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Tuesday, March 8

The Juggernaut

"I knew you would go through the roof over Snow's mention of Bono but I bet Snow dropped the name as a nod to Europe. My money's on Paul Wolfowitz for next World Bank president. [Signed] Chicago Dan"

Dear Chicago Dan:

9/11 was all our tomorrows--all the problems we put off 'til tomorrow while fighting two world wars and the Cold War. Once you see the connection between the development bank business model and 9/11, I guarantee your first reaction will be, "Shut down the World Bank." But the World Bank is but one of many development banks. You can no more shut down the business model created at Bretton-Woods than you can return to before the atom was split.

We cannot and must not prepare ourselves to live with more 9/11s, but we can't deal with the most intractable problems in the developing world unless we grapple with the downsides of the development bank. The candidates now under consideration for Bank president show that Washington has not even confronted what the World Bank was set up to do. So we need to return to Ground Zero, the real Ground Zero, and build up understanding from there:

After the American command saw the first US casualty figures for the Normandy invasion, they looked at each other and said in effect, "The Three Strikes rule must not apply."

Less than two months later, the International Bank for Reconstruction and Development (IBRD) was signed into existence.

American commanders saw that the survival of civilization depended on assuming that if left to their own devices the Europeans would be at each other's throats again, as soon as they climbed out of the ruins of World War 2 and probably even before. Given the state of modern weaponry that meant another world war. That was untenable.

The question was how to ensure that the Europeans were not left to their own devices. There was talk of the US annexing Europe. There was consideration of the basic idea behind Hitler's Third Reich--the third Holy Roman Empire. The last time Europeans had more or less gotten along was under the Roman Empire.

I don't know who came up with the idea or how long before Normandy the idea might have been kicking around. But at some point people said, "Wait a minute. What are we really talking about, when we say Roman Empire?"

What comes first to your mind's eye when you visualize the Roman Empire? No, not troops. You see the Coliseum, roads, aqueducts, vast plazas of marble government buildings.

The Holy Roman Empire was Nirvana for building contractors. It was construction projects and materials procurement, not troops, which caused so many diverse peoples to put up with the Romans. Rome's mania for building was the gift that kept on giving to every outpost in the empire.

As soon as chieftains living in mud huts figured out that you didn't need to make raids on a neighboring tribe to get rich, humanity took a leap forward. Chieftains turned themselves into procurement specialists, building project managers, and entire industries to serve Roman building sprees.

The endurance of the Rome Empire rested on a business model that allowed peoples to sublimate war into competition for building contracts. That is the basic idea behind the IBRD.

So, contrary to myth, the IBRD, which along with spinoffs is now known as the World Bank Group, was not designed to reconstruct postwar Europe. It was not designed to develop Europe. The IBRD was designed to produce a business model that allowed European industries to compete for government building projects financed by low-cost loans.

If the Europeans wanted to go on bashing each other after two world wars, they could do it by competing for business contracts issued by governments--contracts paid for with money borrowed from a bank that loaned exclusively to governments.

Someday, a building materials procurement specialist will write a history of the world. Then many mysteries of history will be revealed. And it will be clear that one of the brightest ideas human brains ever hatched was signed into agreement at Bretton Woods. The development bank model of business is the biggest single factor in the relative peace the world has enjoyed during the past half century.

What's the catch? Many years ago, while first learning about the World Bank, I put that question to a Bank economist. I asked if the World Bank ran the world.

He replied, "No. The IMF runs the world. The World Bank fixes the world."

I observed that the Bank was like no bank I'd ever banked at, so he could he tell me in one sentence what the World Bank actually was?

He replied, "The Bank is a juggernaut."

After chewing that over I replied in the manner of Alice, "But a juggernaut is an engine of destruction. Doesn't your definition of the Bank conflict with the Bank's mission to fix the world?"

"Not at all," replied my guide to Wonderland. "The World Bank is irrefutable proof that you can't fix anything in this world without breaking something, somewhere down the line."

What the Bank can't fix about itself is the very success of its business model, which spawned numerous imitations. You've heard of nuclear proliferation. There is also development-bank proliferation. There is now a version of the World Bank in every world region you can conceive, including the "Islamic Region."

The proliferation set trouble in motion. As long as the IBRD model was serving a relatively small group of competing contractors--the Europeans and Americans--there was enough contract pie to go around. But once everybody and his uncle jumped in, that was a different game. Everybody's clamoring for contracts, which means writing more and more development loans. But there are only so many national governments on earth. Those governments can only contract to put up so many bridges, dams and buildings.

To see where this has led, an episode of the Amazing Race found the teams in a Gulf Arab state. One contestant blurted, "Look at this place! There's a mosque on every corner!"

Ah, but you mustn't think "mosque" when seeing a mosque, if you want to understand development banks. Think cement contract, steel girder contract, electrical contract, copper tube contract, plumbing contract, painting contract....

In short, there is now cutthroat competition among peoples all over the world to get government contracts funded by development bank loans. That means the contract pie is fast reducing to the size of a poptart.

When development banks proliferated, this set in motion a destructive cycle:

1. At some point governments have to pay installments on the development loans,

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 them?

There is also an insidious aspect to the development bank model as applied to LDCs (least developed countries). It keeps the LDCs always moving backward in relation to the developed countries, which sets up another destructive cycle. Pundita will discuss that cycle in Juggernaut, Part 2.

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