Bank’s conditions still problematic in Latin America

22 September 2009

By María José Romero, Choike

World Bank lending has increased dramatically in Latin America, but Bank conditionality is still pushing a harsh macro-economic framework, despite the changes in policy that the crisis has brought to the rest of the world.

During the 2009 fiscal year, which ended in June, World Bank commitments to Latin America almost trebled, from $4.7 billion to $14 billion, the majority through the International Bank for Reconstruction and Development (IBRD), the Bank’s middle-income country lending arm (see Update 66). The proportion of IBRD commitments that were development policy loans (DPLs) rose from 29 to 47 per cent. As has been long pointed out by civil society organisations, DPLs represent an updated form of the structural adjustment policies of past decades, and come with controversial conditionality.

In Latin America and the Caribbean, the Bank has signed DPLs worth $5 billion with Brazil, Peru, Costa Rica, Colombia, El Salvador and Guatemala. Some of them are focused on environmental policy reforms, including the $1.3 billion loan granted to the Brazilian development bank for sustainable environmental management (see Update 65), while others are aimed at finance, public administration and social service sectors.

A $370 million DPL was approved for Peru in August 2008 as a result of an analysis carried out before the economic and financial crisis had broken out.  El Salvador was lent $450 million and Costa Rica $500 million at the beginning of 2009. By then the developing world was suffering the full effects of the crisis of developed countries, and Central America in particular, since it is a region tightly linked to the United States economy through both free trade agreements and remittances. However, no matter when the loans were approved, the frameworks were the same.

The loan approved for Peru includes the Bank’s traditional conditionality framework of macroeconomic and trade policies such as public expenditure control, low fiscal deficits, promotion of public-private partnerships and trade opening by fostering free trade agreements. The loan states clear outcomes to be achieved by the end of the programme in 2011, including that the “fiscal deficit of the consolidated public sector remains less than one per cent of GDP.”

The loan approved in January for El Salvador and the loan approved in April for Costa Rica linked public finance objectives to education and social sector ones. The El Salvador loan focuses on a reform of the tax system (the implementation of two new taxes and the elimination of electricity subsidies) and improvements in social protection and education.  The Costa Rica loan aims at “improving competitiveness to exploit foreign direct investment and trade opportunities offered by DR-CAFTA,” the Dominican Republic – Central America Free Trade Agreement, and supports an educational programme. The first objective includes controversial reforms in the telecommunications and insurance sectors and on intellectual property rights legislation.

Despite the record amount of World Bank commitments during the fiscal year of the crisis, civil society organisations are monitoring the Bank’s activity, taking into account the track record on conditionality and its consequences for development.