Committee for the Abolition of Illegitimate Debt

Since the World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

came into existence in 1946, each year without exception, it has produced positive net results from its activities. In 1963, the World Bank was faced with such huge profits that the new president, George Woods, who only a short time before had been President of the First Boston Bank, proposed that the Bank’s Managing Committee should distribute dividends to its shareholders like any self-respecting bank [1] The idea was abandoned as the managers felt that distributing dividends would give indebted developing countries a poor impression of the Bank. It was decided to transfer the profits to the Bank’s reserves. In 2005, the Bank’s total reserves came to 38.5 billion dollars.

Since 1985, the revenues [2] of the Bank’s main branch, the IBRD (International Bank for Reconstruction and Development), has exceeded a billion dollars every year. Exceptional results were registered for 1992 (1709 million dollars of revenue), in 2000 (1991 million) and above all for 2003 (3021 million).

Graph 1 shows the evolution of operations revenue from 1981 to 2005:

Source: World Bank, Global Development Finance, 2005

How does the World Bank make its profits?

The IBRD makes its profits through repayments received from indebted countries, mainly from a few big middle-income countries [3]. Indeed, the poorest countries cannot afford to borrow from the IBRD – they borrow from the IDA (International Development Agency).

The IBRD makes its profits on the difference between what the capital it borrows on the financial markets costs it, on the one hand, and what the developing countries repay it, (amortization of borrowed capital + interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. ) on the other. Even then, the IBRD would have to ensure that the developing countries do actually repay it, and so it does: the IBRD manages to get repaid regularly. Of course there are a few exceptions and some countries are bad payers – as was the case of Mobutu’s Zaire, for example.

The following table will give an idea of how seriously developing countries take their obligation to repay the IBRD. The developing countries can be seen to repay far more than the IBRD lends them. Developing countries’ net transfer on debt has been negative since 1987. It is also apparent that despite the enormous amounts repaid, the total debt still owed to the IBRD has greatly increased.

Source: World Bank, Global Development Finance, 2005

The next graph shows the evolution of stock and net transfer on debt.

Source : World Bank, Global Development Finance, 2005

Comparison between debt stock owed to IBRD and net transfers since 1970 and 2004
Left-hand scale: net transfer on debt owed to the IBRD by all the developing countries (in billion dollars)
Right-hand scale: Evolution of total debt owed to the IBRD by all the developing countries between 1970 and 2004 (in billion dollars)

The World Bank claims that the profits it makes from the IBRD are not enough to enable it to balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. its accounts, because of a deficit in the IDA’s, which makes low-interest loans to the poorest countries. The following graph shows that if you add together IBRD and IDA loans, on the one hand, and subtract the total of all repayments made by all the developing countries (including the poorest) to the IBRD and IDA, the Bank has been making a comfortable profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. since 1990. So, from 1991 to 1996, net transfer has been systematically negative. As it has since 2000.

Total debt transfers LT (World Bank) Total debt stock Debt stock The total amount of debt LT (World Bank)

Source: World Bank, Global Development Finance, 2005

Left-hand scale: net transfer on debt owed to the WB (IBRD +IDA) by all the developing countries (in billion dollars)
Right-hand scale: Evolution of total debt owed to the WB (IBRD + IDA) by all the developing countries between 1970 and 2004 (in billion dollars)

From 1984, the World Bank decided to diversify where it placed its profits. Other than increasing its reserves, it used it in homeopathic doses for certain UN programmes. Thus in April 1984, the World Bank donated two million dollars to the World Food Programme. This is referred to in the minutes of the World Bank’s Managing Committee meeting as “a good and astute gesture” [4].

Later, from 1985, the World Bank allocated part of its profits to special funds, usually trust funds, for limited purposes. These could be anything from the Bank’s contribution to reducing poor countries’ debt to aid for certain countries affected by the tsunami in December 2004, or donations to the Multilateral Investment Guarantee Agency, the fifth branch of the World Bank [5].

Generally, this use of the funds is criticized by the middle-income countries since it is through them that the World Bank makes its profits. These countries denounce the fact that the rich countries use part of the profits made on their backs for noble gestures towards the poorest countries. They would prefer the Bank to charge them lower interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. .

Note that the Bank is very active on the derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). market, which feeds international speculation. In 2004, the Bank registered a shortfall of 4 billion dollars due to operations on derivatives in currency exchange. Although its usual activities had generated profits comparable to those made in previous years, this made a temporary impact on its net revenue [6]. However all this is leading us to another of the World Bank’s activities, which, however questionable, is beyond the scope of this chapter.