The current global economic crisis is pushing international financial institutions (IFIs) — such as the World Bank and the International Monetary Fund — back into the public spotlight and increasing their importance in developing countries.
Additionally, in the past 18 months the World Bank has invested a lot of management time in redefining itself as the climate-change bank in hopes of funding projects in developing countries that address global climate-change issues, says Chad Dobson, who founded the Bank Information Center (BIC) in 1988 to monitor and reform IFI lending practices.
Dobson’s return to BIC in December 2007 to become its executive director after a 10-year absence coincides with BIC’s 20th anniversary and comes at a time when its watchdog work is more relevant than ever, given the world economic and climate-change concerns.
International anxiety about the downturn in the financial markets — coupled with growing concern about the impact of climate change — has prompted global government and NGO leaders to take renewed looks at the IFIs, which were formed more than 60 years ago to regulate financial markets and promote development.
Two decades ago BIC was one of only a handful of non-governmental organizations (NGOs) that led an international movement seeking transparency and accountability from the World Bank and other IFIs.
NGOs like BIC have played — and still play — a vital role by putting pressure on the World Bank for fundamental changes that can make the Bank better and more effective,” Dobson said.
Since 1989, BIC has received 27 grants totaling $3.25 million to support its work through the Charles Stewart Mott Foundation’s Environment program. The goal of Mott’s International Finance for Sustainability strategy is to shape international investment and trade policies and practices to support sustainable development, which balances social, environmental and economic concerns.
As the global economic market downturn makes it more difficult for developing countries to access loans from private banks, they increasingly could look to IFIs for project funding.
“IFIs have been desperately awaiting the new business this financial crisis will likely generate,” Manish Bapna said.
“Lending from the World Bank and IMF is often counter-cyclical. Their services are found to be more important when developing countries are doing less well and when these countries have less access to private capital.”
Prior to his current job as executive vice president and managing director of World Resources Institute (WRI), Bapna served as BIC’s executive director. He also worked for seven years as a senior economist for the World Bank. That experience, plus his background with BIC and WRI, gives him the ability to see IFIs from a variety of perspectives.
Increased scrutiny of IFI-funded projects in developing countries should go hand-in-hand with their enlarged importance, Bapna says. IFIs need to resist the “tyranny of the urgent,” he says, and not succumb to “mission creep,” allowing their mandates to expand constantly to include the latest global challenge. Instead, in his view, a key element of their mission should be to support “smart” infrastructure — small-scale projects that respond to local demand and are sustainable over the long term.
The World Bank, created in 1944, is one of the largest and most well-known global sources of financial and technical assistance with offices in more than 100 countries.
Historically, the Bank and other IFIs have made grants and interest-free or low-interest loans to developing countries for major infrastructure projects such as dams, oil and gas pipelines, road construction, and other projects that seek to promote economic growth and alleviate poverty.
Because of its tremendous size and resources, the Bank needs monitoring, says U.S. Rep. Barney Frank. He is chairman of the House Financial Services Committee, which has jurisdiction over the U.S. government’s relationship with IFIs, including responsibility for authorizing commitment of U.S. funds to these institutions.
“The information we get from NGOs on the ground is different from what the officials give us. I observed this firsthand when I was in Ghana and South Africa last spring,” Frank said.
“We take those NGO reports very seriously. We need to listen to the experience of civil society.”
Frank said he is prepared to use his chairmanship to put more pressure on IFIs to strengthen their environmental and social policies.
He said he also would continue pushing the World Bank to revise the way countries are scored and ranked in its annual Doing Business report. The report measures selected business regulations in 178 countries and ranks each based on its ease of doing business.
A central flaw of the report, Frank says, is its index on “Employing Workers,” which gives the best scores to countries with the lowest levels of worker and social protection.
“The worse you treat your workers, the better you are rated,” Frank said. He pointed to the 2008 report in which Saudi Arabia had a more favorable ranking for employing workers than Sweden, despite Saudi Arabia’s total ban on trade unions and systematic discrimination against women, and Sweden’s “exemplary worker protections.”
Frank says he will continue to use U.S. financial support for IFIs as leverage for change, if necessary. Today, the U.S. earmarks almost $1.5 billion annually for IFIs.
Fifteen years ago, Frank was chairman of the House Subcommittee on International Development, Finance, Trade and Monetary Policy. At the time, BIC, the Center for International Environmental Law (CIEL), and other nonprofits provided legislators with research indicating a need for major policy changes that would result in greater openness and public accountability at the Bank. But the Bank’s leaders resisted the suggested changes, Frank said, until he and other legislators threatened to stop the flow of U.S. dollars.
“They needed funds, and we needed an inspection panel,” he said.
Under this pressure, the Bank’s Executive Board of Directors created the inspection panel in 1993. It is often called the “granddaddy” of such panels because all development banks now have them.
The three-member, independent panel provides oversight of the bank’s lending to ensure that its own policies and procedures are followed. The panel also gives citizens a legal venue for enforcing their rights.
This set an important precedent in international law because it allows citizens to challenge the activities of a major international institution, says Daniel Magraw, CIEL’s president and CEO.
CIEL, a public interest law organization and Mott grantee, uses principles of ecology and justice to strengthen global environmental law. Since 1990, CIEL has received 21 Mott grants totaling $3.6 million for its work in this arena.
Along with BIC, CIEL is commonly recognized as one of the key nonprofit organizations that helped make the first inspection panel a reality.
At that time, Magraw was director of the International Environmental Law Office at the U.S. Environmental Protection Agency. From his vantage point, the creation of the panel was a “sea change” because it dramatically increased the accountability of the World Bank to follow specific lending guidelines that addressed environmental standards, rights of indigenous people and resettlement of those displaced by projects.
“There was tremendous push back from the Bank’s management,” Magraw said. “It’s human nature; nobody likes having their feet held to the fire.”
Previously, the Bank had not sought feedback from local people either before, during or after a project was funded, he says. The institution’s management consisted of “mostly good people trying to change the world who wondered why anyone would question their motives or actions and who too often were motivated simply to move money by making loans, rather than look at impacts on communities,” Magraw says.
While the inspection panel has paved the way for the Bank to operate more democratically, Magraw says, there still needs to be stronger policies and better implementation. In addition, potentially affected communities need to be better informed and assisted so they can effectively use accountability mechanisms, he says, adding that organizations such as BIC and CIEL play a critical role in ensuring that happens.
“We’ve worked with the Bank to improve its overall approach by providing detailed critiques and descriptions of new and improved ways forward,” Magraw said. “We’ve not just said, ‘Don’t do this’ or ‘Don’t do that.’”
The same is true for BIC, he says, which has a track record of both looking at specific policies and seeing how they fit into the bigger picture.
Through its 20-year history, BIC has been instrumental in helping open the World Bank’s doors to the public by working with other NGOs in the U.S., Asia, Europe and Latin America that were concerned about the social, environmental, economic and cultural impacts of development projects.
Although outside interest in the lending practices of the Bank has waxed and waned through the years, Dobson said, BIC has been steadfast in seeking to change IFI policies and install safeguards so those most affected by IFI policies and projects could have information and provide input.
Today, there is an increase in the number of NGOs focusing their attention on the activities of the Bank, partly because of international media reports about the damaging effects that development projects in the Amazon Basin and elsewhere could have on the planet, and partly because of the new prominence of IFIs in light of the financial crisis.
Increasingly, sustainable development discussions around the world are focusing on three issues: the global economic crisis, global climate change, and the emergence of new sources of capital for development, including the so-called BRIC countries of Brazil, Russia, India and China, Dobson says.
His peers agree, noting that these issues often are linked.
That has prompted many leaders in the field to call for global standards for all IFIs to follow, whether they are supported with funds from many countries, such as the World Bank, or supported by a single source, such as BRIC governments that have cash available for lending in a tightening global economy.
Currently, if the World Bank attaches conditions to its funding, or refuses to finance an infrastructure project because of significant environmental risks, another funding source with fewer or no environmental standards can — and often does — finance the work without any strings attached, says Korinna Horta, senior environmental economist at the Environmental Defense Fund (EDF).
“There needs to be a global response, so we get common standards that everybody everywhere adheres to,” she said. “We do not need a race to the bottom.”
Just as BIC and other NGOs recognize a need today for IFIs to finance projects that better preserve the planet’s resources, these same groups realized many years ago that people needed access to accurate project funding information and a system that guaranteed their ability to get it.
As a result of their work, the World Bank today operates public information centers, posts project information online and releases written reports in several languages. In addition, all Bank-funded projects now must include social and environmental impact studies.
Consequently, the Bank has a fully staffed Environment Department, and about 500 of its approximately 10,000 employees address some aspect of environmental impacts, Dobson said. When BIC first sought reforms, the Bank had only three employees to address environmental issues.
At a celebration marking BIC’s 20th anniversary, leaders from government and the nonprofit sector — including senior World Bank staff members — acknowledged the importance of the organization’s work in educating nonprofit leaders and legislators about the need for policy and procedural changes at public lending institutions.
They noted that from the beginning BIC sought safeguards to ensure that community voices were included when decisions were being made about major development projects that could affect their lives, livelihoods, environment and culture.
Efforts aimed at reforming the World Bank eventually led to changes within other IFIs, including the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group.
Also, new NGO networks were created to address emerging challenges, such as monitoring other lenders that were willing to fund environmentally risky projects, including private banks and national export credit agencies — private or quasi-governmental institutions that act as intermediaries between governments and exporters to issue financing.
While the work has expanded, BIC also has grown from a few employees in Washington, D.C., to 23 people who also work in offices in Bolivia, India, Indonesia, Kenya and Thailand. These sites operate as regional centers for the organization’s on-the-ground work.
In addition to being credited with helping to make the World Bank’s inspection panel a reality, BIC also has been cited as playing a key role in bringing about an earlier watershed moment in IFI reform history.
That victory came when Congress passed legislation in 1989 sponsored by U.S. Rep. Nancy Pelosi. Known as the “Pelosi Amendment,” the policy forbids U.S. executive directors of all major IFIs from voting in favor of projects if either of two conditions is present: the projects were professionally reviewed and likely would have adverse environmental impacts, or assessments were completed but had not been made public at least 120 days before the vote.
This amendment was monumental because it opened the door for community involvement earlier in the planning process, says Horta of EDF. This made it possible for the World Bank to learn about adverse environmental and/or social impacts before the projects are too far along. Consequently, they can be redesigned, adjusted, delayed or even halted entirely, Horta said.
Since 1988, Mott has provided 14 grants to EDF for work on IFIs totaling close to $2.1 million.
Although a lot of major changes have been made for the better, there is still work to do, Dobson says.
For example, he wonders whether the World Bank’s process for lending an allotted $23 billion annually should be changed. If it gave out less money, he asks rhetorically, could it do so more responsibly and with greater monitoring?
“With this current model, the theory is the more money you move, the more development you get. But this model doesn’t look at whether the projects are good or not. You just get money out the door and don’t look back to see how projects went because you have already moved on to next year’s funding cycle.”
The World Bank’s current way of doing business also creates inherent internal tensions, Dobson says, because it pits employees against each other — those who must move the money quickly against those who must ensure projects adhere to sustainable development principles.
During his 20 years in the field, Dobson points to the most important lesson he’s learned: Sustainable development can’t happen outside the democratic process. Experience has shown that the best projects are those in which the people most affected are involved, he says.
“The democratic process is both efficient and effective.”