Intro Sandra Knispel: The World Bank糖心传媒檚 goal is to end poverty. It was founded in 1944 at the Bretton Woods Conference to rebuild Europe and other parts of the world devastated by World War II. The Bank is independent and gives loans to countries solely based on need and merit of the project. But that糖心传媒檚 theory say political scientist. In reality, they argue, some powerful multinational corporations are pulling the strings.
Joining us today is Randy Stone, a professor of political science at the University of Rochester, who is one of the two political scientists who found undue corporate influence at the World Bank. Welcome to the Quadcast, Prof. Stone.
Randy Stone: Thank you, Sandra.
SK: So, before we even get to your charge let糖心传媒檚 backtrack for a moment. Can you talk a little bit about what the World Bank is supposed to do? How it is supposed to work in theory?
RS: Well, the World Bank is a development organization, with about 170 members, which engages in project-based lending. So, it identifies a wide range of different projects; it might be about water safety, or health, or education, or they may build a large dam. And this project is intended to produce economic development and improve quality of human life. It has a rather rigorous evaluative process to go over these projects and make sure they achieve their objectives and that糖心传媒檚 where it sometimes runs into a little trouble.
SK: So, theoretically, a really noble idea.
RS: Oh absolutely. It糖心传媒檚 repurposed itself a couple of times. Of course, it was originally intended to eradicate the devastation of World War II, to rebuild. But, it has subsequently repurposed itself as an all-purpose development organization.
SK: You and Rabia Malik, who got her PhD in political science at Rochester and is now a post doc at New York University Abu Dhabi, wrote the research paper together that appeared in the Journal of Politics. It糖心传媒檚 titled 糖心传媒淐orporate Influence in World Bank Lending糖心传媒� 糖心传媒攈ow do multinationals actually get involved with World Bank projects?
RS: Well, there are two major ways. Projects are implemented by organizations, usually private firms, and about three-quarters of those firms are located in the country in which the project is taking place, and the other quarter or so are multinational firms who operate as contractors for those projects. But, firms are also interested in projects they糖心传媒檙e not directly involved in. If they are downstream in some sense, for example, an aluminum smelter, which is planning to use the electricity that糖心传媒檚 produced by a dam, would be interested in the completion of the dam, even though it糖心传媒檚 not directly involved in the project.
SK: 聽The Bank has a way to ensure the quality of the projects it funds. But that control, which entails withholding loan payout, is not necessarily in the interest of corporations糖心传媒攃an you explain why?
RS: That糖心传媒檚 correct. Now, I should emphasize that the World Bank is one of the most transparent international organizations. There are many other development banks that do not publish nearly as much as the World Bank does. As a result, we were able to do this project on the World Bank. They do detailed evaluations of every project. These project reports, ICR reports, they糖心传媒檙e called, range from 20 to 200 pages in length, and then the Independent Evaluation Group goes back and audits all of these projects again, and in some cases, downgrades the projects. So, there are checks and balances. It糖心传媒檚 quite a detailed process they go through to make sure, first of all, that they糖心传媒檝e accomplished what they糖心传媒檝e set out to do with a particular project, but secondly that they haven糖心传媒檛 violated any one of the large number of mandates the World Bank has taken on over the years; for example, not to displace indigenous peoples, not to cause environmental damage, not to violate human rights, and so on and so forth. All these things are involved in the evaluation process. The difficultly comes in when a multinational corporation, which is interested in the completion of the project so that it will get paid, because it糖心传媒檚 a contractor, or because it wants the electricity from the dam糖心传媒擺but] the firm is not interested in the World Bank糖心传媒檚 mandates. The environmental sustainability, for example, doesn糖心传媒檛 enter into the profit and loss calculus of the firm. And so, the firm may be interested in just rushing something into completion while the Bank staff is concerned about the collateral damage that may be done.
SK: Contemporary models of foreign direct investment rely on large firms and their technical know-how for such large foreign projects. But you write that you find 糖心传媒渘o evidence that multinational corporations糖心传媒� involvement as contractors improves the performance of Bank projects.糖心传媒� What did you find instead?
RS: This is an extraordinary finding, I think. Contemporary economics tells us that the firms that engage in foreign direct investment are the most highly productive firms with the best technology. And you would think that engaging these firms糖心传媒攂ringing their know-how, their technology and their organizational acumen into the picture糖心传媒攚ould help to lead to better outcomes in projects, and it糖心传媒檚 striking that we find that that糖心传媒檚 not the case. It does lead to better evaluations; it does not lead to better performance. And so, the key here was that we took these 4,200-some projects with reports that might be a couple of hundred pages long, we combed through them with a team of research assistants and coded point by point: what were the objectives of the project, and to what extent does the World Bank staff assess the objective as having been met? And we create an index, and we compare that index to the headline grade that the project receives. So, the project gets a B+, but according to our assessment, they only completed 66 percent of the project糖心传媒攕o there糖心传媒檚 a gap there. So then, we wanted to see what is the effect of having a multinational corporation involved in implementing the project on the assessment gap between the evaluation and the underlying performance, and we found a strong correlation. Particularly, when the multinational firm was involved in a particularly important management role.
SK: So, why is it that you, with your team of researchers you would find that assessment gap and nobody at the World Bank seemed to notice, or do they not care?
RS: I糖心传媒檝e talked to a number of people at the World Bank about this and many of them are surprised by our findings. Some of them are not surprised by parts of our findings and are surprised by other parts. I actually had one interview with a World Bank official, where he was insisting that, 糖心传媒淣o, no this doesn糖心传媒檛 happen, there糖心传媒檚 no revolving door at the World Bank. You know, you sometimes hear, these revolving doors where these lobbyists end up working for the government, and government people end up being hired by the firms that lobbied and so forth, no, no, no, that doesn糖心传媒檛 happen in the World Bank, it糖心传媒檚 too attractive working at the World Bank.糖心传媒� And then he thought for a minute and then he said, 糖心传媒淗mm, although I have seen examples of outside contractors, not staff of the World Bank, but outside contractors who did that,糖心传媒� and then he thought and said, 糖心传媒淵eah, I can think of several examples.糖心传媒� And then he started backtracking. The thing about the World Bank is that it is a very complex organization: 20,000 employees, nobody has an overview of all aspects of their operation, so it really takes someone who comes from the outside to get that bird糖心传媒檚 eye view of what糖心传媒檚 happening.
SK: So, when you come in now as the researcher, I would assume that it糖心传媒檚 shocking to at least some of the managers to hear that. 聽How are you being received?
RS: Well, it varies. I mean there糖心传媒檚 always a little bit of skepticism, I mean most World Bank employees糖心传媒攑rofessional staff糖心传媒攁re economists, and they can think of lots of econometric reasons [why] our results might be faulty. And so, they start asking: 糖心传媒淲ell did you try controlling for fixed effects for countries?糖心传媒� and I said, 糖心传媒淲ell, yes, we did actually.糖心传媒� 聽糖心传媒淎nd did you control fixed effects for time?糖心传媒� 糖心传媒淲ell, yes we do have time fixed effects.糖心传媒� 糖心传媒淲ell, did you try this? Did you try that?糖心传媒� And after a while they start scratching their heads and they think, 糖心传媒淲ell, maybe this is a real finding, and now we have to explain it.糖心传媒� We did find some people in the Independent Evaluation Group in the World Bank糖心传媒攌ind of a watch dog auditing agency, semi-independent, really, not fully independent糖心传媒攂ut they were able to fill in a lot of the gaps for us about the incentive structures. Why is it that people within the Bank might have an incentive to look the other way if a project really wasn糖心传媒檛 performing very well? But they, you know, want to get it funded. Bank officials really have an incentive to have their projects go to completion and be successful. Like Garrison Keillor would put it糖心传媒攁ll children are above average, right? So, they have this incentive to push loans and get things to be successful, and if the project gets a bad evaluation, it reflects badly on them. They have a very rigorous internal assessment process for promotions and raises and so forth, and so the quantitative score that you get is important to your career. And so, there have been cases that they can talk about where someone has come in and disputed their assessment when they claim that, well, this ICR report wasn糖心传媒檛 done well. The project really wasn糖心传媒檛 completed, or wasn糖心传媒檛 successful, or had some sort of negative consequences. The Bank糖心传媒檚 staff often push back very hard, so that helped us to understand that if they had an excuse to do so, World Bank staff would have an incentive to look the other way. Then the question is, well, why do they have an excuse to do that? And we think that糖心传媒檚 where the lobbying efforts by the multinationals come in.
SK: So, to be clear糖心传媒攖he incentives actually make the Bank perform potentially worse because there糖心传媒檚 always the incentive to make things look better.
RS: It at least relaxes the incentives to enforce the conditionality. So, the idea is the World Bank lends money in return for getting work done. And one of the conditions that the developing country that糖心传媒檚 receiving the loan has, it糖心传媒檚 supposed to put in some of their own money, perhaps, or they are supposed to facilitate the project in certain ways. And if they don糖心传媒檛 do that then the disbursement of the loan can be held up. The Bank has an incentive to build a bit of a reputation for actually enforcing these things so it can get some cooperation from the developing countries.
SK: Let糖心传媒檚 go back to these string pullers. Who are these large multinationals who exert this undue influence? Because you found that they糖心传媒檙e more likely to come from certain countries than from others糖心传媒�
RS: That was one of our striking findings. You might think, well, multinational corporations are multinational corporations and where these multinational corporations are involved those might be projects that are just different, or countries that are just different, or something. And so, we thought, well, we should look to see whether multinationals from different countries are treated differently. And in fact, we found that American multinational corporations and Japanese multinational corporations have these very strong effects on disbursement and on evaluations, and that that糖心传媒檚 not true for German, or French, or British multinationals. We thought, well, that could be because there are just more multinational corporations from the United States and Japan that are involved, but actually, there are more French multinationals that act as contractors in our data than either American or Japanese ones. So, we think that the reason for this is that the United States and Japan are the two largest shareholders in the World Bank糖心传媒攖hey糖心传媒檙e the two most powerful countries, the United States quite a bit more powerful than Japan in this respect. [It] is the country that initiated the creation of the Bretton Woods institutions, the international monetary fund in the World Bank, but in the 1980糖心传媒檚糖心传媒攁t a time when Japan was growing very rapidly糖心传媒攖heir government set a goal of increasing their representation in the international financial institutions. And the United States was willing to give them a bigger share of the World Bank in return for not giving them a bigger share of the IMF, and so there was kind of a deal that was struck there. So, Japan ended up being quite influential in the World Bank. You can see that in the direction of policy advice that the World Bank adopted in the 1990糖心传媒檚, and you can see that certainly in their voting shares. So there糖心传媒檚 reason to think that if two countries are going to stand out it would be the United States and Japan.
SK: So, basically your data is showing very clearly (or what you found in your data analysis) that the two countries who have the most say in the World Bank also are the two countries where the large companies directly benefit from that?
RS: Right. We can糖心传媒檛 measure the size of the benefits the firms are getting, but we can see that there are very substantial differences in disbursement rates in these projects. So, for a multinational firm from the United States that has management responsibilities糖心传媒攖hat糖心传媒檚 kind of the best case for exerting influence糖心传媒攖hat causes about a 10 percent increase in the disbursement ratio, that is, the ratio of money disbursed to money committed in a project.
SK: Let me be a devil糖心传媒檚 advocate here. Why does it actually matter if multinationals pull the strings? Isn糖心传媒檛 that just sort of a way of letting the market regulate itself?
RS: Well, the thing is that the firms have different incentives than the Bank. They have different interests. They want to make a profit. They糖心传媒檙e not interested in the environmental impact. They糖心传媒檙e not interested in the human rights impact. There was one particularly egregious case that we talk about in the paper, which was a dam that was under construction on the Paran谩 River between Argentina and Paraguay, and this was a dam which was a very expensive project. Even President Menem of Argentina, who was not known as a paragon of clean government, referred to it as a monument to corruption. So, at the height of the case it came under scrutiny by the Inter-American Court of Human Rights because it was displacing indigenous people, which was one of the things the World Bank is supposed to avoid. Doing so the bank insisted that a program be incorporated to compensate the indigenous people whose land was being flooded. And the managers of the project bought up the land from the indigenous people so that they could collect the compensation payments. So, it was a thoroughly corrupt deal, but the American firm that was operating as the general contractor on the project got fully paid. It was a company called MWH, which is based in Denver.
SK Now, the Bank has certain tools in its tool kit to糖心传媒攁t least theoretically糖心传媒攎ake sure that the projects are of high quality. And so, suspending disbursements of loans is a very important and powerful tool in that tool kit and helps also the bank to maintain its reputation. Of course, that could mean risking the success of a particular project. Can you explain a little bit this conundrum and how the bank sort of tries to balance the two sides?
RS: That糖心传媒檚 right. Well, in any particular case if you suspend the funding, chances are the project won糖心传媒檛 be completed, or it won糖心传媒檛 be completed well. And so, the Bank realizes that it糖心传媒檚 shooting itself in the foot every time it pulls the trigger. So, it糖心传媒檚 reluctant to do that, and almost all projects are completed eventually. They get delayed, but the average disbursement rate is almost 90 percent. Very often projects are delayed and delayed, and there are negotiations, and then eventually the money is disbursed. Eventually things are done so it糖心传媒檚 costly to actually employ the sanction of cancelling a project for non-performance. On the other hand, if you never do it then you糖心传媒檙e not credible, right? 聽Then you can糖心传媒檛 get cooperation, and you can糖心传媒檛 accomplish much of anything, so the Bank has to be able to employ that sanction when it糖心传媒檚 appropriate. So, they糖心传媒檝e created an incentive. It actually counts against the evaluation of the project if it is more fully funded than is justified by the accomplishment of the objectives. That counts against the project. At least, [as a staff member,] if you糖心传媒檝e got a bad project, you can cut your losses by not fully disbursing it. Now, if there糖心传媒檚 pressure to disburse the loan there糖心传媒檚 a multinational corporation, which presumably has lobbied its congressman, and the congressman has presumably contacted糖心传媒攐r probably a congressman糖心传媒檚 aide has contacted糖心传媒攕omebody in the US Treasury, which oversees the US Executive director, who sits on the board of the World Bank. Somebody in the US ED [executive director]糖心传媒檚 office contacts someone in the appropriate department and says, 糖心传媒淲ell, this is a project we糖心传媒檇 kind of like to see go through.糖心传媒� No one along the way knows how important it was to the multinational, how important it was to the congressman, how important it was to the US Treasury, but it sounds kind of ominous. You don糖心传媒檛 want to get in trouble with a congressman, or the US Treasury, right? So, everybody goes along. So there糖心传媒檚 incentive to disburse. Well, everybody in the office knows this is a project we糖心传媒檙e supposed to disburse, so we糖心传媒檇 better give it a pretty good evaluation, because we have to justify the disbursement rate. So, we think that糖心传媒檚 where the bias comes in.
SK: You write that you don糖心传媒檛 have the smoking gun, so let糖心传媒檚 go back to your methodology. What did you look at and how did you come to this conclusion without the proverbial smoking gun? What are you basing your claims on?
RS: Right. So we don糖心传媒檛 have is an interview with somebody in the World Bank who said, 糖心传媒淲ell, I did this because I was contacted by the US Treasury.糖心传媒� We don糖心传媒檛 have an interview with somebody in US Treasury saying, 糖心传媒淪omebody in, you know, the xyz congressman糖心传媒檚 office contacted me and that糖心传媒檚 why we did this corrupt deal.糖心传媒�
SK: You糖心传媒檇 need a subpoena for that one.
RS: Right. That糖心传媒檚 the kind of evidence that you糖心传媒檙e not likely to get. I did actually make a FOIA request for correspondence between US Treasury and Congressional offices but I never heard back.
SK: We should quickly say FOIA, Freedom of Information Act Request. Which is often used by media, but anybody, any citizen can basically request this. How long has it been since you filed that?
RS: It糖心传媒檚 been about two years, so it糖心传媒檚 well past the stage where I should have heard back something, but I never heard anything. So, the kind of evidence that we do have is quantitative evidence. We have statistical correlations. We have a large data set. We have 4,200 of these projects and so we糖心传媒檝e got 4,200 observations in our analysis, and they cover a very large number of countries over the years 1994 till 2013. And what we can do to try to improve our inferences based on this data is a bunch of robustness checks. So, as I mentioned, we can control for the identity of the countries receiving the loans to see whether that糖心传媒檚 driving it. Maybe certain countries are just harder to do projects in, so we糖心传媒檝e controlled for that. We糖心传媒檝e controlled for time fixed effects, so we糖心传媒檝e controlled for the fact that there may have been change over time in the World Bank糖心传媒檚 procedures, or the kinds of projects it was engaging in. We control for the type of the project. We糖心传媒檝e got information about sectors for projects.
SK: Because some sectors are just harder?
RS: They might be. Some sectors might be harder. We didn糖心传媒檛 find systematic patterns, actually. It seems like the evaluation process accommodates the differences in the projects sufficiently that we didn糖心传媒檛 see any strong effects, because the objectives of each project are tailored to that type of project. The rubric for indicating whether there糖心传媒檚 success or not is presumably related to how difficult it is in particular projects. We also controlled for different evaluation regimes, because the World Bank has gone through four different ways of coding their evaluations in the time period that we studied, so we wanted to make sure we controlled for that. We used a placebo test. We substituted foreign direct investment flows into the country for our measures of interest to see whether it糖心传媒檚 just foreign direct investment that is associated with this and not the activity of particular multinational corporations, and we didn糖心传媒檛 find any similar effect with the placebo treatment. One other thing, we thought it might be the case that it糖心传媒檚 actually countries that are favored by the United States, or US allies, who get treated better than non-US allies, and it just happens to be the case that US allies get more investment from US multinational corporations, right? That could cause a spurious correlation. Also we tried that and we found that, we didn糖心传媒檛 find any evidence that US allies were treated any differently than non-US allies. It was really due to the multinational corporations, so that allows us to discredit a number of alternative interpretations of our findings. That doesn糖心传媒檛 mean that we糖心传媒檝e proven that our findings actually have the interpretation that we claim, but many other interpretations that we could think of are not consistent with the evidence.
SK: How did you get the idea to look at the role of multinationals in the first place? Did somebody tell you hey, there糖心传媒檚 something untoward going on? Did you suspect that from data?
RS: Well, no. I糖心传媒檓 just kind of a suspicious person. But I am working on a broader project on multinational corporations and their influence over multilateral institutions of various sorts. So, I have a paper about the influence of international banks over the IMF, and I糖心传媒檝e got a paper about the influence of multinationals over World Trade Organization disputes. And so, I was looking to see whether I could find something similar in the World Bank. And initially I thought that there probably would be something more to the geo-politics story, that US allies would be treated differently. I was surprised to find how strong the results were on multinational corporations and how robust they were. And then, of course, once we had that result we wanted to try everything we could to try to prove it was wrong, because, of course, reviewers are going to try to do that. And we weren糖心传媒檛 able to, so we thought, well, this is the story, so let糖心传媒檚 tell the story we糖心传媒檝e got.
SK: So, then what ought to change? Can the problem be fixed?
RS: Well, the difficulties that we find are first of all that the United States is too powerful in the international system. It has too much influence over international organizations; and secondly, that money has too much influence in American politics. You put those two things together, and it糖心传媒檚 very difficult for international organizations to behave in an unbiased way, to try to function the way they糖心传媒檙e written down on paper to function. It糖心传媒檚 probably inevitable the United States will continue to exert an extraordinary degree of influence over multilateral institutions. My previous work suggests that it has very extensive informal influence in the International Monetary Fund, for example. So, I think the most likely direction to reform is to reform the influence of money and politics in the United States. That糖心传媒檚 also a tall order because, of course, it糖心传媒檚 the people who have the money and are already very influential in our political system who often get to write the campaign finance laws, but I think that is a key place for reformers to start to work. The World Bank, to its credit, has tried to reform, and it has instituted remarkably transparent procedures so that we were able to generate the data to use to do our analysis. We couldn糖心传媒檛 do an analysis like that on the Asian Development Bank, or the Inter-American Development Bank, or the African Development Bank. They don糖心传媒檛 provide the same quality of data on their websites, and that糖心传媒檚 a positive thing [on the part of the World Bank]. There糖心传媒檚 been a lot of pressure by non-governmental organizations over the years for transparency at the international financial institutions and that has really yielded a lot of dividends. So, sunlight is the other solution. If you can糖心传媒檛 reform the campaign finance laws, and you can糖心传媒檛 keep the United States in a box, because it is after all the most powerful country in the world, then revealing what糖心传媒檚 going on is probably the best antidote to these kinds of patterns of cozy politics.
SK: So, keep shining a light on it?
RS: We keep working at it!
SK: Thank you, Professor Stone, for joining us for the Quadcast.
RS: Thank you, Sandra.
SK: That was Randy Stone. He糖心传媒檚 professor of political science at the University of Rochester, an expert on international relations, comparative political economy, and Russian and European politics. Thank you for listening for the University of Rochester糖心传媒檚 Quadcast. I糖心传媒檓 your host, Sandra Knispel.