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Saturday, March 12

The Juggernaut, Part 2: Half a bridge is better than none

In Part 1 Pundita looked at the World Bank as part of the 'system' of development banks. I explained that the basic development bank model is actually designed to benefit the industries--represented on projects by contractors--that work on projects the development banks underwrite, execute, and oversee for governments. It is the system that must be examined when asking how the World Bank can better serve the poorest countries. Those who suggest dismantling the Bank don't understand the system, which is so successful at employing industries that if the Bank closed down, other development banks would arise to take up the shortfall.

Yet the proliferation of development banks set in motion a destructive cycle that is hard to break and keeps the LDC ('least developed country') governments hooked on development bank loans. In this essay I examine a spinoff cycle that doesn't get attention from the public because it's not part of the most glaring mistakes of past development bank projects. Yet this cycle is the most damaging in the long run because it tamps down human potential. And it is connected with entrenched social problems in both LDC and developed countries--problems that range from drug addiction to terrorism cells. West Europe has become a backwater for these problems. So to begin:

Many people outside the banking community don't realize that the World Bank is much more than a bank in the general understanding of the term. The Bank not only loans money for development projects, the Bank is also involved in every aspect of the project. The Bank has their own engineers who specialize in particular projects, their own procurement specialists and project financial analysts. This is on the theory that the poorer countries cannot fully provide the pool of expertise needed to properly execute the projects, even though the projects do make use of local talent.

So on paper World Bank projects have a valuable educational component. Bank project engineers, other Bank professionals and contractors from advanced countries work with the locals, who use that route to learn about modern technologies and methods. The catch is that the LDC governments can't afford to borrow the kind of money that uses state-of-the-art building methods, materials, and technologies.

I remember a Bank power engineer telling me that he couldn't leave the Bank to work in private industry because the advances in his field were so rapid that he no longer had the qualifications to be competitive. This was despite all the dams he'd helped build in developing counties. He explained that the dam projects he worked on for the Bank used technologies 20 years behind current ones.

But it's not only Bank engineers who can find themselves stuck behind the times. The LDC locals who work on the projects are not getting the information/technology transfer that helps them become competitive in the modern world. They are only competitive in trade with countries that are in the same boat.

Now one might argue that advanced societies don't owe technology transfer to the backward countries, and that any teaching element connected with development bank projects is gravy. True on both counts, if you keep the discussion narrowed to the actual projects. But if development and foreign aid pours trillions over decades into bringing the poorest countries out of abject poverty, and the countries stay in abject poverty, this signals a flaw in the approach. The Half a Bridge approach to development lending institutionalizes business and lending practices that provide poor-quality infrastructure. This sets up a destructive cycle. The practice:

1. Contributes to an inferior pool of local workers, so that LDC governments continue to hire contractors from advanced countries for projects that must be done right (e.g., Sahib Zone buildings, oil industry infrastructure).

2. This creates a brain drain: the brightest and most determined nationals flee their LDC to receive education abroad and work in advanced countries.

3. This shrinks the LDC's tax base, meaning that educational institutions remain inadequate for turning out skilled workers.

4. This further entrenches bad conditions for the LDC poorest, who flee to advanced countries and take the most menial jobs or go on the dole.

5. This creates an immigrant underclass in the developed countries.

6. The underclass supplies crime and terrorism syndicates with an inexhaustible supply of cheap, disposable labor.

Then people in developed countries ask, "Why are we overwhelmed with illegal drugs, child prostitution, gangs of thieves, and nut cases who think it's fashionable to blow themselves up?"

To understand the part that development banks play in these situations, walk the cat backward through the above cycle. Then keep walking back through the cycle outlined in Juggernaut Part 1. To review:

1. At some point governments have to pay for the loans they receive from development banks,

2. they can't pay without an adequate tax base and expanding economy,

3. hard to expand a 'commanding heights' (socialist) economy,

4. but if governments move away from socialist government, the contract pie shrinks for contractors--the ones who depend on getting business from governments that get loans from development banks,

5. when the contract pie shrinks, many contractors go belly up,

6. that shrinks the country's tax base,

7. return to "1" and repeat the cycle several times,

8. the government defaults on the loan payments,

9. the development banks stop writing loans,

10. more contractors go out of business,

11. the tax base shrinks even more,

12. the broke debtor governments stand outside the annual G7/8 meetings and rend their clothing and gnash their teeth,

13. the G7/8 put together some kind of debt relief (i.e., refinancing the loans and writing more loans),

14. Return to "1" and repeat the cycle.

Then Americans ask, "Why is it so hard for these poor countries to get away from socialist government, which is killing their countries?"

If you keep walking the cat backward, you can stop before reaching Bretton Woods. When the IBRD model was applied to advanced countries that had simply fallen backward, as happened in West Europe during WW2, it was a success. The trouble began with Robert S. McNamara's tenure as president of the World Bank.

McNamara did not understand how the IBRD gizmo worked. He believed the myth about the IBRD, which leaps over the critical factor of how the Bank really works. To review, when studying the Bank's failures, it's chasing red herring to think in terms of "development." The IBRD was not designed to "develop" a country. It was designed to keep businesses afloat by giving them contracts financed by loans to governments.

McNamara didn't understand this, which is not a slur on his intelligence. The World Bank is so complex in its workings that it takes Bank employees about two years to learn to navigate the basics of the Bank's way of doing things. (Reading books on how the Bank works only shaves a few months off the learning curve.) So when Americans are put in the president's chair they are at the mercy of the Bank's mandarins--senior management who have been working at the Bank for years. That's what happened to McNamara.

To cut a story, Robert McNamara assumed that the IBRD could apply their loan model to "developing" the world's poorest countries out of abject poverty--countries that had not fallen backward but had always been backward, by modern standards. However, what the IBRD gizmo does, when applied to the LDCs, is the same thing it does when applied anywhere: provide gainful employment for many skilled contractors from advanced countries. So to blame the Bank for failing to develop the LDCs is akin to blaming your electric blender because it doesn't toast bread. The Bank wasn't set up to do what McNamara wanted done.

But it compounds the error of misapplying the IBRD model, if the Bank underwrites projects that operate according to the theory that half a loaf is better than none. What use is it to build a bridge with outmoded materials, structural design, and inefficient building methods--a bridge that when completed is insufficient to handle the vehicular traffic?

Pundita will tell the use: the need for major repairs within a year of the bridge's opening requires the development bank to write yet another loan to the government. That loan will be serviced by contractors using technologies 20 years behind the times. That will create the need for another loan....

Again, all this works splendidly to keep many contractors gainfully employed. But if the goal is to help the LDCs pull themselves up, this is not the way to go about it. The highest cost of the Half a Bridge theory is that it wastes human intelligence. It condemns minds to learning things that are obsolete in the modern world.

The reader might ask whether this Half a Bridge style of business also holds back the contractors from the developed countries--the ones who specialize in servicing highly technical projects for development loans. I doubt there's ever been a study done on the question. But I imagine if an engineering firm can coast on projects that don't require the employees to be at the cutting edge and don't require R&D--that would leave the firm dependent on doing work that is obsolete in the advanced countries.

For a very brief and cutting overview of Robert McNamara's contributions to the World Bank, see:
http://www.techcentralstation.com/072904E.html

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