Why Is The World Bank Still Lending?

By Adam Lerrick
October 28, 2005; Page A13

The Wall Street Journal

When the World Bank was founded, its mission was, and still remains, to assist developing countries by way of capital loans with moderate interest rates. At that time, capital markets were fairly small and conservative. The World Bank would borrow from private capital markets, and in turn, would lend that money to developing countries, which did not have access to private capital markets. The Bank covered its costs by charging moderate interest rates and by the guaranteed membership of industrialized countries, which were more likely to pay off their loans and interest rates on a timely basis. The idea was that the developing country would build up its capital through projects funded by these loans and eventually be able to borrow directly from private lenders.

The problem arises once these countries are able to borrow from other market sources and no longer need the bank. The capital markets today are much broader than when the bank was created, and middle income borrowers (the bulk of the Bank’s income) are able to borrow at lower rates than the Bank is able to offer. However, the Bank continues to lend money out. As the author of this piece said, “World Bank lending is clouding the landscape and wasting resources. All that the Bank provides in a world of sophisticated financial markets is the subsidy that fills the gap between the real cost and what recipients are willing to pay.”

The Bank was designed to help poor countries, and if it insists on lending money to poor countries that cannot and will not pay, while the middle-income borrowers are getting money elsewhere, a new financial structure is needed to keep up with other existing and emerging capital markets. The World Bank needs to remember that it is in the development business, not the banking business, and thus it is much harder to compete with private capital market.

Questions and Comments:
What are the pros and cons of restructuring the financial structure of the World Bank? Would a new structure change the mission of the Bank to help poor countries? How can we, as a society, guarantee that poor countries are receiving assistance, while at the same time protecting the interests of industrialized and sophisticated countries, which necessarily foot the bill for the Bank? Will the World Bank become obsolete if it does not in fact change the way it conducts business?

Making Moves Toward the Caribbean Single Market and Economy

“St. Kitts to Begin Offering Caribbean Community Passports to Citizens”
http://aolsvc.news.aol.com/special4/article.adp?id=20051027160009990008
AP Worldview - AOL News
October 27, 2005

On October 25, 2005, St. Kitts joined Suriname and St. Vincent as the third country in the Caribbean Community (CARICOM) to offer Caribbean Community passports. This move is a major thrust towards the January 2006 launch of the Caribbean Single Market and Economy (CSME), a non-political trade group modeled after the European Union. The CSME will encourage the free movement of goods and skilled persons throughout the region. Skilled persons include university graduates, media workers, athletes, artists, and musicians.

The 15 CARICOM member states include (1) Antigua and Barbuda; (2) The Bahamas; (3) Barbados; (4) Belize; (5) Dominica; (6) Grenada; (7) Guyana; (8) Haiti; (9) Jamaica; (10) Montserrat; (11) St. Kitts and Nevis; (12) St. Lucia; (13) St. Vincent and the Grenadines; (14) Suriname; and (15) Trinidad and Tobago. Associate members include Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, and the Turks and Caicos Islands.

Citizens of St. Kitts will be able to obtain the new passport beginning November 15, 2005. The CARICOM passport is a National passport bearing the logo of CARICOM, the words “Caribbean Community”, and the Coat of Arms and the name of the issuing member state. The passports will be used for intra-regional and extra-regional travel. The Caribbean passport is one move toward unifying the region.

While other members are expected to adopt the new passport by 2007, the Bahamas and Haiti have expressed that they do not intend to participate in the CSME. The Bahamas feels that their structure and financial markets are currently attractive to foreign investment and that CSME membership and their association with some of the more inefficient member states would only weaken their economy. Supporters of the CSME feel that the trade group will enhance the region’s ability to compete with the U.S.-backed Free Trade Area of the Americas (FTAA).

As the January 2006 launch date approaches, it will be interesting to see if any other member states besides Trinidad and Barbados will be prepared to enter the CSME.

Africa's Biggest Debt Agreement

By David White
Financial Times
October 21, 2005

On October 20, 2005, Nigeria, Africa’s most populous nation, tied up Africa's biggest-ever debt deal and set terms for its main lenders to write off $18 billion of the money it owes them. But, to receive this deal, Nigeria had to commit to paying the Paris Club nations $12.4 billion, mainly to France, the UK, and Germany. Ngozi Okonjo-Iweala, finance minister, justified the outlay, saying Nigeria might not have had the opportunity again. "We think it's a good use of the money," she said.

The debt agreement would reduce Nigeria’s risk premium, improve the country’s financial reputation, and encourage skittish investors. The deal is separate from the debt cancellation plan agreed by leaders of the Group of Eight richest countries at their July summit in Scotland, under which some African countries are due to see their debts to the World Bank, International Monetary Fund and African Development Bank wiped clean.

Earlier this week, the IMF endorsed Nigeria’s economic policy framework. Debt service savings will appropriately be channeled into water resources, power, roads, health and micro-finance for farmers, and will be monitored by the UK's Department for International Development and the World Bank to avoid diversion of funds.

Some economic experts and proponents of debt cancellation maintain that it is irresponsible for Nigeria to pay $12 billion when it is looking for money to fight AIDS, and health and education problems, among other issues. However, if the offer is not taken advantage of, the debt profile would only rise and further compromise the economic good of the country. What is in the best interest of a country that is trying to reform and re-position itself for growth?

An Update on Agricultural Subsidies

"For France, Cutting Farm Support May Be Last Straw"
International Herald Tribune
October 21, 2005
http://www.iht.com/articles/2005/10/21/business/wto.php

Also refer to the WTO's summary of Doha negotiations relating to agriculture: http://www.wto.org/english/tratop_e/dda_e/
dohaexplained_e.htm#agriculture


The E.U. Trade Commissioner has asked French leadership to lower the country's current agricultural subsidies and import tariffs. With WTO negotiations on this topic moving again and new meetings scheduled for the end of 2005, France's efforts could help progress the WTO's goals of "correct[ing] and prevent[ing] restrictions and distortions in world agricultural markets." But what about France's concerns that eliminating domestic agricultural supports will "undermine the French way of life"?

Governance Matters

Every other two years, the World Bank comes out with statistics analyzing the socio-economic performance of each country. The resulting report is known as the GRICS: Governance Research Indicator Country Snapshot. The word "governance" is broken down into six indicators: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. For a more technical discussion of the theory behind governance indicators, please go here.

I am especially interested in rule of law development in Asia, so I clicked here to see how East Asian countries were doing regarding rule of law development:

Besides comparing countries in Asia, you may also compare countries of the world, and come up with a similar chart. When I chose the countries, I selected the "10 largest GDP" (meaning the richest) and the selection yielded this nice user-friendly chart. It is indeed not surprising that Singapore and Hong Kong rank the highest, and China ranking 7th out of ten countries.

While the comparison is bi-yearly, the last one being 2004, the latest statistics came out May of this year (2005).

The percentile rank for China's rule of law indicator is 40.6%. The lowest percentile rank is Somalia, 0%. Guess which country has the highest rule of law percentile ranking?

Iceland--100%.

Can you imagine living in a country where there is 100% rule of law? (just joking, the 100% should be in relative terms, meaning that it's the most "rule-of-law-ly" country in the world--it sets the example for all of us!)

Source: World Bank.

The Dominican Republic-Haiti Situation

Stories from the BATEYS
(the old sugar cane labor camps)
Where Rosa considers buying a mother

By Tim Griffiths
Berkeley Student Journal

SANTO DOMINGO, THE DOMINICAN REPUBLIC — So far, I have been able to visit three "batey" communities since my arrival in the Dominican Republic. The bateys date from the heyday of the Dominican sugar industry, when the government recruited laborers from Haiti to work the cane fields and the refineries. The industry constructed these small company towns called bateys to house the workers and their families.

Because of their history, the bateys today are home to the Dominican Republic's largest concentrations of Haitians and Dominicans of Haitian descent. Not coincidentally, the bateys are also among the most marginalized, isolated and impoverished communities in the Dominican Republic. Over the next few days, I hope to send a few stories that report on my visits to the bateys and the people living there. Here is the first one:

Batey Altagracia: Rosa's Dilemma

"I need to buy a mom," said the woman.

I'm supposed to know what's going on here, but I confess that this request threw me off completely. We were standing in a small clearing in Batey Altagracia amid homes cobbled together out of wood planks, scraps of tin roofing and tree limbs - a village that is a collage. I had come to Batey Altagracia to listen to the stories of the residents and their efforts to obtain nationality documents for themselves, or for their children. Lico Augustín, a MUDHA staff member who grew up in Batey Altagracia, recommended that I speak to Rosa (not her real name), the middle-aged woman who now stood before me. Her hair was wound in tight braids around her head and she wore a long colorful sun dress. Years of constant exposure to the sun gave her skin an almost leathery look and she seemed elderly before her time. She also had no teeth, which made me wonder if perhaps I simply had not understood her correctly.

"Pardon me, señora, what did you say?"

"I need to buy a mom," she repeated, "but they're very expensive."

"I'm sorry. I'm not sure I understand. What do you mean you need to buy a mom?"

"That's what they told me in the office of the civil registry. I went to get my papers so that I could register my daughter. She's in the seventh grade. They told me that I had to have papers from my mother, but my mother died 15 years ago in Barahona. They told me maybe I could buy a mother."

"You mean that you would hire someone to pretend she was your mother, is that it?"

"Of course. But I can't afford it right now. Mothers are very expensive." Rosa pointed down the path towards some other dwellings. "Gina has the same problem. Her daughter is also in seventh grade. I'm not sure what we're going to do…"

Sadly, I don't know what Rosa and Gina are going to do either. I'm at a loss as to what to tell them. There does exist an incredibly long, tedious and expensive bureaucratic process by which they could try to get themselves registered, but it would require multiple bus rides halfway across the country, tracking down witnesses and officials (not to mention probably having to coax them into action with a few extra pesos on the side) and potentially multiyear waits for the government to process the documents. Who am I to say that buying a mother, if Rosa and Gina can somehow scrape together the cash - and if they can get away with it - is such a bad idea?

Meanwhile Rosa and Gina's daughters are a year away from having to take the National Exams that would allow them to go on to high school studies. But without birth certificates, the two daughters probably will not be allowed to take the exam. Perhaps they will drop out … and have children … who may very well also go unregistered … and so on … just another set of links in the chain of grinding poverty and hopeless government bureaucracy.

Global Outlook on Capital Markets

The McKinsey Quarterly has stated that the total value of the world's capital assets has grown from $53 trillion in 1993 to $118 trillion in 2003. The liquidity of world assets has increased, as seen from the trend of increasing investment in equities and debt securities and decrease in bank deposits.

The United States has $44 trillion's worth of financial assets, one of the four major regions that owns 80% of all of the world's financial stock. The other three regions are the European Union, Japan and the United Kingdom.

Where is China in this picture?

Although China's financial market is relatively small and new as compared to Japan's, the McKinsey Quarterly still describes it as the world's "fastest growing," and "the country has amassed a sizable portion of the world's bank deposits."


Sources consulted:
The McKinsey Quarterly

Zimbabwe Running On Empty

By Brendan Boyle
Sunday Times (South Africa)
October 9, 2005

Zimbabwe renewed its appeal for financial assistance from South Africa after the International Monetary Fund (IMF) rejected its bid for a partial return to the global lending community.

In its comprehensive review of Zimbabwe's economic performance over the past five years, the IMF report reflects a government clinging to shreds of optimism while the country spirals towards collapse.

"After some improvement in 2004, Zimbabwe's economic and social conditions have deteriorated sharply this year," the IMF staff said in their report on a visit to Zimbabwe in July. "Without a bold change in policy direction, the economic outlook is bleak."

IMF analysts have warned that Zimbabwe’s external debt, which is already worth 67% of the current GDP, is unsustainable and would have to be rescheduled by 2010.

Some of the problems leading to the decline of the economy in Zimbabwe include:

*Gold output halved from 1998 to 2003;
*Coal production, soy and wheat acreage, cattle and pig slaughtering and milk production all halved between 1998 and 2004; and
*The manufacturing volume of foodstuffs, drinks, textiles and metals are below half their 1990 levels and the overall manufacturing index is at 58% of 1990 output.

In less dismal news, the IMP also reported that the formal banking sector is resilient, and there is a promising improvement in platinum production.

In their assessment of the staff report, the IMF's executive board warned Zimbabwe's government that failure to implement tough reforms would hurt poor people the most.

After discussing the staff report, the directors proposed a series of interventions to stabilize the macroeconomy as quickly as possible and then lay a foundation for increased domestic productivity and improved export earnings.

After repeatedly reneging on debt payments to the IMF, Zimbabwe was suspended from technical assistance and lending and came close last month to becoming only the second country ever to be expelled completely from the fund.

As the political and economic climate in Zimbabwe continues to worsen, what effect will this have on the stability of the whole region? Zimbabwe recently made multi-million payments to the IMF to reduce its arrears, and bought itself a six-month reprieve from talks of expulsion. Was this money well spent? Or, as some critics say, should the money have gone to directly benefit the 70% of the Zimbabwean population that is living below the poverty line?

US system for financing aid "dysfunctional"

Financial Times
Monday, October 17

Andrew Natsios, the head of the US Agency for International Development (USAID) (clever ancronym, no?), recently told the Financial Times that the way Congress allocates funding to discrete initiatives makes it very difficult to integrate aid in a coherent development effort.

Initiatives with specific goals, particularly to fight diseases, are popular in Congress and in the country. By contrast, it is “much harder” to sell the idea of funding development in general. “Development is not understood, even inside the Beltway in Washington,” said Mr. Natsios.

Natsios briefly referred to the political consequences of aid, citing the turnround in support for the US at the expense of al-Qaeda in Indonesia after its prominent role in the post-tsunami recovery effort.

Natsios said USAID was trying to get around federal funding limitations by integrating aid efforts on the ground, and was deliberately using funds mandated for specific purposes in a way that advanced development in general. “The HIV/Aids capacity building we are doing is helping to improve entire health systems,” he said.

Why does Congress prefer to to channel money into single-issue projects? Why is it also important for the US to support general development as well?

Uncertainty as Brazil Starts Oil License Auction

By Jonathan Wheatley in Sao Paulo
October 17, 2005
Financial Times

http://news.ft.com/cms/s/b6881bfe-3f2c-11da-932f-00000e2511c8.html

The Brazilian government has opened bidding for licenses to drill for oil and natural gas in some 1,134 cites, 697 of which have never been explored. This auction is being held in an attempt to increase international interest in the natural resources of Brazil. The main fear of many internal investors is that regulatory uncertainty in market for oil, and the domination of Petrobras, will have a negative impact on outside and domestic firms. Although the licenses are handed to bidders through the ministry of energy, the ministry’s power has decreased over the years as Petrobras rose as the industry leader.

What effect will these licenses, especially the licenses for the 697 unexplored areas, have on the international market for oil? Will these licenses have the effect of decreasing the price of oil, due to an increase in supply, or will the market remain stagnant?

What's the Future of China's Flexible Currency?

The discussion in the United States on China's exchange rate policy has been controversial. Earlier in the spring of this year, some U.S. legislators have threatened to impose a 27.5% tariff on Chinese imports if China remains slow in changing its exchange rate policy.

China has finally unpegged its currency in September of this year. The current discussion between the United States and China is how much the trading band is allowed to float, and the timeline for a complete floating rate in the future.

In late July, the renmenbi (RMB) was revaluated by 2.1%, in a managed float, with an allowed fluctuation of 0.3% a day. Against the euro and the yen it is about 3%. A complete floating exchange rate is not expected to come anytime soon.

The international law and policy implication of this floating Chinese exchange rate is that, while exchange rate fluctuations will ease the current trade imbalance, they also provide daily indication on the strength of China's economy. One may stop and wonder about this scenario very far into the future--what if the RMB becomes so strong and widely traded that it can be used as an international currency to pay for oil?


sources:
Richard McGregor and Darryl Thomson, China Widens Trading Band of Renmenbi, Financial Times, Sept. 24, 2005, at ft.com.

Edmund L. Andrews, Snow Shifts Its Demand on China, N.Y. Times, Oct. 18, 2005.

Foundation for the Economics of Sustainability.

Caricom rebuffed over the FTAA

Caricom Rebuffed Over the FTAA
BBC Online October 5, 2005.

http://www.bbc.co.uk/caribbean/news/
story/2005/10/051006_ftaa.shtml

In December 1994, at the Miami Summit of the Americas, the heads of state of 34 countries in the Western Hemisphere agreed to form a Free Trade Area of the Americas (FTAA) by January 1, 2005 to progressively eliminate trade and investment barriers.

The FTAA was to be the largest free trade area in the world. The FTAA would increase economic integration and remove the tariff and non-tariff barriers to the free trade of goods, services, capital and investment, benefiting people throughout the Western Hemisphere.

In November 2003, the FTAA Trade Negotiation Committee (TNC) meeting in Puebla, Mexico, reached a deadlock in negotiations. One of the main issues of conflict was agricultural subsidies. The Mercosur countries (Mercado Común del Sur, or Southern Common Markets), led by Brazil and Argentina, demanded that farm subsidies be reduced and that the issue be included in the discussions. The United States felt that agricultural subsidies should be addressed only by the World Trade Organization (WTO) and not within FTAA deliberations. The Mercosur merged in 2004 with the Andean Community to form the South American Community of Nations (SACN).

Caricom (Caribbean Community) countries agreed with the Mercosur position and requested a Regional Integration Fund (RIF) that would give special treatment to countries with smaller economies. Without the special treatment, Caricom believes it will not be able to survive the trade competition in the free trade arrangement.

The Caricom region has already been negatively affected by the large entry of subsidized agricultural products into their region from the developed world. These foreign products place pressure on locally developed goods by forcing Caricom countries to cut out subsidies for their local producers as a condition for financial assistance.

The Bush Administration in 2003 announced that it would negotiate free trade agreements with Andean nations (with the exception of Venezuela) and Panama, which many feared would undercut the FTAA process. This fear may have been realized as negotiations have not continued. Caricom countries are concerned that the draft declaration for the fourth Summit of the Americas is silent on the FTAA. Three requests to the Brazilian and U.S. co-chairs of the committee have gone unanswered.

Will the FTAA ever happen?

Exports still driving demand in south-east Asia

The Economist, October 13th, 2005
"In search of elusive domestic demand"
http://www.economist.com/displaystory.cfm?story_id=5025883

The author suggests that exports remain the primary driver of economic growth in south-east Asia, and domestic demand continues to remain stagnant. For example, exports stood at 168% of Singapore's GDP last year. The author seems to believe that for economic growth to be truly sustainable, it must, at least in part, be driven by domestic demand.

Is this a valid assumption? Is the author's belief that international trade is “fickle,” inaccurate? Finally, if international trade is fickle, why might domestic demand not be so?

New Accounting Rules in the E.U.

"Is a Clear Picture of Corporate Health Being Obscured by New Accounting Rules?"
Financial Times
October 17, 2005
http://news.ft.com/cms/s/c9fc54f2-3eaa-11da-a2cb-00000e2511c8.html


The European Commission recently developed new accounting standards (International Financial Reporting Standards or IFRS) to promote corporate transparency and allow investors to more easily compare accounting information across countries in the E.U. The new standards demand detailed public releases about the value of companies. The new system, however, has many critics, who argue that the volume and type of information requested is misleading and obscures the true status of disclosing companies.

Is there such a thing as too much disclosure? Is IFRS too complex for its own good?

Journal of Gender, Race and Justice 10th Annual Symposium

The Journal of Gender, Race & Justice, a publication of The University of Iowa College of Law, will host its 10th Annual Symposium on Friday, October 7 and Saturday, October 8 at the Levitt Auditorium in the Boyd Law Building. This year's topic is "Crossing the Line? Examining Current U.S. Immigration & Border Policy."

Renowned activists, documentary filmmakers, and professors from across the country will be in Iowa City discussing this timely issue. Topics for discussion include an examination of the effectiveness of border and immigration policies, the ways in which these policies work to marginalize certain ethnic groups, and an in-depth look at immigration and border policy alternatives.

Members of The University of Iowa Community are invited to attend this lively dialogue of ideas. For more information, please mailto:e-mailjgrj@uiowa.edu or visit http://www.law.uiowa.edu/journals/grj/symp.php.