992

Aid for Just Development

By Stephen Hellinger, Douglas Hellinger and Fred O’Regan

Boulder, CO: Lynne Reinner, 1988

The Lords of Poverty: The Power,

Prestige and Corruption of the

International Aid Business

By Graham Hancock

New York:

Atlantic Monthly Press, 1989

Sardar Sarovar:

The Report of the Independent Review

Ottawa: Resource Futures

International Inc., 1992

A Blighted Harvest: The World Bank and African Agriculture

Edited by Peter Gibbon, et. al.

Trenton: Africa World Press, 1993

Storm Signals: Structural Adjustment and Development Alternatives in the Caribbean

By Kathy McAfee

Boston: South End Press, 1991

BankCheck Quarterly

c/o International Rivers Network

1847 Berkeley Way

Berkeley, CA 94703

New Internationalist

P.O. Box 1143

Lewiston, NY 14092

The Haiti Files

Edited by Jim Ridgeway

Washington, DC:

Essential Books, 1994

[an error occurred while processing this directive]