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Liquidating the World Bank: with debtor countries buying back their loans and introducing self-financing development

Discussion paper

By Dr. Shann Turnbull

Shann Turnbull obtained an MBA from Harvard in 1963 and wrote Democratising the Wealth of Nations in 1975 based on his experiences as an investment banker. He has been an advisor to corporations, national and provincial governments and is a co-author of the TOES book Building Sustainable Communities. He is currently a board member of the Capital Ownership Group and a Fellow of the International Institute for Corporate Governance and Accountability, both sponsored by the Ford Foundation. He obtained his PhD by showing how the science of governance can be applied to organisations. 

12 June, 2001

Outline of the proposals

The World Bank (WB) claims that it cannot cancel any more debt without jeopardising its ability to borrow funds for lending on at the lowest interest cost.

Additional debt could be immediately cancelled if the WB terminated the need for any further borrowing by stopping making loans while teaching client countries how to introduce self-financing development.

Existing borrowing by the WB could be repaid from loan repayments to the bank by viable client countries. The $29 billion in shareholder funds and retained earnings of the bank could then become available to cancel the debts of the least viable client countries. In this way the WB could be wound up over the next 20 years or so.

The need to call upon some of the $177 billion of uncalled shareholders funds to payback the $199 billion the bank has borrowed to finance its operations would depend upon the ability of borrowers to payback their loans. This in turn would depend upon the success of implementing the self-financing proposals outlined below. These proposals would make the WB a genuine partner with its client countries because if development is not achieved the interest and principal payments to the bank will be diminished or not paid. The WB will be forced to write off further debt to increase the liability of its shareholders to make good any shortfalls in liquidating the WB.

Whether or not a bank termination plan is put in place a program should immediately be introduced to allow any debtor nation to buy-back their loans from the WB and its International Finance Corporation (IFC) that makes loans to their private sector. The loans from the WB/IFC would be purchased by a specially constituted "Economic Development Facility" (EDF) established in each country buying back its loans. The EDF would issue local currency bonds to the WB/IFC to purchase the loans to their country.

The EDF would be established in a local development bank (LDB), or other nominated domestic bank. The EDF would initiate and manage a self-financing development program that would become locally managed and controlled over a five-year period to terminate the alien economic policy prescriptions of multilateral financial institutions and minimise financial exploitation by unilateral and private sector lenders for projects that could be internally self-financed. One way of establishing internal self-financing institutional arrangements with the extra attraction of widely sharing the benefits of development is set out in my discussion paper "The use of central banks to spread ownership" http://cog.kent.edu/CogStrategyConf6-8May2001/COGCentrlBks3.htm

How client countries could buy back their WB/IFC loans

(Outline for discussion and illustrative purposes only)

1. WB enters into 20-year management contract with the LDB or other designated entity in the debtor country to initially manage the EDF in conjunction with the client government and its Central Bank (CB).
2. EDF purchases its country’s WB/IFC loans by issuing 20-year bonds in a local currency but with the interest payments stapled to the net profits of the EDF. This means the WB would not be paid interest on its 20-year local currency bonds if the EDF did not make profits.
3. WB staff initially manages the EDF in the client country until indigenous staff is trained to take-over during the first five years.
4. The EDF at its option may redeem or buy back all or part of its local currency bonds issued to WB/IFC at any time at their original US dollar cost. This option provides a way for client countries that are successful in introducing self-financing development to terminate the export of excess profits from their success. These profits would otherwise be exported in the form of interest payments to the WB/IFC as provided for in point B above. This option also provides the WB with an incentive to assure the successful training of indigenous managers to take over the self-financing development process.

Details (for discussion and illustrative purposes only)

1. WB transfers staff to the LDB to train local management with $US dollar costs paid for from the proceeds of $US interest payments made by the client government on its debt now held by the EDF.
2. A contract between WB, LDB and CB sets up a $US dollar escrow account/sinking fund to receive all $US dollars remitted to the client country by other financiers, investors, and also obtains hard currency from exports generated from development projects financed by the EDF. (Client government retains control of all hard currencies obtained from aid agencies, earnings from established export businesses and any remittances from foreign investments). In this way the LDB maintains control of the hard currency it attracts and/or earns from its development projects. This would provide the capacity for the EDF to buy out its obligations to the WB/IFC if it wishes to exercise it option provided for in point D above to accelerate the rate of development.
3. Payments to the WB in $US for the management of the EDF converts to a local currency after five years to force the indigenisation of its management.
4. Pursuant to the contract between the LDB, WB, CB and the client government the EDF can:

Self-financing techniques

EDF finances projects by creating alternative currencies and/or selling interest free loans as described in the "The use of central banks to spread ownership". A key point of this paper is its description of how to keep wealth producing projects balanced with welfare projects to avoid creating dependency of a "debt trap".

In addition, other community self-financing initiatives are introduced through sub-contracts by the WB with the E.F. Schumacher Society in the USA, the New Economics Foundation in the UK and similar other non-government organisations from around the world. A number of these techniques are outlined in the TOES book: Building Sustainable Communities: Tools and concepts for self-reliant economic change by Bennello, Swan & Turnbull, edited by Ward Morehouse. Some of these proposals were included in the ten specific suggestions by the author submitted on November 19^th 1999 to the WB "Development Market Place" with the support of the Australian aid agency, AusAID. They are listed below to illustrate various ways of introducing self-financing self-governing development processes that could also counter corruption from enriching democracy.

Proposals WB Tracking number

1. Attract external investment while increasing local ownership¹ 991911042258 AMT

2. Self-financing urban development 991911043713 AML

3. Watchdog Boards 991911044940 AMS

4. Self-regulation and embedding democracy 991911034120 AMS

5. Social, ethical and environmental auditing 991911022303 AMA

6. Self-financing development 991911023928 AMS

7. Tax policies to democratise the wealth of nations 991911031420 AMW

8. Loan insurance to finance development 991911075313 AML

9. Self-Help Associations for Regional Economy (SHARE) 991911070741 AMS

10. Local currencies for financing development 991911051153 AML

In regards to the last point, redeemable local currencies could be in the form of "negative interest rate" money widely used in the USA during the great depression as reported by Irving Fisher in his 1934 book Stamped Scrip published by Adelphi & Co. This illustrates the need for developing countries to learn about and adopt techniques that were utilised in the last century by those countries that achieved development without the presence of the WB. Specially created project currencies can also be used to finance infrastructure projects with their redemption being achieved through usage payments for water, roads, schools, hospitals, and power suppliers, etc. Grameem Bank type lending provides another method of revolving finance at the local level.

Operation of program

When a country purchases its loans from the WB/IFC, the interest cost exported from the country is tied to the profits made by the EDF pursuant to point B above. These profits should rise with successful and expanding development. This is because the EDF is obtaining interest free credit from the CB and/or from its own issue of local currencies and earning interest on advances to private sector firms and development projects formerly financed by the IFC and any other international financiers who the EDF can replace. In effect the EDF is privatising the cost of servicing WB loans.

As the EDF has the ability to leverage its balance sheet with new credits it can leverage its income accordingly like a commercial bank does from "fractional banking" (Refer to "The use of central banks to spread ownership"). The income of the EDF and so that remitted to the WB is maximised by minimising the EDF management costs and maximising the financing of private sector projects. This should allow the income paid to the WB through the stapled local currency income bonds to greatly exceed the current interest earned by the WB on its current loans. It is to avoid this situation that the EDF obtains the option, but not an obligation, to redeem its local currency bonds to the WB/IFC in $US at any time.

Additional sources of EDF profit could arise from the issue of "Stamped Scrip" and other specialised project currencies. These sources, with the foreign exchange escrow account, would allow the EDF to directly capture in hard currency, profits from development and preserve their value independently of official government money and the economic policies of the host government. In other words the arrangements would allow the EDF to quarantine its activities to protect the sovereignty of host governments from World Bank and/or IMF imposed policies.

If the EDF program is not successful then the WB will loose interest on its loans and the local currency loans will not be converted to $US and redeemed. The WB would well then be forced to forgive the local currency bonds it accepted in replacement for its $US dollar loans. It is no use continuing with the present arrangements that have demonstratively failed to introduce self-sustaining development. Here is a way to tie the future of the WB on its ability to introduce self-governing self-financing development for the poor nations of the world.