The Sins of a Sainted Bank

By Adam Zagorin/Washington

How can a bank designed to do good works, and not even make a profit, earn such a bad reputation? The World Bank, which is 50 years old this year, ought to be celebrating its career as the Mother Teresa of global finance. All told, the bank has extended $300 billion in loans to pay for 6,000 projects ranging from Japan's bullet train to a cataract-surgery clinic in India that will serve 11 million people. Instead of inspiring congratulations, however, the institution's golden anniversary has drawn damning accusations that the bank has damaged the environment, bolstered authoritarian regimes and favored rich people over poor ones. The criticism is getting noisy and forceful. A loose coalition of several hundred groups plans to send thousands of demonstrators to the bank's annual summit in Madrid in October. And last week the U.S. Senate voted to make a $1.2 billion contribution to the World Bank contingent on the bank's proving its loans make economic sense and do not deface the landscape.

The bank, which was launched in the peaceful afterglow of World War II as the basis for an orderly and wise international economic system, is financed by contributions from the wealthiest of its 177 shareholder nations. Yet the institution now faces a cacophony of grievances. Among them:

In the past fiscal year the bank distributed nearly $16 billion but took in nearly $20 billion in repayments and interest from borrowers. As a result, say some critics, the bank is sitting on capital instead of funneling it to poor countries.

Loans too often finance huge Third World construction projects, notably large dams, which drastically change the environment and force millions of people to relocate.

The fiscal and monetary prescriptions the bank imposes on borrowers have thrown the economies of some developing countries into turmoil, sending the prices of necessities beyond the reach of the poor.

The bank is badly managed, and its 6,000 employees are overpaid (average compensation: $123,000 annually).

The elaborate renovation by the bank of its Washington headquarters, which has added 1.5 million sq. ft. of new space, will cost $100 million more than was budgeted.

These assaults on the World Bank, which have surfaced in several academic books and in speeches by congressional leaders, have pushed president Lewis Preston, a former chairman of the J.P. Morgan banking company, to initiate what may become historic changes at the bank. In 1992 he launched an overhaul of the $104 billion loan portfolio and a year later hired New York public relations whiz Herb Schmertz to revamp the institution's image. Schmertz turned in a confidential report several months ago that acknowledged some of the most serious accusations against the bank and said there exists "a significant gap" between what the bank says and what it does.

Some of the strongest criticism of the bank focuses on the nonprofit institution's idle surplus of capital. Countries have been paying back their debts plus interest at a faster rate than the bank has issued new loans. In the past fiscal year, it parceled out nearly $16 billion in support of 1,900 projects, but it also collected nearly $20 billion in repayments and other charges from borrowers, many of them poor. That has left an excess of $4 billion, most of which the bank keeps in short-term interest-bearing investments. Over the past four years, Brazil, for example, has paid the bank $5.3 billion more than it has received. Of course, this kind of gap is an inevitable consequence of offering interest-bearing loans that must eventually be repaid. But critics insist that the current $4 billion surplus is excessive for a bank in the business of giving weak nations a hand.

Critics are equally scornful of the imposition of so-called structural- adjustment policies, part of a strategy followed by the bank and the International Monetary Fund to get bankrupt or poorly run countries back on their feet. In exchange for approving a loan, the IMF often demands that countries take such steps as privatizing state-owned industries, devaluing currency, and living by austerity and export-oriented measures. But governments frequently pay for such programs by cutting back on subsidies for food and other basics crucial to the poor.

A currency devaluation promoted by the bank and the IMF in Francophone West Africa this year provides a striking example of the problem. About 80 million people in 14 African countries awoke one morning last January to find that basic goods had doubled in price; the decision provoked protest riots in Senegal. The IMF and the World Bank defended the policy, saying the overvalued currency was keeping the nations' agricultural and industrial exports from being competitive abroad. But "very often the result is falling wages, rising income inequality and deepening poverty," says Douglas Hellinger, managing director of the Development Group for Alternative Policies, a nonprofit advocacy group.

Another hardship for which the bank is being blamed is large-scale involuntary resettlement to make way for bank-financed dams and other construction projects. An internal investigation by the World Bank made public this spring found bank enterprises responsible for creating 2.5 million "development refugees" between 1986 and 1993. An additional 600,000 people, mostly in India and China, could be affected between 1994 and 1997.

A case in point was a resettlement program involving the Sardar Sarovar Dam, part of an enormous project that envisions building 3,000 large and small dams on the Narmada River in western India. The scheme sparked outrage when it was disclosed that 200,000 people would be displaced by one $3.5 billion dam. | After years of protest by human-rights and environmental groups, the bank commissioned an independent investigation of the Narmada proposals in 1992. The resulting report castigated the bank and India's government for lack of planning. In the end the bank gave New Delhi six months to take corrective measures. India refused and in March 1993 turned down further bank funding for the project.

Weak internal management has led to other embarrassments for the bank. The proportion of its loans considered to be "major problems" because borrowers have, for instance, failed to cut budget deficits or subsidies rose from 11% in 1981 to 20% by 1991. A quarter of all agriculture and irrigation projects were in trouble, as were roughly a third of those meant to fight poverty. A report commissioned by the bank decried an "approval culture" in which employees responded to pressure from management to make loans without paying sufficient attention to the quality of the projects involved. "Every guy in this bank thought he was going to get promoted based just on the number of loans he could get approved," says Preston. "It was a crazy way to run a railroad."

Preston, who ordered up most of the internal studies, has taken some modest first steps to correct the problems. On the loan front, he has increased the number of staff members dealing with overseeing projects 40%. He has also created an independent panel to air and evaluate complaints, and he has established an information center where documents describing bank-financed projects are made public in an effort to boost credibility.

For all its faults, even some critics concede, the bank remains a relatively efficient instrument for distributing an increasingly limited supply of development-aid money. A $2 billion contribution, for instance, gives the institution enough collateral to raise about $45 billion on world capital markets and then offer that money as loans. Often this means the bank is at the center of some of the world's most breathtaking changes. In May it unveiled the first part of an innovative $2.4 billion loan program to spur economic growth in the West Bank and Gaza Strip. Last year it offered $610 million to restore production in Russia's oil fields and $450 million to assist private-sector companies in Poland. But without additional reform, major donors may become even more reluctant than they are now to continue funding those missionary good works.

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CREDIT: TIME Chart by Jason Lee

CAPTION: BANK "PROFITEERING"?

With reporting by Meenakshi Ganguly/New Delhi and Ian McCluskey/Brasilia