Managing Globalization

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Sunday, February 19, 2006

MOST PEOPLE AGREE that globalization is here to stay; that it has both positive and less positive effects; and that the world lacks good institutions to ameliorate the negative ones. The "Equator Principles," created by the private-sector arm of the World Bank in 2003 and now embraced by 40 big private banks, are a rare creative effort to grapple with this deficit. The principles govern the social and environmental impact of large-scale projects such as mines or roads or dams; although their implementation remains uneven, the fact that perhaps $125 billion of the $170 billion in global project finance is supposed to respect the Equator code represents genuine progress. On Tuesday an updated version of these principles faces a vote by the board of the World Bank. It is vital that the governments that sit on the bank's board approve the update.

The purpose of the update is to make the principles more effective and less legalistic. Instead of requiring project managers to check a large number of boxes -- for example, hold two consultations in each village along the path of a proposed road -- the new code would specify social and environmental outcomes and then allow flexibility on how to get there. Critics complain that this would make it hard to hold project financiers accountable, but the accountability under the old code is flawed: A project with good substantive outcomes could be faulted for an inconsequential procedural mistake. The critics also complain that the required outcomes are not good enough: For example, the code fails to require that people who are relocated because of an infrastructure project should be given legal tenure over their new dwelling. But here the standards are guilty only of preferring the possible to the ideal. They stipulate that relocated people must be left better off than before.

The critics often fail to see that perfectionist standards have a downside: Such standards can raise the cost of building roads or installing urban water systems to the point that less development happens, in which case the poor suffer. But the critics include activist groups that have the ear of the World Bank's European shareholders, and even if they fail to secure a rejection of the revised guidelines at Tuesday's board meeting, they may bully private banks into spurning the revisions. The idea of driving a wedge between the World Bank and private lenders is counterproductive. If commercial banks cease to observe the same social and environmental rules as the World Bank, borrowers that want to ignore the environment will be able to shop around for compliant financiers.

For the World Bank's new president, Paul D. Wolfowitz, the success of the updated guidelines should be a priority. Ever since the early 1990s, when private capital began to flood into emerging markets, skeptics have doubted the relevance of the World Bank in countries such as Brazil or Thailand. In fact, because the world lacks good institutions to manage globalization, keeping the bank active in these rich developing countries is justified. For example, the bank is mobilizing money to fight avian flu, even in comparatively rich Turkey. But the Equator Principles are a direct response to the skeptics. They demonstrate that the bank can remain relevant in a world awash in private capital -- provided that the governments that sit on its board do not frustrate its efforts.


© 2006 The Washington Post Company

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