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News & Notices December 1997

for World Bank Watchers

TABLE OF CONTENTS

Acronyms p. 2 Quotes p. 3 I. New Bank Management Plans Nearly 70% Increase In Lending In Two Years p. 4 II. New Products Recently Approved By Bank’s Board p. 9

A. Adaptable Program Loans & Learning And Innovation Loans p. 9 B. The World Bank Encourages Private Provision Of Infrastructure p. 12 1. World Bank Group Services p. 13

2. Incentives To Governments p. 13 3. IDA Guarantees p. 15

4. Other New Products p. 17 5. MIGA Guarantees p. 19 6. Questions And Concerns About Guarantees

p. 19 7. Securitization And Capital Mobilization Using Bank Or IDA-Financed Assets p. 20

III. United States Congressional Action p. 22 A. Foreign Aid And The World Bank p. 22 B. IMF Issues p. 25 C. Other: WTO Hears From Congress p. 28 IV. New And Noteworthy Publications p. 29 BOXES: 1: The Two Dimensions Of The Reorganized World Bank p. 6 2: Guarantees: Understanding The Terminology p. 14 3: Understanding Performance Triggers p. 16 4: How Does Securitization Work? p. 21 5: FY98 Foreign Aid Conference Report And Associated Remarks By Sen. Leahy p. 23 6: Appropriations To The Multilateral Development Banks, FY 1998 p. 25 7: What Is The Capital Account? p. 28

Contact: Globalization Challenge Initiative 7000-B Carroll Avenue Suite 101 Takoma Park, MD 20912 (301) 270-1000 FAX (301) 270-3600 E-mail: ncalexander@igc.org Bread for the World Institute 50 F Street, NW Suite 500 Washington, DC 20001 Phone: (202) 639-9400 Fax: (202) 639-9401 e-mail: sgrusky@bread.org

Note: This publication is prepared collaboratively by Nancy Alexander of the Globalization Challenge Initiative and the Bank Watchers’ Project at Bread for the World Institute with assistance from Ford Foundation and John D. & Catherine T. MacArthur Foundation.

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Acronyms APL Adaptable Program Loan CAS Country Assistance Strategy IBRD International Bank for Reconstruction and Development (also known as the World Bank) IDA International Development Association (also known as the World Bank) IFC International Finance Corporation (member of World Bank Group) ESAF Enhanced Structural Adjustment Facility (administered by IMF) LIL Learning and Innovation Loan MIGA Multilateral Investment Guarantee Agency (member of World Bank Group) NAB New Agreements to Borrow (administered by IMF) WTO World Trade Organization

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Americans should not deny the fact that of all the nations in the world, theirs is the most just

and the best model for the future. — David Rothkop. "In Praise of Cultural Imperialism?" Foreign Policy. Summer 1997. p. 47*

Through the International Monetary Fund (IMF) and other international economic institutions,

the West promotes its economic interests and imposes on other nations the economic policies it thinks appropriate...Non-Westerners do not hesitate to point to the gaps between Western principle and Western action. Hypocrisy, double standards, and ‘but nots' are the

price of universalist pretensions. Democracy is promoted but not if it brings Islamic fundamentalists to power; nonproliferation is preached for Iran and Iraq but not for Israel; free

trade is the elixir of economic growth, but not for agriculture; human rights are an issue with China but not with Saudi Arabia; aggression against oil-owning Kuwaitis is massively

repulsed but not against non-oil-owning Bosnians. Double standards in practice are the unavoidable price of universal standards of principle.

— Samuel P. Huntington.The Clash of Civilizations and the Remaking of World Order. (New York: Simon and Schuster, Inc., 1996). (Chapter 8, cited in Harvard Magazine

January - February 1997).

...when two concepts [the market and democracy] are contradictory, one of them has to come out on top. It seems obvious that, all over the world, the market economy today is

more dynamic than democracy. Stronger forces are backing it...As legislatures and courts lose power to central banks and corporations, market elites will become stronger than

democratic elites, further shrinking the reach and appeal of the public sphere...Eventually, democracy will fade away, having been replaced by market mechanisms and corruption.

— Jacques Attali. "The Crash of Western Civilization: The Limits of the Market and Democracy." p. 60.

...globalization increases the demand for social insurance while simultaneously constraining

the ability of governments to respond effectively to that demand. Consequently, as globalization deepens, the social consensus required to keep domestic markets open to

international trade erodes. — Dani Rodrik. "Sense and Nonsense in the Globalization Debate.” p. 26

Currently, the WTO Agreement on Safeguards allows member states to impose temporary

trade restrictions following an increase in imports — but only under a stringent set of conditions. One could imagine expanding the scope of the agreement to include a broader

range of circumstances, reflecting concerns over labor standards, the environment and even ethical norms in the importing country.

— Dani Rodrik. "Sense and Nonsense in the Globalization Debate." p. 36

*Quotes (except Huntington's) are from this issue of Foreign Policy.

QUOTES

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I. New Bank Management Plans Nearly 70% Increase In Lending In Two Years ...anyone even slightly familiar with history will find unsettling parallels between the present

situation and the onset on the Great Depression. Then as now, stock markets worldwide crashed; then as now, banking crises depressed production and employment; then as now, government officials professed optimism.

--Robert J. Samuelson. "The Asian Connection." The Washington Post. December 10, 1997. With global markets in turmoil, debate is erupting over the role of the IMF and World Bank relative to the crises. Politicians and pundits are seeking to allocate blame and responsibility. They are asking: Should these institutions shoulder some blame for the crises? What responsibility should they have for addressing the crisis? One thing is sure: more huge infusions of money will be required before the troubled economies can right themselves. Section III(B) deals with the IMF's financial requirements. When the U.S. Congress convenes in January, the question of whether the U.S. should provide financial guarantees needed to underpin expansion of the IMF's resources will be wildly controversial. Even prior to the market turmoil, the World Bank was planning a dramatic expansion in its lending. A long-awaited cost-effectiveness review (CER) performed by an independent firm, KPMG, and Bank management has just been delivered to the Bank's Board of Directors.1 The CER analyzes the business processes associated with several areas of work [the lending decision process, performance of economic and sector work (ESW), information systems2 and real estate]. It concludes that increased demand for improved Bank services could boost lending from the fiscal year 1997 total of $19 billion to $25 billion per year. Bank management has more ambitious plans. Even in the face of a sharp decline in adjustment lending from 26% (FY97) to 11% (FY99), the Bank plans to increase its overall lending by almost 70%. Put another way, this is an increase of more than two-thirds in the total lending volume in two years. Specifically, the Bank plans to balloon its lending from $19 billion in fiscal year 1997 (FY97) to $33 billion in FY99 and then contract moderately to $27 billion in FY00. The Bank will not be capable of meeting these lending targets unless levels of adjustment lending increases dramatically! With the growing demands of governments in crisis, this may occur. Soaring lending volumes will be accompanied by a host of new initiatives, which are part of President Wolfensohn's Strategic Compact with the Board of Executive Directors. These initiatives would create stronger external partnerships; reinvigorate middle management; facilitate information and knowledge sharing; decentralize to countries; build professional development and excellence; and launch new products. Some new products are reviewed in Part II of this bulletin. 1 The CER (not the report by the independent firm) was transmitted to the Board.

2 One interesting finding of the CER is that the Bank consumes 900 million pages per year or 90,000 pages per staff member. This level of consumption is equivalent to felling 152 pulp trees per day.

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World Bank Lending Projections3

(millions of US$)

Past Current Planned Category FY 94-

96 FY94-

96

FY97

FY98 FY99 FY00 FY98-

00 Commitment (US$M) 21,570 Avg. % 19,559 28,087 33,129 26,941 Avg. %Sectors with High Lending 1. Transportation 2782 12.9 3736 4073 4969 4957 16.02. Agriculture 2739 12.7 3560 3651 4903 3502 13.63. Electric Power & Energy 2222 10.3 1917 3061 3346 2209 9.74. Education 1991 9.23 1017 2415 2882 1913 8.15. Finance 1978 9.17 1213 1685 2120 996 16.16. Multisector 1963 9.1 2151 2556 1888 700 5.8Other Sectors 7. Population, Health,

Nutrition 1467 6.8 997 1264 2948 3044 6.8

8. Urban Development 1273 5.9 821 1854 2253 1994 5.99. Public Sector Management 1165 5.4 1193 1769 1491 1536 5.410. Environment 906 4.2 215 645 1955 1697 4.211. Water Supply & Sanitation 863 4.0 684 1826 2286 2155 4.012. Social Sector 690 3.2 1369 1180 1027 1293 3.213. Oil & Gas 604 2.8 137 814 993 808 2.814. Industry 410 1.9 196 168 894 107 1.915. Telecommunications 259 1.2 - 112 331 - 1.216. Mining 237 1.1 313 1039 - - 1.1 Doing More with Less The Bank plans to lend much more and spearhead the initiatives listed above with a smaller staff. The cost-effectiveness review shows that the Bank can save $170 million per year by fiscal year 20014 and that about half of this total can be achieved by cutting staff costs. Layoffs are estimated to number 500 to 700. To understand how the Bank staff is shrinking, it is necessary to understand how the reorganized Bank works. A description of what is technically referred to as a “matrix management” system is provided in Box 1. Downsizing, in and of itself, is not bad. What matters is how the downsizing affects the incentives and capacities of the institution. Most Bank staff with whom we have spoken share the view that incentives are compromising the quality of Bank-financed operations. This view seems to be shared both by those who have secure jobs and those who do not.

3 World Bank. Health, Nutrition, and Population Sector Strategy. (Washington, D.C.: The World Bank, 1997). p. 73. 4 This estimate is $50 million higher than the estimate made in the Bank Strategic Compact.

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Many face job loss. They are being priced out of the Bank's internal market. The Bank has devised an internal pricing formula that doubles or triples the salary and overhead of staffers outside of the sector or region in which a project originates. Because of this scheme, the cost of hiring many staffers is prohibitively high. We know of one staffer who is required to bill his time at

Box 1

The Two Dimensions Of The Reorganized Bank Newly-appointed managers govern two parts of the reorganized Bank: (1) Country management units (CMUs), which have small staff and large budgets, are

organized into six geographical regions who demand expertise from... (2) Sector management units (SMUs), which have large staffs and small budgets, are

organized into Networks and which supply the expertise requested by the CMUs. Money and Staff. While CMUs usually employ very few people (a Country Director, plus some assistants), they control most of the Bank's resources. The SMUs which employ large numbers of staff have a budget that is only one-tenth that of the CMUs. Fiscal year 1998 budget allocations make it clear that CMUs hold the reins of power: the regions and CMUs have been allotted $776 million, whereas the Networks and SMUs received $80 million. Accountability. The CMUs and, ultimately, Country Directors, have responsibility and accountability for the size and quality of all Bank-financed operations in a country. SMUs and, ultimately, Sector Heads, contribute to quality control by (a) constituting task teams with the requisite skills; (b) designing and integrating sector strategies into country programs; and (c) ensuring the integrity of quality assurance operations. The "Master Plans." For each country under its auspices, a CMU drafts a Country Assistance Strategy (CAS) which constitutes the "master plan" for policy reforms and project investments in the country.1 The CMUs use their fat budgets to contract with individuals in the SMUs to carry out the master plan contained in the final CAS. If staff in SMUs do not have enough contracts, or work program agreements, with the CMUs, they could find themselves out of their jobs.

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the rate of $7,000 per week. Instead of contracting the Bank staff, many Team Leaders are hiring outside consultants to prepare and implement projects. This system is demoralizing staff and impairing the quality of Bank projects by inflating the costs of putting together multi-disciplinary teams to prepare or implement a project. In addition, some units (e.g., the central environment unit, called the "anchor") are being dissolved or torn apart (e.g., Asia Technical). In the long-run, it could be a benefit if environmental staff are being redeployed to operational units. But we understand that the CMUs’ demand for environmental scientists is declining. New Top Managers The Bank's new management has been appointed in waves, culminating in a shake-up among the Bank's top managers — called "Managing Directors" in November. In early 1998, we will send you a directory, Who's Who in the Reorganized Bank? to help you locate managers with whom you will be working. President Wolfensohn called for a "much stronger sense of teamwork" among Managing Directors and Vice Presidents.5 Wolfensohn said that in view of the "fundamental importance" of private sector issues to the success of the World Bank Group's mission, he would take over the leadership of the Private Sector Development Group from departing Managing Director, Richard Frank. The rapidly expanding orbit of this Group is described in Section II of this newsletter. There are four Managing Directors. Two deal with internal corporate issues; two with operational issues. The two dealing with internal issues are Bank Treasurer Jessica Einhorn and newly-appointed Corporate Secretary Shengman Zhang. Most recently, Shengman Zhang was the Executive Director for China at the World Bank and a member of the Global Environmental Facility Council. In his new position, he will oversee Board/management relations and administrative issues that cut across the World Bank Group, such as personnel, or Human Resources. He will also work with the Bank/Fund Development Committee and the Inspection Panel. Heretofore, two Operational Managing Directors — Gautam Kaji and Caio Koch-Weser — have been responsible for the operations of the Vice Presidents of the Bank's six geographical regions. Now, Managing Director Sven Sandstrom will take over an operational portfolio from the departing Gautam Kaji. The regional and substantive responsibilities of the Operational Managing Directors are outlined in the table below.

5 In addition to President Wolfensohn and the vice presidents, senior management consists of the Managing Directors, Vice President and Chief Economist Joseph Stiglitz, Legal Counsel Ibrahim Shihata, and the Chief Executive Officers of the IFC and MIGA.

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Sven Sandstrom Caio Koch-Weser

Regional Responsibilities

Africa East Asia and the Pacific

Europe and Central Asia Middle East and Northern Africa

South Asia Latin America and the Caribbean

Network (and SMU) Responsibilities6

Poverty Reduction & Economic Management (PREM) Finance, Private Sector, & Infrastructure (FPSI)

Human Development (HD) Environmentally & Socially Sustainable Dev. (ESSD)

6 The staff of the Bank’s four Networks work for the regional and country departments of the Bank.

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II. New Products

A. Adaptable Programs Loans (APLs) and Learning and Innovation Loans (LILs) 1. Background Recently, the Board approved use of Adaptable Program Loans (APLs) and Learning and Innovation Loans (LILs) in an attempt to overcome deep dissatisfaction with the Bank's current tool kit of lending instruments. Dissatisfaction has been ripe for many reasons: a. The time period between initiating a project and seeing any results on the ground is about 4 years, including two years to process and approve the loan and nearly two years to disburse 10% of the loan. The Bank gives an example of a project intended to protect a forest which was mostly destroyed during the extended project preparation. b. Standard assumptions of the project cycle — namely that a flawless "blueprint" can be designed at project initiation and successfully implemented in a multi-year timeframe. Such an approach may work for constructing a bridge that serves an important purpose. It doesn't work for heuristic, participatory development involving constant learning and involvement of the affected stakeholders (e.g,. post-conflict reconstruction, urban upgrading, dam construction, environmental protection, etc.) c. The "puppet master" approach to lending. This approach assumes an all powerful puppet master (i.e., a deus ex machina force, like the Wizard of Oz) residing among experts at the World Bank or their consultants that can pull the strings of a project or program, as if it were a puppet, and make it dance. Since stakeholders of are not inanimate objects, they often rebel. For instance, frequently governments do not comply with the conditions, sometimes called "bribes,"7 attached to loans. Even when a project is "successful," it can succeed for the wrong reasons. For instance, when Zimbabwe's loan portfolio8 improved significantly, the Operations Evaluation Department (OED) of the Bank discovered that it was because World Bank officials were very successful in identifying and designing projects. Zimbabwe's loan portfolio should improve when Zimbabweans are involved and excited about preparing projects that will improve their lives. d. Sluggish disbursement of money.Partially as a consequence of the above factors, governments are often sluggish in disbursing projects which has impeded the Bank's ability to meet its lending targets. 7 Paul Collier is slated to take a new position as Director of Research at The World Bank. Currently, he is based at Oxford's Centre for the Study of African Economies and is an external evaluator of the IMF's ESAF. He has documented how conditions, as "bribes," tend to fail.

8 A loan "portfolio" is a collection of loans. A country loan portfolio is the collection of loans to a country. For instance, Since 1980, the Bank has approved 28 operations in Zimbabwe totalling $1.4 billion. At the end of fiscal year 1996, the Zimbabwean portfolio of active loans consisted of one adjustment loan ($125 million) and eight projects ($419 million).

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Bank officials suggest that the new products are a retail, rather than wholesale, approach to lending. The retail approach assumes that behavioral human variables matter. Preparation of these "retail" loans is less costly, but supervision and other transaction costs are higher. 2. Adaptable Program Loan (APLs) The adaptable program loan is a loan with a long-term development purpose and a phased-in implementation process. It provides continuous and dependable support for a borrowing government to address development problems, particularly when many stakeholders are involved. The APL allows the borrower to pilot test solutions to development problems in ways that could reduce the risk and exposure of the World Bank. That is, if pilot schemes fail, the borrower and the Bank can cut their losses and close the project. If successful, pilot exercises can be scaled up with greater levels of certainty about project viability. The APL is seen as "client friendly" because: • the Bank can tell the borrower: "ready [for financing] when you are;" • the Bank and the borrower can focus on development results;9 and • the APL designs will be simple. Complex loans which are front-loaded with multiple

conditions frequently fail. The Bank believes that, to a modest degree, the APL will boost demand for Bank loans insofar as the borrower might be less likely to seek alternative funding sources if World Bank support were long-term and dependable. Eventually, demand for APLs is expected to rise to the level of twenty per year at an average size of $50 million each for a total of $1 billion, or about 5% of Bank lending. The Bank's Board of Directors approves the project concept, an upper limit for total financing, and the first installment, or tranche, of the loan. At this initial stage, only initial investments are prepared for financing. Subsequently, Bank management have the authority to approve successive tranches. The APL is a variation on the current Sector Investment Loan [also the Sector Investment and Maintenance Loan (SIM)], which is used to coordinate donor activities in a sector by, for instance, a phased approach of building capacity and then making strategic investments in, for instance, sector restructuring and reform. The Bank cites important applications as including: • female literacy programs • environmental protection 9 The 1992 Wapenhans portfolio evaluation pointed to the complexity of loans as a factor in their failure. The evaluation also stated that a principal cause for poorly performing loans was the "approval culture" of the Bank, wherein Bank management spent inordinate amounts of time and money getting projects prepared for Board approval. Little time or money was spent on implementing and supervising projects to obtain the desired outcomes. Wolfensohn pledged to shift the Bank from an approval to an implementation culture.

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• basic rural health care • institution building • research • social forestry • reform processes. 3. Learning and Innovation Loans (LILs) The LIL is a small APL, which does not require Board approval. Like the APL, it allows a "grow-as-you-go" approach to lending in which iterative learning and testing of solutions can occur. As a rule, an LIL will not exceed $5 million. The Bank's master plan for each borrowing country, the Country Assistance Strategy (CAS) will specify the upper limit or number of LILs allowed in the timeframe of the CAS. After testing the demand for LILs in more than 20 countries, the Bank is projecting a demand for 50 LILs per year at approximately $4 million each for a total of $200 million in annual commitments. These loans are viewed as high-risk and low-exposure. Bank management10 notifies the Board of approvals. Bank officials say that certain circumstances (e.g., a newly elected government or regional challenges, such as coastal management or soil conservation) may merit issuance of clusters of LILs. In some circumstances, borrowers may wish to create regional facilities to deal with a specific development challenge. 4. Examples of APL and LIL Loans: Mexico: Rural Development in Marginal Areas. This project involves the Bank, the Food and Agricultural Organization (FAO), civil society organizations, and governments in four states, in participatory preparation of a project to benefit the poorest populations of the region. As learning occurs, the project could expand into 20 marginal areas. Indonesia: Coral Reefs Program. Several donors, the Government of Indonesia, and the Bank will engage communities in the management of coral reefs. The first phase involves a community pilot and development of a national policy framework. India: Haryana Power Restructuring. The project will attempt to reform the power sector in several states in order to break down state monopolies and launch regulated, commercial entities. Russia: CAS Program of Supplemental Lending. Supplemental lending will expand successful projects in areas such as environmental management, urban transportation, and highways.

10 The regional operations committees (ROCs) reporting to the regional vice presidents will approve the LILs.

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Burkina Faso: Private Irrigation and Agro-Processing. The project involves the government, FAO and the Bank in a long-term privatization of irrigation. The pilot will test partnership arrangements among stakeholders and the government. 5. Cautionary Notes We are concerned about the criteria that governments must meet to qualify for these loans. There are criteria which establish upward accountability between the government and the World Bank. We are unaware of criteria which establish downward accountability between the government and affected communities. Upward accountability can be facilitated by monitoring and evaluation to ensure that benchmarks of progress are achieved and that appropriate mid-course corrections are made. To date, the World Bank's monitoring and evaluation (M&E) processes have been notoriously poor in quality, but that may change. We are more concerned with the apparent absence of downward accountability. We suggest that use of these instruments should incorporate aspects relating to transparency, and participation in decision-making by beneficiaries. It will not be a surprise when unaccountable and repressive governments use these new, flexible loans in unaccountable and repressive ways. The freedom and autonomy that permit creative and inclusive loan processes also invite misuse of authority and resources. B. The World Bank Encourages Private Involvement in Infrastructure For many years, the World Bank has provided loans to its member governments for investment in infrastructure. Now, the Bank is expanding its products and services in order to catalyze private sector investment in infrastructure as well. At the Annual Meeting in Hong Kong, the Development Committee considered and endorsed an Action Plan to facilitate private involvement in infrastructure. Currently, investors provide 10% to 15% of total investment in infrastructure in developing countries. Estimates suggest that private investment could account for more than 70% of infrastructure investment. Historically, only three of the four institutional members of the World Bank Group — the IBRD, IFC, and MIGA — provided guarantees to promote what the Bank calls the "private provision of infrastructure" (PPI).11 In November, the Board approved "in principle" the use of IDA resources for guarantees. Final approval will be granted this month provided that U.S. concerns relating to information disclosure standards are adequately addressed by management. The terms of reference for the Infrastructure Action Plan were very narrow. Bank management maintained that analysis of potential risks to the environment and local communities (or, for that matter, to private investors) was beyond the scope of their research agenda. Furthermore, there was inadequate consultation with groups outside the Bank as the Action Plan was conceived. Thus, we have many questions and concerns that are raised below (see page 17). 11 In the past, the IBRD used its guarantee authority sparingly. However, it now has over 50 guarantees for PPI in the pipeline.

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The Action Plan neglected the question of how private provision of infrastructure can extend affordable, quality service to poor communities. This needs to be remedied. Will the PPI focus on power and telecommunications sectors, which have little payoff for poor people, rather than water and sanitation services that have a high payoff? Will the PPI focus on mobilizing foreign investment and neglect the need to take steps (e.g., strengthening domestic financial markets in borrower countries) to mobilize domestic private investment? The PPI will be carried out by the Bank's operational staff in the Finance, Private Sector and Infrastructure (FPSI) Network. The initiative includes: 1. World Bank Group Services • preparation of Country Framework Reports by the Bank and borrowing governments. These

Reports will describe a country's policies and regulatory framework as well as its goals and strategies for involving the private sector in each infrastructure sector. The draft Framework Report would be discussed at a round table attended by government, private sector, NGO, donor and international financial institution representatives. The final report would feed into the World Bank's Country Assistance Strategy (CAS), the document which describes the Bank's medium-term policy and project investment priorities in a country.

• the launch by the Bank of an Infrastructure Advisory Services Unit, which will work with governments to: (a) provide advice on issues including choice of market structure, regulatory regimes, selection and award of projects, and financing options; (b) stimulate and broaden investor interest; and (c) inform regulatory proceedings and commercial disputes. Working with the IFC, the FPSI "anchor" (the central secretariat for FPSI in the Bank) will set up and staff the Advisory Services Unit.

• expanded educational course offerings by the Bank's Economic Development Institute, including courses in regulation, project finance and municipal services;

• establishment of the International Forum for Utility Regulation (IFUR), so that regulators can exchange information and experience.

• the launch by MIGA of the Investment Promotion Agency Network (IPAnet) — a global information clearinghouse and communications network on foreign direct investment.

• Bank support for infrastructure action agenda of the Asia-Pacific Economic Cooperation (APEC) group's Business Forum and the Business Advisory Council.

• a pilot infrastructure information exchange in Latin America — the region which has had over 130 infrastructure privatizations in the last twelve years, a rate of privatization three times greater than any other region of the world.

2. Incentives to Governments • country-level infrastructure financing facilities Some borrowing governments will be

encouraged to launch facilities to mobilize private investment in infrastructure. For instance, last year's CAS Progress Report for India describes the proposed establishment of an Infrastructure Development Finance Company (IDFC) with initial equity capital of $1.4 billion which will facilitate finance for infrastructure projects.12

12 At the same time, the Government of India liberalized the foreign investment regime.

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Box 2 Guarantees: Understanding The Terminology Our discussion of guarantees presumes a knowledge of three things — namely the distinction between: (1) IBRD and IDA countries (2) Loans versus guarantees (3) political versus commercial risk 1. "The World Bank" is composed of two facilities which serve creditworthy and non-creditworthy borrowers. The facility which serves creditworthy borrowers is called "the International Bank for Reconstruction and Development" or IBRD. It loans at market terms. The facility which serves poor, non-creditworthy borrowers concentrated in, but not limited to African governments, is called "the International Development Association" or IDA. It loans at "soft" or concessional terms, meaning that its loans have a low interest rate — 0.75% — and long grace and repayment terms. Thus, an IDA loan, or "credit" as it is technically called, has a high grant component (approximately 80%). 2. Loans and guarantees.13 A guarantee is a commitment to a third party that has loaned funds to a borrower in a Bank-member country. The guarantee ensures the third party that the Bank will repay the guarantee portion of the obligation, if, under specified conditions, the borrower does not meet its obligations. The borrower may be the member country or a company. The Bank offers two types of guarantees: • partial risk guarantees cover government obligations spelled out in agreements with the project

entity and ensure payment in the case of debt service default resulting from non-performance of contractual obligations undertaken by governments or their agencies in private sector projects.

• partial credit guarantees cover all events of non-payment for a specified part of financing. This helps to extend maturity periods, which is often significant in obtaining longer-term financing for large construction projects.

Loans and guarantees are provided by both private institutions (commercial banks) and public institutions [multilateral banks and bilateral governments, the latter through export finance/credit (guarantee) corporations]. Some claim they are indispensable for building the confidence and providing the incentive for private financiers to invest in infrastructure projects. Others say that such guarantees distort risk calculations. 3. Political versus commercial risk. There is not a clear distinction between political and commercial realms, which creates its own set of problems. As a general rule, however, 13 This section relies on the World Bank "Annual Meetings Backgrounder on Guarantees."

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commercial risks refer to the risks to profits due to production inefficiencies or lack of demand. Political risks refer to those risks over which the government has some measure of power. Mitigating political risks involves obtaining government commitments not to expropriate private holding, to protect the investment from consequences of war and unrest, to maintain foreign exchange convertibility, to maintain a favorable macroeconomic environment, to maintain an appropriate regulatory regime, to ensure aspects of the performance of state-owned bodies, and fulfill other contractual obligations. Private lenders and investors in infrastructure projects seek guarantees to protect them from these risks. They seek guarantees from export credit agencies, private insurers, and multilateral institutions. • a carrot and stick approach to induce governments to privatize existing infrastructure

In some countries catalyzing private sector participation in infrastructure is a trigger condition that, when accomplished, qualifies a government for higher levels of borrowing. The government of Zimbabwe is required to make privatizations, can halve that allocation. Accomplishment of trigger actions, such as galvanizing private sector participation in ports, energy and telecommunications by fiscal year 1998 qualifies the Government to borrow another $50 million.

3. IDA Guarantees On November 20, the Bank's Board approved in principle a $300 million pilot program which would provide IDA partial risk guarantees to lenders providing the financial backing for major projects, including infrastructure and factories in IDA-only countries.14 For several years, Bank management has proposed but the IDA Deputies have rejected this idea. On November 20, the proposal was only approved in principle because the U.S. rejected it on the basis of inadequate procedures relating to standards for information disclosure. As it stands, the proposal would require that all guarantees provided by World Bank Group members would conform to the IFC information disclosure standards which are being established this month (December). The United States is concerned that the new standards are unacceptably lower than IBRD standards. The Bank expects that it will resolve issues raised by the United States and achieve final approval of the proposal by the end of 1997. Under the pilot program, IDA will only use its reflows15 to provide guarantees to investors in high-performing IDA-only countries. As described in the box below, a country's progress in liberalizing and privatizing its economy is generally the primary determinant of the Bank's definition of high-performing countries.

14 An "IDA-only" country receives only IDA resources as contrasted with more creditworthy "blend" countries (e.g., India, China, Zimbabwe) which receive both IBRD and IDA resources.

15 Repayments of maturing credits as opposed to new contributions.

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An IDA guarantee to private lenders will usually be backed by counter-guarantees by the government. A guarantee provided to lenders for a project in an IDA country will need to serve purposes specified by the Country Assistance Strategy (CAS) of the country. Supporters of the guarantees argue that if governments borrowed from IDA to build and run such projects as public entities, the governments would bear both the commercial and political risks. Under the proposed arrangement, governments bear only the political risks. Box 3

Understanding Performance Triggers Most structural adjustment loans are released in installments, or tranches, provided that specified conditions are met. A borrowing government's performance is judged by the extent to which it honors the conditions on its loans. The Bank also has conditions placed upon whole groups of loans. These "mega-conditions" are called "triggers." The economic performance of a borrower qualifies it for a high, medium (base) or low level of borrowing. To move from one level to another, a borrowing government's must accomplish trigger actions, which often relate to liberalizing and privatizing the economy. For instance, the government of Uganda may qualify to borrow $250 million (the high case scenario) provided that it implements key economic reforms (the "triggers"). If it fails to implement trigger actions, it will only qualify to borrow $100 million (the low case scenario). IDA guarantees will be offered in circumstances where other (official and private) guarantors will not offer sufficient insurance for a private sector project. The Bank assumes that the IDA guarantee will have a catalytic effect — that is, it will attract investors and lenders. The Bank anticipates using IDA guarantees for investments in the following countries and sectors:

SECTOR POTENTIAL COUNTRY Power Bangladesh, Benin, Côte d’Ivoire, Ghana, Kenya, Nicaragua, Senegal, Sri

Lanka, Togo Water Ghana, Senegal Rail Malawi, Senegal/Mali, Zambia Ports / Airports Ghana, Sri Lanka, Vietnam Specific investments envisioned include the following:

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• Bangladesh: Haripur Power Project: 300 megawatt (MW) natural gas-fired combined cycle power generation plant. Project cost: $300 million. The Bank is setting up a Private Sector Infrastructure Development Fund (PSIDF) which could provide up to $120 million.

• Yemen: $200 million 250 MW gas turbine power generation plant. • Cote d'Ivoire: The Azito Power Project: $300 million, 450 MW gas fired power plant. • Ghana: Tema Free Zone. Development of 1200 acres of land including infrastructure. Phase

1, development of 600 acres $50 million, plus $75 million for an industrial waste water treatment plant. Government of Ghana is negotiating with Malaysian developer, Business Focus on the lease of the first 600 acres. Political risks involve withdrawal of investment incentives, including tax breaks, exemption from customs and duties and licensing laws. Ghana's CAS also notes progress in privatizing infrastructure. In 1996, Telekom Malaysia bought a 30% stake in Ghana Telecom and Western Wireless, USA bought a license to compete with Ghana Telecom in all services. CMS Michigan and Enon are considering investment in power generation.

• Uganda: Bujagali Hydropower Project: $500 million, 290 MW hydroelectric power plant on the

Nile River. • Nicaragua: 50 MW thermal power project and 75 MW geothermal power plant. 4. Other New Products The two most important new products are IBRD guarantees to support private enclave projects in IDA-only countries and subsovereign guarantees. These products were described and critiqued in earlier issues of "News & Notices" so they are only briefly reviewed here. a. IBRD Guarantees to Support Private Enclave Projects in IDA-Only Countries. In June, the Board approved use of IBRD resources to provide guarantees to private sector investors in infrastructure projects in less creditworthy IDA countries. The Bank will review use of this product after three years or after issuance of $500 million in guarantees. While the Bank is proceeding to employ this instrument, there are many unanswered questions about how it can be used accountably. An enclave project is one which is located in a poor (IDA-only) country which generates foreign exchange and is isolated from the host country economy. In theory, the host country benefits from job creation and streams of tax or royalty revenues. Private sector lenders and investors assume the commercial risk involved. The IBRD partial risk guarantee ensures compensation to lenders up to 25% of the exposure of lenders/investors if the host government violated its contractual obligations (war or expropriation). The Nam Theun 2 Hydroelectric Power Project in Laos proposed for power supply to Thailand may utilize a $94 million guarantee. When the Board approved this proposal, they raised numerous questions, including:

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� How do such instruments foster development? The projects guaranteed are private, commercial enterprises generating foreign exchange earnings from exports and their financing and operations must be totally segregated from the host country's economy.

� How can the Bank ensure compliance with Bank standards, including environment,

resettlement, and information disclosure standards? � How can the Bank ensure that revenues accruing to the government will be used for

developmental purposes? � Can the Bank provide protections for the host country government and citizens?

Arrangements protect the Bank and the lender, but leave poor IDA-only countries very vulnerable and liable for payment in foreign exchange of potential claims on market terms. Given the fact that enclave projects financed by the Bank in the past have a high failure rate, poor countries are even more vulnerable.

b. Guarantees to subsovereign (provincial and municipal) governments As described at length in "News & Notices" #17, the Bank and the International Finance Corporation (IFC) are working at the subsovereign (provincial and municipal) level to mitigate risks to lenders. In several countries (e.g., India and Brazil), these guarantees are being marketed aggressively. The International Finance Corporation (IFC) is taking the lead within the World Bank Group to expand business by modifying fee structures and offering new services, such as: c. Partial risk guarantees will permit the International Finance Corporation (IFC) to provide guarantees for some, rather than all, risks associated with a project. d. Local currency guarantees will, if a full-risk guarantee is called, allow the client to denominate its subrogated loan in local currency. e. The contingent credit is a product which is being developed for the Songo Songo project in Tanzania. It will back a Currency Convertibility Fund, which will be drawn down if the project can not meet its foreign currency obligations. f. The sequential multi-use credit is being tested by the Bosnian Guarantee Facility, which provides partial sovereign risk guarantees to investors in Bosnia and Herzegovina. IDA money is disbursed to the Facility when a guarantee is issued. If the guarantee is not called, the resources are used for other purposes. Guarantees are backed not only by IDA ($10 million), but also by Switzerland, Sweden, and others. Reportedly, the facility has attracted the interest of eight foreign companies who are potential investors.16 5. MIGA Guarantees 16 Reported in Transition. (World Bank newsletter, June 1997).

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At the Annual Meeting of the Bank and the Fund, Ministers agreed to expand MIGA's capital base by $1 billion.17 MIGA, which promotes foreign direct investment by providing foreign investors guarantees against political risks and providing advice to its member governments, has expanded provision of its guarantees from $132 million in 1990 to $2.5 billion as of September, 1997. MIGA has concentrated on the mining and tourism sectors, but is rapidly expanding its services in the infrastructure area and, especially, power. Among Board members, there is some controversy have provision of guarantees to the financial sector and whether such guarantees have a favorable development impact. MIGA envisions offering between $650 million and $1 billion in guarantees in fiscal year 1998 and, in ten years, it envisions mobilizing $100 billion in foreign direct investment with between $15 billion and $24 billion in guarantees. 6. Questions and Concerns About Guarantees The Board is raising many concerns about guarantees, such as those listed above (see 4(a). Other concerns relate to: (a) Selection Criteria. The criteria for projects which would qualify for guarantees are too general and non-specific. They do not ensure that the project would reduce poverty. Much experience to date shows that privatized public services do not adequately serve marginal areas and populations. MIGA is developing selection criteria that will guide decisions about whether to provide guarantees. "Absolute criteria" will include social and environmental impacts and other factors as they relate to proposed projects, proposed investments, the host country and the investor's country. Other criteria will relate to exceptional risks and opportunities related to proposed projects. MIGA submitted a proposed framework for assessing development effectiveness to the Board entitled, Development Effectiveness, Project Selection and Allocation of Capacity, which was discussed in mid-December. To date, development impact has been a function of a project's job creation, revenue to the government, or exports generated. However, MIGA's portfolio facilitates investment in areas where job creation can be minimal or negative: infrastructure, mining and financial sector investment. Rather than alter the areas in which it facilitates investment, MIGA is changing the way it assesses development impact. MIGA monitored 15 projects18 and found that they created 5,871 jobs, generated $339 million in exports and $57 million in annual taxes and duties paid to the government.19

17 Comprised of a $150 million grant from the World Bank; $150 million of paid-in capital from member governments; $700 million in callable capital. The $150 million grant from the Bank enables MIGA to increase its guarantee capacity by $525 million immediately.

18 Projects were located in the following countries: Argentina (2 projects) Bangladesh (1); Brazil (1); China (1); Costa Rica (1); Pakistan (6); Saudi Arabia (1); South Africa (1); Trinidad and Tobago (1).

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Another approach to selection criteria is advanced by Friends of the Earth and others. This approach would employ investment screens to ensure that projects foster sustainable development. Investment screens have been commonly used by private investors in the United

States and other industrialized nations to select the portfolios of Socially Responsible Investment (SRI) funds. An investment screen is a set of non-financial (such as social or environmental) criteria that must be met by all companies in an investment portfolio. There are two kinds of investment screens: "negative screens" which are a set of criteria delineating what characteristics companies in the portfolio cannot have (production of nuclear weapons, operations in Burma, Superfund sites, etc.); and "positive screens," which are a set of criteria delineating what characteristics companies in the portfolio must have...20

(b) Opportunity Cost. There is an opportunity cost to using IDA resources for guarantees. Resources used for infrastructure guarantees are not available for other purposes, such as investing in people. The Bank, itself, takes the position that investing in people is a better route to growth. (c) Fiscal Space. It is troubling that a key justification for private financing of services is the argument that it frees up public money (i.e., provides "fiscal space") for investment in human development and poverty reduction. IDA guarantees will only be provided to high-performing governments which, among other things, exercise considerable fiscal discipline. (See Box 3: Understanding Performance Triggers). Such governments are often reducing social sector investments, not expanding them. The proposal does not include inducements to use revenues for social development. (d) Conflicts of Interest. We suggest that the Bank's issuance of guarantees constitutes a conflict of interest. If Bank action to address social or environmental difficulties with privately-financed projects, resulted in the disruption of a project or an escalation of costs, the guarantee could be called. In other words, it could be in the public interest for the Bank to "blow the whistle" on privately-financed projects. However, the Bank would be constrained from taking such action given its liability — namely, the guarantee.

19 Other impacts noted included: impacts on balance of payments (in addition to export revenues) such as imports replaced; investment in human capital (e.g., training); technology transfer; upstream and downstream effects on other businesses; market impact; and social development (e.g., schools, housing, health care, infrastructure).

20 Chan, Michelle, Concept Paper for World Bank Investment Screen," Friends of the Earth, 1025 Vermont Avenue, NW, Washington, DC 20005-6303.

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7. Securitization and Other Capital Mobilization Transactions Using Bank or IDA Assets On November 25, the Bank's Board formally approved transactions that are already standard practice — namely, permitting borrowing countries to mobilize capital from private sources21 using Bank-financed assets.22 How do such transactions work? On the basis of projected long-term cash flows often generated by infrastructure projects — especially transportation and power facilities, governments sell or securitize infrastructure assets and associated liabilities to mobilize capital. This capital might, or might not, be used to achieve the overall development objectives of the country. The borrowing government is required to retain the concessionary component of the IDA credit and not transfer it to the purchaser of the infrastructure project. Thus, governments have greater potential to mobilize private capital through securitizing the assets built/purchased with IDA resources if debt is transferred to the purchaser on market terms. Box 4 How Does Securitization Work? The World Bank provides loan to the Government of China, which on-lends to a province at Bank rates over 20 years for highway construction. The province can transfers part of the assets and revenues from the highway to a construction company. The province might also transfer some or all of the liabilities (the debt) of the highway. The company issued shares on the Hong Kong Stock Exchange based on the net worth (assets minus liabilities) of the highway. The proceeds from this public offering will help finance the remainder of the highway. Of course, the proceeds might be used for purposes unrelated to the highway.

21 A public sector entity (e.g., a government pension fund or insurance company) may also buy the shares of the securitized project.

22 The International Finance Corporation already mobilizes resources through securitization of part of its loan portfolio.

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III. United States Congressional Action A. Foreign Aid and The World Bank On November 13, at the eleventh hour before adjourning for this year, a deal was struck between Congress and the administration on the FY 1998 foreign aid spending bill. They agreed to maintain the status quo on family planning programs, that is, not impose abortion-related restrictions, but to limit funding for family planning to $385 million, to be paid out a monthly basis. In trade-off for this concession, Republicans led by conservatives denied the White House the $926 million in arrears to the United Nations, as well as $3.5 billion in proposed new budget authority for the IMF to address economic crises. The State Department authorization bill, which had contained the reorganization provisions as well as the UN arrears funding, was struck from the final bill by the House. Last minute pleas by Secretaries of Treasury and State were unsuccessful. Several internationally-minded Republicans (e.g., Reps. Bereuter and Leach) are uneasy with the compromise, and have called for Congress to deal separately with the UN and IMF funding issues early next year. The overall funding level for foreign aid, including arrears for multilateral institutions, will be $13.15 billion, or almost $1 billion more than the FY 1997 bill. There are also relatively good outcomes for bilateral development assistance (which will be even higher than the Administration's request), child survival, UN programs, and the Inter-American and African Development Foundations. Legislative provisions that called for consolidation of agencies, including the U.S. Agency for International Development, into the State Department were struck from the final FY 1998 spending bill, as were the provisions authorizing funding of and urging reforms for the UN.

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Box 5

FY98 Foreign Aid Conference Report And

Associated Remarks by Senator Patrick Leahy (D-VT) As expected, the conferees agreed to the Senate full funding level for IDA, or $1.035 billion, which includes arrears payments. The Conference Report calls on the Bank to systematically consult with local communities on the potential impact of loans as part of the normal lending process, and to expand the participation of affected peoples and NGOs in decisions on the selection, design and implementation of projects and economic reform programs. Senator Leahy said: This is common sense. It is also vitally important. Private corporations do not launch

products or services without market surveys and the knowledge that there is a demand for what they have to offer. Public institutions, like the World Bank, also need to know about the people they are serving. This does not mean just interacting more with affected communities, it means letting them wield influence and responding to their concerns.... We want to know whether the intended beneficiaries of Bank-financed projects want these projects and whether they have a say in designing them. Too often, local people are not involved until the implementation stage, when it is too late to have a real influence.

These remarks were part of an extended presentation that Senator Leahy offered (see Congressional Report, November 13, 1997, page S12530) about World Bank reform in connection with the Conference Report:

The Congress is sending two important messages by approving the conference report. First, we recognize that in order to exert leadership in the multilateral development banks we need to meet our financial commitments. We have been in the ludicrous position of having an American, Jim Wolfensohn, at the helm of the World Bank, but our representative on the Board of Executive Directors has been at the sidelines, unable to even vote on some loans. Why? The US sank so far into arrears to IDA — to the tune of nearly $1 billion at one point — that some of our voting privileges were revoked. Now, with the passage of this legislation we are paying off the last bit of arrearages ($235 million), plus our current obligations. Second, we are sending the message that we expect this investment to yield results....Reform at the World Bank is moving forward, but there is a long way to go...I want to take this opportunity to briefly discuss what I believe the Congress needs to see, at a minimum, from the Bank's reform efforts in order to continue to support the institution.... When governments remain undemocratic, when they abuse human rights, the World Bank as a public institution must not collude...the Bank needs to ensure that it is not the handmaiden of borrowing governments which trample on the needs and rights of people in the pursuit of economic prosperity...

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It is not enough to do environmental impact assessments and social assessments. They need to be acted on... The Bank needs to provide management with much stronger incentives to maintain quality [of operations] in the face of pressures for volume and speed....

Much more needs to be done in terms of making information available in borrowing countries in local languages, and providing information in a timely way at early stages of project preparation... We want to see progress in providing the full text of Project Concept Documents as well as draft copies of technical papers that assess feasibility, and information from Country Assistance Strategies... Promoting the private sector must not come at the expense of normal precautions about financial, technical, social and environmental risks...

Mr. Wolfensohn has said he wants to harmonize the World Bank Group's activities under one set of social and environmental policies...It is essential that harmonization not result in a retreat from current policies to a lowest common denominator...

The Inspection Panel... must be maintained and supported... There is one other issue...the mistreatment of women employees at the Bank. Women

have been subjected to gender discrimination, retaliation, abuse of power, and sexual harassment. It is a systematic problem. It has been virtually ignored.

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BOX 6

Appropriations To The Multilateral Development Banks And IMF, Fiscal Year 1998 (in US$ billion)

Recommendations

Institution FY 1997 Request Senate House Final IDA .700 1.034 1.034 .606 1.034 Global Environmental Facil.

.035 .100 .060 .035 .0475

Inter-American Dev. Bank FSO

.010 .0208 .0208 .0208 .0208

IDB Enterprise for the Americas

.027 .030 .030 .030

Asian Development Fund .100 .150 .140 .100 .150 African Development Fund

-- .050 -- .025 .045

European Bank for Recon- struction and Development

.0358 .0357 .0357 .0358

IMF Enhanced Structural Adjustment Facility

.007 0 0 0

IMF New Arrangements to Borrow (NAB)

3.521 0 0 0

B. IMF Issues 1. Enhanced Structural Adjustment Facility (ESAF) Congress refused to provide resources for the IMF's Enhanced Structural Adjustment Facility (ESAF). ESAF becomes self-sustaining in the year 2004. By then the repayments (reflows) of current ESAF loans will be sufficient to meet projected ESAF requests. Until then, ESAF must rely upon the contributions of wealthy nations. The French Managing Director of the Fund, Michel Camdessus, said that, if absolutely necessary, the Fund would sell gold to finance the ESAF. However, to date, the Germans are making their contribution to ESAF conditional upon the fund not selling gold. The very existence of ESAF continues to generate controversy. Some say that it is wrong for the French, through their man — Camdessus, to insist that the Fund provide financial support for poor countries through the ESAF. ESAF provides long-term loans and its critics say that the IMF was created to provide short-term stability. It puts the Fund, a monetary institution, into the development business. They say that IDA was created for long-term development purposes and, the Fund should not insist on duplicating this role. If the Fund insists on duplicating IDA's role, it

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has sufficient resources for this purpose in its Special Contingency Account. They note that in recent years, net transfers between the poorest countries and Fund have been negative. ESAF supporters say that if ESAF were abolished, these net flows would still be negative. But, without continuing ESAF support, poor countries would be even worse off. Other supporters say that the IMF considers the role of ESAF a sine qua non of the Highly Indebted Poor Countries (HIPC) initiative. The Platform/Proposal from the Nicaraguan Civil Society Group to the Nicaraguan Consultative Group (CG) scheduled for February, 1998 in Geneva, Switzerland urges that the World Bank and IMF apply HIPC to Nicaragua as soon as possible. It states that: the ESAF program should be developed with the participation of the main social and

economic actors in the country, with trade associations, chambers of commerce, political parties and organizations specializing in social programs...[T]he process...should include the establishment by the government of firm commitments with clearly defined timelines in the designation of resources for alleviating negative effects of ESAF.

While it is important to resolve the status of ESAF and the relationship between ESAF and the Highly Indebted Poor Countries (HIPC) initiative, it is even more important to de-link bilateral loans and grants from IMF signaling. Bilateral governments provide much more assistance to poor countries than the multilateral institutions do. The quality of this assistance will be far greater if the IMF is not allowed to monopolize the evaluation of poor countries' performance. 2. NAB and IMF Authority Congress also adjourned with the IMF's New Arrangements to Borrow (NAB) held hostage to a dispute over family planning. Some members were also reluctant to provide the IMF with financial backing to bail-out governments which have over-extended themselves and to provide de facto insurance to private investors and speculators. The NAB would underwrite a $25 billion line of credit. The $25 billion will be in addition to an already existing $25 billion line of credit backed by 11 wealthy countries. These lines of credit are only used in extraordinary circumstances. For ordinary circumstances, the Fund has $44 billion in uncommitted resources. This pool of IMF resources will be augmented if the legislatures of member governments ratify an expansion of Fund quotas by 45%, or about $90 billion. The U.S. share will be about $14.5 billion. On December 5, Stanley Fischer, the IMF deputy managing director warned the members, especially the U.S., that the IMF's ability to cope with crises will be jeopardized unless new resources are provided. So far, the IMF has provided a $21 billion line of credit for Korea; $4 billion to Thailand; and $10 billion to Indonesia. At the Annual Meeting, the Interim Committee of the IMF's Board of Governors (the IMF's advisory committee) issued a statement approving an amendment to the IMF's Articles of Agreement in order to give the institution jurisdiction over capital account movements. The Interim Committee

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Chairman Maystadt called the statement a "milestone" in the history of the Fund. At a July meeting of ECOSOC, Camdessus suggested that capital account liberalization would be the 12th commandment of the Fund, succeeding the 11 commandments issued in the 1996 Interim Committee Declaration. It is unclear whether the currency turmoil and devaluation of ASEAN currencies will give policy-makers pause for thought about capital account liberalization. Historically, the OECD's Code of Liberalization permits flexible application of capital account restrictions. The OECD's Multilateral Agreement on Investment (MAI) negotiations are attempting to put an end to these restrictions. UNCTAD has issued cautions with respect to capital account liberalization; it urges monitoring of transactions so that "hot" money flows can be discouraged.23 The ministers of the Group of Twenty-Four (G-24) Developing Countries issued several cautions about capital account liberalization and underscored their opposition to conditioning access to Fund resources on capital account liberalization measures.

23 Warnings with respect to capital account liberalization have been issued from many sources, including Third World Resurgence (especially October, 1997), 228 Macalister Rd., 10400 Penang, Malaysia; FAX: 60-4-2264505 and "The IMF's Final Frontier? Assessing `Second Generation' Reforms," A 9/97 Briefing by Angela Wood, Bretton Woods Project, P.O. Box 100, London SE1 7RT, UK. Email: bwref@gn.apc.org

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Box 7

What Is The Capital Account?

ACCOUNT CREDITS DEBITS Current Account: trade in services, and grants

• Exports of goods and nonfactor services

• Export of factor services • Private unrequited transfers

(nonresident) • Official unrequited

transfers (foreign governments)

• Imports of goods and nonfactor services

• Import of factor services • Private unrequited transfers

(resident) • Official unrequited transfers

(national government)

Capital Account: financial flows and investment

• Foreign direct investment (nonresident)

• Portfolio investment (nonresident) • Other capital inflow (nonresident) • Short -term capital inflow

• Foreign direct investment (resident)

• Portfolio investment (abroad by residents)

• Other long-term capital outflow (resident)

• Short-term capital outflow C. Other: WTO Hears from Congress Other Congressional action... The crushing defeat of President Clinton's fast track legislation is well publicized. Less publicized is the passage of an amendment, sponsored by Representative Sanders (Independent from Vermont), which would provide $1 million to the U.S. Trade Representatives office to report to Congress and local and state governments every time a foreign government initiates an action in the WTO that could force the repeal or modification of U.S. laws. The Sanders initiative arises from fervent public opposition to challenges by foreign governments to local laws, such as a Massachusetts ordinance denying state contracts to companies investing in Myanmar (formerly known as Burma). Venezuela has challenged provisions of the Clean Air Act; Mexico has objected to U.S. laws protecting dolphins; Malaysia and Indonesia have objected to U.S. environmental restrictions on shrimp imports. (For further information, see the Journal of Commerce, 9/29/97

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IV. Publications Control Risks Group, No Hiding Place: Business and the Politics of Pressure. Control Risks Group Limited, July 1997. In the United States, the report is available from Darrell Heasly at Control Risks Group Ltd., 1749 Old Meadow Rd., Suite 120, McLean, VA 22102. TEL: 703/893-0083; FAX: 703/893-8611. To contact one of Control Risk Group’s international offices, check their website at http://www.crg.com/controlrisks/reports/nohidingplace.html No Hiding Place is a "must read" for those grappling with the rising power of market forces and transnational corporations and the declining power and influence of the state. This report, based on surveys and interviews with business and NGO leaders, describes how NGOs are inserting themselves in this dynamic in an attempt to circumscribe the power of corporations. It includes case studies and analyses of Brent Spar; The European Campaign against genetically-modified foodstuffs; Shell in Ogoniland; Texaco in Ecuador; Freeport McMoran in Irian Jaya; and the Free Burma Campaign. The introduction notes: Overall, the report emphasizes the pressure on companies, wherever they operate,

to adopt the highest international environmental, labour and ethical standards. In many cases, companies, governments and NGOs reach consensus on what those standards should be. But significant points of dispute will remain, especially in the areas of the environment and human rights. In the current climate companies must be prepared to justify their policies, even in cases where they are operating in regions once considered remote. Heightened international scrutiny means that perceived transgressors truly have `no hiding place.'"

Uvin, Peter, Development, Aid and Conflict: Reflections from the Case of Rwanda, United Nations University, 1997. Uvin is Associate Professor at the Watson Institute for International Studies at Brown University. He worked for several years in the Great Lakes region for the Swiss Development Cooperation Agency. He has written extensively on issues of development, aid, hunger, grassroots organization and Rwanda and Burundi. In his paper, Uvin notes the contradiction between the 1994 genocide in Rwanda, and the previous view of the country as a model developing country. He seeks to understand the relationship between the violence since 1994 and the country's development process. In particular, he sees the way "development" is defined, managed and implemented in Rwanda as crucial to understanding the processes that led to the genocide. These include: extreme poverty; oppressive government; a long history of corruption; abuse of power, and unchecked human rights violations; deep-felt frustration and cynicism among many poor people; growing individual, ethnic and regional inequality; the political strategies employed by elites in search of protection against the internal and external pressures of democratization and discontent; and a history of institutionalized, state-sponsored racism and discrimination. To obtain a copy, contact: Peter Uvin, Watson Institute, Brown University, P.O. Box 1970, Providence, RI 02910 or Nancy Alexander at the Bank Watchers' Project.