NCPA - National Center for Policy Analysis

Privatize the International Finance Corporation

December 14, 2001

In recent years, the World Bank and International Monetary Fund have recommended restructuring and privatization of state-owned enterprises for developing countries and formerly socialist economies.

On the other hand, the effectiveness of the World Bank and the other multilateral development banks (for Asia, Africa, Europe and the Americas) that channel aid in the form of loans to such countries has become the subject of heated debate.

Now economists are recommending that these government banks could use a dose of their own medicine, in the form of privatization. A case in point, says James H. Smalhout, is the International Finance Corporation, a member of the World Bank group set up in 1956 to encourage private-sector investment in developing countries.

  • There wasn't much private capital investment in developing countries in those days, so the World Bank became a main conduit for lending to developing-country governments.
  • Private businesses outside industrialized countries had even fewer places they could go to raise capital, in part because the Bank's charter permitted it to lend only to governments.
  • But private investment in developing countries now dwarfs the funds coming from official sources like the World Bank and IFC.
  • However, the IFC is a de facto preferred creditor when it comes to repayment of principal and interest -- in competition with private creditors; the preferred position of this government lender discourages the very reforms the banks intend to encourage.

The IFC seldom achieves an eight percent rate of return, whereas private lenders expect higher returns in developing countries. The U.S. government is the largest shareholder in both the World Bank and IFC, and should propose privatization. Selling the IFC would also provide a source of funds for grants (in lieu of loans) to the poorest countries, as President Bush has proposed.

Source: James H. Smalhout, "Experts, Heal Thyselves," Barron's, December 10, 2001.


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