What’s Behind the Withdrawals from the World Bank, IMF?

The backlash against neoliberalism in Latin America is now leading to confrontations between several of the region’s governments and the World Bank and International Monetary Fund (IMF). In the span of just the last few weeks, there has been something of a mass defection from these institutions.

September 4, 2007

The backlash against neoliberalism in Latin America is now leading to confrontations between several of the region’s governments and the World Bank and International Monetary Fund (IMF). In the span of just the last few weeks, there has been something of a mass defection from these institutions.

President Rafael Correa announced that Ecuador was expelling the World Bank’s representative from the country (1), President Hugo Chavez announced that Venezuela would be withdrawing from both the Bank and the IMF (2), and Bolivia, Nicaragua, and Venezuela announced their intention to withdraw from the World Bank-affiliated ICSID or International Centre for the Settlement of Investment Disputes (3). The Venezuelan government has also proposed the formation of a new regional lending institution, the “Bank of the South,” widely perceived as a challenge to the World Bank and the IMF. The government of Argentina has pledged to contribute funds to the new bank, and the Brazilian government may as well (4).

The World Bank and the IMF are international lending institutions. While each has over 150 member countries, the representatives of a few rich capitalist countries hold most of the power. They hold disproportional voting rights and get to appoint their own representatives to the institutions’ executive boards. The president of the World Bank, while formally appointed by the Bank’s executive board, is de facto named by the U.S. government (5). Both institutions tie credit to the adoption of “neoliberal” policies like privatizing public enterprises, reducing public employment, eliminating price controls on basic goods, weakening protections for workers and labor unions, and opening up to international trade and investment (6).

Established and funded by the World Bank, the ICSID functions like an international court in which private companies can bring suits for damages against the governments of member countries. These cases are often brought under provisions of bilateral investment agreements (or so-called “trade” agreements, like NAFTA, which govern not only trade in goods, but also foreign direct investment). While the ICSID does not have police powers for enforcing its rulings, a government that does not comply faces the same possible retaliation as one that refuses World Bank or IMF conditionality— the cutoff of international credit. The ICSID itself stated in a 1988 order in the case Maritime International Nominees Establishment (MINE) vs. Guinea: “Non-compliance by a State constitutes a violation by that State of its international obligations and will attract its own sanctions. The Committee refers in this connection … to the consequences which such a violation would have for such a State’s reputation with private and public sources of international finance.” (7)

The recent withdrawals from the World Bank, IMF, and ICSID by Latin American governments represent a rejection of the conditions these institutions have imposed on poorer and less powerful countries. The withdrawal from ICSID, in particular, represents an assertion of the power of sovereign states to determine the conditions under which they will permit foreign investment— a burning issue today in Venezuela, Bolivia, and other Latin American countries. The Venezuelan government has nationalized the largest telecommunications and electricity firms by simply buying their stock, including the shares owned by large U.S. corporations (8). The government has also asserted control over the country’s oil industry— not by purchase but by threatening to expropriate the holdings of any multinational firms that refused to accept their new status as minority partners (9). Bolivia has made similar moves in asserting control over gas resources (10).

Disputes over property rights exist in every society. In the United States, for example, conservative legal scholars argue that the passage of environmental legislation constitutes an illegal “taking” since it deprives property owners of potential benefits. Others insist that this does not constitute a violation of property rights since there is no “right” to damage the environment and to harm other people. Different states differ, moreover, on what property rights they enforce. The differ over whether the government can expropriate “property” without the consent of the “owner,” under what circumstances it may do so, whether it must give compensation, how “fair” compensation is determined, and even what constitutes an “expropriation.” Some of the recent moves of the Venezuelan, Bolivian, or other Latin American governments may run counter to, say, property rights under U.S. law— but they are, of course, sovereign countries with their own laws.

Some of the recent nationalizations (though not the ones accomplished by purchase of stock) also run counter to the bilateral investment treaties that hold sacrosanct the property rights of multinational corporations. Sovereign states that have entered into agreements, however, may seek to alter them or withdraw from them altogether. If it has no intention of abiding by the rulings of an international body like the ICSID, the government of a sovereign state is perfectly entitled to withdraw from it.

With the tide turning against neoliberalism, the governments of Venezuela and other Latin American countries appear determined to gain greater control of their resources and to use them for social welfare and economic development projects. Might they face a cutoff of investment by multinational corporations and financiers, or the hostility of powerful governments as a consequence? This is certainly possible. But that is a matter of power, not of right.

(1) Hal Weitzman, “Ecuador expels World Bank envoy,” April 27, 2007, www.ft.com.
(2) Saul Hudson, “Venezuela to quit IMF, World Bank,” April 30, 2007, www.reuters.com.
(3)Agencia Bolivariana de Noticias, “Paises de Alternativa Bolivariana acordan retirarse de convencion del Ciadi,” www.abn.info.ve.
(4) “Hugo Chavez moves into banking,” May 10, 2007, www.economist.com.
(5) Alejandro Reuss, “ABCs of the World Economy: The World Bank and International Monetary Fund,” Dollars & Sense, March-April 2000, www.dollarsandsense.org.
(6) Sarah Anderson, “The IMF and World Bank’s Cosmetic Makeover,” Dollars & Sense, January/February 2001.
(7) Quoted in United Nations Conference on Trade and Development, Dispute Settlement: International Centre for Settlement of Investment Disputes, 2.9 Binding Force and Enforcement, p. 8.
(8) “Venezuela seizes largest telecom,” Bloomberg News, May 9, 2007, www.iht.com; “Venezuela buys 93 percent of electric company in nationalization move,” Associated Press, May 10, 2007, www.iht.com.
(9) Reuters, “Venezuela pulls control from Big Oil,” May 1, 2007, money.cnn.com.
(10) BBC News, “Bolivia gas under state control,” May 2, 2006, news.bbc.co.uk.

Alejandro Reuss is a historian and economist, and writes on contemporary Latin America and global economic issues. He is a member of NACLA's Editorial Committee.

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