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I would like to thank this Committee for its invitation to comment on the proposed amendment to S. 1792 that would extend the reporting and analysis requirements of the National Environmental Policy Act (NEPA) to U.S. votes on loans granted by the World Bank and other multinational development banks (MDBs). Since the Reagan Administration has asked Congress to approve some $ 14 billion in aew cash and guarantees for the World Bank, it is particularly appropriate that we consider steps such as this one that might improve the prospects that such funds will be well used.
I speak as the head of the Competitive Enterprise Institute (CEI), a pro-market public interest group, active in both the environmental and economic policy areas. In the environmental area, CEI has taken the lead in developing Free Market Environmentalism, an approach based on the realization that rational economic policies tend to advance environmental goals. Free Market Environmentalists argue for an expanded environmental role for voluntary arrangements by both profit and not-for-profit organizations (Chapter IX of the 1984 Council on Environmental Quality's Annual Report, "Private Provision of Public Amenities" provides many valuable examples of the valuable role such groups already play). Market oriented environmentalists support the valuable role now played by private property and favor the extension of such stewartship arrangements to a wider range of those environmental resources (wildlife, groundwater, western lands) now managed politically. We also favor the enforcement of private voluntary agreements (contracts) and the retargeting of liability rules to again conform to the polluter-pays-principle. Free Market Environmentalists also argue that policy makers are too quick to adopt political solutions to environmental problems. Our analysis indicates maay situations in which major government agencies (the Bureau of Land Management, the Forest Service, the Department of Transportation, the Department of the Interior) have created significant environmental damage. (For further information on such "Government Failure" research, contact CEI or the Political Economy Research Center (PERC) in Bozeman, Montana.)
CEI's economic policy work in the area of financial services has focused on the extent to which politics often reduces the viability of economic investments. Domestically, CEI favors reform of federal deposit insurance (in particular, a reduction in the federal subsidy) and further financial service deregulation. The current system of subsidies and restraints, we believe, encourages imprudent lending practices and tends to destabilize the whole financial service Industry. For many of the same reasons, CEI opposes similar guarantee/subsidy policies in the international lending field. CEI staff played a leadership role in the 1983 debate over U.S. involvement in the International Monetary Fund (the IMF). An article discussing that debate (see "The Politics of IMF Lending," Ca to Journal, Vol. 4, No. 1 (Spring/Summer 1984) is submitted for the record.
In the Cato paper, I characterized the debate between those favoring politics and those favoring the marketplace as follows:
"One school sees the market as a fragile institution requiring the guidance of an impartial and objective government referee to enforce
order and stability. The alternative view sees the market as both
The debate over the World Bank and its value in promoting world economic development while preserving environmental quality raises these same conceras. As indicated by our name, CEI favors a wider role for voluntary market arrangements.
My comments today focus on the value of extending NEPA reporting requirements to U.S. lavolvement in international lending institutions. Such mandated disclosure requirements would call attention to the widespread failure by many World Bank loan recipients to respect private property and contracts, and more importantly to the economic and eavironmental consequences of such failures. Such disclosure requirements are necessary. The Administration has now asked the American taxpayer to provide substantial new funding to the World Bank ($ 14 billion in cash and guarantees). Taxpayers have a right to know how their money will be spent. Today, that knowledge is extraordinarily difficult to obtain. Even World Bank defenders such as Robert Ayres concedes that "the World Bank is not a noticeably open institution." NEPA reports will open up the process and allow a more loformed review process.
BACKGROUND ON WORLD BANK :
A brief history is perhaps in order. The World Bank and the other multinational development banks grew out of the economic meetings following the Second World War. Those meetings led to the creation of three major International economic institutions: the International Monetary Fund (the IMF), the General Agreement on Tariffs and Trade (GATT) and the International Bank for Reconstruction and Development (the World Bank). The IMF was to encourage stable relationships between the currencies of the various countries. GATT was to facilitate open trading arrangements, and the World Bank was to rebuild the war-ravaged economies of the world. All of these institutions are now in disarray. The IMF has become a major threat to the stability of world economy, providing the financial support that makes possible the continuation of policies destructive of both economic and ladividual liberties throughout the world. GATT succeeded in reducing standard protectionist tariffs to a large degree but has now been overwhelmed by protectionist sentiments sweeping the world and the novel use of non-tariff barriers.
The World Bank has fared no better. The swift recovery of the economies of Europe and Japan soon eliminated the original reason for its original establishment. Seeking new purposes, the Bank turned to the Third World and began to underwrite experiments in socialist development that continue to this day. The havoc created by the World Bank has increased
massively since Robert McNamara's reign (late 1970s to 1981). McNamara apparently guilt-ridden over his role in the Vietaam disaster decided to force feed the Third World into prosperity. The damage done by the wellintended but foolishly aaive policies that stemmed from McNamara's leadership were massive.
The result has been a growing range of criticisms of the World Bank across the political spectrum. Conservatives criticize its policies of supporting left wing dictators, an array of fashionable "social coasciousness" programs such as population control, and its tendency to ignore the views of the U.S. representatives to the Bank (See, for example, Melanole S. Tammen, "World Bank Snookers U.S. Congress Agaia," Heritage Backgrounder, No. 649, May 23, 1988). Liberals note the Bank's support of authoritarian regimes and its contiaued failure to deliver on the poverty reduction promises it makes (see, for example, Erik Eckholm, "The Dispossessed of the Earth: Land Reform and Sustainable Development," Worldwatch Paper 30, Washington D.C., June 1978). Free market groups oppose the failure of the bank to insist on the basic prerequisites of viable economic development secure property rights and contracts (see, for example, James Bovard, "The World Bank vs. The World's Poor," Cato Institute Policy Analysis, No. 92, September 28, 1987). Environmentalists note the tendency of the World Bank to adopt (at best) a pork-barrel public works approach to Third World development in which every river should be dammed, every road built, every tree cut and every mine dug (see, for example, Brent Blackwelder, Financing Ecological Destruction, Environmental Policy Institute, Undated). The result is that many groups are aow prepared to use the information that would be made available by this new NEPA requirement.
BACKGROUND ON NEPA:
The National Environmental Policy Act is broadly compatible with the goals of the World Bank. NEPA declares that "it is the continuing policy of the Federal Government ... to create and maintain conditions under which man and aature can exist in productive harmony, and fulfill the social, economic, and other requirements of present and future generations of Americans." The original charter of the World Bank contained language arguing for rational economic development. The NEPA Act was signed into law by President Richard Nixon in January 1970 and, according to the 1984 Council on Environmental Quality report, issued in the "environmental decade."
NEPA was enacted, in part, to recognition of the environmental problems that too often arise from politically determined investment. As implemented and interpreted in a number of court cases, that Act specified that all federal agencies (unless exempted) prepare for public review an Environmental Impact Statement (EIS) detailing the expected consequences of each ma jor policy action. EIS statements have become an important tool in examining the economic and environmental consequences of domestic governmental policy. NEPA - by forcing an agency to provide information about a wide range of possible impacts of that decision -- improves the ability of interested citizens to respond and react to ongoing government policies. The act of filing an Environmental Impact Statement cannot, of
course, ensure rational decisions; however, it does make the process more transparent and thus easier for others to criticize. Taxpayer and citizen groups are provided additional information about the case for the project and can challenge that logic if they believe it faulty.
The rationale for NEPA grew out of the massive role of the federal government in our economy and the realization that political decisions posed a serious threat to the environment. Enviroamentalists had begun to realize that the Corps of Engineers tendency to dam every river, channel ever stream, drain every wetland; the Bureau of Land Management's western land and water policies; the Department of Energy's subsidized energy programs; and the major public works projects of the Federal Highway Administration all involved major threats to the environment. The absence of economic restraints meant that such projects night continue even if they lost vast sums and did little good. NEPA has been used on many occasions in the policy debate over the wisdom of these and other federal programs.
CEI,. I might note, is familiar with the NEPA Act. Indeed, CEI is now engaged in a suit based in part on the failure of the Department of Transportation (DOT) to obey the NEPA reporting requirements. DOT failed to submit data on the safety costs of one of its major regulatory programs, the Corporate Average Fuel Economy (CAFE) standards, possibly because such data would have undermined the political support for this program.
NATURE OF POLITICAL LENDING:
Private loves tors, of course, make many mistakes. Still such individuals do weigh the costs of a specific project, its anticipated benefits and proceed only if the anticipated benefits outweigh anticipated costs. Siace private lavestors generally face most of the costs of their actions directly, they have every reason to take care. Only in unusual situations would the choices made inflict major costs on third parties. For the most part especially when property rights have been extended to the resources at risk private decisions advance public purposes.
The contrast with the incentives facing political decision makers making an lavestment could not be greater. The costs of a political project are borne by the general taxpayer, not the bureaucrat, while the benefits of the project are generally enjoyed by politically preferred interests. The result is that programs may remain politically popular even if they prove economic and environmental disasters. Indeed, the term "pork barrel" politics was invented to describe such commonplace misinvestments. Examples in the United States include the Syafuels Program and the clinch River Breeder Reactor programs. In addition, politicians are often afflicted with an Edifice Complex and wish to build the modern equivalent of pyranids to project their fame into the future. New national capitals, airports, highways, dams and universities, major industrial plants all have received major funding in many countries from the World Bank. Wise lavestments in infrastructure are, of course, essential to economic progress. However, when politics rather than economics determines the design and scope of such projects, the benefits often prove illusory, the actual costs far greater than anticipated.
Indeed, the World Bank has supported what amounts to a modern version of the "Cargo Cult," a quasi-religious movement that grew up in the South Pacific after World War II. Islanders had experienced an unexpected boom during the war years as the allies created and then abandoned major bases throughout the region. Since that initial wealth has been accompanied by airplanes, airstrips and hangers, the islanders created models of these realities hoping that these offerings would lure back foreiga wealth.
Many of the World Bank programs can best be seen as modern versions of that same confusion of cause and effect. Since the West has a vast public works and social welfare infrastructure -- an elaborate system of highways, canals, power grids, pipelines, ports, schools and universities, welfare programs, large industrial complexes including steel and pulp mills, and copper mines and refineries and the West is indeed rich, many politicians have come to believe that simply building such artefacts would make a nation wealthy. This confusion of the results of economic progress with its causes has been disastrous, The World Bank has tended time and time again to place the infrastructure cart before the economic development horse. The tragic consequences of that policy are visible throughout the world.
That tendency to view almost any public works project as inherently worthwhile is very familiar in the U.S. And, of course, the results are worthwhile to the politician who gains a new project for his district. After all, any project will result in transfer payments which provide a temporary boost to the local economy. New spending in the district will create some clear beneficiaries. Moreover, there will be ribbons to be cut when the project is initiated even afterwards, if it is ever finished. That the resulting project all too often lies idle afterwards creates few obvious problems for the politician. The costs of such wasted investment are diffuse. The politics of pork place little weight on the intrinsic value of the project and much more weight on its costs -- a more costly project that does little may actually be preferred to a less costly project that generates major economic benefits. After all, these benefits may be dispersed across the economy or go to groups aot well organized politically.
In the West, such political misue of scarce capital lowers national productivity and living standards, but we are a wealthy people and such losses are not readily apparent. In the Third World, such misinvestments are far more serious, representing the squandering of the very scarce surplus generated in these nations and thus reducing further the chances that these nations will ever escape poverty. Unfortunately, the 11kelihood that political lending will prove economically and environmentally disastrous is particularly great in the Third World. In many such countries, the pre-requisites of economic growth -- a climate in which entrepreneurship is encouraged, private property respected, and contracts honored are often absent or weak.
For political reasons, the World Bank and the other MNBs have acted as if such factors are irrelevant to economic performance. That is nonsensical as the recent actions of Premier Gorbachev clearly demonstrate. The World Bank does review the economic rationale of a specific loan project, but that review is scarcely the objective, skeptical analysis