The Global Governance of the World Bank

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EX NO: Y3587462

The Global Governance of the World Bank and

Asian Development Bank can best be Understood

as Part of the Logic of Global Capitalism

Critical Assessment

4,043 Words (Excl. Bib)

3/15/2016

MUNDUS MAPP: European Public Policy

International Organizations Dr. Jappe Eckhardt

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Introduction

The 21st_{century is a peculiar time in geopolitics and global capitalism. In the decades leading} up to it, the world order has become muddled with uncertainties and obfuscated conflicts. After World War II, the world quickly became shaped by a divisive development in the

balance of powers: a seeming divide between East and West, and more importantly a cold peace between ideals. The victorious nations of World War II quickly came to the realization that their alliance had held water only in the dire necessity to overcome the Axis powers. In the time of rubble and reconstruction, communism and capitalism seemed to have little in common; mistrust and hostility resurfaced. Consequently, and rather simultaneously, the United Nations (UN), the World Bank (WB), the World Trade Organization (WTO), and the International Monetary Fund (IMF) were established. These organizations essentially became tools of providing stability and removing trade barriers. At face-value, these aimed to provide economic growth and enhanced national security opportunities for all member countries involved. This in turn led to a whirlwind of economic development within the participating countries; unfortunately, research has exposed this growth as unsustainable in several African nations and in much of South America (Dollar et al., 2004). Similar to these international developments, in 1999, we witnessed the creation of the European Union (EU) and subsequently the introduction of the shared currency, the Euro (EUR), in 2002. The establishment of the European Union was indicative of a societal inclination towards

providing smaller states with more power through aggregate decision making. Thus, through the examples given, the overall trend of the 21st_{century has arguably been the creation of} multilateral agreements and allegiances, a search for mutual benefits (Kissinger, 2014; pp. 366).

The question posed within the paper is as follows: whether, or not, the creation of the Asian Development Bank (ADB) and the World Bank could be considered a development outside of

the interests and logic of global capitalism. This will be analysed and considered on the grounds of the definitions provided for the WB and ADB, the rhetoric used by the respective banks, and the overall fit into the definitions of capitalism, and more importantly, the

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conducted in academia. More importantly, plenty of contemporary discussion within news and media are tracking a perceived shift into the direction of multi-, uni-, or bipolarity.

Definitions

In order to provide an overview of this topic, the following definitions are vital in order to

establish an understanding of the status quo.

Global Governance

The movement or theory of global governance is closely related to, and often involves, institutionalization. Within this paper, the approach taken to understand global governance

will be in line with historical institutionalism, as reflected by Charles Tilly in his approach of studying history via “big structures, large processes and huge comparisons” (Tilly, 1984). More precisely, this refers to nations delegating power to an institution in pursuit of shared goals or ambitions - such institutions include the UN, WB, WTO, and the ADB. The name suggests a type of governance that is exerted beyond a singular entity, and thus a non-singular system. Professor Adil Najam has effectively defined the concept as “the management of global processes in the absence of global government” (Riazati, 2006). The rise of global governance could be described as an organic response to the overarching trend of

globalization, marked by the dissolution of the Soviet Union in 1991. Recently, the post-Cold-War geopolitical environment was witness to a paradigm shift that required new responses to shared international anxieties such as: environmental concerns, property rights, trade, public health, and agriculture. Several of the aforementioned factors require a new response and have been conceptualized as “global commons”, defined by Smithian economic theory as

“rivalrous” and “non-excludable” (Smith, 1992). However, heterogeneity of preferences, the feature that provides efficacy to global governance, is also simultaneously undermining common global goals. Through the myriad actors involved, compromises need to be made,

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Global Capitalism & Capitalism

Global capitalism, as opposed to capitalism, is the global trend that has been homogenizing states and economies’ economic structures. As with global governance, global capitalism has also recently emerged from the downfall of the Soviet Union and the consequent shift in national priorities (Gilpin et al., 2000, pp. 458). The natural result of the globalization of capitalism is a significant increase in competition, and consequently, a growing necessity for nations to specialize productive efforts. According to the theories and research conducted by a number of established economists, ranging from Adam Smith to Joseph Schumpeter,

capitalism is able to promote economic growth and improve standard of living (Smith, 1993; Kissinger, 2014; Gilpin et al., 2000; Lucas, 2003; Schumpeter, 1942). Nonetheless, despite

the vogue for these claims and the intellectual calibre of the proponents of this theory, it remains highly controversial. Equally, it is claimed that capitalism does not lead to wealth

creation for the general populace, and there is a contemporary rise in the belief that capitalism leads to wealth creation only for a small percentage of people in a given society. This belief is

critically reflected in the Marxian theory of capital accumulation, in which wealth does not trickle down, but rather becomes concentrated in the hands of a few – later elaborated on by the likes of Thomas Piketty (Marx, r.1990; Piketty, 2014). Hence, global capitalism refers to market capitalism as a system transcending borders, thus enlarging the market, and increasing the amount of involved actors.

International Organizations

As the section on “Global Governance” (p.3), explains, institutionalization and global governance are two concepts that work hand-in-hand. In this paper, institutionalization will refer to the process by which a person or entity accessing an institution is being forced to adhere to strict norms and controls in order to be accepted (Merriam Webster, 2016). International organizations are, as the name suggests, organizations with international members, influence, or presence. They can be subdivided into two main types: (1) International non-governmental organizations [INGOs] and (2) Intergovernmental organizations [IGOs]. INGOs are non-governmental organizations that operate

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Nature Organization, and World Trade Organization. Across IGOs, the purpose can vary greatly, some with a general scope and others pursuing niche or precise missions.

Thus, with a number of international organizations, the membership structure makes for several actors or states aiming to cohesively tackling a problem together, arguably via global

governance.

i) World Bank

The World Bank (WB) is a multilaterally governed, international financial institution founded in 1944 at the Bretton Woods Conference, and its membership comprises 188 participating

countries. It was founded simultaneously with three other institutions including the

International Monetary Fund (IMF). Both the WB and IMF are based in Washington, D.C.,

and are known to frequently collaborate. The WB provides credits and loans to developing nations in the self-proclaimed pursuit of the global reduction of poverty. More specifically, and according to the WB’s Articles of Agreement, “All its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment” (World Bank, 1989). Historically, the WB has been managed almost solely by American nationals; of the 12 WB Presidents, 10 were born Americans, one was an Australian (James Wolfensohn) who was a naturalized American citizen before taking office, and there has been one South Korean national (Jim Yong Kim), who also later became a naturalized American citizen.

ii) Asian Development Bank

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Debates on Capitalism

There are myriad fiercely contrasting perspectives on capitalism: to many, it is more than just an economic system - it’s a school of thought and an ideology. Capitalism is often identified by its characteristics: private property, capital accumulation, wage labor, voluntary exchange, a price system and competitive markets. These may occur in concert or isolation within an economy (Gregory, 2012; p. 41).

Capitalism

When Winston Churchill discussed democracy, he famously coined the idea that “democracy is the worst form of government, except for all others” (Churchill, 2008, p. 574). Many proponents of capitalism believe that it, too, should be held to the same standard and

considered similarly as a system with inherent value, and inherent flaws, but with the positive outweighing the negative (Krugman, 1997). Operating on this premise, a multitude of camps emerged, leading to debate regarding the necessary level and amount of economic

governance. For the sake of brevity, the systems discussed will be laissez-faire and mixed economy. Arguably, the only economic system working within nations operating under the Washington consensus is the mixed economy system. This is the result of economic

neoliberalism, mixed with the necessity for governments to provide quality controls and services such as welfare, healthcare. Therefore, in its purest form, laissez-faire economic governance is non-existent in modern, Washington consensus capitalism. Thus, within this paper, the focus will remain on mixed economy capitalism .

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Figure 1: World's GDP per capita, since beginning of the Industrial Revolution

(Maddison, 2001)

This type of evidence of the global GDP growth is undisputed, yet the question raised is

whether there is a direct correlation between global growth in GDP and poverty reduction. Understanding whether the growth of GDP alleviates poverty is essentially at the forefront of

interest for economists, on both sides of the spectrum, whether they are proving its efficacy or disproving it (Wade, 2004). According to standard economic theory, the Heckscher-Ohlin model, trade gains should flow to abundant factors. This suggests that in developing countries unskilled labor would reap the most significant benefits from global capitalism and trade liberalization (Topalova, 2007). Conversely, according to new theories, in the long run this could in actuality reduce the wages of unskilled labor forces, even in countries boasting labor abundance (Topalova, 2004). Banks are a vital part of this economic structure as they provide capital necessary for businesses to operate and invest. In terms of the monetary interplay, there are effectively three major currencies (the USD, EUR, and JPY) clashing with one another. This could be compared to a collision of tectonic plates, with the resulting ripples and quakes being felt internationally. Nonetheless, capitalism works best when the markets are closely tied to another with little or no barriers of trade in place; consequently, there is a clear

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Global Capitalism

The line that separates the terms ‘globalization’and ‘global capitalism’ is blurred and

obfuscated. In both instances, we are discussing conditions in which governance structures are changing owing to international integration (Albrow et al., 1990). The IMF saliently defined

four essential factors of globalization: (1) trade and transactions; (2) capital/investment movements; (3) migration and movement of people; (4) the dissemination of knowledge (IMF, 2000). Unequivocally, these terms can also be considered pillars of capitalism, as capitalism also relies on trade, markets, capital, intellectual property and free movement of capital and labor.

Global capitalism as a system aims to incorporate and integrate as many countries as possible, as this effectively creates a larger market and greater opportunities for productive

specialization for all involved. Arguably, sharing economic systems also leads to less geopolitical friction, as goals and values tend to be more aligned. Inevitably, this relentless growth and intensive expansion is leading to massive privatization and commodification. Famously, some critical economists fear this development and predict an exponential decrease

in public spheres within involved nations (Robinson, 2008). This in turn could then

undermine the services provided by the public sector, such as health, education, housing, and

enterprises. This discussion also provides reason to criticize or question the ulterior motives of international organization such as the WTO and WB.

Polarity in Politics

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Unipolarity, or as it is also commonly referred to as “hegemony”, describes a system of power distribution whereby one state is undeniably more influential than all others. This influence can be defined by cultural, economic, or military dominance [or all three] (Huntington, 1999.p. 2). Arguably, the nation that would be most emblematic, for having been a hegemon in contemporary history, would be the United States, post-Cold War. In the wake of the dissolution of the USSR, the US was able to secure power and influence on a variety of levels, whilst simultaneously securing leading positions in international organizations. To date, ample academic evidence supports that the US has retained its position as global hegemon (Wolforth, 1999; Kagan, 2008). The resulting stability derived from unipolar domination is established on the basis of raw power advantage. Numerous IR scholars debate the potential of unipolar power to lead to global peace, the most salient counterargument being that an

asymmetric distribution of power is unsustainable and ultimately breeds conflict. Monteiro, for example, has emphasized the multitude of inter-state-wars that the United States was

involved in merely between 1990 and 2013: Kuwait, 1991; Kosovo, 1999; Afghanistan, 2001-present; Iraq, 2003-2010 (Monteiro, 2011).

Bipolarity

Bipolarity is defined by the duality of global power shared – thus, the power distribution is shared by two states. Generally, within this scenario, states find themselves having to choose to ally with one or the other, yet unable to work with both. The Cold War provided a textbook example of this dynamic with the dichotomy of the USSR and the US (Waltz, 1964). Both were strong sovereign states with strongly defined values and cultures, large populations, advanced technology, ample resources, and military power; granted, many of these vaunted characteristics would later falter or be disproved, but for a period this was the case. The dichotomy this created led to countries establishing allegiances based on these factors, as well as on reciprocal diplomacy. Critics believe this system to be inherently flawed, as it could lead to a perpetual condition of Pareto efficiency, in which two states will continuously grow and develop at the expense of all others (Piketty, 2014). Similarly criticized within Trotsky’s

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neither state will aggressively expand or absorb nations as this will lead to countermeasures taken in order to level the playing field (Waltz, 1974). Nonetheless, this argument could also

be turned on its head: it could be argued that this is exactly what one can witness within international politics, wherein the U.S and Russia have been erecting military bases and

missile silos in a competition for supremacy (Kissinger, 2014).

Multipolarity

Logically, following the conceptualization of polarity within uni- and bipolar examples, the state of multipolarity is defined by the condition wherein a multitude of nations are on equal footing with regard to military, cultural, and economical power. Multipolarity within IR is considered a geopolitical condition in which states tend to be evenly distributed, with ample openings for collaboration. This opportunity simultaneously has potential for growing tensions and conflicts, as the abundance in points of contact are conducive to friction (Vasquez & Heneham, 1999).

Conclusion & Analysis

The previous chapters have discussed and defined some of the terms and concepts that are essential in order to better understand the global governance of both the World Bank and the Asian Development bank - namely, by providing an overview of what global governance is, how international organizations work, the differences between capitalism and global

capitalism, and describing polarity within an international relations context.

These terms, theories, and concepts are vital in order to further the discussion surrounding the

thesis deliberation: “The Global Governance of the World Bank and Asian Development Bank can best be understood as Part of the Logic of Global Capitalism”.

The global governance of the World Bank, as defined within the prior chapters, can be

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continuously been claimed in ever-reoccurring-manner by US nationals, with no other nationals having a chance at taking the presidency. Secondly, the headquarters are

geographically located in the heart of the American capital, providing proximity to all important US political and financial institutions. Moreover, the largest financial donation for

the WB comes from the US state department, carrying with it the blatant dominance over the pursued agenda in terms of investment decisions. Finally, the US wields the highest voting

power in percentage (as of 2014, at 15.85%), significantly outweighing all other member nations. (Second place in voting power is claimed by Japan at 6.84% - less than half of the US’ power.) (WB, 2016). In this case, though at face value an IO managed through a system of global governance, the World Bank is heavily influenced by a single sovereign nation. The United States, as any sovereign nation, is directly or indirectly steering the bank into a

direction that would provide nationally beneficial results (Krugman, 1997), and within development and finance, this will result in a yield of security and political stability, or financial gains. Following World War II and during the Cold War, there was more apparent clarity surrounding the ulterior motives of the WB, as it was also utilized in order to bolster states that the US deemed at risk of tipping into communism. This was most famously reflected in the first WB loan ever provided, to France, for $250m, that was provided under harsh conditions. It was clearly stipulated by the WB that France had to agree to produce a

balanced budget, provide priority of debt repayment to the WB above all other governments, and all government employees associated with the communist party were to be removed

(Bird, 1992; p.288-291). This was symbolic for the WB potential to leverage political power, reflective of American foreign policy, in order to ward off communism. Later, during the implementation of the Marshall Plan, the WB was forced to shift its focus from Europe, as many European nations were already receiving aid. Although the pursuit of mutually beneficial agreements and developmental loans or financing could also be beneficial to all other member nations, its objectivity is offset by the fact that the WB is steered with a strong US bias aiming at ensuring national interests, before those of other members. The discussion surrounding developmental economics as a means of providing political stability or conflict relief, could also be evidence as to a means of nations bolstering trading partners in order to increase exports, and/or imports (James et Al, 2007). These arguments would be emblematic of the essence of market capitalism, and more fittingly, global capitalism. Nations united under the banner of multilateral organizations, providing developmental support via financing

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restructure supported national economies by privatizing public services with well-established and wealthy corporations - again, providing reason to believe that the services of the WB are

catalysing global capitalism (Robinson, 2008). Finally, through this type US steered selective developmental support, the World Bank’s influence could be considered detrimental to

multipolarity. Instead, as reflected within the IR definitions of polarity, the WB seems to be shaping geopolitics into a more unilateral process (see chapter: Polarity in Politics).

The Asian Development Bank surged into operation as an Asian parallel of the World Bank. The services offered aimed at providing similar assistance but with the promise of a different approach than that of the Washington consensus, and with closer geographic and cultural proximity to many of the nations in need of support. This has afforded the ADB rapid growth in financing importance within the Asia-Pacific region. As previously discussed, the ADB, although multilateral in nature, is also heavily dominated by one member nation. This

leadership position was seized by Japan. Japan, as the majority share-holder (by far), has been able to fill the ADB’s presidency with Japanese nationals on a rolling basis. Distinctly like the US, it has become the de-facto governing nation of the ADB, and shapes the path and agenda of the ADB. In turn, this also leads to a multilateral organization promoting the goals and agenda items of one nation; again, we witness a multilateral bank subtly driving geopolitics

into the direction of unipolarity (see chapter: Polarity in Politics). The behaviour of the ADB has been described as “very similar to the US”, and the intended outcomes of Japanese aid-giving are, historically, strikingly strategic. Throughout the 70s and into the early 90s, the Japanese government provided aid within Latin America and the Caribbean under the Japanese banner, and also under that of the ADB. The support provided did not only benefit the supported nations, but also served Japan’s national-political and economic interests within the region. Simultaneously, through its support and simultaneous collaboration with the US, the US-Japanese political and trade relationship improved (Katada, 1997; p. 931-945).

Conclusively, from the succinct overview provided, it becomes apparent that the two development banks are advancing their own interests more than the nations supported. The existing research and academic debate provides reason to believe that, although multilateral in nature, the WB and ADB are acting on behalf of singular nations. The effect of this type of global governance is that the resulting power exerted by the banks leads to a higher

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existence lies within the context of global capitalism. Finally, as the banks are seemingly being utilized as vehicles for exerting power, and reinforcing dependency, it could be argued

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The Global Governance of the World Bank