The World Bank as an Instrument of American Foreign Policy
- January 27th, 2020
- in Capstone Commentary
by Claire Faivre
Established in 1944 as a pillar of the Bretton Woods system for European post-war reconstruction, the World Bank’s mission and member base has since evolved to become a fundamental player among international economic institutions. The employment of a weighted voting system that allocates voting power according to member countries’ contribution to the Bank’s capital stock, accompanied by the traditional control over the Bank’s presidency, and the physical location of the Bank itself in the US capital, are considerations consistent with the claim that the World Bank has been effectively captured by the United States. Nowhere is the case of the World Bank’s capture and subsequent use as an instrument of American foreign policy more apparent than the Bank’s mid 20th century missions in Latin America.
World Bank policies consistent with a pattern of US capture include the granting of loans and other forms of aid to countries compliant with US security and economic interests. Per the World Bank’s Loan Handbook for World Bank Borrowers (2017), Volume 1 Section 2 details the three financing instruments utilized by the World Bank. These include Investment Project Financing (IPF), Program-for-Results (PforR) and Development Policy Financing (DPF). While critical relief aid is distributed on a case by case basis, the allocation of loans in any of the three standard forms has historically favored member countries deemed necessary to, and compliant with US foreign policy objectives, neglecting and even punishing those countries that are perceived as a threat. The following case studies will expound on this trend in World Bank loan allocation policy.
Traditionally considered to be within the US’ sphere of influence, Nicaragua played a critical role in helping to achieve US security interests in the 1950s and 60s. As the influence of communism spread across Latin America, there was growing fear amongst US administration that the power of the USSR was physically encroaching on their territory, presenting a very real threat to national security and American political stability. To this extent, the United States enthusiastically supported the Somoza dictatorship that controlled Nicaragua for 44 years, as the family vehemently opposed communism. Consistent with the claim that the World Bank works as an instrument of American foreign policy, the World Bank (2018) reported that Nicaragua was the recipient of 8 loans between the 1950s and 60s. After the Sandinista regime overthrew the Somoza leadership in 1979 though, there was a 6 year halt in World Bank funding to Nicaragua. Though the Sandinista government remained intact, the United States attempted to destabilize the government through various economic and political means during the first years of its rule, and the suspension in World Bank funding to Nicaragua is consistent with the US’ attempt to destabilize the government by targeting the economic welfare of the nation.
The case of Chile is one that highlights the World Bank’s preclusion to loan money to countries that are acting counter to US economic interests. In 1970, shortly after the election of President Salvador Allende, the copper companies of Chile were nationalized per Allende’s campaign promises. These copper companies were partly US owned, and their nationalization presented huge financial losses for those Americans who had invested in them. Consequently, the United States sought retaliatory measures to punish the Allende administration for their interference with American economic prosperity, and World Bank loans to Chile were suspended. This loan allocation, or rather lack thereof, highlights the close relationship between not only the United States and the World Bank, but more accurately America’s business sector and the Bank. Following the assassination of President Allende in 1973, World Bank funding again began to funnel into the country, as suggested by the World Bank report that $5.3 million was then loaned for “Technical Assistance” in 1974. To this extent, World Bank operations in Chile support the claim that the United States has captured the Bank and uses it to bolster US economic concerns.The following will address the continued use of the World Bank to achieve US security interests by examining the allocation of Bank funding to United Nations Security Council (UNSC) temporary members in an attempt to ensure passage of US backed resolutions.
To elucidate the nature of the World Bank’s relationship with the UNSC, it is necessary to briefly examine the institutional structure of the latter. Composed of 5 permanent members and 10 rotating members, the UNSC requires 9 affirmative votes and disallows for any of the 5 permanent members to veto a proposal in order to pass a resolution. To this extent, passage of resolutions requires the compliance of temporary members. As the work of Dreher (2009), illustrates, the United States has influenced these temporary members to ensure passage of favorable resolutions by offering preferential aid distribution from the World Bank to those temporary members. Historically, World Bank aid has not been distributed to the countries that need it the most, but rather to those that are of strategic importance to the United States because of their geopolitical location or commercial significance. The Democratic Republic of the Congo is of little use to the United States politically or economically, however, within the institution of the UNSC during the interim of their service on the council, the DR Congo took on an institutional significance to the United States. Subsequently, a country that between the years of 1960-1981 received on average 1.2 World Bank projects per year, received 10 projects from 1981-1982. It is of no coincidence that the sudden increase in World Bank attention to the DR Congo coincides perfectly with the years during which it served as a temporary UNSC member. To this extent, the United States’ capture of the World Bank and its subsequent use as a means of ensuring passage of preferential UNSC resolutions exemplifies the US’ use of the World Bank as an instrument of US foreign security policy.
To help explain the mechanisms that allowed for US capture, the following will offer a brief overview of the World Bank’s structure and decision making authorities followed by a more in depth analysis of these operations. With 189 member countries all given shareholder designation, the World Bank is representative of almost every country. However, these countries are not equally represented within the institution, particularly in voting considerations. The World Bank employs a weighted voting system in which shareholders are given voting powers consistent with their contribution to the Bank’s capital stock. To the extent that the United States is the Bank’s largest single shareholder, it commands the largest portion of the vote, and in this way has assumed capture of the institution. Additionally, to pass any resolution, the World Bank requires an 85% supermajority which as the following explanation will detail, makes it exceedingly difficult if not near impossible to pass a resolution without the consent and support of the United States.
As of September 2018, the World Bank reported that the United States controlled 15.98% of the total vote. This is more than the combined voting power of the next three largest world economies, those being China, Japan, and Germany respectively, which have a combined voting share of 15.37%. Further, the United States has nearly double the voting power of the entire African continent, with the 53 World Bank member countries maintaining a combined voting share of only 8.07%. To this extent, any attempt to combat World Bank sponsored American foreign policy, and to achieve the required 85% supermajority in voting concerns, would require substantial cooperation from the other member countries. As the data reported by the World Bank suggests though, other member countries that command considerable portions of the voting power, primarily the countries of Western Europe, are allies of the United States and have proven historically unlikely to pursue foreign policy objectives contradictory to the US’. The United States’ domination of the voting system has allowed it to use the World Bank to achieve its foreign policy objectives in the ways elucidated above.
Less critical to explaining the capture of the World Bank but still worth consideration, are the location of the World Bank’s headquarters and the origin of the institution’s presidency. Consistent with the notion that it has in fact been captured by the United States, the World Bank is headquartered in Washington, D.C. and since its creation in 1944, has always been headed by an American. As the largest shareholder in the Bank, the United States is given power to nominate a candidate for the Bank’s presidency. While the nominee is subject to approval by the Board of Executive Directors, the United States’ position as the largest shareholder has historically been unchallenged, thus the nominee pool has always been exclusively American. Until another country becomes a larger contributor to the Bank’s capital stock, or the United States is incentivized to nominate a non-American, the Bank’s presidency, and therefore control of the overall management of the Bank, will remain captured by the US. Headquartered near the US Treasury and within proximity to the influence of Wall Street, the very location of the Bank is indicative of the United States’ influence, and the influence of the American business sector over the Bank.
Conclusively, as a result of the weighted voting system, traditional domination of the Bank’s presidency, physical headquarter locality and disproportionate representation within with Directorship of the Bank, the United States has effectively captured the World Bank. The cases of Nicaragua and Chile are but a few which readily demonstrate the willingness of the World Bank to administer loan allocation policies that are consistent with US economic and security interests. The corollary relationship between World Bank aid apportionment to countries temporarily serving on the UNSC as a means of securing passage of US backed resolutions further supports this conclusion. To this extent, and consistent with the claim of capture, the United States has used its domination of the World Bank as an instrument of achieving its foreign policy objectives since the Bank’s creation in the post-war era.