Samuel Cohn: Global Social Trends

Carolyn Coburn, Michael Restivo and John Shandra have written a wonderful article about the actual consequences in human lives when international financial organizations emphasize loan repayments and creditworthiness above everything else. In “The World Bank and Child Mortality in Sub-Saharan Africa” Sociology of Development (2015), they do a statistical analysis of child mortality in the region between 1990 and 2005. Sub-Saharan Africa is the poorest region in the world. It has long been characterized by low income, low levels of medical care and high death rates for infants, children and adults alike. There are many causes of these high death rates. Overpopulation, food insecurity, crop failures, civil wars, warlordism, inadequate supplies of clean water, inadequate public sanitation, weak or non-existent provision of medical services, and ecological/migratory conditions promoting the spread of epidemic disease all play a role.

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However, the financial policies of the World Bank at one time aggravated these conditions. Subsequent World Bank policies helped to undo a lot of the previous damage.

Back Story:

There was a gigantic debt crisis in the 1980’s that engulfed most of the developing world. Sub-Saharan Africa was caught up in that mess. In the 1970’s, international banks were awash with all sorts of extra money because high oil prices flooded the banks of the world with petrodollars. The banks were looking for places where they could invest all that money. The banks began to write loans to poor nations in the Global South. Some of the earlier loans were well conceived. But as the petrodollars kept rolling in, underwriting standards became looser and looser. Soon banks were writing gigantic loans with only the most pro forma financial oversight. The outstanding debt loads were far more than the developing nations could ever hope to pay; it was only a matter of time before this teetering financial structure would come crashing down – and the poor countries of the world would find themselves in hock for unbelievably huge amounts of money.

It was the dubious underwriting on the part of the international banks that produced the debt disaster. But the banks had no intention taking a penny of loss on their questionable investments. Their plan was to make the poor countries of the world pay every cent that was owed, no matter how awful the consequences of those repayment plans would be on the countries in the hole.

The International Monetary Fund and the World Bank were the two transnational financial organizations responsible for maximizing the flow of repayments. The primary approach of the World Bank was to provide structural adjustment loans – loans from the World Bank to the poor countries of the world to allow them to defer payment on their original obligations. A structural adjustment loan solves no problems. Imagine you are in over your head on your Mastercard payments. You take out a new Visa card and you charge your payments on the Mastercard bills to the new Visa. You have not lowered your debt obligation one bit. One solves debt problems by writing off a portion of the loans or forgiving a portion of the loans rather than giving a new loan that simply adds to the debt burden overall.

But giving structural adjustment loans is what the World Bank was doing.

And worse …the structural adjustment loans came with conditionalities that were savage in and of themselves.

In order to get the structural adjustment loans, Sub-Saharan nations had to accept draconian reductions in their government expenditure.

Reducing government expenditure is fine if all that represents is cutting government waste.

It is another story when that government expenditure was doing vital things. One of the most important forms of government expenditure in Sub-Saharan African budgets were health expenditures.

African governments were forced to close health care facilities; fire doctors, nurses and other health care workers; reduce their purchases of pharmaceutical drugs and medical supplies; reduce programs of public works designed to build clean water systems or provide sewage and human waste removal; and cut programs of mosquito eradication.

Just the shortage of medical supplies all by itself would have produced a health crisis. One of my acquaintances broke his leg in Kenya during this period. At the hospital, they could only take one X-Ray. That one X-Ray was a ¼ exposure. They had to use each sheet of X-Ray film four times in order to have enough film to go around. Each patient could only get a single ¼ image.

This was bad enough. However, there was an additional adverse effect of these retrenchment programs. Governments had to cut three fundamental sources of income support for their population: government employment, welfare payments, and subsidies for food. So at the same time that medical services were being cut back, people were poorer and hungrier. This made the population much more vulnerable to infectious disease.

On top of that, clinics and health services that had historically provided their services for free or for nominal sums were told that they had charge fees large enough to recoup the cost of medical services. Those clinics that were still open to provide services had to charge patients enormous sums just to allow those patients to be seen. Coburn et al. show how in one hospital in Kenya, net of entrance fees, patients had to pay for gloves for the nurses, surgical blades, syringes and disinfectants.

Coburn et al. actually under-estimate the adverse effects of the structural adjustment loans. One of the major sources of “government waste” that the international banks attacked was “corruption” going to the political allies of the government. Some of those allies were warlords. Many of those countries had delicate tenuous balances of power between different ethnic groups and different regions. Contestants for power were kept at bay because they received their share of the swag.

When the financial crunch hit, the rival warlords stopped receiving their peace payments. At the same time, the military capacity of the capital city was weakened by cuts to the armed forces. This was an open invitation to start rebellions and civil wars. And that is exactly what happened. Some of the most horrible and savage civil wars in African history occurred during the debt repayment period of the 1990’s. Death rates tend to go up when warlords are slaughtering the population.

Coburn et. al statistically estimated the effects of having a World Bank Structural Adjustment Loan on the child mortality rates of the Sub-Saharan African countries. In every analysis they did, receiving such a loan dramatically raised child mortality.

This was true even when they controlled for pre-existing debt service (how much financial trouble the country had already been in before it got into debt problems), multinational corporate investment (the wonderful money supposedly pouring into the country because now with a structural adjustment loan, the country is financially responsible), domestic investment (the wonderful money coming from local investors now that their country is financially responsible), female secondary school enrollment (a general measure of skill in the population – and thus a measure of development potential), democracy (some dictators underspend on health) and the fertility rate (high fertility populations tend to have sicker babies). None of the extra variables changed the basic finding that having a Structural Adjustment Loan increased death rates among children.

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So where is the good news in this otherwise very gloomy story?

International organizations keep a lot of demographers and public health experts on their staffs. These staff were reporting back to their superiors in report after report after report that these new austerity measures were causing a major health crisis in Sub-Saharan Africa.

The United Nations Children’s Fund had a particularly well-informed and mobilized staff that was quite concerned about what was happening to mortality in Africa. In 1987, The United Nations Children’s Fund published a damning report with compelling statistical evidence about how much harm was being caused by international debt repayment programs. Throughout the 1980’s and 1990’s, the United Nations led a substantial public relations campaign to get international financial organizations to undo the damage they were causing by providing money to rebuild and reestablish newly broken African public health systems.

The World Bank, to its credit, realized the merits of the arguments being put forward by the U.N. and the international public health community. Beginning in the 1990’s and continuing through the 2000’s, the World Bank began to give World Bank Health Loans – monies explicitly earmarked for the reconstruction and refunding of medical services in Sub-Saharan Africa. These loans were usually targeted for very explicit purposes, such as rebuilding clinics in countries that had experienced civil wars, or purchasing basic medical supplies such as blood pressure gauges and autoclaves. These programs were generally thoughtfully considered, well-targeted and useful.

Statistically, just as the Structural Adjustment Loans raised child mortality, the World Bank Health Loans reduced child mortality. The World Bank Health Loans worked even taking into account all of the control variables mentioned in the early discussion of Structural Adjustment Loans. The size of the benefit from getting a World Bank Health Loan was considerable. Technically, the adverse effects of having a Structural Adjustment Loan were slightly bigger than those of having a Health Loan. So, most countries would have been better off having neither type of loan. However, if a country was already stuck with repaying a Structural Adjustment Loan, getting a World Bank Health Loan undid a very large share of the damage done by the earlier Structural Adjustment Loan.

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The Moral of the Story?

Even large impersonal international banks can do the right thing. Yes, a lot of damage was done by irresponsible lending to the poor countries without attention to careful underwriting or credit analysis. This is actually not uncommon in the world of international finance. There has been a long run of global debt crises brought on by huge waves of global overlending during prosperous periods. (See Kenneth Rogoff and Carmen Reinhardt's 2011 This Time is Different: Eight Centuries of Financial Folly for a grim historical narrative of this persistent pattern.) Yes, there was a lot of damage brought on by the pain induced by repayment regimes imposed by the banks. (See Catherine Weaver’s 2008 Hypocrisy Trap: World Bank and the Poverty of Reform for more on that.)

But even allowing for these various adverse forces, the people who work in international banks do believe in economic growth and do want to see global poverty eliminated. So under the right circumstances, they can be induced to step up and do the right thing. When human and moral welfare comes first, the international banks can put a whole lot of money in the service of eliminating suffering and producing significant amounts of human progress. International banks can’t be charity organizations; at the end of the day, they have to be banks. They are charged with maintaining the financial viability of the world.

But economic responsibility and humanitarianism are often intrinsically synergistic. A population that is not sick and not dying is far more productive and capable of creating wealth.

A moral economy can still be a prosperous economy. Banks that do the right thing can produce extraordinary value not only financially but in terms of the betterment of human life.