Greening the Bretton Woods Institutions

Key Points

  • The IMF and World Bank have failed to integrate environmental sustainability into their lending, concentrating instead on export-led exploitation of natural resources.
  • Congressional funding pressure has had some success in promoting transparency, accountability, and environmentally sound policies at the BWIs.
  • Despite years of reform efforts, the World Bank’s structural adjustment loans still do not follow the institution’s environmental policies.

The Bretton Woods Institutions (BWIs)—the World Bank and the International Monetary Fund (IMF)—have come under increased scrutiny and criticism over the past several years. In 2000, thousands of demonstrators took to the streets of Washington, DC, and Prague to protest against these institutions and demand change. (Similar protests, scheduled for September 2001, were called off in the wake of the terrorist attacks in New York and Washington.) The protests followed a scathing report by a prominent congressionally appointed panel-the Meltzer Commission—that called for drastic reforms of the World Bank and IMF. Combined with the ongoing criticism by advocacy groups from both developing and industrialized countries, these events have focused unprecedented attention on the BWIs.

This long-overdue scrutiny is most welcomed by the environmental community. Environmental groups have fought since the 1980s to overhaul the World Bank and IMF, urging the institutions to incorporate environmental goals, to become more open, and to change the types of investments they support. As the BWIs’ largest shareholder, the U.S. has played a role in forcing them to respond to citizens’ concerns. For example, the U.S. Congress conditioned the World Bank’s appropriations on the institution’s adoption of environmental and information disclosure policies. Congressional suasion also led to the creation of the World Bank’s Inspection Panel, an independent accountability mechanism. And in 1994, Congress used the power of its purse to force more information disclosure at the IMF. These efforts have yielded some successes with significant ramifications, including:

  • A set of environmental policies and standards that the World Bank applies to its borrowers, that are considered de facto international environmental standards by bilateral finance agencies and corporations.
  • More transparency in the operations of the BWIs and greater acknowledgement that civil society has a role to play in critiquing and shaping lending programs.
  • More accountability mechanisms to promote better quality lending, such as the independent Inspection Panel at the World Bank.

Although important, these improvements have occurred at the margin of the BWIs’ operations. The World Bank still provides loans for environmentally and socially harmful projects such as oil, gas, and mining. IMF and World Bank structural adjustment loans still promote export-led growth, encouraging natural resource exploitation and endangering local communities that depend on these resources. The World Bank’s structural adjustment loans are not subject to the institution’s environmental policies. And staff at the institutions rarely question how the structural adjustment loans they design will affect either the environment or the poor. Despite these problems, the U.S. Treasury Department has been a staunch advocate of structural adjustment.

Although the U.S. has played a positive role in pushing for more transparency and accountability at the BWIs, profound problems remain with how the institutions put principles into practice. For example, although the World Bank has established environmental policies, its own studies find that enforcement is weak. A recent internal review revealed that the bank has failed to comply with its forestry policy, at the expense of both the forests and the poor.

“Categorization” of World Bank projects also falls prey to political pressures. This process is supposed to demand detailed environmental assessments of the most environmentally harmful projects, but bank staff often downgrade projects and thus evade full assessments. Finally, while the bank has adopted green rhetoric, its actual portfolio fails to reflect its supposed commitment to environmental protection. In fiscal year 2000, close to half the lending from the World Bank’s private sector divisions was in environmentally harmful sectors, such as oil, gas, coal, mining, chemicals, and infrastructure projects. Meanwhile, the resources that the bank devotes to environmentally beneficial projects are miniscule, amounting to just 1.02% of the institution’s lending in 1998.

The bottom line is that most IMF and World Bank operations fail to genuinely incorporate sustainable development principles. As the single largest shareholder of both institutions, the U.S. government should play a leading role in pushing them to change the direction of their lending and to incorporate environmental goals routinely into their approach.

Problems with Current U.S. Policy

Key Problems

  • Although IMF and World Bank structural adjustment programs can lead to environmental degradation and increased poverty, there are currently no requirements for environmental and social assessments of these loans.
  • The World Bank’s lending portfolio reveals continued funding of environmentally harmful projects and decreased funding of environmentally beneficial projects, belying its green image.
  • The World Bank’s environmental and social policies have been weakened over the years, and World Bank staff often ignore those that remain.

The BWIs have done an impressive public relations job, selling themselves as changed institutions that have reacted responsibly to widespread criticism. The World Bank describes itself as 180 degrees different from what it was in the 1980s. Similarly, the IMF contends that it judges itself by how it serves the poor. But these descriptions do not fully reflect reality.

The IMF explains that as a macroeconomic institution it deals solely with short-term economic issues and has no mandate to address the environment. While it is true that the purpose of the IMF is to address economic stability and short-term liquidity problems, the fund has inappropriately involved itself in longer-term restructuring of economies, often with negative environmental results. In addition, the IMF plays an even broader role by bestowing a “seal of approval” on countries that follow its prescriptions. This seal is often a precondition for other donor assistance, debt relief, and private investment. The IMF’s model of economic growth is based on export-led growth rather than domestic productive capacity. This export-led growth has tended to be based on primary commodities, rather than manufactured or processed goods, whose prices are notoriously unstable and whose extraction is environmentally hazardous.

Stabilization and adjustment have become virtually synonymous at the IMF. Any typical IMF stabilization/adjustment program—including budget cuts, tax increases, and trade and investment liberalization—has environmental costs and benefits. IMF economic programs often result in unnecessary environmental degradation because they fail to consider environmental costs and benefits. The IMF fails to recognize the inseparability of economic stability and environmental well-being. Only in 2001 has the IMF begun a pilot project to assess social, though not environmental, impacts in a few countries.

When it comes to broad economic policy, the World Bank has followed the IMF’s lead and adopted structural adjustment programs based on the same principles of export-led growth. Although conservation NGOs fought for years to get the World Bank to adopt environmental and social guidelines for its lending, these policies still do not apply to the bank’s structural adjustment loans. The structural adjustment policy loophole is a glaring problem that must be rectified. This has become a greater problem as the bank has, in recent years, significantly increased its lending for structural adjustment loans. Currently the bank is trying to amend the cap that stipulates no more than 25% of its portfolio can be structural adjustment loans.

When it comes to projects, the World Bank also has a long way to go before it can truly claim to be promoting environmentally sustainable development. Many World Bank loans support projects that involve unsustainably managed natural resource extraction or pollution-generating projects, such as coal-fired power plants or oil pipelines. The World Bank has responded to environmental criticism by promoting Global Environmental Facility (GEF) add-on grants, but has made little progress in integrating environmental sustainability into its own portfolio. The bank’s lending portfolio tells the story: between 1998 and 1999, funds committed to environmental projects decreased by almost one-third.

At an institutional level, the World Bank has undergone a restructuring and reorganization that has weakened the role and purpose of its environment department. The bank is more decentralized, making it even more difficult to integrate environmental goals into the institution’s overall portfolio. Country departments must pay for environmental expertise and advice, which imposes additional costs during periods of budgetary constraints. The World Bank is also in the process of revising and weakening its policies—making key elements of some policies voluntary rather than mandatory—which is a major step backwards. And, of course, policies are only half the picture. The bank also needs to follow its policies, since there is voluminous evidence in internal studies showing widespread disregard for them.

Toward a New Foreign Policy

Key Recommendations

  • The U.S. should insist on environmental and social assessments for structural adjustment lending.
  • The U.S. should pressure the World Bank to phase out destructive investments in sectors like fossil fuel and mining, and shift to sustainable energy.
  • The U.S. should urge the establishment of a development screen for the World Bank’s private sector loans.

Criticism of the twin Bretton Woods Institutions can be expected to continue as long as they fail to make serious reform of their core activities a major priority. The U.S. should play a strong role in catalyzing this overhaul, and environmental sustainability should be a key item on the reform agenda.

On top of the U.S. environmental reform agenda for the BWIs should be overhauling structural adjustment lending. The IMF, staffed by macroeconomists and with no guiding policy framework, is not equipped to promote policy reforms outside its immediate area of expertise—balance of payments and exchange rate issues. Longer-term lending should be left to the World Bank. But economic adjustment policies at the World Bank must also be overhauled. The World Bank and IMF are piloting limited social assessment in a few countries, but have excluded the environment. The World Bank should amend its structural adjustment policy to include social and environmental assessment. Information disclosure must also be improved, including release of drafts of sectoral and structural policy loans, so that civil society can participate in shaping policies. In addition, participation in the process of negotiating structural adjustment loans must bedramatically broadened, so that all relevant government stakeholders are involved. This should embrace the full range of government officers, including environment ministers and parliamentary officials.

The environmental agenda for the IMF is primarily a “do no harm” agenda, that is, an attempt to stop the institution from setting policy in areas where it lacks expertise. But the IMF could also play a positive role in encouraging environmental protection. For example, the IMF has been tasked with promoting budget transparency in its borrowing countries. Publishing environmental spending figures in government budgets might pressure those governments to at least maintain, if not increase, investment in environmental sustainability. At minimum, this type of disclosure would enhance the power of citizens to hold their governments accountable.

The IMF could also play a role in devising methods of incorporating environmental services into economic valuation. One of the fund’s functions is to gather data on the macroeconomic health of its member countries. But these figures are based on GDP measures that fail to capture environmental externalities. This approach is flawed, because presumes that natural resources are infinite and does not recognize the liabilities created by unsustainable development. The IMF—as a global statistics depository and in its role of providing technical assistance on national income accounting systems for finance ministries in developing countries—should work with governments to develop green accounting systems and to integrate environmental criteria into each country’s national accounts.

Regarding fiscal policy, the IMF could promote more “win-win” solutions by including green taxes as part of its advice. This could generate revenue while influencing economic activity in ways that have positive impacts on the environment.

In addition, other reforms are sorely needed regarding the World Bank’s operations. As with the IMF, the environmental community has historically focused on a “do no harm” approach to minimize the damage caused by bank projects. In that vein, the World Bank should expand its “negative list”—types of projects that it will not finance—to include those that lead to severe environmental harm. This negative list should apply to all of the World Bank’s lending arms, including those that lend to the private sector, and should include projects impacting protected areas; infrastructure or extractive projects in frontier or primary forests; oil, gas, and mining investments; projects involving the production or use of persistent organic pollutants; and large dams with significant environmental/social impacts. The World Bank is about to undertake a review of its role in extractive industries. As part of this review, it should institute a moratorium on oil, gas, and mining, at least until new green and socially responsible policy guidelines are in place.

If the World Bank shifted away from these harmful projects, it would free up resources for environmentally sustainable development. As part of a “do more good” environmental agenda, the bank should proactively set positive lending targets for its sectoral loans to leverage investments in environmentally sustainable development. For example, in the energy sector the World Bank could shift global investment trends by financing environmentally sound power projects. It could accomplish this by setting quantitative targets for investments in alternative/renewable energy, demand-side management, and energy efficiency programs.

One of the challenges the World Bank faces is making a positive contribution to development through its private sector divisions, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). Most of the IFC’s and MIGA’s investments lack a connection to poverty alleviation and sustainable development—the stated mission of the World Bank. The IFC is beginning to address this through a “Roadmap to Sustainability” initiative. As part of this initiative, the U.S. should prioritize the establishment of clear development criteria and an environmental/social screen by which to assess projects and corporations. A strong screen would promote better quality projects by culling harmful projects and companies with poor environmental and social records. Furthermore, such a development screen would clarify the kinds of results the IFC aims to achieve from its investments and would reduce the time and resources spent on projects that do not match the organization’s development priorities. Finally, to enhance commitment to the consistent application of such a screen, the development criteria should be formulated through a broad participatory process.

Carol Welch is a deputy director of international programs at Friends of the Earth in Washington, DC, where she specializes in international financial institutions.