At the World Bank, Money Is No Object

This article originally appeared in The Wall Street Journal.

At first glance, one of Latin America’s largest infrastructure projects, a 2,000 mile, $2.1 billion pipeline that will deliver gas from Bolivia to Brazil, might look like a triumph of the free-market. Unlike most other massive projects in the region’s past, the pipeline is apparently a private-sector venture on the Bolivian side, and it is the first Brazilian gas project with private-sector participation.

But the World Bank and Inter-American Development Bank are important sources of funding, raising serious questions about the viability of the project and about the development lessons the lending agencies have learned over the years.

It took the World Bank decades to publicly recognize that it suffered from a “culture of lending,” an affliction to which the Bank’s more secretive regional partner, the IDB, has yet to admit. Latin American governments took about 50 years to discover that state-led planning — generously financed by the two banks — does not work. The aid agencies now preach the virtues of the market, yet this infrastructure project contradicts their rhetoric.

There is no question that Brazil’s growing energy demand exceeds its supply. The country’s indisputable growth potential is, as always, cited in support of officially financed investment schemes. Still, attempts to fulfill needs without proper regard to the market’s assessment of costs or risks — what development expert Peter Bauer calls “price-less economics” — typically lead to debt, not development.

The World Bank has undertaken a cost-benefit analysis which concludes that the gas project is profitable yet unable to receive financing in the private market. That is the World Bank’s way of saying that the market exercises questionable judgment, is incapable of financing long-term ventures, and may not even have the resources for sizable investments.

The claim that the gas project is so large that private financial markets are unable to raise sufficient capital lacks credibility. The beneficiaries of subsidized finance are some of the world’s richest corporations, including the majority owners of Gas Transboliviano, Enron Corp. and Royal Dutch/Shell Group and other private firms on the Brazilian side with combined annual revenues that surpass $75 billion. If companies of that size are unwilling to assume the full risk of their own investments, there are probably good reasons why taxpayers should not be forced to do so.

There is no evidence that the multilateral lending agencies have a superior ability to look into the future. In Indonesia, for example, the current crisis forced World Bank president James Wolfensohn to admit that his agency “got it wrong” when it recently praised that economy. Brazil itself is one of the World Bank’s largest clients and a prominent casualty of the Third World debt crisis of the previous decade. Although most of Brazil’s debt was owed to commercial banks, there was always an implicit expectation (subsequently justified) that were anything to go wrong in the major borrower countries, the multilateral lending agencies would bail them out.

The desire to avoid repeating past lending mistakes has led to the current support for private ventures like the gas pipeline. But if the lending agencies are not supplanting sources of private finance, then they are second guessing the market’s judgment about the financial worthiness of such investments. That is especially risky in Brazil. The country, after all, has a worrisome and growing fiscal deficit and has been unwilling to introduce real reforms.

In fact, Brazil ranks as one of the least economically free countries in Latin America. The World Bank itself concedes that one reason adequate private financing is not available for the gas project is that “Brazilian energy markets are not yet sufficiently deregulated.” Providing aid under such conditions does not tend to promote market reforms; instead it relieves Brazil of establishing policies that would attract private investment.

James Burnham, former U.S. executive director at the World Bank, observes that the multilateral development banks have in this way often displaced other sources of finance. That is especially true in the energy sector, he notes, where “local capital as well as foreign investors would take over if governments would permit normal market conditions to prevail.”

Development banks should not enthuse about subsidizing big business in Latin America. Thailand, Indonesia and South Korea all suffered from a problem that largely caused their current turmoil and has long plagued Latin America: crony capitalism. If anything, the region’s history and the collapse of the Asian model has made clear the need to erect a wall of separation between business and government. Now that Latin America is moving from planning to the market, the latest lending fad only reinforces old traditions and popular suspicions that a market economy benefits the rich at the expense of the poor.

Unfortunately, the development banks also continue to back state-owned enterprises. Loans for the pipeline project, for example, are going to the Brazilian gas transport company that is majority owned by Petrobras, the country’s state-oil concern. Worse, Petrobras is actually expanding into Bolivia by helping to finance the pipeline there. Long before the development banks decided to support this venture, energy consultant Roberto Hukai told the Financial Times in 1996 that “the private sector would love to run this pipeline on an economic basis, but the government insists on giving control to a vast public-sector company,” thus confirming Mr. Burnham’s misgivings.

Of course, the Brazilian government plans to eventually reduce Petrobras’s share in the gas company. But this would simply provide a subsidized windfall to the private sector at the risk and expense of taxpayers. Perhaps the World Bank should take its own advice on privatization as expressed in its 1995 book “Unshackling the Private Sector: A Latin American Story.” “Fresh investment in rehabilitation, modernization, or expansion” of state-owned firms, the Bank said, “is best left to future owners.”

The present support for the gas pipeline project is reminiscent of Brazilian president Juscelino Kubitschek’s ultimately destabilizing effort to produce “50 years of progress in five” during the 1950s. The aid agencies may currently emphasize private-sector ventures, but forced development will not work any better now than in the past. Brazil can and should achieve rapid growth with high levels of private capital flows. This would require widespread liberalization — a process that is more likely to succeed if Brazil avoids succumbing to the development banks’ continuing institutional pressures to lend.

Mr. Vásquez is director of the Project on Global Economic Liberty at the Cato Institute