NOTICE

There will be few if any postings between June 1 and June 11, after which time regular postings will resume.

Zoellick nomination to head World Bank prompts cheers, jeers.

Sources:
International Herald Tribune: Zoellick has a new agenda for World Bank
Wall Street Journal (posted on truthabouttrade.org): Zoellick's World Bank bid garners support
Servihoo (Mauritania): Zoellick choice as World Bank president "grotesque": activist group

Robert Zoellick, former U.S. Trade Representative under the current President Bush and Washington insider, was nominated by the U.S. President to head the World Bank in the wake of Paul Wolfowitz’s controversy-wracked resignation.

Zoellick’s nomination must now be approved by the 24-member board of the World Bank. However, most reports suggest that he will be approved by the board without much contention. Zoellick’s supporters, including former U.S. Secretary of State James Baker assert that he will bring strong leadership to the Bank and is committed to its mission of alleviating poverty. Nancy Birdsall, president of a Washington-based NGO called the Center for Global Development, stated that Zoellick’s diplomatic skill and experience will serve him well in the post, charging that former Bank president Wolfowitz had lost sight of the institution’s mission and alienated the board. She said that Zoellick is well-equipped to undertake the process of “calming and healing” which she claims is badly needed at the Bank.

Critics of the nomination voiced concerns that Zoellick, as a proponent of free-market economics, is a poor fit for the Bank in a global climate that is beginning to doubt that free markets are a sound approach to poverty alleviation. The European-based Committee for Abolition of the Third World Debt has called Zoellick’s nomination “grotesque.”

Others, notably Chilean President Michelle Bachelet, criticized not only the nominee but the nomination process itself. In particular, she took issue with the fact that the United States has for sixty years exercised it “prerogative” to select the World Bank president, despite the fact that the Bank is a multilateral institution. She suggests that the Bank presidency should rotate among nations, selecting the best people and not limiting candidates to a roster of US citizens.

Historically, the United States has selected the head of the World Bank while Europe has selected the head of the International Monetary Fund (IMF). However, developing nations and up-and-coming economic powers in particular have criticized this practice.

Of his future as Bank president, Zoellick himself has stated that he must first work to “calm the waters” at the Bank. He also stated that the Bank is undergoing “mission adjustment” but did not go into detail on this statement. Zoellick has not set forth a concrete agenda, and commentators have looked to his past—in particular his role as former U.S. Trade Representative—in attempts to forecast what his approach might be.

The fact remains, however, that such prognosticating may do little to reveal the path Zoellick will take if his nomination is approved. As the U.S. Trade Representative, Zoellick was an appointee of the Bush administration for a post in the same. In this situation, Zoellick is again an appointee of President Bush, but this time the position to which he would be elevated is not an administrative post, rather it is to head a multilateral, international institution.

For discussion:
1. Should only one nation or region enjoy the “prerogative” of selecting the leaders of multilateral, international institutions?

2. Do you think Zoellick is a good choice for the post?

3. Do you think that the World Bank should promote only free market economies?

Solidarity Lending Helps Women in Paraguay Achieve Autonomy

Sources: Jameel Jaffer, Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit through Innovations in Contract Structure; Solidarity Lending Bolsters Community Development

Influenced by recent Nobel Prize winner Muhammad Yunus’s concept of micro credit, the Paraguayan non-governmental organization CAMSAT (Health for All Mutual Aid Center) organized the Área de Créditos Solidarios (ACRE) credit program, a solidarity lending program, in 2000. Catholic priest Pedro Velasco established CAMSAT, which has operated for 17 years in Bañado Tacumbó, one of the poorest neighborhoods of the Paraguayan capital of Asunción, in order to provide training and organize activities aimed at the elimination of poverty in this community. Though the official rate of poverty in Paraguay is 38%, CAMSAT’s 2006 census indicates that at least 85% of the more than ten thousand residents of Bañado Tacumbó are unemployed. Among the residents employed in the formal economy, only one-tenth earn the official minimum wage of US$ 240 per month.

Currently, approximately 750 families are members of CAMSAT. In exchange for their monthly membership fee equivalent to three U.S. cents, family members are entitled to medical care including low cost pharmaceuticals, tutors for children, a soup kitchen for children, and skills training for adults. In addition, CAMSAT offers micro credit through ACRE to 650 local individuals. ACRE loans carry an annual interest rate of 1.6%. In contrast, loan interest rates in Paraguay are generally regulated by the country’s Central Bank, which sets annual rates in the range of 20% to 25% for banks and 25% to 30% for finance companies. Moreover, other types of loans available to the poor in Asunción sometimes charge predatory interest rates of up to 30% a week, effectively precluding repayment.

Typically, banks and other financial institutions do not offer loans to the very poor, or they require collateral, guarantors, and paperwork the poor cannot supply. ACRE, however, neither demands specific requirements nor expects signed documents from its loan applicants. Father Velasco explains that the only prerequisite for an ACRE client is personal commitment. Even with this approach, ACRE enjoys a 97% repayment rate. Quotas are paid off weekly, according to what each borrower can afford. As the initial loan is paid off and the borrower builds a strong repayment history, the line of credit can grow.

ACRE uses a solidarity group lending model. Under this approach, the initial micro credit loan of US$ 60 is dispensed to groups consisting of five borrowers. Each member of the group gets a discrete loan over which s/he exercises exclusive control, but the group structure affords various incentives. Co-members may exert peer pressure on one another or may feel yoked to one another through collective group responsibility and shared social, moral, religious or cultural values and norms, thereby ensuring repayments. Members of the group are from the same neighborhood, may have personal ties, and are familiar with one another’s financial situation, not to mention the idiosyncrasies of the local economy and the future prospects of their co-beneficiaries’ respective projects. They are in a unique position to screen and monitor one another. In addition to these financial incentives, the group structure may also serve as a sort of broadcasting mechanism through which health and other information of relevance to the poor may be disseminated.

One initiative to come out of the ACRE program is the Bañado Poty bakery. Run by a local women’s organization, the bakery was initially set up with a US$ 100 loan to purchase raw materials. Now, the bakery has 19 employees, most of them women, and produces between 600 and 800 kilograms of baked products per day, supplying more than 90% of Bañado Tacumbó food stores, with revenues of US$ 8000 per month. Because the women employees work in their own neighborhood, they are able to care for their respective children. The bakery’s coordinator reports that the initiative has had other positive impacts on the lives of these women: the women are more aware of their rights and of gender equality.

ACRE has grown from 30 solidarity loan groups to 130 groups, and currently moves about US$ 60,000 per year. The program has developed thus fair without any outside aid, covering its own administrative costs, maintaining the flow of credit, and absorbing any unpaid loans through the funds derived from the 1.6% interest rate. If an institution were to provide ACRE with money so that it could loan US$ 200,000 per year (equivalent to more than 1 billion guaraníes) to 300 solidarity loan groups, CAMSAT projects it could use the profits earned to expand into housing programs for the poor.

For discussion: Should governments in developing countries create incentives for commercial banks and financial institutions to make donations to solidarity lending programs like ACRE? Should governments allocate parts of their budgets to such programs?

China dabbles in high finance, prompting US concerns

Sources: Los Angeles Times: China taking a stake in US investment titan; Reuters: China not expecting control of foreign companies: paper.

The United States is perhaps the world’s biggest proponent of “free trade”, open markets, and liberalized economies. However, the US government’s enthusiasm for globalization appears to wane when foreign countries begin to invest in domestic (US) companies or markets. This kind of trepidation resurfaced this week as the Chinese government invested a substantial sum--$3 billion--in the Blackstone Group, an aggressive US investment firm that has stakes in a number of leading US corporations.

China’s government operated entity, the State Investment Co., will hold a stake in Blackstone that amounts to just under 10% of the management company’s stocks. If the deal had met or exceeded 10%, it would have required approval by the US government. Notably, Chinese holdings in Blackstone will be tied to the management company as opposed to the funds it controls. Further, the stocks purchased by State Investment Co. are non-voting shares, so concerns about undue influence being exerted on US firms and financial markets is likely unfounded.

Reports note that this is a major move for China, a growing power in the global market. They also suggest that it is part of that country’s shift from operating almost solely as a center for affordable manufacturing (something that US and other interests have taken advantage of for years) to a player in the world of high finance. It appears that it is this transition may be the source of US concern; reports note the fact that China backed out of a bid for the oil giant Unocal in 2005 amid harsh public criticism of the proposed deal in the US.

For discussion: Do you think that US concerns over China’s growing involvement as a leader in global markets are misplaced?

Is China’s prosperity and growing economic prowess a success story, a threat, or both?

What is the goal of economic development if not to empower nations to engage globally in financial markets?

Is US discomfort linked to valid concerns regarding economic security or is it a protectionist, NIMBY (not in my backyard) approach to free markets?

Grant-Proposal Guidelines and Their Effects on NGO Programming: An Intern’s Perspective in Cambodia

Tiana Gierke has written an "On the Ground" essay that explores the tensions between Cambodian NGOs and the international donor community. An intern at the Legal Aid of Cambodia (LAC) in Phnom Penh, Gierke suggests that in their chase after donor funding, NGOs risk losing their focus: "While the benefits of the indigenous-rights project cannot be ignored (providing access to justice in Cambodia’s most remote provinces), my experience in Cambodia showed me that there is an inverse relationship between the breadth of NGOs’ programs and the effectiveness of their service to a community. An organization that is constantly expanding to tackle new problems or to serve new communities beyond its expertise inherently forgoes opportunities to improve or expand existing projects. There is a balance to be struck for sure. However, it is in the public’s best interest for NGOs to specialize, and in some respects, the grant application process encourages just the opposite."

We encourage our readers to use our blog to discuss the essay with the author.

"My Lessons from Korea"

Our Center has recently debuted a new feature, On the Ground, which provides experiential essays relating to development. One of the essays currently posted is by HeeJin Lee, who interrogates the meaning of development as it relates to her upbringing in Korea and her development work for Korea's Foreign Ministry. She states, "By learning more about Korea and reflecting on my own experiences, I realized that development is not necessarily a distinctive process with a clearly defined beginning and an end. Rather, I believe that it is more of a continuous accumulation of the effects of socio-economic policies, no matter how small, on the everyday lives of ordinary people. "

We encourage our readers to use our blog to discuss the essay with the author.

Wolfowitz Resigns

Paul Wolfowitz, President of the World Bank, has submitted his resignation, effective June 30th. The circumstances of his resignation are unprecedented. Below is the link to the statements of the Executive Board and Mr. Wolfowitz.

http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21339650~pagePK:34370~piPK:34424~theSitePK:4607,00.html

Wolfowitz's Fate

Below is the link to the Second Report of the Ad Hoc Group "concerning a possible violation of [World Bank] Staff Rules in favor of a member closely associated with [President Paul Wolfowitz]." This document is posted on the World Bank's website.

http://siteresources.worldbank.org/NEWS/Resources/secondreportoftheadhocgroup.pdf

South American Countries to Create a New Development Bank

Sources: Adios, World Bank!; Ecuador President Suggests Regional Fund to Replace IMF; South American Bank Members to Inject Up to $500 Million; South American Countries Agree Creation of Development Bank

During their meeting last week in Quito, finance and economic ministers from Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela agreed on an initiative to establish a new multilateral development bank—the Banco del Sur (Bank of the South) — for South America and to restructure the Latin American Reserve Fund (FLAR), transforming it into the “Fund of the South,” a macroeconomic stabilization fund to manage the reserves of South American countries and provide a single monetary unit for the region. The president of Ecuador, Rafael Correa, still irate with the World Bank’s recent cancellation of an already approved US$100 million loan, expressed his public support for a South American multilateral lending fund and the creation of a regional currency; at a meeting with the various finance ministers, he suggested the proposed bank and fund comprise a strategy to obstruct the “financial logic” of the World Bank and International Monetary Fund (IMF). The World Bank cancelled Ecuador’s loan in response to Ecuador’s congressional reform of an oil-revenue fund originally established in 2002 at the behest of the International Monetary Fund (IMF); the fund was initially structured so as to apportion 70% of revenues for foreign debt repayment (e.g., repayment of loans to the World Bank). Ecuador—hoping to address the dire conditions of over half its population, which lives under the poverty line—lowered this amount to 50%. President Correa further commented that the World Bank and IMF have failed to balance their “dual roles as agents against poverty and representatives of big international creditors.”

Indeed, frustration over the last two decades across many South American countries with the World Bank and IMF, as well as other multilateral finance institutions, has gradually led to a backlash against these lenders and has simultaneously increased the momentum of plans for an alternative bank. Last month, the Venezuelan government declared it would pay off all its outstanding debt with the World Bank five years ahead of schedule; furthermore, President Chavez announced that Venezuela plans to withdraw its membership in the World Bank and IMF. Similarly, Argentina, Brazil, and Ecuador have settled their debts with the IMF. Supporters of an alternative development bank staunchly oppose the policy prescriptions and conditions the World Bank and other multilateral lending institutions have historically imposed on borrowing nations; studies by the Center for Economic and Policy Research and the United Nations’ Economic Commission on Latin America have shown a correlation between this “conditionality” and the persistence of poverty and inequality. It is thought that the imposition of inequitable conditions are attributable to the governance structures in multilateral lending institutions: voting privileges in the World Bank and Inter-American Development Bank (IDB) are based on financial contributions, thereby granting the United States Treasury the largest share of the vote. The United States is also the only member of the IDB to wield veto power. P romoters of the new development bank, in contrast, indicate that voting power will be based on neither monetary contribution nor political might, and that no single country will be the “sole owner.”

Brazil’s Finance Minister Guido Mantega explained that capitalization for the proposed bank of the South will come from contributions ranging between US$300 million and US$500 million from each member country. Preliminary estimates suggest the bank could start with between US$ 800 million and US$ 1 billion. Mantega further explained that the “ultimate objective is the creation of an economic, social, and political block like the European Union.” Ecuador’s Finance Minister Ricardo Patiño announced at a joint press conference that the member countries will invite Costa Rica to participate in the analysis of the restructuring of the Latin American Reserve Fund. Presidents of the member countries will formalize the creation the new development bank sometime in late June, possibly in Caracas, during the opening of the America’s Cup. The next planned meetings of officials will take place on May 11 in Rio de Janeiro, Brazil, and May 22 in Asunción, Paraguay.

For Discussion:

Will the Bank of the South be able to compete with the Inter-American Bank, whose major shareholder is the United States? Will the creation of the Bank of the South further delegitimize the World Bank? What kinds of innovative lending arrangements might member countries of the Bank of the South devise?

Lula Ignores Drug Patent That Would Reduce Poor Brazilians' Access to HIV/AIDS Medications

Sources: AIDS Drug Negotiations Break Down Between Brazil and Merck; Brazil Breaks AIDS Drug Patent with Generic Version from India; Brazil Bypasses Patent on U.S. AIDS Drug; Brazil Overrides Merck Patent on HIV Drug; Indian Generic Drug is Brazil’s Pick

On May 4, 2007, following three years of failed negotiations with the American pharmaceutical giant Merck & Co., Brazilian President Luiz Inácio Lula de Silva issued a “compulsory license" for Efavirenz, an anti-retroviral drug used by people infected with HIV/AIDS. The Brazilian government had attempted to induce Merck & Co. to reduce the price of Efavirenz after classifying it as a drug “of public interest” on April 25 and asked the company to make Brazil a better offer. Merck & Co. responded by offering a 30% discount ($1.10/pill, down from $1.57) that President Lula da Silva, heeding the advice of Health Minister José Gómes Temporão, promptly rejected. Generic Efavirenz sells for as low as $0.45/pill; Brazil hoped to negotiate a price of $0.65/pill, the price Merck & Co. charges Thailand. Lula da Silva’s signed decree effectively bypasses Merck & Co.’s patent on the drug, permitting the Brazilian government to import rival generic versions of Efavirenz or produce it locally, and thereby escalates the global conflict over drug pricing between the pharmaceutical industry and developing nations, particularly with respect to HIV/AIDS.

Although the country has threatened to break drug patents in the past, Friday’s decree was the first time the Brazilian government had ever followed through on such a threat; in previous negotiations with large pharmaceutical companies, threatening to break patents actually won price reductions for the Brazilian government. Such was the case in 2005, when Abbott Laboratories negotiated an agreement for Kaletra, another anti-AIDS drug.

Brazil has justified its action in boosting affordable AIDS medicine on the 2001 World Trade Organization (WTO) Trade Related Intellectual Property Rights (TRIPS) agreement, which authorizes developing countries to privilege public health over intellectual property by issuing compulsory licenses in health emergencies or when pharmaceutical companies engage in abusive pricing. The compulsory license mechanism allows the developing country to legally manufacture or buy generic versions of patented drugs while paying a small royalty to the patent holder. Merck & Co.'s Vice-President Jeffrey Sturchio, in contrast, has characterized Brazil’s action as an expropriation of intellectual property and said that it “will have a chilling effect on whether companies research diseases of the developing world and in the long term will have an impact on the poorest countries.”

Under Brazil’s public health policies, the government provides free AIDS drugs, condoms, and syringes to the poor. Approximately 180,000 Brazilians receive free AIDS drugs, but among these, only 75,000 take Efavirenz. This policy has stabilized HIV infection rates in Brazil to a level comparable with the infection rate in the United Stats: around 0.6% in adults. Merck & Co. points to Thailand's higher prevalence of HIV in explaining the $0.65–$1.57 price differential.

Some news agencies report that President Lula da Silva’s Chief of Staff has yet to decide whether to allow Brazil to manufacture or to import generic versions of the drug, while other sources report that Brazil will purchase generic Efavirenz from three companies in India at a 72% discount and will pay Merck & Co. a 1.5% royalty on these imports.

For Discussion:

What kind of bargaining power exists between giant pharmaceutical companies and governments of developing countries? What is the proper balance to be struck between rewarding innovative pharmaceutical companies and promoting public health by offering free access to AIDS medications? Should intellectual property laws be enforced in a more flexible manner in order to protect the health of those living in developing countries?

“Even the Montreal Canadiens are now American…”

Sources: CanWest News Service: Tories slammed for standing by as firms gobbled up; Financial Post: Canada Inc. needs better governance; CTV.ca: Flaherty to issue clarification on tax policy; Ottawa Citizen: Pressure mounts on Tories to explain takeover policy

The title of this entry is a statement made by a member of the New Democratic Party (NDP) in Canada. It illustrates how political tensions are mounting there over two related policies that affect international commerce:

1) The “gobbling up” of Canadian firms by foreign entities—a government agency, Investment Canada, is charged with overseeing and approving or denying bids by foreign interests to take over domestic companies—it has yet to deny a single bid.

2) A proposal by the Conservative (Tory) government that would eliminate the ability of Canadian corporations to deduct interest from loans used to finance foreign investments. The Tories claim the measure would prevent “double-dipping” by domestic companies that locate in “tax havens” and so already avoid paying Canadian taxes. The Liberals and the NDP, however, claim that the policy undermines the competitiveness of domestic companies in the global market.

Tensions regarding these policies have increased in the wake of a hostile takeover bid by the U.S. based Alcoa, Inc. of Canada’s Alcan. Both are major aluminum producers. However, it does not appear that Alcoa will be alone in trying to acquire Alcan, significant interest has come from other foreign corporations as well.

Alcan joins a growing list of Canadian companies that have been purchased by foreign interests, and minority parties are beginning to question whether or not the takeovers are serving the best interests of the Canadian people. In particular, concerns have been voiced over potential job losses. Quebec’s Industry Minister noted that “[t]he government does not intervene in financial markets or the structure of ownership of companies,” but “[w]e do intervene to preserve jobs.”

For discussion:

Do you think the Canadian government can “intervene to preserve jobs” without “intervening in financial markets or the structure of ownership of companies”?

Do you think job preservation is a proper role for the government?

World Bank Gives Aid to Help Kazakh Youth

Source:
Frozen Funds to Help Kazakh Youth under New International Agreement

This week, the World Bank announced its plans to assist the governments of Kazakhstan, the United States, and Switzerland in setting up an independent foundation in Kazakhstan to help poor children in Kazakhstan. The foundation is called the Bota Foundation (“young camel” in Kazakh) and will use approximately $84 million of the Bank’s frozen funds.

The concept and program of the Bota Foundation was developed by the World Bank in response to a request from the three governments to develop a way to use the funds for the direct benefit of the people of Kazakhstan, a country of 15 million people with an average per capita income of $3,800. Shigeo Katsu, World Bank Vice President for Europe and Central Asia, says that it “is very gratifying to see that under this agreement the funds will go to support poor Kazakh families and children-at-risk through community-based activities and scholarships….This is a very positive step forward for the Kazakh people and government, and the World Bank is pleased to play a role in ensuring that the funds are invested in youth whose development and aspirations are so critical to Kazakhstan’s future.”

Question: Under the agreement, the funds are to be directed in the most transparent and efficient manner to the most deserving sections of society where the application of these funds would have lasting developmental impact. What mechanisms should World Bank put in place to ensure that the funds are dispersed according to their best, most beneficial use?