Difficult beginnings between the UN and the World Bank

22 October 2006 by Eric Toussaint


 SUNFED versus IFC and IDA

ABSTRACT [1]: The World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
are specialized institutions of the UN, comparable in theory to the International Labour Organization (ILA) or the Food and Agriculture Organization of the United Nations (FAO). As such, they are supposed to cooperate closely with the various UN bodies and the other specialized institutions to achieve the objectives set out in the Charter and in the Universal Declaration of Human Rights.
From the outset, the World Bank and the IMF attempted to extricate themselves to a large extent from the obligations that bind member organizations of the United Nations system. In the case of the Bank, while its development aid mission should have led it to seek a
rapprochment with the UN, its directors consistently managed to place the Bank outside the UN’s sphere of authority. The Bank and the IMF were instrumental in heightening the Cold War, and later, in playing on the reactions of leaders in the most industrialized countries to the growing influence of developing countries calling for a new world economic order.

Having no Marshall Plan Marshall Plan A programme of economic reconstruction proposed in 1947 by the US State Secretary, George C. Marshall. With a budget of 12.5 billion dollars (more than 80 billion dollars in current terms) composed of donations and long-term loans, the Marshall Plan enabled 16 countries (notably France, the UK, Italy and the Scandinavian countries) to finance their reconstruction after the Second World War. to promote their growth, the developing countries proposed that a new UN body be created, based on a “one country, one vote” system designed to facilitate loans to their industries: SUNFED (Special United Nations Fund for Economic Development). The industrialized countries were fiercely opposed to this move, and successfully imposed a counter-proposal, the International Development Association (IDA), a branch of the World Bank, thus effectively putting an end to SUNFED.

 Early relations with the UN

In March 1946, on the occasion of the first meeting of the governors of the World Bank and the IMF, the president of the Economic and Social Council of the United Nations [2] (known by the acronym ECOSOC) handed a letter to the directors of the World Bank asking it to set up liaison facilities with its organization. The Bank postponed discussion of this issue until the executive directors’ meeting to be held in May 1946. In fact, the Bank dragged its feet so successfully that it was only in November 1947 that an agreement between the two parties was found. According to Mason and Asher, the Bank’s historians, the negotiations were not particularly cordial [3]. The first letter from ECOSOC having gone unanswered, a second letter was sent, to which the executive directors of the Bank replied that, in their view, a meeting on the subject would be premature. Meanwhile, the United Nations had already signed cooperation agreements with the International Labour Organization, UNESCO and the FAO.

In July 1946 a third attempt was made when the UN Secretary General proposed that the Bank and the IMF begin negotiations in September 1946. The directors of the IMF and the World Bank subsequently met and decided that such a meeting was still not timely. This is what Mason and Asher had to say about these stalling tactics: The Bank was very fearfull that becoming a specialized agency of the UN would subject it to undesirable political control or influence and hurt its credit rating in Wall Street ... [4]. The Bank finally adopted a draft text to be submitted for discussion with the United Nations; this text was more a declaration of independence than a declaration of cooperation. Then followed a day of discussions at UN headquarters, during which the Bank’s president, John J. McCloy, agreed to exercise a little more moderation.

The resulting agreement was accepted by ECOSOC’s negotiating committee, but it raised a furore within ECOSOC itself and at its General Assembly. During ECOSOC’s 1947 session, the Soviet Union delegate described the draft agreement as a flagrant violation of at least four articles of the UN Charter. Even more embarassing for the Bank’s directors, and obliquely, for the United States, was the attack led by the delegate from Norway (the native country of the current UN secretary general, Trygve Lie). He declared that Norway could not tolerate such privileges being granted to the Bank and the IMF, because it would undermine UN authority. To which the United States delegate retorted that nothing would undermine UN authority more than the impossibility of its coming to an agreement with the Bank and the IMF. Finally, ECOSOC adopted (13 for, 3 against and 2 abstentions) the draft text which was ratified in September 1947 by the Bank’s governing council (the governor representing Yugoslavia abstained). The agreement was approved by the UN General Assembly in November 1947.

This agreement ratified the Bank’s status as a UN specialized agency, but, at the Bank’s request, allowed it to operate as an “independent international organization”. Following the same line, it authorized the Bank to use its own judgment as to what information could be usefully communicated to ECOSOC, which constituted a departure from article 17, paragraph 3 and article 64 of the United Nations Charter (article 64 gives ECOSOC the right to obtain regular reports from specialized agencies). It was also a departure from article 70, which allows for reciprocal representation at each deliberation. Yet in spite of this, the Bank and the IMF reserved the right to invite UN representatives only to the meeting of the Governing Council. In reviewing these events, the Bank’s historians declare that this agreement was considered unsatisfactory by the United Nations secretariat, but that it felt obliged to accept it. They go on to say that the Bank’s president, “McCloy, could not be classified as a admirer of the United Nations, and Garner (the Bank’s vice president) was considered anti-UN” [5].

The creation of the IFC and IDA [6]

From the beginning of World Bank operations, the governments of developing countries, starting with Latin America and followed by India, criticized the fact that their countries enjoyed no aid facilities similar to those of the Marshall Plan, which was restricted to Europe. Indeed, World Bank loans were granted at current market interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, while Marshall Plan aid was mainly given in the form of grants. A small proportion of Marshall Plan aid was in the form of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -free loans or loans with interest rates lower than those of the market.

In 1949, an Indian economist proposed creating a new international organization within the framework of the UN. He suggested it be called the “United Nations Administration for Economic Development”. Some years later, the same idea took shape within ECOSOC, and SUNFED (Special United Nations Fund for Economic Development) was set up. From 1950 to 1960, several Third World countries, as well as the USSR and Yugoslavia, waged a systematic campaign within the UN to consolidate and reinforce SUNFED. For the US government and the governments of the other major industrial powers, the idea of a special fund controlled by the UN and separate from the World Bank was unacceptable.
Among the reasons behind the developing countries’ demand for a specialized UN agency to finance their development was the question of voting rights. They wanted a UN specialized agency in order to ensure that the “one country, one vote” rule was applied, as opposed to the census-type rule applied within the Bank. The same reason - but in reverse - was behind U.S. and other major powers’ opposition to the proposal: the small number of rich countries were afraid of becoming minority voters.

As recounted by the Bank historians, Mason and Asher, and later by Catherine Gwin, in 1954 the United States made a first counter-proposal which the Bank put into practice in 1956 with the creation of the International Finance Corporation (IFC), whose role was to grant loans to private sector companies in developing countries [7]. This new initiative failed to quell dissatisfaction and the developing countries’ campaign in favour of SUNFED gained strength: in 1958, this Special United Nations Fund was authorized to finance pre-investments in developing countries.

Unfortunately, the Third World camp quickly became divided. India, which had originally supported SUNFED, switched allegiances and declared itself favourable to the second U.S. counter-proposal. This proposal involved the creation of an International Development Association (IDA), linked to the World Bank, as an alternative to SUNFED [8]. The pro-Washington Indian lobby Lobby
Lobbies
A lobby is an entity organized to represent and defend the interests of a specific group by exerting pressure or influence on persons or institutions that hold power. Lobbying consists in conducting actions aimed at influencing, directly or indirectly, the drafting, application or interpretation of legislative measures, standards, regulations and more generally any intervention or decision by the Public Authorities.
was convinced that India would benefit from IDA since the major powers predominating in the Bretton Woods institutions would understand the necessity of giving India special treatment in view of its strategic position. And India was right: in the first year of IDA activity, it received 50% of IDA loans.

By proposing the creation of IDA, the U.S. government had a dual objective: on the one hand to prevent the United Nations continuing to reinforce SUNFED and thereby satisfying the needs of developing countries; on the other hand to find a way of using the currency reserves of developing countries that the U.S. Treasury had been piling up since 1954 through the sale of its agricultural surpluses under Public Law 480 [9]. Several authors agree that it was Senator Mike Monroney of Oklahoma who first floated the idea: he put a resolution before the Senate for the establishment of an IDA in cooperation with the World Bank and proposing that non-convertible currency reserves should be paid into this agency in order to grant long-term, low interest loans that would be paid back in local currency. Basically it meant that loans would be made to poor countries so that they could buy North-American agricultural surpluses [10]. Eugene Black, president of the World Bank, would later say: “IDA was really an idea to offset the urge for SUNFED” [11]. It is worth quoting Mason and Asher here: “As an international organization affiliated with the World Bank, IDA is an elaborate fiction. Called an « association » and possessed of Articles of Agreement, officers, governmental members galore, and all the trappings of other international agencies, it is as yet simply a fund administered by the World Bank.” [12]
The United States provided 42% of IDA’s initial funding, thus ensuring U.S. predominance within the agency.

At the same time that IDA was founded, the DAC (Development Assistance Committee of the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/
) was being set up in Paris. This was a structure designed to “coordinate” bilateral development aid from the most highly industrialized countries. This spelt the final demise of SUNFED, the United States having imposed institutions where U.S. control could be guaranteed.

 IDA financing

IDA does not borrow on the financial markets. The money it lends comes from donations made regularly by member countries (mainly the most wealthy industrial countries, and also the Petroleum Producing Countries (OPEC OPEC
Organization of Petroleum-Exporting Countries
OPEP is a group of 11 DC which produce petroleum: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. These 11 countries represent 41% of oil-production in the world and own more than 75% of known reserves. Founded in September 1960and based in Vienna (Austria), OPEC is in charge of co-ordinating and unifying the petroleum-related policies of its members, with the aim of guaranteeing them all stable revenues. To this end, production is organized on a quota system. Each country, represented by its Minister of Energy and Petroleum, takes a turn in running the organization. Since 1st July 2002, the Venezuelan Alvaro Silva-Calderon is the Secretary General of OPEC.

OPEC : http://www.opec.org/opec_web/en/
) since the 1970’s, and from the repayments which it receives.

Every three or four years, the contributing countries haggle over the kitty. It is the stuff of great debates in the U.S. Congress, which is where the payouts are decided. Bargaining proceeds smartly between Congress, the Washington government and the U.S. presidency of the World Bank/IDA. Yet the amounts at stake are actually very modest. What is really important is to ensure that money loaned by IDA comes back to the donors in the form of purchases (linked aid) [13].

The World Bank’s refusal to comply with UN demands concerning Portugal and South Africa

From 1961, when most colonial countries had won their independence and become UN members, the General Assembly on several occasions adopted resolutions condemning the apartheid regime in South Africa and Portugal’s iron dominance over several African and Asian countries. In 1965, in view of the continued financial support of the Bank and the IMF for these regimes, the UN made a formal demand: “To all the specialized agencies of the United Nations, and in particular the International Bank for Reconstruction and Development and the International Monetary Fund (...) to refrain from granting Portugal any financial, economic or technical assistance so long as the Portuguese Government fails to renounce its colonial policy, which constitutes a flagrant violation of the provisions of the Charter of The United Nations” [14]. It issued a similar demand concerning South Africa.

The Bank’s directors met to take position and a majority of executive directors decided to continue making loans. To justify this decision, they invoked article 4, section 10 of the Bank’s statutes [15] which forbid political involvement! All the most industrialized countries, backed by a certain number of Latin-American countries, voted to continue the loans. In 1966, the Bank approved a 10 million dollar loan to Portugal and a 20 million dollar loan to South Africa. Subsequently, under further pressure, the Bank stopped making new loans to these countries. However, a UN structure, the Decolonization Committee, continued for 15 years to denounce the fact that the Bank allowed South Africa and Portugal to apply for World Bank financing for projects in other countries. In addition, the Bank sought the favours of South Africa to obtain donations to IDA [16].




Copyright: Eric Toussaint 2006.
Translated by Judith Harris.

Footnotes

[1This text was first published in French in Eric Toussaint, Banque Mondiale: Le Coup d’Etat permanent, CADTM-Syllepse-Cetim, Liège-Paris-Genève, 2006, chapter 3. The book will be published in English in 2007. Copyright: Eric Toussaint 2006. See also The Creation of the Bretton Woods Institutions http://www.cadtm.org/article.php3?id_article=1986

[2The Economic and Social Council of the United Nations makes recommendations with a view to coordinating the programmes and activities of the specialized institutions of the UN (article 58 of the United Nations Charter). To this end, ECOSOC enjoys powers which are granted to it by virtue of the terms of Chapter X of the Charter. Article 62 paragraph 1 thus states: “The Economic and Social Council may make or initiate studies and reports with respect to international economic, social, cultural, educational, health, and related matters and may make recommendations with respect to any such matters to the General Assembly, to the Members of the United Nations, and to the specialized agencies concerned.”

[3Mason Edward S. and Asher, Robert E. 1973. The World Bank since Bretton Woods, The Brookings Institution, Washington, D.C., p.55.

[4Idem, p.56.

[5Ibid., p.59.

[6This section is largely based on Van de Laar, Aart. 1980. The World Bank and the Poor, Martinus Nijhoff Publishing, Boston/The Hague/London, 1980, p. 56-59 ; Mason Edward S. and Asher, Robert E. 1973. The World Bank since Bretton Woods, The Brookings Institution, Washington, D.C., pp. 380-419 ; Gwin, Catherine. “U.S. relations with the World Bank, 1945-1992”, in Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 2, pp.205-209; Rich, Bruce. 1994. Mortgaging the Earth, Earthscan, London, p.77.

[7Mason Edward S. and Asher, Robert E. 1973. p.384-385 ; Gwin, Catherine. in Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. p.206 ; Van de Laar, Aart. 1980. p.57.

[8Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1, p. 1127

[9Van de Laar, Aart. 1980. p.57; Gwin, Catherine , in Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. p.206; Mason Edward S. and Asher, Robert E. 1973. p.386-387.

[10Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1, p. 1128

[11Mason and Asher, p.386.

[12Mason and Asher, p.380-381.

[13Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1, p. 1149.

[14UN Doc. A/AC.109/124 and Corr. 1 (June 10, 1965).

[15Article IV, section 10 stipulates : “The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially in order to achieve the purposes (set by the Bank) stated in Article I ”. See chapter 6.

[16Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1, p. 692

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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