July 22nd, 2003
The Role of IFIs
Halifax Initiative Coalition
I may have been asked to give this talk as I, among our Commonwealth colleagues, sit closest to Washington. As there is so much experience in the room in addressing issues of the World Bank and the IMF, I will merely start a list of all the ways that the IFIs are implicated in the relentless drive towards privatization of public assets.
First, I would like to quickly share two contextual comments regarding this push towards privatization. It must be situated within the drive towards the end of history, or the ultimate global supremacy of US-modeled capitalism. This victory was declared at the end of the Cold War. The end of history envisions the role of the state being limited to maintaining law and order and a sound investment climate.
To highlight the ideology, I would like to quote the International Finance Corporation, the private sector lending arm of the World Bank Group, from its 1995 publication, “Privatization: Principles and Practice”
In the last decade, the world has experienced a revolution. At its most profound, it saw the tearing down of the Berlin Wall, and the demise of communism in a large number of Soviet states; but it has touched most developed countries and a rapidly growing number of developing ones. Throughout the world, in diverse circumstances, policy-makers have been critically re-examining the performance of publicly-owned economic assets, and in gathering numbers have turned to the improved performance that private ownership brings. The word privatization, almost unknown a decade ago, is here to stay whether as the necessary first step on the long road toward a competitive market economy in former socialist countries, or as the key to unlocking private-sector led growth in Latin America, Asia and elsewhere. (Preface).
Elsewhere in the document, the IFC trivializes opponents to privatization as public assets by equating this reluctance to the same reluctance experienced when “selling the family silver”.
The second general comment I would like to add our to our conversation is in regards to the definition of essential services. I would like to add public pensions and agricultural extension services. We saw in the video of South Africa yesterday the importance of government pensions. Two large families were surviving on one pension. Yet the World Bank has been very active in the advising against public pension schemes in favour of private. Agricultural extension services are critical to small farmers, yet they are being privatized, again often at the behest of the World Bank. In Sri Lanka for example, fish breeding centers were privatized, the private sector began growing tropical fish for export markets rather than food fish for inland fish farmers, leaving 25,000 people without livelihoods and many more lacking a vital source of protein.
Like any good transnational corporation, the IFIs take a vertically integrated approach to privatization. I will name the 8 ways in which the IFIs facilitate privatization, returning to elaborate on the first two. I will then name three new initiatives at the IFIs which we need to watch as they will impact on IFIs approaches to essential service delivery. I will not discuss the WDR or PRSPs as they will be discussed by others on this panel.
- Create the enabling environment for privatization. These efforts set the stage for the perceived inevitability and superiority of privatization.
- Force privatization through conditioning loans and debt relief.
- Shape global development thinking through its knowledge bank. The World Bank produces reams of information – situating itself as the Gateway for Development. These reports are meant to provide the intellectual framework for their approaches.
- Attract the private sector. MIGA, for example, hosts a website that is a virtual auction block for privatization of state assets. IFC has held workshops for private sector on the potential of the global “market” in water, education and health care.
- Consult, advise and train governments and the private sector on privatization. The World Bank Institute offers courses on privatization, the Bank has produced Tool Kits on subjects such as labour and privatization, the Bank has two consulting arms on privatization and foreign investment. The Bank also has a programme of staff exchanges with companies. For example, a Bechtel staff could work at the Bank for a year. Advise might come in terms of the structure of a power purchasing agreement between the state and in independent power producer, and typically these shift risk to the state.
- Lend money directly to the private sector and IFC can also purchase equity in companies.
- Insure the private sector against commercial and political risk. There has been some discussion at MIGA in regards to insuring against what I would call democracy. For example, if a government reverses a decision based on popular uprising, a company could be insured against this.
- Arbitrate disputes between investors and state. The fifth and least known arm of the World Bank Group, the International Court for Settlement of Investment Disputes (ICSID), is a closed arbitration court used under bilateral and multilateral investment or trade agreements. The Bolivian decision to end the water privatization in Cochabamba is now under arbitration at ICSID, because Bechtel, a US company, treaty shopped for a country with a bilateral investment agreement with Bolivia, found Netherlands and opened a subsidiary there.
1. The Enabling Environment:
The enabling environment for privatization of essential services started a long time ago – with irresponsible lending, resulting in the debt crisis and the subsequent structural adjustment programmes.
Characterize traditional SAPS by starving the state and feeding the market.
Rapid and inappropriate trade and financial liberalization starves the state in numerous ways. Removal of state subsidies to labour-intensive sectors to increase competitive nature of the sector, coupled with removal of tariff barriers can increase unemployment as jobs have not been as promised absorbed into other aspects of the economy. Tax revenue is lost. One area not looked at very often is loss of budget revenue due to asset reserves increasing. In some countries in East Asia these have risen to 30% of GDP tied up in asset reserves. In Sub-Saharan Africa, asset reserves have doubled to around 10% of GDP.
Macroeconomic policies such as deficit disciplining create enabling environment for privatization. For example, Argentina, with the approval of the IMF, passed a zero-deficit law which means that parliaments in budgets cannot approve increases on spending to essential services, even if it is for a onetime capital outlay for example.
Reductions in government expenditure, privatization of natural and other public assets also enables an environment that makes privatization seem inevitable and superior. This has been called privatization by stealth.
Whereas many of these initiatives take from the public and the public sector with one hand and pass on assets and wealth to the private with the other, legal and judicial reforms pave way for foreign private sector ownership, investor rights etcetera.
Other IFI approaches that enable privatization are:
- Their approach to secrecy in loan and conditions negotiations.
- Their diagnostics. The Bank and Fund provide the diagnostics for poverty assessments, for cost/benefits analysis, for estimations of debt sustainability, growth, export earnings, you name it, consistently wrong, usually overinflate positives and underestimate negatives. These inform the PRSPs, debt relief etc. Also since the adoption of the Private Sector Development Strategy, the Bank prepares studies on the sound investment climate, which is based on their assumptions of what a sound investment climate is. These assessments inform Country Assistance Strategies.
Second point on forced privatization. These are regularly part of loand and debt relief conditions as we all know. But I wanted to call attention to the move to pre-conditioning, where donors reward good performers – based on criteria that include openness to the private sector. The Bank then determine allocations based on performance. Other donors fall in line with Bank assessments of good performance.
This relates to our discussions on governance. Donors, particularly the IFIs, use the term governance as a new word for typical structural adjustment. I would like to quote Paul O’Neill, former US Treasury Secretary, as I believe this definition of good governance is that used by the IFIs.
“Good governance means ruling justly, enforcing laws and contracts fairly, respecting human rights and property rights, and fighting corruption. Encouraging economic freedom means removing barriers to trade with neighbors and the world, opening the economy to foreign and domestic investment and competition, pursuing sound fiscal and monetary policies, and divesting government from business operations. Economic freedom also means recognizing that it is the private sector that creates prosperity, not central planning or bureaucracies.” — Paul O’Neill, till recently Treasury Secretary of the US.
We need to be careful when we call also for good governance to be explicit as to what we refer, stating clearly it is not about adoption of neo-liberalism.
Finally, three new developments to monitor for impacts on essential service delivery.
One, initiative to combat bribery and fight corruption. Bank making a lot of noise about this, however, focus has been on bribe takers rather than givers. In other words, the focus is on petty corruption of low-paid bureaucrats rather than the white collar crime of multi-national companies affecting bidding processes, or bribing their way into water rights. Acres International, a Canadian company, was recently convicted by the Lesotho High Court of corruption related to the Lesotho Water Highlands Project, a huge power project that supplies South Africa as we heard yesterday. The Bank has yet to blacklist Acres.
Corruption breeds from forced, rapid, secretive privatization. Joe Stiglitz, former Chief Economist at the Bank and Nobel Prize winner, has referred to privatization as briberization.
Next, the Bank is also starting to talk about human rights. From my limited engagement in dialogues with the Bank in this area, it appears that the Bank is monitoring rather than engaging in initiatives to push for human rights approaches.
Lastly, the push for poverty and social impact assessments. A lot of NGOs are rallying for PSIAs to require IFIs to take into account poverty and social impacts of approaches such as privatization. In a leaked IMF Working Paper on PSIA, it suggests that the emphasis will accept privatization as a given, and then find ways to mitigate impacts, rather than comprehensive options or strategic assessments.
 In the discussion period, the good point was raised in regards to the role of the Regional Development Banks as well in facilitating, driving privatization. I focused on the World Bank in particular as it is the “brand” leader.
 The Economic Times, December 17, 2002, p.7. quoted in “Aid and Governance” by Kavaljit Singh, January 2003.