Why we should be worried by the World Bank shoveling $36bn to ‘financial intermediaries’

April 2, 2015 0 By Duncan Green

Everyone’s heard of the World Bank, but far fewer people know of its private sector arm, the International

Look on our logos ye mighty, and despair!

Look on our logos ye mighty, and despair!

Finance Corporation, which describes itself as ‘the largest global development institution focused exclusively on the private sector in developing countries’. It’s huge and growing, and it’s got some nasty skeletons in its cupboard – today it comes in for a good kicking from The Suffering of Others, a report by a logotastic coalition of 12 NGOs, including Oxfam, ahead of the World Bank Group Spring Meetings.

Nearly two thirds of the IFC’s lending goes to the financial sector, mainly to ‘financial intermediaries’ (FIs), including commercial banks, private equity and hedge funds.

Now there’s no question that poor countries and people need access to finance: access to financial services and private finance plays a critical role in economic and social development, and is often sorely lacking. The trouble arises because the IFC is shovelling billions into FIs in a ‘hands off’ strategy that has led to some spectacular own goals – the report brings together some horrific case studies of the social and environmental impact of these loans, including rubber, sugarcane and palm oil plantations in Cambodia, Laos and Honduras, a dam in Guatemala and a power plant in India. Other risky projects include yet more power plants and dams in West Papua, Laos and Guatemala, a mine in Vietnam, and sugar plantations in Guatemala.

In the words of one community representative from Cambodia, ‘We want the World Bank to know that its money is being used to destroy our way of life. Nowadays, we are surrounded by companies. They have taken our community lands and forests. Soon we fear there will be no more land left for us at all and we will lose our identity. Does the World Bank think this is development?’

That Cambodian community and a number of others have taken complaints to the World Bank’s Compliance Adviser/Ombudsman (CAO), and the IFC has promised to shape up, but the report argues that it has made nowhere near enough progress to date.

Anti-dam protest by indigenous people, Guatemala

Anti-dam protest by indigenous people, Guatemala

In addition to the direct impact in destroying the lives of poor communities, this matters for at least two further reasons – the IFC is increasing its exposure in fragile states (where safeguards and rule of law are particularly absent) by 50 per cent, and lots of other big lenders are jumping on the FI bandwagon, from the Brazilian development bank BNDES and the European Investment Bank, to the Green Climate Fund and the new Global Infrastructure Facility.

I started to think about the report from a systems perspective: if financial lending takes place in a complex system, then it is impossible to predict the impact of any given loan in advance – demanding total prior knowledge of impact is effectively saying you are opposed to all loans. The report doesn’t say that – what it mainly argues for is much better systems of transparency, feedback and self correction, which is just what you need in a complex system. Currently, the IFC is falling way short on all three. For example, how can feedback systems work when  in 94% of the IFC’s highest risk investments in the last two years, there is no information publicly available about where the investment has ended up on the ground?

But if it can get the right combination of as good an ex ante risk assessment as possible, coupled with proper feedback loops and response mechanisms, it could provide a useful model for others.

Last year on this blog, Peter Chowla explored the choices facing civil society organizations on this shift towards the use of FIs – definitely worth another read:

‘Success stories, such as Korea, Taiwan and China, relied on a heavily regulated domestic financial sector that supported

The wrong kind of financial intermediary

The wrong kind of financial intermediary

industry. The IFC doesn’t seem to have this in mind, but instead prioritises “financial deepening” and “financial inclusion”, as fuzzy as any concepts in the development lexicon.’

Peter set out ‘three possible approaches civil society could take: asking for stronger rules and transparency; investing in ‘better’ private financial institutions; or throwing it all out the window and demanding public (not private) sector finance.’ This report seems to be going for the first.