Andrés Vaccari

Masters of Illusion: The World Bank and the Poverty of Nations
By Catherine Caufield

(The Australian Financial Review June 27-28, 1998)

The World Bank deserves to occupy a privileged place in any self-respecting encyclopedia of paranoia and conspiracy theories. Its hermeticism, public unaccountability and the extent of its power have been the target of much controversy.

While free market advocates applaud the fact that it has opened the developing world for business, a large proportion of the community considers the bank’s name a synonym for modern-day imperialism and the protection of foreign interests. The Left condemns it as a perpetuator of capitalistic oppression, the Right as wasteful foreign aid. Environmentalists and human rights groups draw attention to its deplorable record in these areas. And meanwhile the World Bank lumbers on, impervious to the criticism.

With Masters of Illusion, Catherine Caufield has produced a sober and exhaustive study of this institution, presenting her wide research in a thoroughly readable form. Arising from a unique historical and ideological soil, both the International Bank for Reconstruction and Development (or World Bank, for short) and its sister organization, the International Monetary Fund, had their formal birth at the UN Financial and Monetary Conference in Bretton Woods in 1944. The bank was devised to provide financial assistance to poor nations for long-term development projects. Regarded with skepticism by Wall Street and the US public, the bank’s beginnings were far from auspicious. When it opened in May 1946 it could find neither a president, nor a market for its bonds, nor any clients that would borrow.

Caufield chronicles the World Bank’s expansion from lender and guarantor of loans to financial think-tank, economic adviser, environmental agency and “unofficial planning agency for the Third World”. In the late ’50s, the bank began to involve itself with the design and implementation of the projects it was asked to fund. It extended its areas of expertise and demanded that its clients adopt certain economic policies. Caufield contends that the bank does not have the resources to properly scrutinise and assess the large number of schemes it funds. Furthermore, she argues that it does not even show a strong willingness to do so. Often ignoring local knowledge and the advice of its own experts, the bank opts for a blanket approach to economic reform that has turned out to be misguided and extremely harmful. Although the notion of “development” is central to its philosophy, Caufield maintains that the bank’s understanding of it is vague and arbitrary, measured by a handful of economic indicators like a country’s GDP and the level of foreign investment. For the bank, “development” is also synonymous with infrastructure, such as roads, dams, agricultural equipment and colonization schemes. So-called “social” lending (mainly housing, health and education) is considered unprofitable and still accounts for a minority of loans. Until recently, the bank believed that improvement on these areas would inevitably “trickle down”. However, according to Caufield, most infrastructure projects financed by the bank have been monumental failures, and still cause it much embarrassment. For example, the Sardar Sarovar Dam in India’s Narmada Valley, just one glaring case Caufield studies, cost hundreds of millions of dollars and was deemed useless.

The recent Indonesian crisis (not covered in this book) offers another interesting example. Despite the army of experts at its disposal, neither the World Bank nor the IMF predicted the crisis. James Wolfensohn, the bank’s current president, attributed the massive drop of the rupiah to economic factors and “lack of confidence”, despite the fact that many economists accuse the bank of encouraging an overconfidence which led to heavy borrowing and which became a disincentive to reform. They also claim the bank ignored the political dimension of the crisis, the “signs of nepotism and corruption” which had made the Indonesian economy uncompetitive.

The World Bank emerges from Caufield’s picture as a bloated organization doggedly blind to its own shortcomings, an organization largely responsible for colossal human death and environmental damage, as well as the further decline in the living standards of developing nations. By the 1980s, it had become apparent that the majority of developing countries had not borne well the cost of trying to keep up with the world market economy. Today the burden of their foreign debt far outweighs their growth in GDP, due to heavy borrowing and the lending frenzy of the ’70s. Despite huge injections of money and half a century of scheming, inequitable patterns of income remain the same and the gap between the rich and the poor is wider than it has ever been.

Masters of Illusion is absorbing and distressing, convincing and devastating. But above all, it is necessary. The persuasiveness of Caufield’s argument hinges on her exclusive reliance on authoritative testimonies, including official bank memos and documents, interviews with insiders, employees involved in the projects and the findings of various bank-funded internal surveys. She portrays the bank as an institution afflicted with organizational schizophrenia, stifled by complacency, bureaucracy and a narrow vision.

While the needy will be footing the bill for many generations to come, the World Bank staggers on - a relic of a brave new order that hopefully will never be.