#19 | October 9 - 22, 1997  

by Matt Taibbi

If a salesman tried to convince you to buy a pill to cure cancer, you'd probably be pretty surprised if you found out that he wouldn't touch the stuff himself in a million years. If you knew that, and if you had any sense, you wouldn't buy the medicine even if it worked.

Let's put this another way. Imagine that your tax dollars were going to help a corporation that already had a worldwide monopoly and was earning over a billion dollars a year in pure profit. This corporation had the full political support of all the civilized nations of the world, and was insured by the collective will of all of these states against market risk and was guaranteed to make a profit on every deal.

You'd be pretty mad, wouldn't you? It would sure make you feel resentful about your own financially insecure position in life, wouldn't it? Now just imagine that this same corporation was also the world's leading proponent of laissez-faire market economics, yet was, again, totally immune to market risk, and guaranteed a huge profit anyway? You'd be amazed by the gall of a corporation like that, wouldn't you? You'd wonder: how do they get away with it?

Now imagine that this same corporation called itself a non-political entity while simultaneously having a direct influence on the character of budget appropriations in dozens of countries around the world. This corporation told countries how to spend their taxpayers' money, how to regulate (or deregulate) their industries, how to manage their environment, how many people to employ; told countries who should have access to medicine and who shouldn't, how strong their currencies should be, and even how to conduct their foreign policies. And after doing all of this- virtually co-opting the decision-making process generally left to elected representatives- it turned around and said that it had nothing to do with politics.

You'd be pretty angry. Or, you should be. But you obviously aren't, because this has been going on for fifty years, and if you are a citizen of an affluent Western country, you've been a complicit partner in the whole process. The corporation is the World Bank. It makes about $1.5 billion a year in profits while completely immune to market risk.

As it is in developing countries all around the world, the World Bank is the primary shaper of economic policy here in Russia. It has lent $8.2 million at interest to Russia in the last six years to fund a wide range of reforms which they say are intended to improve the lot of poor people. It believes that poor people, in order to become affluent, have to be completely exposed to market risk in order to provide the stimulus to work and become efficient. So in Russia, the Bank's main task has been to provide this stimulus through reform. Good plan. Hard work. Discipline. Pulling yourself up by your bootsraps. All that Horatio Alger stuff. Even the eXile believes in it. The only thing is, the only people who don't really believe in it are the people at the World Bank. How did that happen? And how badly has Russia been suckered? Read on.

A little background on the World Bank. It was formed in 1944 and gave out its first loan in 1947. It was created more or less on the initiative of one man, the famed British economist John Keynes. Together with the United States government, the British had begun to think, very early on in WWII, about how they wanted the world to be shaped after hostilities were concluded. It was Keynes's vision that the combined economic resources of the civilized world could be used to raise the standard of poor people all around the world. As Keynes said to delegates at the United Nations conference in Bretton Woods, New Hampshire that gave birth to the Bank: "We have an opportunity to serve the common people everywhere."

Keynes's idea was to create a financial vehicle for providing development loans to poor countries. His mechanism for obtaining this was ingenious. He made each of the nations who ratified the plan pay a small "subscription" fee, then asked them to pledge a significantly larger amount which would be "on call," used only if one of its debtors were to default. But in Keynes's view, default would be unlikely, as the Bank would have such tremendous financial and political clout- a Bank of Nations- that default would be economic suicide.

Keynes's comments at the time seem to suggest that he genuinely believed that he could help the poor with his great invention. This might be why his portrait no longer hangs in the Bank headquarters in Washington. Because the Bank has developed along very different lines, more in tune with the motives of other players who helped bring about its creation.

The United States delegation, which in 1944 was for obvious reasons the most powerful in the UN, envisioned the Bank as a means for helping the United States find outlets for its enormous industrial output, which had been raised to a feverish pitch during the war. As then-Secretary of State Dean Acheson said:

"No group which has studied this problem...has ever believed that our domestic markets could absorb our entire production under our present system...we need those markets [abroad] for the output of the United States...we cannot have full employment and prosperity without those markets."

There was another motive. As Susan George and Fabrizio Santelli note in their book "Faith and Credit," about the World Bank, the U.S. needed to develop the natural resources of foreign countries for their consumption. They quote a State department official in 1944 as saying:

"Our metals are running out and so may our oil eventually...other essentials must come from abroad and in fifty years, like the British, we may have to export to pay for the things we need in life."

In short, access to foreign markets was very much on the mind of the United States at the Bretton Woods conference. But it wasn't until much later, in fact just before the World Bank's arrival in Russia, that it mastered its technique for gaining access to those markets.

The World Bank was not very active in its first twenty years or so, lending less than a billion dollars a year to countries around the world. However, it built, in that time, a system of guaranteed profit. The system worked like this:

The World Bank raised funds for its lending capital by issuing bonds and other securities. Since the Bank had the backing of all the major industrialized powers of the world, these securities were pure gold, as safe as U.S Treasury Bonds. They were a rock solid investment.

The Bank then lent developing nations money at market interest rates. Its lending rates were attractive, but certainly not overly advantageous. Now, here's the catch: the developing nations the Bank lent to absolutely had to pay its loans back, because its credit rating depended, first and foremost, on its record in repaying World Bank loans. If they defaulted on the World Bank, they could kiss all other lending goodbye.

The Bank was not lending money blindly. It was instituting projects that had a tremendous impact on the internal policies of the governments it lent to. Aside from infrastructure projects in areas like the energy sector and agriculture, it also funded privatization of state industries and streamlining of state budgets. On the surface, this was all good, but the only problem was that there was no correlation between the effectiveness of the Bank's projects and its ability to collect its loans. Unlike all other market lending institutions, it was not accountable when it made bad lending judgements. Regardless of what damage its projects did or didn't do in its borrower countries, the Bank was always gong to be repaid on time-guaranteed.

As George and Sabelli wrote, "The Bank has discovered the dream formula: Guaranteed Profits, No Risk. We are not sure what this system is called, but it is not capitalism."

For twenty years, the Bank lent its money and quietly made massive profits. Its ineffectiveness or lack thereof was of a relatively limited scale. But then, in 1968, its leadership changed, and it became more energetic-and reckless. It also acquired the political bent it has today.

Most people associate the name Robert McNamara with words like "napalm," "body count," and "war criminal." As Lyndon Johnson's secretary of defense in the 1960s, McNamara was the name most Americans associated with the pointless, disastrous war in Vietnam. It was McNamara who implemented the strategy of simply inflicting as much punishment on North Vietnam as possible. It was his contention that when a certain threshold of pain and misery had been inflicted on the North Vietnamese, they would stop meddling in what they considered the affairs of their own country.

After McNamara resigned from Johnson's government, he assumed the Presidency of the World Bank. Without getting too much into the particulars of his effect on the Bank, he managed to achieve two main objectives: he vastly increased the pace and volume of World Bank loans, and he gave the Bank its ideological character.

McNamara, while still in the Pentagon, had outlined his plan for saving the world's poor, which he considered an urgent problem. He believed that it was worldwide instability, caused by poverty, which posed the greatest threat to United States security, a threat greater even than communism.

"We could find ourselves literally isolated, 'fortress America' still relatively prosperous, but surrounded by a sea of struggling, envious, and unfriendly nations..."

As evidence he cited statistics which showed that 164 "outbreaks of violence" had taken place between 1958 and 1965 in 82 governments, all friendly to the United States. Only a few of these outbreaks were between nations; most were uprisings against governments.

McNamara believed that the key to preventing these outbreaks was economic development. Once the poor of the earth were better off, he argued, they would be less likely to revolt.

However, McNamara had a fundamental flaw in his reasoning. He believed that aid to the poor needed to be distributed through the very governments that these poor people were likely to revolt against. Among other things, he believed that these governments needed, first and foremost, to provide "security" to their nations. In other words, in order to enact developmental reform, U.S.-friendly governments first needed to be armed against their own people.

"There can be no development," he said, "without security."

McNamara's policies, as World Bank President, would eventually turn out to enhance Western security by providing an extra bulwark against the poor, not by empowering them. As experience proved, the World Bank would be the most effective vehicle in the world for strengthening elites in poor nations.

Two weeks ago here in Moscow, a sensational article appeared in Nezavisimaya Gazeta. Like most sensational articles which contain news detrimental to U.S. interests, it was not reported in the Western media. The article was a reprint of a letter from U.S. Undersecretary of the Treasury Lawrence Summers to Anatoly Chubais. It featured a picture of Chubais in the guise of the Statue of Liberty. The article stated frankly that it is easier to be an agent of a foreign power "if you can go and meet him on official business anytime you please."

In that letter from Summers to Chubais- which incidentally opened with the curiously informal and somewhat condescending "Dear Anatoly"-Summers instructed Chubais to implement a number of changes in Russia's economic policy. Among other things, it asked Chubais to end trade advantages between CIS countries, in order to heighten the competitiveness of Western products. It also called for Chubais to reform the tax system along lines more advantageous to foreign investment.

"Imagine," Nezavisimaya Gazeta's Tatiana Koshkareva and Rustam Narzikulov wrote, "what the reaction would be if Russia's Deputy Finance Minister Aleksei Kudrin wrote Al Gore with instructions on how to remake America's Federal Reserve in the image of Russia's Central Bank. In the best case scenario," they wrote, "Kudrin would be called insane. In the worst, he would be accused of interfering in America's domestic affairs."

Lawrence Summers is the former chief economist of the World Bank. He is also the primary architect of U.S. policy to Russia. And in every way, his policies mirror that of the World Bank, which has been dictating Russia's economic policy for years.

The World Bank manages the economies of the world through a process it calls "structural adjustment," which it began practicing in 1987. Simply put, it makes policy demands of governments in return for granting loans. Generally these demands include privatization of industries, downsizing of government employee rolls, devaluation of currencies, and an end to subsidies.

The State Accounting Chamber provided the eXile with an example of World Bank policy demands. In a copy they made of a1996 letter from then-Deputy Economics Minister Sergei Vasiliyev to then-Vice Premier Vladimir Potanin, Vasiliyev outlined changes that the World Bank demanded in exchange for a series of loans. Among these changes were an end to all agricultural and energy subsidies. At the same time the World Bank was making these demands, it was sending scores of highly-paid consultants to Russia to implement reforms. In other words, it ordered thousands of Russians fired, while simultaneously demanding the hiring of exorbitantly-paid World Bank consultants.

It has not yet been demonstrated that the World Bank's lengthy program of "structural adjustment" in Russia has had a salutary effect. On the contrary, there is plenty of evidence to show that its main reforms-privatization, reduced tariffs, and an end to subsidies-have been disastrous.

Industrial production in Russia has ground to a halt as immediate exposure to far more efficient global competition has put Russia's cumbersome industries out of business. Social services have been slashed in accordance to World Bank budget "austerity" programs. And mass privatization has resulted, on the whole, into a mass redistribution of wealth from the state into the hands of a small financial elite.

Keynes's "common people" have, on the contrary, been laid off, stripped of medical benefits, seen the quality of their public educations decline to almost nothing, and fed a steady diet of Western consumer goods to compensate for their trouble.

"Most of the World Bank policies are obviously necessary," said Oksana Dmitrieva, a Yabloko Duma deputy. "We need to privatize industry, we need reform of our economy. But their style is to implement these reforms without thinking of their consequences. They don't do anything to replace the services they are taking away. They don't consider the loss of jobs, the loss of industries to a city, the loss of health care to a family, etc. And when you reform without thinking of consequences, it can have a very severe social effect."

Dmitrieva said that she believed the World Bank did not look at the specific needs of Russia at all, but simply followed a pre-ordained playbook.

"They work according to a system," she said. "Privatize this and that, reorganize this and that. It's a formula. They don't believe that countries have their own individual needs and nuances."

Aleksandr Bultagov, press spokesman for the LDPR, more bluntly expressed the hostility of nationalist politicians toward the World Bank, which many see as a willfully destructive foreign power.

"The World Bank financed the destruction of Russia. Period," he said.

Despite all of these catastrophic changes about which politicians have such strong feelings, the World Bank still has the chutzpah to come out and say that they do not involve themselves in politics. The official party line, as espoused by Summers and others, is that the Bank only deals in economic issues. Therefore issues like medical care, education, industry, foreign policy (if tariff agreements can be taken to be a core of all foreign policy) and other issues are not, under the World Bank's vision, political matters. What exactly is politics, according to the Bank, is not clear.

"I'm sorry, but we do not ever involve ourselves in politics," said Marina Vasilieva, spokeswoman for the World Bank office in Moscow, when contacted by the eXile.

What about the World Bank's structural adjustment programs?

"That isn't politics," she said. "Those are strictly budget questions. We call that strengthening the budget."

What did she think politics was, if not budget questions? Isn't voting on what the government should and should not pay for exactly what elected politicians do-practically to the exclusion of everything else?

"No, this is not politics."

A little note about Lawrence Summers, the author of the letter to Chubais. Lest anyone have any doubts that the World Bank is no longer interested in helping the poor, here is a little anecdote about our Clinton-appointed Undersecretary of the Treasury.

While still chief economist to the World Bank a few years ago, Summers made the mistake of being candid in an internal memo on Bank environmental policy. Some brave underling got ahold of the memo and distributed it to the press.

The memo was extremely interesting. What it said, in a nutshell, was that it made more sense for ecologically-unsound industries to base their operations in poorer countries:

"Just between you and me," he wrote, "shouldn't the World Bank be encouraging more migration of the dirty industries of LDCs [less developed countries]?"

Summers listed three reasons. The first among them:

"The measurement of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic of dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."

The translation of this incredible passage is simple. Poor people in low wage-earning countries produce less and live shorter lives. A person who produces $1000 of GDP per year and works 20 years after the age of 30 is worth $20,000 to the world economy, while an American, who produces $20,000 per year and works 30 years past the age of 30, is worth $600,000 to the world economy.

In other words, it is financially more sound to kill a bunch of poor people with toxic waste that it is to kill a bunch of Americans.

Summers didn't stop there. He went on to say: "I've always thought underpopulated countries in Africa are vastly underpolluted."

So the man running U.S. economic policy to Russia, and by extension heavily influencing Russian domestic economic policy, is a person who measures human life in dollars and cents, and who believes poor people are worth less than rich people. And Americans wonder why Russians hate us.

The World Bank gets away with what it does because of a generally accepted belief in the in the efficacy of the market as a self-correcting, benign tool for human development. The Bank has identified itself with the cause of the market and done more than any institution in the world- including the U.S. government-to promote its spread around the world.

In fact, the World Bank has not only furthered the cause of the market, the Bank has advanced a new and extreme type of market economics. It is an economic policy grounded in the belief that the global market, with the absolute absence of trade barriers, is the best system for producing growth all around the world.

In service of its global market ideal, the Bank has consistently furthered a number of policies. They include, among other things, wage reduction, which they call "demand management," which reduces inflation and also guarantees a surplus of goods which can then be exported. In other words, if local populations are too poor to buy their own products at market prices, there will always be some left for foreigners to buy.

The Bank also promotes the export of raw materials to earn foreign exchange. To this end it favors the devaluation of currency, which makes goods more favorably priced for export.

A paradox of this latter policy is that, if similar reforms are enacted in countries which export the same materials, the ensuing competition to secure a favorable export price pushes both nations ever-downward, with only the consumer countries winning out. In this system, countries like Russia, which depend heavily on exports of raw materials, inevitably lose out to consumer countries which export more sophisticated manufactured goods and technology, like the United States.

To further support the market, the World Bank also supports the stripping of all trade barriers. In recently privatized countries like Russia, this inevitably results in mass unemployment. In fact, the World Bank, when it began its program for reforming Eastern Europe, often referred to its programs under the maxim, "It it doesn't hurt, it's not working."

In short, the Bank believes that everybody in the world should be absolutely, on economic principle, exposed to the market at all times. No shelters. No reprieves. Horatio Alger.

Everybody should be exposed, that is, except the Bank. And if Russian girls end up hooking to pay for food while the World Bank makes its risk-free billions, well, that's just the laws of economics in action. No reprieves. After all, hooking isn't such a bad option, nor is crime in general. As Lawrence Summers said about Russia in 1991: "I've always praised the obvious entrepreneurial energy of the black market."

That the vast majority of World Bank projects are contracted out to Western corporations is also straight economics. And if companies privatized along Bank guidelines do not provide better or cheaper service, or if the whole damn country falls apart as a result, well then, the Bank only has one thing to say to the borrower country:

Fuck you, pay me!

"The World Bank privatized housing and utilities, and said that it would be better for everyone," said Dmitriyeva. "But in fact, it only made things more expensive and left Russians with less money to pay for the things they need. Aside from that, little changed. But we have to...pay for these loans anyway."