The World Bank is not financially sound.

• Author: Adams, Patricia

THE WORLD BANK, the single largest source of development finance for Third World leaders, has played financial charades to hide irresponsible lending and appear fiscally sound. Yet, because of the industrialized countries, uncritical support, and because of its own iron-clad constitution, the bank faces little or no incentive to behave responsibly. That spells tragedy for people in the developing world affected by the bank's uneconomic "development" projects and hardship for Western taxpayers who unwittingly hold the world's riskiest loan portfolio and $100,000,000,000 in liabilities. The damage of a possible collapse could be diminished were political leaders in the industrialized countries willing to face up (earlier rather than later) to the bank's shaky financial status.

In 1985, two World Bank agencies--the International Bank for Reconstruction and Development (IBRD), which operates on a nearly commercial basis, and the International Development Association (IDA), the bank's concessionary loan wing--approved a $450,000,000 loan to help India finance a massive irrigation-hydroelectric scheme on the Narmada River. With more than 3,000 dams and a labyrinth of canals that forcibly would displace over 1,000,000 people, the project offended almost everyone.

Public outrage within India concerning the bank's stubborn support for the megaproject led to a "Quit India" movement--a revival of Mahatma Gandhi's campaign against British colonial rule--to expel the World Bank. International outrage over the project, meanwhile, was threatening the bank's bid for an $18,000,000,000 capital fix for IDA from the Western countries that periodically refill the association's coffers. Both Finland and Canada cut their contributions, and the U.S. Congress--the bank's biggest benefactor--was threatening to withhold its 20% share of IDA's budget. An independent project review, financed by the World Bank itself to quell critics, backfired, confirming that the project would perform poorly and impoverish some 240,000 people whose land would be swallowed up by the dam complex. The project-and especially Sardar Sarovar, the largest of the Narmada dams--had become an albatross around the World Bank's neck.

The World Bank could not walk away from the project without offending the Indian government, though. Faced with a balance of payments crisis and public opposition to its economic reform package, the Indian government also was furious with foreign environmentalists meddling in its sovereign affairs and with the World Bank over Sardar Sarovar. In a daring game of financial brinkmanship, India threatened to default on its World Bank debts if the bank stopped supporting the dam. The Indian government had it over a barrel--a default would put 15% of the World Bank's entire portfolio in the limbo of non-accrual status, threatening the IBRD with its first annual loss.

The World Bank clumsily capitulated in March, 1993. After nearly a decade of controversy and after India had failed to satisfy the loan's requirement for a comprehensive resettlement plan, the bank canceled the remaining $170,000,000 in disbursements for Sardar Sarovar to appease its critics. Almost simultaneously, to please its client state, the World Bank proffered India more than 10 times as much as the canceled loan, half of it not pegged to specific projects with their potential for embarrassment, but for the general purposes of the Indian government. The Indians won that showdown with the bank, which could not risk the unknown world that lay beyond a major borrower's going into arrears.

Buckling to pressure over a dam project seemed uncharacteristic of an institution considered the world's most unflappable financier. With a reputation for imposing discipline on its borrowers, for cool-headed, unsentimental economic analysis, and with an unshakable AAA credit rating, the World Bank, particularly the IBRD, always had seemed the most prudent of financial institutions .

Established in 1944 at Bretton Woods, N.H., by British economist John Maynard Keynes and the world's leader's, the IBRD finances its $16,000,000,000 annual lending operations primarily from borrowings that are 100% backed by member governments. The IBRD then lends money--more than $100,000,000,000 currently is outstanding to developing countries at just below commercial interest rates.

IDA, meanwhile, provides long-term loans--35-40 years--at no interest (but with a 0.75% annual service charge") to the bank's poorer members. Unlike those of the IBRD, IDA's lending operations--about $6,000,000,000 annually, currently totaLing over $50,000,000,000--are funded by trienniaL grants from its rich-country members.

Although the IBRD and IDA are two legally and financiaLly distinct entities, they are known colloquially as the World Bank. They publish one joint...