IDB Plan To Sell The Public Sector: The Cure or the Ill?

September 25, 2007

According to the Inter-American Development Bank, the regional inter-governmental bank and largest multilateral lender for Latin America, Latin America is poor because its people are inadequately educated, sick and stuck. According to almost everyone else, most Latin Americans are uneducated, sick and stuck because they are poor and not the other way around, but the IDB has the billions, so what it says goes. In its 2000 Economic and Social Progress Report the Bank explained Latin America’s failure to develop in terms of inefficient government institutions. [1] In 2001, the Report once again blamed Latin America’s institutions for the hemisphere’s ills, zeroing in on public health care, education and infrastructure as the public agencies responsible for poverty and unemployment. [2] In other words, the problem is public social services, and the solution is simple: privatize them.

The Bank is making big loans to help governments drag supposedly obsolete and wasteful agencies into the efficiently entrepreneurial 21st century. Since the early 1990s, when the IDB first began to support and execute the package of punitive neoliberal policies called the Washington Consensus, the Bank has funded the privatization of waste water treatment, airports, roads, secondary education and pension funds. It has turned telecommunications, social security, kindergarten, hospitals and electricity generation over to the private sector for operation and profit-seeking. Welfare and housing funds have been farmed out, together with vocational schools and vaccination programs. Like the kid with a hammer who thinks everything looks like a nail, the Bank has the same response to every dilemma. To be an economist at the IDB is to accept one single article of faith: private is better than public.

This faith is based almost entirely on fiction. Throughout much of the region, governments lack the resources and ability to provide adequate oversight and regulation of the private sector, such as it is. And “consumers” lack the mobility, ability and resources to shop around for the most suitable provider of such necessities as heat, water, health care and first grade.

Nonetheless, the past 15 years have been busy and profitable ones for the privateers in Latin America: 396 sales and transfers of public assets to the private sector between 1986 and 1999, representing more than half the value of all privatizations in the developing world. The chief economist at the IDB identifies three countries—Bolivia, Peru and Brazil—in which the value of accumulated privatizations exceeded 10 percent of GDP during the period, and six countries—Argentina, El Salvador, Guatemala, Mexico, Venezuela and Colombia—where the value was greater than 5 percent. [3] Despite such hefty shifts of infrastructure and public responsibility to the private sector (where jobs were to be generated and better services provided) unemployment and poverty rates are higher than ever across the region. Nor have the sales made a dent in the debt. [4] But profitability is up, the Bankers report cheerfully, and so is efficiency, which they define as revenue per worker. They note with confidence, but without substantiation or definition, that the unemployment associated with privatization is only short-term.

They remain puzzled, however, by a phenomenon they call “The Privatization Paradox:” although profits and efficiency increased with privatization, the policy is unpopular. Sixty-three percent of Latin Americans feel their countries have not benefited from it. [5]

If the Bankers ask us—which they generally do not—we can explain this. Suppose a government borrows about $100 million from the IDB (plus $550 million from the World Bank) to fix up the water company in the capital and install a planeload of hardware and software to track costs. Suppose the government then sells the revamped operation at a modest price to a consortium consisting of a French water company, a Spanish bank and some local banks made up of strategically placed brothers-in-law, ex-business partners, ministers’ mistresses and the like. Suppose the new consortium, which has itself invested only about $30 million, then fires, say, 50 percent of the public company’s employees, and immediately starts agitating to raise water rates over the amount specified in the 30-year no-exit contract. Then suppose the consortium borrows another $300 million from the IDB just before neglecting maintenance and concentrating its services where bill paying is most secure, ultimately providing to the unlucky consumers saddled with the higher rates and the public debt only intermittent flows of brownish liquid containing potentially brain-damaging levels of nitrates and flecked with unattractive bits of fecal matter. How popular do you suppose that policy is going to be? Not very. That’s my bet.

This is, in fact, the case of Aguas Argentinas, the consortium that runs the water system of the Buenos Aires metropolitan area, and which defaulted on its corporate debt in April, 2002 leaving the future of the water company and the provision of services for Buenos Aires in limbo.

Such tales have become commonplace. Still the IDB does not relent. On the contrary, the Bank has concluded that the social and economic crises affecting Latin America continue because privatization has not gone far enough. The fact that certain crucial infrastructural and social functions remain in public hands is, apparently, screwing up the whole scheme.

And the scheme is pretty well screwed up: Argentina, Latin America’s premier privatizer, defaulted on its public debt in December 2001. One probable cause: the World Bank and IDB-sponsored privatization of the pay-as-you-go social security system deprived the government of the reserves it needed to weather cash flow problems. [6] Following the default, the government was obliged to devalue its currency by more than 60 percent, and during May and June of 2002, the Argentine economy was shutting down at the rate of 50,000 lost jobs per week.

Next door in Brazil, the value of the currency became so precarious that two months after Argentina went belly-up, operatives of the U.S. Federal Reserve gathered Brazil’s principal creditors together in New York and begged them to keep lending in order to prevent economic collapse. [7] The following month, two prominent long-time advocates of privatization released data showing that the impact of privatization on income gaps in the region was negative to “mixed.” [8] And in October, 2002, the World Bank issued a report to show that privatization had done little or nothing to improve the fiscal position of Latin American governments. [9]

According to the IDB’s own statistics, as privatization proceeded, income inequality widened and deepened throughout the region, despite increased economic growth. If the already skewed income distribution of the 1980s had simply been maintained instead of aggravated over the period, 45 million fewer people in the region would have found themselves living below the official poverty line during the 1990s. [10]

Judging from the general state of uproar in Latin American politics, most people already know this without bothering to read the IDB reports. It seems that the continent’s consumers are not convinced that the Bank’s privatization prescriptions to cure poverty are all that useful. There is little evidence to suggest, for example, that public institutions and their employees are actually to blame for increasing poverty and unemployment. In fact, the record on public social services in Latin America is not too bad. Between 1960 and 1995, the ministries of education built the schools and hired the teachers necessary to provide virtually universal access to primary education and to cut illiteracy from 34 to 13 percent. [11] Through public health care, rural clinics, vaccination campaigns and public hospitals, life expectancy dramatically improved during the same period. [12] The expansion of public water systems also contributed to the extension of life expectancy, mostly through the reduction of infant mortality. [13] It was when the International Monetary Fund, the World Bank and the IDB began to insist on cuts in public budgets to resolve the continuing debt crises in favor of the bankers themselves that these services began to deteriorate so markedly and instead of expanding, infrastructure started to crumble.

For example, in 1990 and 1991, the new Nicaraguan government, under pressure from the multilateral banks, cut its health budget in half—from $132 million to $67.5 million a year—just like that. [14] After reporting that “public complaints about the [health care] system had become frequent,” in 1993, the World Bank cobbled together a $15 million loan to finance the concession of public hospitals to autonomous operating authorities and sub-contract health care services to for-profit companies. Many of these enterprises were later shown to have been created solely for the purpose of accessing these contracts and to have lacked competence in health care service delivery. Numerous companies had to be sanctioned. [15] Undeterred, in 2000, the IDB came forward with a $1.7 million grant to “…support and promote private sector participation in the health care services market in Nicaragua by improving and broadening existing regulations and creating a more stable and predictable investment climate conducive to government contracting with such agencies as the Ministry of Health and the Nicaraguan Institute for Social Security.” [16]

For an institution continually compelled to fault the public services of Latin America and charge them with failure to produce results and lack of program evaluation, the IDB is curiously tolerant of its own shortcomings. Frequently wrong but never in doubt, the Bank relentlessly enforces privatization, despite broadening political protests from public sector workers and citizens. In El Salvador, health care workers and doctors have protested since 1992 and gone on strike intermittently since 1999 to prevent the privatization of public hospitals. Late last year, the national legislature twice passed a law—since overturned—to prohibit the sell-off of the public health care system. [see “El Salvador,” this issue] The Brazilian National Front for Environmental Health systematically fights the privatization of municipal water systems, and the municipal workers union in Cali, Colombia, successfully forced the government to withdraw for one year an IDB-endorsed privatization plan for their enterprise. [See “Colombia,” this issue] At their July 2002 meeting, the Chilean Unified Confederation of Workers denounced Chile’s current president for his allegiance to the privatization policies of the multilateral banks. In perhaps the best-known case of resistance, a coalition of popular organizations forced the Bolivian government to withdraw from a contract that would have handed the operation of the water system in Cochabamba over to Bechtel, a U.S. corporation. [see “Bolivia,” this issue]

Ignoring the conclusions of its own opinion surveys, as well as the increasingly vocal and visible opposition to privatization, the IDB claims that this policy represents a response to the popular will, and that the Bank does only the bidding of democratically-elected presidents. Spokespersons for the Bank deny that it shills for the private sector and insist that the institution has no policies of its own other than to endorse democratic processes and good governance. [17]

Evidence to the contrary is implicitly visible in many IDB documents. One of the more revealing is the Country Program Evaluation for Peru during the authoritarian government of Alberto Fujimori. While the President, his political cronies and his secret police network plundered public agencies, the IDB’s internal assessment asserted that the Peruvian authorities undertook structural adjustment and pro-market reforms “with great enthusiasm.” [18] As a result, the evaluators gleefully reported, Peru was a focal point for development assistance during the decade. [19]

In stark contrast to its pro-democracy rhetoric, the Bank has also insulated itself from meaningful popular pressures by structuring its loan approval process in such a way as to marginalize the influence of national legislatures. Typically, the IDB prefers to deal exclusively with the executive branches of borrowing governments: They’re easier to manage than the congresses because the presidents are, without exception, haunted by debt commitments and determined to avoid defaulting during their terms. They’re also cheaper to buy than legislative majorities. A former executive director at the IDB observed off-the-cuff that the Bank’s fast-disbursing privatization policy loans are typically spent in the following manner: 30 percent for pork for the high-level political guys who have to sign on, 30 percent to compensate the government for lost revenue after the facility is privatized, and 30 percent for the actually stated objectives of the loan. So despite the much-heralded return to democracy in Latin America and the celebration of a diversity of political cultures, we see a striking uniformity of loan and project objectives across both countries and sectors at the IDB: From Argentina to Guyana, from Belize to Colombia, the purpose spelled out in project documents is to “support” and “promote private sector participation” and “reform.”

The loan generating process behind these projects is seamless, and it varies little across the continent, whether the Bankers are dealing with economies the size of Brazil or Belize. It begins with a Trojan Horse of “non-reimbursable technical assistance” provided by the IDB to the potentially borrowing government. This gift consists of a couple of million or so for contracts, plane tickets and spending money for IDB-approved consultants to study a sector and recommend reform measures. The resulting recommendations are uniform: private sector participation. This is the case whether the IDB experts are looking at a starved and strangled government service like health care in Nicaragua, or a prosperous, efficient public revenue producer, such as many of Colombia’s municipal enterprises. [20]

The consultants then write the loan proposal, often including lucrative budget slots for their own future employment, plus the pork for designated political beneficiaries in the office of the presidencia or atop the relevant ministry. If the consultants are especially astute and detect the rumblings of discontent about massive outsourcing and layoffs, they tack a “consensus-building” component onto the loan to provide funding for focus groups and advertising campaigns that flog privatization. [21]

These last activities are presented publicly by the Bankers as initiatives designed to enlist civil society participation in IDB operations. Sometimes these programs are rather expensive, but in the end, they really pay off. An unwilling population borrows money for an advertising campaign to convince itself that it wants something that it doesn’t want, and then has to pay the money back—with interest. Cute. No wonder those consultants get the big bucks.

The politicos then take the proposal to the IDB Board for approval, which is made up of persons not unlike themselves and their old friends from graduate school. Only after the IDB Board approves the loan does the legislature in the borrowing country even see the proposal. It is not uncommon for loan documents to be written only in English, with no available Spanish translation. In Colombia, legislators reported, they rarely receive supporting documentation for an IDB loan. Frequently they have no idea that a loan has been approved and disbursed until the executing agency shows up in their districts. [22] It’s a sort of super-fast-track operation for whole sector budgets.

And it’s about to become more unilateral still as the Bank promotes its innovative new lending products. Of most concern is the Multi-Phase Loan, designed to provide the flexibility a head of state is going to need when dealing with sensitive issues like busting unions or shrinking pensions. This arrangement establishes a sector reform loan disbursed over a period that is generally twice as long as the more conventional loan, and subject to unqualified adjustment as time goes by.

Typically, only the first phase of the loan is approved by the Bank’s executive directors. Subsequent adaptations to policy or implementation may be decided without substantive review by any elected official or government representative, even in cases where the government of the borrowing country changes over the life of the loan. In the IDB’s new Social Development Strategy, we are told that “by 2005, Bank lending should exhibit a substantial increase in the share of these operations in the social sectors.” [23] For voters, this means that no matter whom you elect next time, you are going to get pretty much what you got this time—and probably the time before. How’s that for consensus building?

If privatization policies are failures and they cannot deliver even minimal social improvements, why are the IDB and its sister institutions so single-mindedly committed to this course of action? Well, Watergate wisdom would suggest that we “follow the money.” The trail of corruption is long and wide; promenading along it we find Alberto Fujimori and Alan García, presidents of Peru, Arnoldo Alemán, president of Nicaragua, Carlos Menem, president of Argentina, Fernando Collor, president of Brazil, Ernesto Samper, president of Colombia, Carlos Andres Pérez, president of Venezuela, Carlos Salinas, president of Mexico—must we go on? We can, you know. There are more of them—and these are just the presidents. Then there are the ministers, vice ministers, deputy ministers and chiefs of staff. All of these guys were forced to resign, indicted, jailed, exiled or impeached, except for Samper, whose Cali cartel connections prevented overt legal action against him. Fujimori is currently a fugitive from justice, such as it is in Peru for the likes of him. Menem was under house arrest, but he’s loose now and thinking of running for President again.

Then, of course, there are the private beneficiaries: Suez Lyonnaise [24], Intergen, Duke Energy [25], Endesa, Banco Bilbao Vizcaya [26], AES, Citigroup, Unión Fenosa [27], Microsoft and Sithe Energy. Before they came to grief in the United States, Vivendi, Enron and WorldCom also sacked the public sectors of Latin America. Summing it all up, Colombia’s Auditor General Carlos Ossoa Escobar said simply, “The history of privatization in Colombia leaves much to be desired because one can almost suppose that behind each case lies a theft.” [28]

One thing the IDB is right about, though: The public sector in Latin America needs reform; a reform that would clear out the thieves at the top instead of leaving them there to oversee their permissive new regulatory systems. While we’re at it, we might also reform the IDB; it’s a public institution that spends way too much when you consider what it actually delivers. In its rhetoric, the Bank encourages accountability and fiscal responsibility for the public sector in the Americas, but in practice, alone among government institutions, this one is above the law. Even Carlos Menem went to jail. Not for long, but still. The IDB never answers for the programs that failed, for the millions (billions?) that were stolen, for the jobs that disappeared, for the savings that suddenly were worthless.

An IDB reform would require a new Multi-Phase Loan approach, which we should have no trouble shoving past the Board. We’ll begin with the “Non-reimbursable Technical Assistance to Promote IDB Strengthening,” program, which would consist of a grant for a million or so to identify the 50 percent of the staff slated for summary dismissal. Next, we’ll need a grant from the Social Entrepreneurship Program to provide training so that the layoff victims can join women, indigenous, incapacitated and other marginalized groups in hopeless efforts to boost their incomes by washing windshields or something. Third, we’ll need the investment loan for, oh, $50 million maybe, to crank up the currently non-functioning waterfall in the IDB foyer again. If we do this right and inform no one, we can probably avoid complaints from displaced office workers until it’s too late for them to stop us. And finally, we’ll need to kick off an “IDB Institutional Modernization Enhancement Project” to update the information system so that at long last we can find out where all that money has gone and why everybody we know is still so poor.

Beatrice Edwards is a research analyst based in Washington,D.C. who monitors the multilateral development banks for Public Services International

1. Development Beyond Economics. Economic and
Social Progress in Latin America 2000 Report, Inter-
American Development Bank, Washington, D.C.,
2. Competitiveness: The Business of Growth.
Economic and Social Progress in Latin America
2001 Report, Inter-American Development Bank,
Washington, D.C., 2001, pp. 3-6.
3. “The Privatization Boom in Latin America,” Latin
American Economic Policies Second Quarter 2002,
Research Department, Inter-American Development
Bank, Washington, D.C. 2002.
4. “For millions, another ‘lost half-decade,’” Latin
American Weekly Report, November 12, 2002, pp.
5. “The Privatization Paradox,” Latin American
Economic Policies Second Quarter, 2002, Inter-
American Development Bank, Washington, D.C.
2002, p. 1.
6. Dean Baker and Mark Weisbrot, “The Role of
Social Security Privatization in Argentina’s Economic
Crisis,” Center for Economic and Policy Research,
Washington, D.C., April, 2002.
7. Paul Blustein, “Banks Vow To Maintain Brazil
Credit. Pledge Gives a Boost To IMF Bailout Effort,”
Washington Post, August 27, 2002.
8. For the country studies they reviewed, Nancy
Birdsall and John Nellis concluded, “At least initially,
and on average, privatization has worsened wealth
distribution (highly likely) and income distribution
(likely).” “Winners and Losers: Assessing the distri-
butional impact of privatization,” Working Paper
Number 6, Center for Global Development,
Washington, D.C., May 2002, p. 18.
9. Lourdes Trujillo, et al., “Macroeconomic effects of
private sector participation in Latin America’s infra-
structure,” World Bank Policy Research Working
Paper 2906, The World Bank, Washington, D.C.,
October 2002.
10. Competitiveness: The Business of Growth.
Economic and Social Progress in Latin America
2001 Report. Inter-American Development Bank,
Washington, D.C., 2001, p.1.
11. Education in the Americas: Quality and Equity in
the Globalization Process, Organization of
American States, Washington, D.C. 1998, p. 13.
12. Pan American Health Organization, Basic Indicator
Series, .
13. Pan American Health Organization, Trends and
Analysis, .
14. Health Sector Reform Project, Republic of
Nicaragua, Staff Appraisal Report No. 12393-NI,
The World Bank, mimeo., November, 1993.
15. Gerard M. la Forgia and Roberto Gutiérrez,
“Growing Pains, The Nicaraguan Social Insurance
Health Model in Transition,” presented at “The
Challenge of Health Reform, Reaching the Poor,”
sponsored by the the World Bank and the Inter-
American Development Bank, San José, Costa Rica,
May, 2002, p. 9.
16. “Program of Support for the Strengthening of
Private Health Care Service,” (TC-99-05-04-8),
Inter-American Development Bank, unpublished,
approved October, 2000.
17. Meeting with K. Burke Dillon, Executive Vice
President, Inter-American Development Bank,
Santiago,Chile, March 16, 2001; “Frame of
Reference for Bank Action in Programs for
Modernization of the State and Strengthening of
Civil Society,” Inter-American Development Bank,
18. See “Cleaning Up After Fuijimori: Peruvian Panel
Probes ‘Economic Crimes’ Linked to Privatization,”
NACLA Report, Vol. XXXV, No. 4, January-February
2002, available online at
19. Country Program Evaluation, 1990-2000, Office of
Evaluation and Oversight, Inter-American
Development Bank, Washington, D.C., May, 2002.
20. Pereira Potable Water and Sanitation Program,
approved September 1999, Inter-American
Development Bank, .
21. See for example, Guyana: Nonreimbursable techni-
cal-cooperation funding for the design of the public
sector modernization program. Inter-American
Development Bank, approved, January 4, 2000.
“However, relatively more risk is associated with the
future implementation of the reforms to be
designed, particularly the employment rationaliza-
tion and retrenchment. The risks may include 1) a
militant labor force and 2) a volatile political envi-
ronment in the run up to elections at the end of
2000. In order to mitigate these future risks from
the design stage, the project will develop flexible
policy options rather than single recommendations;
initially entail only a voluntary rather than compul-
sory retirement and involve consultants with exper-
tise in Caribbean labor relations,” p. 2. Consultants
retained to design “consensus building” activities
were paid $50,000 from this IDB grant.
22. Meeting with Colombian legislators (Guillermo
Rivera, Pedro Arenas, Edmundo Maya, Wilson
Borja, Lorenzo Almendra, Gustavo Petro, Pedro
Pardo), Bogotá, Colombia, July 26, 2002.
23. “Social Development Strategy,” September 2002
draft, Inter-American Development Bank, unpub-
lished, p. 38.
24. “Belgian buyer in protested Peru privatizations may
have bribed Fujimori,” Agence France Press, June
2002. Juan Pablo Toro, “Peruvian Privatization
Leads to Unrest; Tractebel Accused of Corruption,”
Oil Daily, June 19,2002.
25. Sheila McNulty, “A-rated Duke admits round trip
trades,” Financial Times, July 16, 2002.
26. Leslie Crawford, “U.S. probes alleged money laun-
dering by BBVA,” Financial Times, July 16 2002.
27. “Hispanics – Dominican Republic/Protests Three
Shot in Dominican Protests over blackouts,” EFE
News Service, July 16, 2002.
28. SINTRAEMCALI, “Llega la crisis maquinada a
EMCALI,” http://

Tags: privatization, IDB, foreign aid, neoliberalism

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