Aidwatch Briefing Note: The World Bank in East Timor June 2001

1. World Bank dictating terms of development in East Timor While East Timorese society has been heartened by the stability and security restored by the Peace Keeping Forces, and by the good relief work supported by the international community, it is distressed and confused by the emerging role of the World Bank. Praise for the World Bank from UNTAET head Sergio de Mello has not allayed these concerns.

On a recent visit to East Timor AID/WATCH researchers Yoga Sofyar and Tim Anderson found consistent concern amongst NGOs, church groups and administration officials, that the development assistance - generously and freely given by the international community - is being managed in a predetermined, secretive and authoritarian manner. The main responsible agency for development decisions has been the World Bank, supported by the International Monetary Fund (IMF) and the Asian Development Bank (ADB).

Successive World Bank teams have now argued that the "clean slate" of East Timor's devastated economy presents an ideal opportunity for a 'free market' experiment. They have argued this consistently, as a 'best practice' notion, despite East Timorese opposition.

So the World Bank is pushing for privatisation of the publicly funded Agricultural Service Centres, and the Asian Development Bank's 's proposed Microfinance Project is designed for privatisation. The World Bank has also blocked proposals by East Timorese administrators and UNTAET for public facilities such as a public grain silo and public abattoirs, insisting that all potential revenue-generating projects must be privatised. The World Bank has termed such public facilities "command and control activities" - an inappropriate reference to Soviet styled totalitarianism. Minister for Economics in the Transitional Administration, Mr Mari Alkatiri, told AID/WATCH that his cabinet was "resisting" pressure from the World Bank not to use the Trust Fund for public facilities.

The World Bank has also begun indirect pressure to push East Timor into cash cropping. Orthodox economists at the Bank argue that food production is less important than export earnings, so coffee production should have precedence over basic grain production. However the prospects for international coffee prices are poor, and the expansion of cash cropping has huge implications for land management (including land disputes) and environmental degradation in East Timor. A significant expansion of cash cropping would be likely to assist large landholders at the expense of small subsistence farmers.

Will East Timorese people have a say in this process? Not without a fight. Recently a group of East Timorese economists, retained by the World Bank to analyse the state of the country's coffee industry, resigned en masse after their work was trivialised. They had been offered a couple of weeks and ten dollars a day each to complete a large study. Other consultations organised by the World Bank have been tokenistic or, as Sahe Director Aderito Soares says, "cosmetic". According to the main student body, IMPETU, a World Bank youth consultation involved a brief forum at IMPETU offices - then the Bank representatives were not seen again.

The Asian Development Bank has been put in charge of US$7.7m of Trust Fund moneys intended to establish microcredit for poor rural people, especially women. However this project has been designed with interest rates of between 40% and 80% pa. Further, there are plans to privatise the scheme as a profit making venture, and international consultants have been allocated US$600,000 of Trust Fund moneys.

Demetrio Amaral de Carvalho, Director of the Haburas Foundation, told AID/WATCH that the World Bank appeared to have "its own perspective" on what projects would be funded, and this had a lot to do with profit making. Many community proposals have been ignored. The relief and peacekeeping efforts have been good, but the current process was not "nation building".

2. The World Bank 'needs to explain' its past role in East Timor

The World Bank now dominates economic policy in the new East Timor - it was invited in by the UN and has been entrusted to manage money donated (not loaned) by the international community. But wasn't the World Bank also involved with the old regime? What was its role in East Timor under Indonesian rule? East Timorese activists painfully recall World Bank involvement in birth control and transmigration programs, and in indirect support for the murderous militia.

The World Bank has long financed birth control programs in developing countries, influenced by the old Malthusian view that poor people were poor because there were too many of them. So the World Bank helped finance birth control programs in many poor countries, including Indonesia. In 1990 President Soeharto was even awarded the UN 'Population Prize' for effective birth control programs. However "family planning" under Soeharto was both coercive and, combined with transmigration, repression and slaughter, a tool of genocide in East Timor. The military was used in programs which included deceptive recruitment into sterilisation (said to be "vaccinations") and forcing injectable contraceptives (of the drug Depo-Provera) on girls in high schools. Families were limited to three children. Recruitment into birth control programs was around 60% in East Timor, compared to 20% in the rest of Indonesia. The World Bank loaned significant moneys for this process.

Transmigration is a long standing practice intended to relieve Indonesian population pressures, mainly in Java. However in East Timor this was used as a tool of dispossession. It involved the import of large numbers of poor Javanese and Balinese migrants, many of whom were given East Timorese farmers' land. Other more wealthy Indonesian migrants filled senior posts in East Timorese schools, hospitals and the public service. By the mid 1990s the East Timorese population of 800,000 comprised about 150,000 Indonesian immigrants. In a 1994 evaluation the World Bank acknowledged that it had financed transmigration schemes in Indonesia through seven projects totalling $560 million. This report found that while many of these projects had achieved their settlement goals, "Transmigration had a major negative and probably irreversible impact on indigenous people", as well as causing major environmental damage, particularly through deforestation.

Finally, World Bank money intended for development purposes was diverted to the TNI-backed Militia, who murdered and burned before and after the independence referendum in August 1999. According to an Australian SBS investigation, the Militia received at least A$12 million of World Bank money, as well as nine billion Rupiah from Indonesia’s Foreign Affairs Ministry. Ben Fisher of the World Bank's Jakarta office is reported as saying that the Bank was aware of this diversion, but was unable to stop it "short of stopping overall support" for the Jakarta regime.

When there was an international outcry over the army-militia violence, the World Bank briefly played a more positive role, by joining the US Government in pressuring Indonesia to leave the country. However much of the World Bank's past activities are yet to be explained to the East Timorese people. Sahe Institute Director Aderito Soares says that the World Bank needs to provide some explanation for its past role. It is wrong, Mr Soares says, for the World Bank to simply appear in East Timor, after the 1999 referendum, "as an angel".

References: Sarah Storey (1995) Coercive Birth Control and Settler Infusion, Melbourne University

World Bank (1994) Transmigration in Indonesia, Operations Evaluation Dept, Precis No 72,

SBS (2000) Dateline: East Timor, reporter Mark Davis, 16 February ETAN (2000) 'Australian documentary details Indonesian Government funding of the Militia', www.etan.org/news/2000a/4ausdoc.htm

3. The Asian Development Bank's Microfinance Project

The Asian Development Bank-managed Microfinance Development Project for East Timor is a poorly conceived and regressive scheme. While the US$2.5m credit line to East Timor's non-profit credit unions is welcome, the proposed Microfinance Bank is a top heavy body which aims to extract exorbitant interest rates from 'the poorest of the poor'.

Unlike some other microfinance schemes, the ADB proposal sets out to construct a profit making enterprise, destined for privatisation, which will set its interest rates according to its clients' willingness to pay. This is standard banking practice, but inappropriate for a scheme to help poor people. The ADB document makes clear that the scheme is based on willingness to pay, and not on cost recovery and financial sustainability. Poor rural women, in particular, are to be charged between 40% and 80% per annum interest rates on Rupiah based loans.

To facilitate such exorbitant rates, the ADB proposes 'interest rate liberalisation' by UNTAET, to enable 'market oriented' interest rates. Yet in this case 'market oriented' means as much as may be extracted with consent from a highly vulnerable group - poor people desperate for a little finance.

This project contrasts with some other trust fund initiatives, such as the small enterprises project (SEP) run by the Banco Nacional Ultramarino (BNU), which charges 10% on small loans (min $500), over a period of up to 3 years. The $US is of course more stable than the Rupiah, but even the Bank Rakyat Indonesia charged only 18-24% on its small loans. The Grameen Bank of Bangladesh charges about 20% on its very small loans - a high rate in recognition of the higher costs involved in servicing very small loans.

The ADB's stated rationale for its 40% to 80% annual rates (=3% to 5% per month) is that the potential clients "are more concerned about access to services … than about the cost of services", and that interviews have showed that 3% to 5% monthly rates are viewed as "acceptable", partly because some money lenders are charging up to 100% per month.

However in the assumptions of its projected financial statements, the ADB reverts to a 12% interest rate, set on $US loans. This unexplained switch in rationale makes the financial statements misleading. The statements show the Microfinance Bank recovering a net profit (after tax) of about $350,000 after its first three years. The 12% rate would continue to make a good deal of money into the future, but only from the hard work of its very poor clients, who must also pay back all their capital within just one year.

The reason for a profit making scheme, instead of a cost recovery scheme, only becomes clear when one discovers the note (in Appendix 3) that suggests "majority equity [in the Microfinance Bank] should be divested [from UNTAET] to borrower and private sector over a period of time". In other words, a public asset created to help the East Timorese people is to be sold off as a private profit scheme.

On top of the high rates and profit orientation, the ADB project suggests a $600,000 payment of Trust Fund moneys to four international consultants for 47 person-months work - an equivalent pay rate of US$150,000 per annum. This is an extravagant and inappropriate use of Trust Fund money.

UNTAET should revise the ADB project, setting a cap on interest rates that ensures only cost recovery and sustainability, and strictly limiting consultants' fees. Better advice on microfinance projects is available much cheaper that this.

Reference:

Asian Development Bank (2000) Microfinance Development Project East Timor, November

4. The World Bank - fighting poverty or supporting profiteering? The World Bank 'Mission Statement' is to "fight poverty" and to "help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors". However this is just the public language of the Bank.

The World Bank's constitution (created in 1944, before the Universal Declaration of Human Rights) makes it clear that its underlying purpose is to: "assist in reconstruction and development ... by facilitating the investment of capital for productive purposes ... to promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment." (Article One)

So whatever may be said by the World Bank in glossy brochures, it is required by its articles to be primarily an agent of private foreign investment. Further the associated economic liberal philosophy, supported by most World Bank managers, argues that private-for-profit investment is the main force behind effective and efficient economic development. This philosophy is hostile to development based on public, state or community controlled investment and planning.

The World Bank is a special type of bank but, like an ordinary bank, it makes money from lending money. In the year 2000 the World Bank's income from loans was over US$8 billion and its income from investment was over US$1.5 billion. Yet it also paid almost US$7 billion in interest, and its net income for the year was US$1.991 billion. The World Bank is therefore not a charity, but a large money making corporation.

However the Bank also sets up the conditions for profitable private banking and profitable private foreign investment. This may involve infrastructure or social investments, usually funded by loans and often involving investment opportunities for large private companies. World Bank loans are often associated with private bank loans, and World Bank conditions are almost always the prerequisite for these sometimes larger private loans.

The conditions attached to World Bank loans (eg. privatisation, less restrictions on foreign investment, lowering import taxes, removal of subsidies, restricted public investment, minimise labour and environmental controls) are all designed to encourage further private-for-profit investment in, and trade with, the developing country.

An important assumption in all World Bank operations is that there can be a "happy marriage" between (1) development programs that will benefit poor people, and (2) profitable opportunities for giant multinational companies. Conflict between these two goals tends to be ignored.

Low interest loans are also made to the very poorest countries through the World Bank's 'soft loan' arm, the International Development Association (IDA), which is funded by the World Bank's wealthy member countries. Here the interest rate is only about 1%, and the loans are paid over a long period (35 to 40 years, often with a 10 year non repayment period). However the same conditions are applied (privatisation, less restrictions on foreign investment, lowering import taxes, removal of subsidies, restricted public investment, minimise labour and environmental controls) and the World Bank thus gains significant control over the developing country's economic policy.

So who controls the World Bank? It is not like the UN General Assembly, where each member state has one vote. It is not a UN agency at all. Along with the IMF, it was set up in 1944 with a corporate structure, which it still retains today. Member states of the World Bank are 'shareholders', and their shares (and thus their voting power) vary according to their economic size. In the year 2000 the USA had 16.5% of shares, European Union countries had about 22%, and Japan 7.9%. The G8 group of wealthy countries have about half the votes on the World Bank, and so effectively control its operations. The Bank's headquarters are in Washington and its President has always been a US citizen.

References World Bank (2001) Mission Statement, www.worldbank.org

IBRD (1944-2001) Articles of Agreement, www.worldbank.org

World Bank (2001) The World Bank Annual Report 2000, www.worldbank.org

5. The UN and the Dual Economy There is a fair amount of confusion about the World Bank’s role in East Timor, because at the moment East Timorese public life is dominated by UNTAET (the United Nations Transitional Administration in East Timor), including the military and the civilian police. And much attention is focussed on the elections and human rights issues.

Yet while the peacekeepers are generally appreciated, and while some soldiers are highly respected (eg. the New Zealanders for their work at the border, the Koreans for their discipline, and the Thais for their work with orphans) some other sections of the military have been involved in harassment and aggressive behaviour. And the power and high incomes of UN staff and consultants have generated considerable resentment.

The UN presence has created a serious dual economy, with UN staff paid 30 and 40 times more than East Timorese public servants, regardless of skills. A number of restaurants in Dili have no East Timorese customers. And a fair amount of the small business operations in Dili are directed at these usually friendly but also aloof and very wealthy temporary residents. This is a highly artificial situation.

The average UN soldier's wage is about US$47,000, while the UN civilian police (CIVPOL) get an average US$36,000. These are basically New York wages, paid for by the a peacekeeping budget (separate to the World Bank dominated Trust Fund for East Timor) of around US$560 per annum. On the other hand, the small group of East Timorese public servants (including teachers and nurses) are paid from a yearly budget of less than US$50 million. Their average wage is now less than US$1,500 per year. Yet many prices (eg. Telstra phone and internet services) appear to be set against the wealthier, international capacity to pay.

6. An Insider's Critique of the World Bank

Over the years several World Bank officials have resigned and criticised the bank's direction and priorities. But no insider has made as devastating a critique of World Bank operations as the World Bank's former Senior Vice President and Chief Economist Joseph Stiglitz. Mr Stiglitz had been a Professor of Economics at Princeton, Yale and Oxford, and an adviser to US President Clinton, before he joined James Wolfensohn's administration in the mid-1990s.

Yet after reviewing the IMF and World Bank's disastrous 'shock therapy' on Eastern Europe in the late 1990s, Stiglitz began to challenge the 'Washington Consensus'. In 1999 he declared that Eastern Europe was worse off after a decade of 'free market reforms' than it had been under communism in 1989. Stiglitz said "Almost without exception, these countries have yet to return to their 1989 GDP levels ... More disturbing, we are seeing similar dramatic downturns in social indicators. Life expectancies have fallen for 18 of the 25 countries for which we have data [and] poverty has increased from 4% to 45% of the population."

He was just as blunt about the impact of IMF structural adjustment policies, applied to Thailand, South Korea and Indonesia after the 1997 Asian financial crisis. The actions of the IMF in cutting public spending and raising interest rates were said to be "bad psychology and worse economics ... You ask the question 'Who are you protecting?' You're protecting firms that have gambled [on currency rates]. Who is paying the price? Workers who are going to be put out of jobs."

Stiglitz was forced out of the World Bank in late 1999, after furious reactions to his criticisms from US Secretary of Treasury Lawrence Summers. While a supporter of liberalised trade, Stiglitz questions liberalised investment: "There never was economic evidence in favour of capital market liberalisation. There still isn't. It increases risk and doesn't increase growth ... [these policies are] all based on ideology." He supports demonstrators' calls for citizen and worker participation in economic decision making. "Countries should be encouraged to arrive at a national consensus to create their own strategies for development".

References

Executive Intelligence Review (1999) 'World Bank's Stiglitz: Shock Therapy Failed', www.aboutsudan.com/issues/debt/shock_therapy_failed.htm, July 16, p.50

Soren Ambrose (2000) 'Stiglitz, Maverick World Bank Economist Pushed Out', 50 Years is Enough: US Network for Global Economic Justice, www.50years.org/ejn/v2n4/stiglitz.html, 24 August

David Moberg (2000) 'World Bank Fires Stiglitz: The World Bank cuts its ties to the economist who became an unlikely hero to world trade protesters', In These Times, www.salon.com, May 2

7. Timor Gap Treaty Issues Not Yet Out in the Open

Negotiations between the East Timor Transitional Authority (represented by US diplomat Peter Galbraith) and the Australian Government are said to be proceeding towards a better deal for East Timor. Instead of the 50/50 split in oil and gas shares negotiated between Australia and Indonesia, the discussions are said to be been heading towards an 85% or 90% share for East Timor. In current international law terms, virtually all the oil and gas reserves of the ‘Gap’ area are in East Timor's waters.

Indonesia gave up its claim to a better deal in exchange for Australian formal recognition of its annexation of East Timor. Shamefully, the Australian Government accepted this deal.

Most attention has focussed on the seabed boundary line between Australia and East Timor. Yet other issues may be relevant to the negotiations. For example, the Treaty relies on a share of oil and gas after the company has recovered its costs. But how are costs calculated and accounted for? Perhaps the companies should also be paying greater royalities to East Timor, if their accounting practices were properly scrutinised. After ten years of operations, such issues should be reviewed. But we don't yet know the answers because the negotiations have so far been kept secret.

For these and other reasons, Aidwatch has called on the Australian Government to make public the details of its Timor Gap Treaty negotiations with East Timor. The Australian public is entitled to assure itself the East Timorese are getting a fair deal from both the Australian Government and the oil companies.

References DFAT (1991) Treaty between Australia and the Republic of Indonesia on the Zone of Cooperation in an Area between the Indonesian Province of East Timor and Northern Australia [Timor Gap Treaty], Australian Treaty Series 1991 No 9, http://www.austlii.edu.au/au/other/dfat/treaties/1991/9.html

McKee, Geoffrey (2000) ‘The New Timor Gap: will Australia now break with the past?’ in

Lansell Taudevin and Jefferson Lee (Eds) (2000) East Timor:Making Amends? Australia East Timor Association & Otford Press, Sydney

8. A Stronger Role for the Australian Government

AID/WATCH would like to see the Australian Government play an active role in helping engage the East Timorese community in the development of their country. A sustained effort is needed to help this new neighbour nation find its feet, and express its own character and voice. The paternalism must end.

AID/WATCH has written to the Australian Government to urge that: § In all available fora, it insists that East Timorese representatives have the final say on the deployment of the donated Trust Fund moneys

§ In view of East Timor's poor communications (the phone system was destroyed by the retreating Indonesian army and militia) the Government arrange that Telstra offer to the East Timor Transitional Administration an affordable telephone and internet system, cross-subsidised by Telstra's other profitable concerns.

§ It make public the details of its negotiations with East Timor over the Timor Gap Treaty, so that the Australian public can assure themselves the East Timorese are getting a fair deal from the Australian Government and the oil companies

§ The Government expand its efforts in education and training support (especially teacher training and medical training) to more than cover the gap left by Indonesia

9. Should An Independent East Timor Join the World Bank?

Presently the World Bank has influence in East Timor because it has been entrusted to manage the funds donated to the people of East Timor by several countries, including Australia, Japan and Portugal. Although the World Bank is not lending money, it has power because (i) UNTAET has invited it in (ii) the donor countries have placed it in a position of trust, and (iii) because East Timor does not yet have a properly constituted Government.

However when the US$520 million of Trust Fund moneys are spent, and when East Timor has its own Government, what will be the role of the World Bank? The Bank only operates in states which are World Bank members. Will East Timor join the World Bank?

The incentive to join would be to gain access to the cheap loans of the International Development Association (IDA) - the 'soft loan' arm of the World Bank. Long term loans with only 1% interest are available to very poor countries - but only if they agree to comply with World Bank economic policy conditions. Additional private commercial loans may also be more easily negotiated, if the World Bank/IDA conditions are met. So what are the conditions?

Formally, IDA loan recipients must agree to implement policies which "promote economic growth and poverty reduction". In practice, the World Bank believes these to be the same policies which apply to both IMF and World Bank 'structural adjustment' programs - neoliberal policies based on the 'Washington Consensus'. This group of conditions includes: a reduction in tariffs (taxes on imports); reducing controls on private foreign investment; reducing government spending and borrowing; currency deregulation; deflationary measures (high interest rates, cuts to government spending) to prevent inflation; the removal of subsidies (to 'get prices right'); and the privatisation of productive, publicly-owned businesses. Since 1995 the World Bank under James Wolfensohn claims to have departed from this view, but the changes have been mostly in language.

So there is a different sort of price on cheap IDA loans - the loss of an ability to independently construct economic policy. Yet the appeal of cheap finance is great. Investment (public or private) is important for development, and a poor country like East Timor will want some source of funds for this investment.

Are there alternatives to the World Bank model? Banks and many large companies will say no. However some other countries successfully attract controlled private investment through 'joint ventures' - combined public-private enterprises. Private foreign investors prefer the liberalised regime enforced by the World Bank - but they will also take what they can get.

Written by Tim Anderson for AID/WATCH

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