Many opponents of macrolending say that the loans are not wise investments. They assume they are not repaid and are just hand-outs with a fancy name. But according to my professor who worked at the World Bank for over 20 years, all WB loans are paid back. My problem is not the stewardship of the money, but that dependency still occurs with macrolending as it does with hand-outs.
According to Friedman in The Lexus and the Olive Tree, the Cold War created walls, but now globalization creates a web (2000, p. 8). Through this web, capital, information, consulting, and support can come from multiple sources. However, with the World Bank Group and IMF functioning as two arms of the same body, many developing countries do not have a choice of connection to this web except through the IMF or World Bank. Other options exist, but no other feasible options. It’s like a child who is told by his teacher, you didn’t have to come to school today, it was your choice. Not completely true, someone else has control. The child is a dependent, and many countries are dependent on controlling development banks. The banks worry about accountability, corruption, and reputation when making loans. And rightly so, but this worry leads to controlled conditions. This control lessens effectiveness. To decrease the level of ineffectiveness and intrusiveness, borrowing countries should have more choices: in what type of investment they receive, in the conditions, and in lending institutions.
Tight conditions lead to fatal outcomes. For example,Zambia was left in tight spot. She had chosen to invest borrowed money in teacher training, but then repayment of this debt to IMF was demanded. Zambia’s government was forced to freeze teacher hiring and wages, sending many Zambian- trained teachers to other African nations to make a living wage. Oxfam brought suggestions to the IMF due to this downward spiral in which Zambia and other developing countries found themselves. Oxfam saw Zambia as a country in great danger to AIDS and education as the anecdote, so the choice of present teacher hiring or future debt relief extended beyond an issue of human capital. Oxfam informed the IMFC before their annual meeting in Washington of six strong recommendations. Firstly, World Bank and IMF could avoid the contradiction of giving money for a project only to demand repayment which stops the project by considering other options before loans, such as direct foreign investment. The World Bank and IMF could facilitate uncorrupt and liberal foreign direct investment and then receive a commission from the investor company to maintain administrative costs. The hindrance to this solution is that the U.S. ties aid to policy that the U.S. believes will lead to growth. Growth over aid is the correct goal, but options for supporting growth besides loans such as FDI should be considered.
Secondly, to instrument choice of lending institutions, the World Bank could continue to analyze and consult, but then regional lending banks could write the loans. This way, a country can take the recommendations, but would have more flexibility in choosing the conditions for the loan that were realistic for their government as long as they could find a regional bank to agree. This would work better than outside analysts and World Bank loans, because of trust. World Bank has no affiliation, no one to benefit by giving the advice and can therefore be more trustworthy advisers. The policy part is the tough part; the lending part many sources are trustworthy enough to do. The consulting should stay central so that the learning can continue to build upon itself.
Thirdly, the IMF should not disband because of moral hazard. One, risk is part of the economics game. If countries do not take risks, they cannot move forward. Calculated risks are the key and the IMF makes sure that when a country is in trouble and must take a risk, that the risk is calculated by world-class economists. Two, the IMF is considered the economic police, not the economic safety-net. There are still consequences for bankruptcy and these consequences can lead to death for many people. Governments take this seriously.
Fourthly, policy experts suggest refusing loans to corrupt or hostile governments, the problem with that reform is it leaves a country in a downward spiral. In The Moral Consequences of Growth, Friedman links poverty to more hostility, “poverty fosters political coups, which in turn foster more poverty, and hence more coups” (2005, p. 323). Conversely, he shows development is linked to political freedom and sums up the ways to development: 1) invest in productive capacity, 2) invest in human resources, 3) invest in the environment, 4) invest in research to generate growth in the future. How can a corrupt, hostile government reach democracy without a push on their economy?
Overall, splitting the power and opening choice will increase the base of support because even if a loan proves a poor decision, the borrower is the one who chose it, and it is then the borrower’s fault, not the World Bank’s or IMF’s. It delinks the WB and IMF from the country’s economy and therefore makes them less powerful and less controversial.