NCPA - National Center for Policy Analysis

WORLD BANK LOANS ARE AN IMPEDIMENT TO GROWTH

September 24, 2004

Since 1945, the World Bank has spent some $383 billion in developing nations with the aim of reducing poverty. But its own research suggests the main cause of poverty is not a lack of money, but government regulation that strangles economic growth, say observers.

Latin America is a large beneficiary of World Bank handouts, but big government policies have impeded any long-lasting expansions from taking root. For example:

  • In Brazil it takes 152 days to start up a business; by contrast, it takes two business days in Australia.
  • It can take as long as 500 days to enforce a contract in Brazil, while in Guatemala it takes 1,459 days.
  • Closing a business and settling with creditors takes a remarkable 10 years in Brazil and about 5 years in Haiti; in Ireland, it takes about 3 months.

The World Bank's lending policies exacerbate the problems associated with incompetent government because it removes the discipline of the market, say observers:

  • There is no incentive for government to eschew antibusiness policies when creditors continue to inject money into their economy.
  • By issuing guarantees to investors against bad governance risks (such as breach of contract), the World Bank reduces the incentives for government to build authentic credibility with respect to contracts.

Ultimately, the World Bank should not lend to regions with limited access to capital because the market is sending a powerful signal that the risks and returns in these areas are not favorable, and that corrections in the investment climate must be implemented, say observers.

Source: Mary Anastasia O'Grady, "World Bank Researchers Find Truth, But to What End?" Wall Street Journal, September 17, 2004.

For WSJ text (subscription required) http://online.wsj.com/article/0,,SB109537494295220315-search,00.html

 

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