How the World Bank Is Hurtling Us Toward Environmental Ruin

Excerpted from Foreclosing the Future by Bruce Rich. © 2013 Bruce Rich. Reproduced by permission of Island Press, Washington D.C


In 2000 a dedicated physician working to promote public health for the poor in developing countries condemned the World Bank for promoting “corporate-led economic globalization” that “not only failed to improve living standards and health outcomes among the poor, but also... inflicted additional suffering on disenfranchised and vulnerable populations.” He recounted his own experience in a Latin American country where the World Bank subsidized huge multinational mining and oil investments while encouraging the weakening of environmental laws that “led to significant ecological degradation from deforestation, oil spills, and poisoned waterways.”

These words were written by Dr. Jim Yong Kim, who assumed the presidency of the World Bank on July 1, 2012.

Kim’s words in 2000 (in a book he co-edited, Dying for Growth, a macabre pun on what the World Bank model of growth was doing to the poor) were all the more disquieting in that they came the better part of a decade after the 1992 Rio de Janeiro Earth Summit, the landmark United Nations Conference on Environment and Development. In Rio, in one of the largest diplomatic gatherings in history, 118 heads of state and numerous international development institutions such as the World Bank made wide-ranging pledges and commitments to address global environmental issues while helping the poor.

More than 20 years after Rio ’92 and 13 years after Dr. Kim’s warnings about the effects of distorted economic globalization, scientific evidence is growing that the global economy has put the entire global climate system at risk, as well as the planetary web of biodiversity and life forms. Species are dying at an alarming and accelerating rate. Economically caused global warming is already undermining the benign, stable climate conditions that have enabled the rise of human civilizations over the past 7,000 years. The inability of our institutions to address these trends is rooted in a continuing worldwide failure of governments and of markets to deal with the impacts of human activity on the natural world.

The World Bank Group is a microcosm of this breakdown. The Bank’s failures to confront the environmental challenges of economic development illuminate the political failures and hypocrisies of most of the governments of its members. The Bank is to blame, but its member governments are even more so.

This book builds on an earlier analysis I published nearly two decades ago, Mortgaging the Earth, which identified many of the persistent institutional and political pathologies that undermine the Bank’s effectiveness. Since then, unfortunately, the environmentally unsustainable development that the Bank has continued to finance is contributing to a global ecological debt that now is foreclosing on the future of human societies.

The world urgently needs global governance at the very moment when it is failing. The World Bank Group has a unique wealth of experience that could help build governance at the local, national, and international levels, if only the Bank would learn from its experience rather than flee from it. Quite a few years ago, an internal review of the Bank’s operations described the problem as unfounded institutional optimism based on pervasive institutional amnesia. In a world desperately in need of global environmental leadership, the Bank could and should play a more positive role.

The Role of the World Bank Group

In the second decade of the twenty-first century, the World Bank is no longer as financially influential as it once was. The growth of international private-sector finance, and of global public lending institutions in newly industrializing nations such as China and Brazil, mean that the Bank has now become just one financial player among others.

But the Bank remains critically important. It continues to put itself forth as an intellectual and policy leader for economic development in the United Nations system and in the global economy at large. The Rio Earth Summit chose the Bank to administer a new fund to finance environmental projects— the Global Environment Facility. After Rio the Bank and other development institutions did try to incorporate environmental concerns more fully into their decision making. More recently, the richer countries chose the World Bank to administer most of the new funds they have contributed to address climate change in developing nations. Still more important for the global environment than these new funds is the ecological impact of the activities financed by the Bank Group’s core lending and finance, which has averaged around $57 billion annually in recent years.

Since the early 1990s the World Bank has also played no small role in promoting a one-sided economic globalization that has liberalized markets and unleashed capital flows. It has done so without effective regulation at either the national or international level to counteract environmental and social abuses unleashed by these flows. Of course, the Bank has been just one player, albeit an influential one, in promoting this agenda, together with the finance ministries of many industrialized countries, led by the United States, as well as private international banks and multinational corporations.

One particularly corrosive effect of this globalization agenda has been a disproportionate growth of corruption in developing nations, resulting in massive outflows of stolen funds from even the poorest countries, laundered through proliferating international tax havens. This corruption is undermining not just the Bank’s environmental performance, but international development efforts across the board.

When one examines the failures to conserve ecosystems, or to mitigate the environmental impacts of development, one finds that failed governance at all levels is almost invariably at the root. The Bank itself is a prime example. Many of its problems are associated with a dysfunctional institutional culture in which the relentless pressure to move money out the door, even in violation of the Bank’s own polices and rules, often overrides all other considerations. What is remarkable about this “loan approval culture” is how well documented it has been for decades through reams of internal Bank reports, and how little the Bank’s management, and member- country governments, whether donors like the United States and other industrialized nations, or developing country borrowers, have done to effectively change it.

Nothing Good from the World Bank?

In September 2007, more than 700 people from all over the subcontinent—villagers, farmers, students, and local advocates—came to Delhi for a mammoth week-long investigative tribunal to examine the World Bank’s social and environmental record. One hundred and fifty representatives of communities claiming to be adversely affected by Bank projects and policies presented testimony before a “jury” that could hardly be dismissed as marginalized radicals: it included the first woman to be appointed chief justice of an Indian state (Kerala), a former justice of India’s Supreme Court, and a former justice of the High Court of Mumbai. Others judging the World Bank’s record included the most internationally renowned historian of ancient India (Romila Thapar), a distinguished economics professor, and Booker Prize–winning author Arundhati Roy.30

The 28-point indictment of the tribunal and the “jury” asserted that the Bank had actively helped to weaken Indian environmental law to benefit large corporate investments. It attacked the Bank for financing the privatization of power, water, education, and health, and for its promotion of user fees for these services, making them unaffordable for India’s poor and leading to their “deepening deprivation.” It lambasted the Bank’s support for carbon trading as subsidizing a private market for selling greenhouse-gas emissions that “in practice is doing nothing to reduce them.” “Our conclusion based on these testimonies,” the tribunal wrote, “is that the majority of World Bank–sponsored projects do not serve their stated purpose, nor do they benefit the poor of India. Instead in many cases, they have caused grievous and irreversible damage to those they intend to serve.”

Several prominent economists who had worked at the Bank for years have been no less withering in their analysis. Take Herman Daly, who worked at the Bank from 1988 through 1994. Daly is famous worldwide as a proponent of ecological economics; for Daly our world economic system, based as it is on an assumption of limitless growth, is on an ultimate collision course with the ability of the Earth’s ecological systems to sustain human populations. In his view, national economies, as well as the world economy itself, will have to adopt totally different goals and values, namely those of a steady state in terms of traditional material growth and the use of resources. A steady-state economy would not preclude development in the sense of technical progress and social welfare. It was a credit to the World Bank at the time that they employed him. But in a September 2011 interview Daly was brutally blunt. He observed that at first he thought that he and the Bank’s environmental staff “at times were being persuasive. But eventually I came to believe that it was really a lost cause and mainly window dressing.” In his view the fatal flaw was the ideology of free-market growth, espoused by many economists and most Bank staff like the defining creed of a religious cult. “I don’t expect,” he stated, “anything good from the World Bank.”

One of the Bank’s top research economists for 17 years, William Easterly (now a professor of economics at New York University), wrote a book in 2001 concluding that every approach to economic development the Bank had undertaken since the 1950s had failed. He was forced to resign after making the mistake of further publishing his findings as an op-ed piece in the Financial Times. One of his main conclusions was that top-down, centralized institutions like the World Bank, with pretensions to global knowledge, global plans, and global solutions, inexorably fail. In 2007 he described the World Bank as the “High Church of Development.” Dead serious, but also with black humor, he wrote: “A dark ideological specter is haunting the world. It is almost as deadly as the tired ideologies of the last century—communism, fascism, and socialism—that failed so miserably. It feeds some of the most dangerous trends of our time, including religious fundamentalism. It is the half-century-old ideology of Developmentalism. And it is thriving.”

Harvard professor Lant Pritchett worked for nearly 20 years at the World Bank, from 1988 to 2007, co-authoring a number of key policy documents in the early 2000s. In September 2010, at a seminar sponsored by the Bank, he let loose. “Economic analysis played zero role in financing decisions [at the Bank],” he declared. “To stop projects was a career killer.” He was reported to “liken the World Bank to a coalition of single-interest groups,” observing “that entrenched single-issue advocacy groups [within the Bank] defend their political entitlement to finance their sectors, too often without adequate economic rationale.”

Easterly and Pritchett contend that the Bank only pretends to use rigorous economic analysis in designing its loans—in reality, the focus is on getting the money out the door, and the various Bank policies and procedures are window dressing. For Herman Daly the argument is not about reforming the Bank to be made more effective in promoting economic growth— rather, the whole ideology of growth is a dead end.

As we shall see in the course of this book, both analyses are correct, and on a deeper level not contradictory: the Bank’s perverse internal incentives are a fundamental problem, and the global environment cannot be sustained without challenging the ideology of limitless economic expansion.

Environmental Failures

Despite the billions the World Bank reported it was lending for environmental and natural-resources management, allegations proliferated in the 2000s that it was more of a menace to the global environment than a solution. These accusations percolated upwards from nongovernmental groups to governments and parliaments.

In June 2011 the United Kingdom House of Commons Environmental Audit Committee lambasted the Bank, calling into question the environmental impacts of the Bank’s lending for agriculture and forestry, as well as extractive industries such as mining, oil, and gas. The Committee recounted that “witnesses highlighted several examples including support for asparagus cultivation in Peru which has resulted in fast depletion of ground water, investments which encourage extensive exploration in the Amazon region for oil and gas for export, and support for off shore oil exploration off the coast of Ghana which would dump the drilling waste at sea.” The committee chair, Joan Walley, declared that “the World Bank should not assume continued support [from the UK] unless it changes its ways.”

The Commons Environmental Audit Committee’s biggest concern was what it characterized as the Bank’s climate-destroying energy portfolio, particularly shocking given that major donor countries to the Bank had contributed many billions of additional funds to mitigate global warming by reducing carbon-intensive energy use in developing nations.

In recent years the Bank claimed to have made fighting climate change, which many scientists believe is the world’s gravest ecological challenge, a top environmental priority. Under Zoellick the World Bank positioned itself to be the world’s leading public climate banker; in 2008 industrialized countries chose it to administer some $6.7 billion in new “Climate Investment Funds” to finance clean, low-carbon energy in developing countries as well as to assist poorer countries in adapting to global warming that is already occurring. Later, at the Cancun, Mexico, international climate treaty negotiations in 2010, the richer industrialized countries also chose the World Bank to manage as interim trustee the first $30 billion of a Green Climate Fund, which is supposed to disburse $100 billion a year by 2020. Additionally, the Bank was a pioneer in jumpstarting the global carbon market: in the decade starting in 2000, with support from rich countries, it established 13 global funds with over $3 billion of assets to promote global trading of carbon-emission-rights off sets.

All of this new climate money was managed by the Bank outside its much larger main lending portfolio. The environmentally minded British Members of Parliament seemed to think that giving more money to the Bank for climate mitigation was throwing good money after bad. “The current state of the World Bank’s lending to support fossil-fuel-powered energy generation is unacceptable and counterproductive,” the committee asserted. In 2010 alone the Bank’s total energy lending totaled about $10 billion, of which roughly $6.5 billion was for fossil fuels, and only $3.5 billion was for energy efficiency and renewable power such as wind, solar, geothermal, and small hydropower. The Bank inflated these 2010 green power figures by counting disbursements from these separate donor climate funds—by one estimate between $520 and $870 million.

In fact, from 2007 to 2010 the Bank lent as much for coal-fi red power development—coal being the most carbon-intensive of all fuels—as the total amount donors put into the Climate Investment Funds. It financed two giant coal plants in India and South Africa that will be among the 50 biggest sources of greenhouse-gas emissions on Earth. The South African plant, Medupi, will be the fourth-largest coal plant on Earth, and its annual GHG emissions will exceed those of 135 of the world’s 212 nations. Thus it was no surprise that the UK House of Commons committee concluded that “the World Bank is not the most appropriate channel for future UK climate finance. It undermines our low-carbon objectives.”

“A Decade of “Mainstreaming the Environment”

Was there indeed a pervasive culture of perverse incentives at the Bank—all the more pervasive, in fact, because it was unwritten?

The Bank’s own internal studies over the years revealed that the institution’s environmental failures were often rooted in deep-seated patterns of behavior. A year before the Tiger Summit, in 2009, the Independent Evaluation Group made a damning assessment of the Bank’s record of sustainable development. Its institution-wide Environmental Strategy, launched in 2001, was supposed to go beyond a “do no harm” agenda, which in theory was already achieved by the Bank’s environmental procedures and safeguards.(The reality was quite different, as the study of projects affecting tiger habitat shows). The strategy proclaimed that the next step would be “mainstreaming” environmental concerns into all of the Bank’s lending: for example, into its infrastructure, agriculture, and forestry projects. The IEG concluded that since 2001 “preliminary indicators suggest that mainstreaming has decreased in some sectors, such as agriculture, energy and transport...”

Environmental components of projects were, on average, less successful than other aspects of Bank lending. “The Bank’s record on environmental stewardship has been uneven,” IEG concluded with typical understatement. In fact, it found that the Bank only attempted to systematically track the results of about one-quarter of all the environmental projects it was involved in.

To understand what really drove the Bank’s environmental failures, whether it was inadequate monitoring of its projects, or lending for big projects without proper consideration of environmental safeguards, the IEG singled out a finding that internal Bank reports and external studies of the institution had emphasized for many years. Like a Greek chorus, these studies had bemoaned for over two decades the Bank’s pervasive “culture of [loan] approval”—the drive to get projects launched. This has resulted in tragedies for the environment and for some of the poorest people on Earth. “Staff and management performance evaluations depend greatly on project approvals,” the IEG observed. “If it were known that approvals depended on having solid information on the results of similar projects, behavior might change significantly” (emphasis added). The IEG report went on: “Internal incentives favor projects with large commitments [of money], which can disadvantage environmental initiatives.” Managers and staff preferred large infrastructure, for example, for electric-power generation, rather than energy-efficiency investments.

Bank finance for environmental purposes had increased in recent years, mainly because, as noted above, rich industrialized countries chose the Bank to administer special new funds dedicated to the environment, funds that were technically not part of the institution’s main lending portfolio but that were used in practice to top it off.

Such findings were old news, and they raised troubling questions about the credibility of the Bank as an international development institution and as a trustee of public money. Yet, as we shall see in later chapters, the Bank’s donor countries, and especially the borrowers, were not particularly interested in changing this state of affairs.

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