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The World Bank and the Third World Debt Crisis in historical Perspective
by Eric Toussaint
14 March 2002

From the early ’seventies, McNamara saw the speed of growth of Third World indebtedness as a problem. He declared: “By the end of 1972, the debt totalled 75 billion dollars and annual servicing was more than seven billion dollars. Debt servicing rose by 18 per cent in 1970 and by 20 per cent in 1971. The average rate of increase of the debt since the 1960s has been almost twice as high as the rate of increase in the export revenues that these countries must use to service the debt. This situation cannot continue indefinitely.” (McNamara, 1973).

However, even under his presidency, the World Bank kept the countries of the Periphery under such pressure that their indebtedness could only deepen. Between 1968 and 1981 the World Bank’s annual loans increased from 2.7 billion dollars in 1968 (the year when McNamara became president of the World Bank) to 8.7 billion dollars in 1978 and to 12.0 in 1981 on the eve of the outbreak of the debt crisis (Bello, 2000, p. 39). The World Bank’s policy actively contributed to creating the conditions that resulted in the crisis. The rise in volume of the debt and debt-servicing without a corresponding rise in export revenues was the first possible cause of crisis, since indebted countries rely on their export revenues to pay back their external debt. The increase in quantities exported without a corresponding increase in demand from the industrialized countries was another possible cause of crisis. Combined, these two factors could only generate a crisis: plummeting prices for the goods exported by the Periphery led to a fall in export revenues, which in turn meant difficulties in paying back. If we now add the triggering factor, namely the sharp rise in interest rates imposed by the US Federal Reserve from the end of 1979 (there are close links between the World Bank, the Federal Reserve and the US government), crisis was inevitable.

Can we therefore claim that there was some dark plot deliberately hatched by the Bank? The answer has to be qualified. There is no material evidence of a plot. But there is evidence that the World Bank and the powers that control it, that is, first and foremost the US government, have a heavy responsibility in the succession of events that led to the crisis as well as in the way that it was used to increase subordination of the Periphery countries to industrialized capitalist countries even further.

Let us review what happened. The rise in interest rates led to the outbreak of the crisis in 1982 when the sudden increase in amounts to be paid back by the debtor countries coincided with a fall in their revenues. Who decided to raise interest rates at the end of 1979? The Federal Reserve along with the Treasury. Why were the countries of the Periphery affected by a fall in their export revenues? It was the result of the export-focused policy recommended by the World Bank and backed by US manœuvres against OPEC, manœuvres that aimed at dividing OPEC so as to bring about a fall in oil prices. As everybody knows, the general trend of World Bank directives is determined by the US Treasury. There was (and still is) large-scale wastage in some countries of the South, embezzlements by the ruling classes in those countries, and those who are responsible should be prosecuted. But let us not forget that the World Bank, the IMF and the leaders of industrialized countries turned a blind eye when they did not actively support those robber régimes. We should not be confused as to the real causes of the crisis. It mainly resulted from decisions made in creditor countries.

What happened to the World Bank when the crisis broke out? Failing to fathom its depth, it did not propose policies that would have protected the interests of debtors faced with increased interest rates. Yet its power, far from being reduced, was tremendously increased. The US government and other large capitalist powers were obviously pleased with the results of the World Bank’s policies. Otherwise they would have restricted its role. Instead they increased the powers of the World Bank and the IMF during and after the crisis. It should be added that these two institutions have garnered fat profits from indebted countries in the form of a reserve.

From the outbreak of the crisis, the World Bank and the IMF have been used as tools to further subordinate countries of the Periphery to countries of the Centre. To this effect they have systematically developed policies of opening up and of deregulation of the economies of the Periphery (structural adjustment) with the complicity of the ruling classes of the Periphery. The human balance is no less than tragic.

The World Bank, the IMF, the governments that back their policies and the governments in countries of the Periphery that collaborated with them are accountable for it all to the citizens of the world, and first of all, to those people who suffer daily because of the debt crisis.

World Bank justification for increased indebtedness

Let us move back in time, and sum up the kind of discourse that justified the active part played by the World Bank in the Periphery’s indebtedness between 1968 and 1982.

Until 1973, McNamara argued that the growth-oriented programmes of developing countries had to be backed. Public aid for development from the developed countries was totally insufficient, he said, and those same developed countries were not dismantling discriminatory measures against imports from developing countries in spite of promises to do so. McNamara even publicly criticized the North’s protectionism and the low level of Official Development Assistance (ODA) on numerous occasions (see McNamara, 1973). The World Bank, he argued, should therefore loan increasing sums to developing countries to help them achieve consistent growth rates and earn sufficient revenues to pay back their debts. As a result, the World Bank set itself a race against time to provide as much credit as possible to developing countries, as a way to make up for inadequate levels of ODA.

This approach was clearly at odds with McNamara’s own warnings concerning debt levels whose rate of growth outstrips that of export earnings.

From 1973 onwards, following the rise in the price of oil and other raw materials, McNamara argued that developing countries could use borrowed funds to develop their communications infrastructure, increase electricity production and boost export-oriented activities. His underlying assumption was that the price of these countries’ exported goods would continue to increase on the world market, or remain stable at the very least. As a result, he forecast that their export earnings would continue to rise thanks to increases in export volumes. These increased earnings, he said, would enable developing countries to service their debts (interest and principal) while reinvesting a portion in the improvement of export-oriented industries. This was expected to have a cumulative effect, triggering or accelerating development while anchoring these countries firmly in the camp of the Western countries. McNamara argued that debt obligations were a powerful material incentive for developing countries to modernize their export-oriented agricultural and industrial sectors. This line of reasoning was repeated in a number of his talks and writings. The virtuous circle of “debt / increased exports / debt servicing” would develop the South and boost world economic growth. The actual course of events has given the lie to this approach: as we have seen, the prices of exported goods plummeted in the 1980s at the same time that interest rates rose sharply. This led to the financial asphyxiation of indebted countries. As for McNamara, he stepped down as president of the World Bank in 1981, a few months before the crisis exploded in everyone’s faces.

The World Bank’s tunnel vision

Although the debt crisis only burst out into the open in August 1982, there had been no shortage of ominous signs. Warnings had been made. Still, the World Bank obviously underestimated the dangers of the situation. One need only look at its 1981 annual World Development Report: “These trends suggest it will be more difficult for developing countries to manage their debt, but they do not presage any generalized problem. This analysis is confirmed in projections for the balance of payments in the 1980s, based on various probable scenarios” (emphasis mine).

The 1982 Report was released just a few weeks before the explosion of the Mexican crisis. It provided an even more blinkered and optimistic analysis of the situation (Edwards, 1995). In its 1983 report, the World Bank said that there were liquidity problems that had only affected specific countries, and not entire regions or groups of countries. Yet about 30 countries followed closely in Mexico’s footsteps.

The 1984 Report provided optimistic projections until 1990 in the relationship between Latin American export earnings and debt-service payments. In actual fact, the exact opposite occurred (Edwards, 1995). For a number of years, the Bank continued to promote the illusion that the debt crisis was above all a liquidity crisis, instead of recognizing that the debtor countries were actually insolvent. These debtor countries were not simply experiencing liquidity problems; they were in the midst of a fully-fledged crisis, of a long-term structural nature.

In 1986, with the debt of developing countries well in excess of one trillion (one thousand billion) dollars, the Bank said that by the mid-1990s total debt would at the very worst be in the order of 864 billion dollars. By 1995, however, total Third World debt was 1,940 billion dollars - twice the forecast amount.

The IMF made exactly the same errors. In its quarterly report Economic World Outlook of April 1982, the IMF said that, in spite of a number of repayment problems, Latin America would obtain major loans from the international financial community. In its October 1982 report, the IMF said that recession would be avoided. In its 1984 reports, the IMF seconded the World Bank in calculating that the ratio between debt servicing and export earnings would improve for Latin America. In actual fact, the exact opposite occurred.

Wrong forecasts on world market prices

The World Bank was just as arbitrary and wrong in its forecasts of the export revenues meant to rescue developing countries from debt. Its 1981 predictions for the price of African raw materials were off by 62 per cent for minerals and metals; by 156 per cent for oil; by 180 per cent for fats and food-oils; by 103 per cent for beverages; by 60 per cent for lumber; by 97 per cent for non-food agricultural products (George and Sabelli, 1994). The Bank could have easily foreseen that - with all countries of the South seeking to maximize exports in order to meet debt obligations - the prices of the exported products would drop.

The IMF did not perform any better. In the report on the Least Developed Countries published by UNCTAD in 2000 (p. 70) an internal IMF survey is mentioned which says that in 1983 it negotiated an agreement with Zambia based on a completely unrealistic hypothesis. According to the agreement, the price of exported copper was to rise by 45% within four years. This was to enable Zambia to pay back its creditors. In fact the price of copper fell by about 12% so that this “least developed” African country was stranded with an even heavier burden than before the agreement (Brooks, R. et al. -1998- External Debt Histories of Ten Low-income Developing Countries: Lessons From Their Experience, IMF, reference paper, WP/98/72, Washington DC).

In 1991, the Bank repeated the same mistake. Its international economy division continued to put out optimistic forecasts which, within two years, were also revealed to be thoroughly groundless. Real market prices were dramatically lower than predicted: 47 per cent lower for coffee; 56 per cent for cocoa; 74 per cent for sugar; 35 per cent for rubber; and 52 per cent for lead, to name but a few.
In the 1990s forecasters still insisted that prices of commodities would rise and that as a consequence the GDP of developing countries would increase by over 5% a year between 1992 and 2002. Actually the reverse proved true: commodity prices fell by approx. 30% between 1996 and 1999, (IMF, Annual Report 2000, p. 11). Meanwhile, the growth rate of the GDP in developing countries was 3.2% in 1998 and 3.8% in 1999 (IMF, Annual Report 2000, p. 12).

The World Bank as drain on the South’s resources

World Bank leaders have calculated the return on funds deposited in the Bank by industrialized countries as their participation in its capital. The Bank’s official publications say nothing about this, but an idea of its profits is provided in specialized publications aimed at the business community. The following is an extract from a speech given to an audience of Belgian employers in 1986 by Jacques de Groote, Belgium’s CEO at the IMF and World Bank, and published in the bulletin of the Belgian employers’ Federation. The extract speaks for itself:

“The advantages that Belgium, like all World Bank member countries, acquires through its participation in the group’s institutions can be measured by looking at the return rate. The return rate is the relationship between, on the one hand, total spending by the International Development Association (IDA) and the World Bank on a country’s companies based on contracts secured by these companies and, on the other hand, this country’s contribution to the World Bank and IDA. As a result, the return rate is the relationship between what companies obtain through the sale of equipment and consulting services, and what Belgium contributes to the World Bank and IDA. The return rate from the World Bank to the industrialized countries is significant and continues to rise; from late 1980 to late 1984, it has risen from seven to ten for all industrialized countries taken together. Which means that for every dollar put into the system, industrialized countries got back seven in 1980 and 10.5 now” (FEB, 1986).

Chris Adams, a scientist working with Focus on the Global South (Bangkok) analysed the lending policy practised by the Asian Development Bank (an institution which is closely related to the World Bank, just like the African Development Bank and the Interamerican Development Bank). Among the main shareholders (called “donors”) of the Asian Development Bank we find Japan, the United States, Germany, Canada, Australia, Britain, Italy, and France… According to Adams, most donor countries actually receive more from the ADB in the form of contracts for their companies than what they contribute to the bank (Adams C., 2000, p. 27).

The Wapenhans Report (1992) and the Meltzer Commission (2000) on the World Bank’s failures

Do the World Bank’s loans at least produce satisfactory results? In February 1992, the Bank’s vice-president, Willi Wapenhans, carried out a confidential study evaluating projects financed by the World Bank - some 1,300 projects in 113 countries. The conclusions of the study were shocking: 37.5 per cent of projects are evaluated as being unsatisfactory upon conclusion (up from 15 per cent in 1981), with only 22 per cent of financial commitments seen to be in line with Bank directives. When a commission of the US congress presided by Alan Meltzer presented a report on the World Bank and the IMF in February 2000 it estimated that 65 to 70% of the Bank’s projects in poorer countries were dismal failures (55 to 60% of failures in the developing countries).

… with profits still flowing in

As already noted by McNamara, the Bank is not a philanthropic venture. Though it does not like this being noticed the World Bank garners about 1,500 million dollars in profits that are added to its reserve. Where do these profits come from, if not from transfers from the populations of the Periphery through debt repayment?

1994-2001: a succession of crises

1994: second Mexican crisis (following upon the crisis of 1982) leading to the crisis in Argentina; 1997: South-East and East Asian crisis; 1998: Russian crisis; end of 1998 - beginning of 1999: crisis in Brazil; end of 2000 - beginning of 2001: crises in Argentina and Turkey… Each time the World Bank failed to foresee the looming crisis. As Thailand and the other three Asian “tigers” were about to be shattered in their economic power, the World Bank confidently stated in its 1997 report that the global level of indebtedness was healthy. “Although global debt grows at a faster rate than exports, the ratio between debt stock and exports is still moderate, only 99% in 1996, which is much lower than the average ratio of 146% found in low or medium income countries” (World Bank, 1997, p. 160).

Yet a careful analysis of the figures provided by the Bank itself should have led to another conclusion: it should have appeared that the private sector debt had leapt to unprecedented heights in 1996 with no backup guarantee whatsoever. It also recorded that short-term debt (with a high interest rate) had soared and that volatile investments had multiplied.

After the outbreak of the crisis the World Bank suggested remedies that created terrible human suffering and led the governments of countries in the Periphery to gradually relinquish central instruments of national sovereignty.

From 1996: Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative

In 1996 the World Bank and the IMF launched a debt relief programme for heavily indebted poor countries (HIPC: 41 countries qualify among over 180 countries in the Periphery). This programme was given wide media coverage. Those 41 countries were to be helped to service their debt. Generosity was quite beside the point: creditors merely wanted to keep getting money back. In this context the G7, the IMF and the World Bank promised to cancel 80% of the debt in those HIPCs. This happened at the Lyon summit in June 1996. Three years later, at another G7 summit at Cologne in June 1999 they announced even more radical relief that might cancel up to 90% of the external debt. This figure was given because of the pressure exerted by the world campaign for the cancellation of the debt in poor countries known as Jubilee 2000.

According to the UNDP the amount that the World Bank and the IMF think that they might release is less than the cost of a single new US stealth bomber. It is roughly equivalent to the cost of setting up Euro-Disney, now Disneyland-Paris (UNDP, 1997, p.103). In five years (1996-2000) the amount of money actually invested by the IMF in the trust fund used to relieve the debt is less than the amount paid to its 2,300 employees in the year 2000 alone. Yet another comparison: the amount invested by the IMF to relieve the debt of the 41 HIPCs between 1996 and 2000 is less than 2% of the amount it spent on rescuing creditor countries in South-East Asia, Brazil, Russia, and Argentina during the same period. The amount spent by the World Bank is less than its annual profit, that is around 1,500 million dollars. Nor should we forget that those amounts are later to be paid back to the World Bank and the IMF, for they never give up a debt. So the relief measures are in no way a valid solution to the problems of indebtedness and drastic austerity that literally crush the social budgets of indebted countries.

The World Bank and IMF’s two actual goals are first to make sure that indebted countries can pay back the rent of loaned money regularly and second to keep their influence on those countries. Since the beginning of the Initiative in 1996 the stock of their debts has increased from 205 billion dollars in 1996 to 215 billion dollars in 2001 (Source: FMI, World Economic Outlook, ). Worse: in 1999, HIPCs paid back 1,645 million dollars more than they received as new loans (Source: World Bank, Global Development Finance, 2001). Between 1996 and 1999, according to the World Bank, just servicing the debt in those countries has increased by 25% from 8,860 million dollars in 1996 to 11,440 dollars in 1999 (source: World Bank, GDF, 1999 and 2000). Notwithstanding the swindle that the HIPC initiative represents, it has won over a number of NGOs, both in the North and in the South, as well as the governments of the involved countries and of course the media. (Toussaint, 2001b; Guttal, 2000 in Focus on the Global South 2000).

Unprecedented legitimacy crisis

Since 1997 - 1998, the World Bank and the IMF have been going through an unprecedented legitimacy crisis. Countless mass demonstrations have opposed their policies both in industrialized countries and in countries that have to implement their decisions. Since 1999 each of their annual meetings (one in April and the other in September) has led to radical and powerful counter-demonstrations. The two institutions are also undergoing an internal crisis: Joseph Stiglitz, chief economist and vice-president of the World Bank, has resigned, as has Ravi Kanbur, editor of the World Bank’s annual World Development Report, both in 1999 - 2000. Stiglitz and Kanbur stood for reform within the World Bank. In the United States the two institutions are severely criticized by the majority of Republican Congressmen and some Democrats too. The commission of the US Congress led by the Republican Meltzer, with Jeffrey Sachs representing the Democrats, revealed that far from giving priority to poorer countries, they devoted 80% of their operations to countries of the Periphery that already have access to financial markets.

Attempts at restoring their self-image through the Poverty Reduction Strategy Papers (PRSP)

In order to counter the effects of the legitimacy crisis while still steering a neo-liberal course, the Bretton Woods institutions launched a new initiative in September 1999 which they called the Poverty Reduction Strategy. HIPC governments applying for debt relief are required to prepare a Poverty Reduction Strategy Paper (PRSP, see glossary) to be approved by (part of) their country’s civil society. Officially it means giving a human face to structural adjustments by increasing health and education expenditure for the lower classes and by implementing policies aimed at helping the poor. But the Paper can in no case swerve from the objective of structural adjustment, namely privatization of services (water, electricity, telecommunications, public transports); privatization or closing of public industrial companies where there are still any; suppression of subsidies of basic products (bread or any other basic staple food); increased taxation of the poor through generalization of VAT (at a single rate of 18%, as is already the case in countries of the West African Economic and Monetary Union); cancellation of protective tariffs (which amounts to opening up economic competition between local producers and multinational corporations); liberalization of capital flows (which usually means a massive outflow of capital); land privatization; policies intended to retrieve the costs of health care and education. The HIPC’s agreement to implement such policies is a sine qua non condition for the IMF, the World Bank and the Club de Paris for any future alleviation of repayments or any further adjustment loans. The IMF has now increased to about 90 the number of countries which may qualify for the Poverty Reduction and Growth Facility (PRGF). This policy will not succeed in significantly reducing poverty any more than previous policies. Those arsonists, the Bretton Woods institutions, start new social fires and expect NGOs and local communities to play fireman and quench the crises.

The World Bank is now bent on winning over NGOs and local authorities. It has developed an integration/recuperation strategy which works through soft loans intended to support microcredit initiatives (often for women’s co-operatives) and local health and education structures. The World Bank has opened a special desk for loans and gifts intended to support NGOs. The World Bank singles out local administrations for loans destined to finance such projects as the purification of waste water. Accountability in public management has become one of its major concerns, to the extent that it now refers to the Porto Alegre participatory budget as a model.

This policy of courting civil society, aimed at retrieving some legitimacy, has already produced significant results. Some NGOs and local authorities are now involved in a process of collaboration with the World Bank.

Debate within the US government on the future of the World Bank

After the many crises since 1994-1995, and widespread doubts as to the IMF and the World Bank’s ability to counter them, the future role of the Bretton Woods institutions is the subject of often acrimonious debate in the United States. Several high-level commissions have been working on the issue: in 1994, the Bretton Woods commission chaired by Paul Volcker (former president of the Federal Reserve) considered a possible merger of the IMF and the World Bank, only to conclude that this was not timely. In 1999-2000 the Congress commission chaired by the Republican Alan Meltzer with a representation from the Democrats drafted a report asking for a clear redefinition of the roles played by each of the two international institutions. It suggested that the Bank’s activity be limited to poorer countries, those that have no access to capital markets, while the IMF would be concerned with the other countries of the Periphery. The Commission’s conclusions were rejected by the Clinton Administration but the debate is still on. Major changes are still possible. It remains to be seen how the Bush Administration, which started in 2001, reacts. In June 2001 it appointed Anne Krueger to replace Stanley Fischer as second officer in the IMF. Krueger has expressed strong neo-liberal views (as opposed to the views of Joseph Stiglitz, seen as a Keynesian).

In a paper published in 1998 Anne Krueger underlines the differences between the 1970s and the end of the 1990s. She indicates that in the early 1970s the United States had decided to boost the role of the World Bank and the IMF by reducing their bilateral aid and increasing their multilateral aid (Krueger, 1998, pp. 1987 and 1999). Since then, global liberalization has strongly reduced the room for manœuvre of these institutions since private capital flows predominate. Besides, the Cold War is over. “Until the end of the Cold War, political support for development assistance through the IFIs [IMF and World Bank] and bilateral agencies originated from two groups: those on the right concerned with security, and those on the left supporting development objectives on humanitarian grounds. With the end of the Cold War, support from the right eroded and the Bank’s efforts to spread itself into new issues may reflect a search for a broader political support base” (Krueger, 1998, p. 2010). The following comments are meant to explain the evolution of the World Bank: “Many of the accusations about the Bank’s organizational ineffectiveness may originate from its efforts to extend in all directions in all countries. A strong case can be made that, in getting as involved as it has with environmental matters, cooperation with NGOs, combating corruption, and embracing other”new issues,“the Bank has moved far beyond its essential competence in addressing many of these issues, and in so doing, has overstretched the capacity of its staff” (op cit). She explains that the Bank still wants to be involved in all sorts of issues whereas it ought to choose among three alternatives: “1) continue to be a development institution, focusing only on those countries that are truly poor and gradually phasing out activities in the middle-income countries; 2) continue to operate in all client countries, focusing on the”soft issues“of development such as women’s rights, preservation of the environment, labour standards, and encouragement of non-governmental organizations (NGOs); 3) to close down” (Krueger, p. 2006). In this survey Krueger clearly rejects the third alternative, and finds arguments supporting the first two while adding that a choice will have to be made. She is obviously not much concerned about development issues. As to the mode of functioning of these institutions, she takes a clear stand against modifying the constitution, lest the priciple of “one country, one vote” be adopted, and is doubtful about a possible merger (Krueger, 1998, p. 2015). In other words, decisions must still be made by the powers that be.


The future of the World Bank and the IMF is a crucial issue for social movements (the same applies to the future of other international institutions such as the WTO, UNCTAD, the United Nations). What is at stake is no less than the future of mankind. Debates are raging among those in power as well as among movements trying to develop alternatives. Answers can only be found if we determine which international institutions can help to meet fundamental human rights as defined in the Universal Declaration of Human Rights and in the International Pact on Economic, Social and Cultural Rights.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.