Greening the Bretton Woods Institutions.

The Bretton Woods Institutions (BWIs)--the World Bank and the International Monetary Fund (IMF)--have come under increased scrutiny and criticism over the past several years. In April 2000, thousands of demonstrators took to the streets of Washington, DC, to protest against these institutions and demand change. The protests followed a scathing report by a prominent congressionally appointed panel--the Meltzer Commission--that called for drastic reforms of the World Bank and IMF. Combined with the ongoing criticism by advocacy groups from both developing and industrialized countries, these recent events have focused unprecedented attention on the BWIs.

This long-overdue scrutiny is most welcomed by the environmental community. Environmental groups have fought since the 1980s to overhaul the World Bank and IMF, urging the institutions to incorporate environmental goals, to become more open, and to change the nature of the investments they support. As the BWIs' largest shareholder, the U.S. has played a positive role in forcing them to respond to citizens' concerns. For example, the U.S. Congress conditioned the World Bank's appropriations on the institution's adoption of environmental and information disclosure policies. Congressional suasion also led to the creation of the World Bank's Inspection Panel, an independent accountability mechanism. And in 1994, Congress used the power of its purse to force more information disclosure at the IMF These efforts have yielded some successes with significant ramifications, including:

* A set of environmental policies and standards that the World Bank applies to its borrowers, that are considered de facto international environmental standards by bilateral finance agencies and corporations.

* More transparency in the operations of the BWIs and greater acknowledgement that civil society has a role to play in critiquing and shaping lending programs.

* More accountability mechanisms to promote better quality lending, such as the independent Inspection Panel at the World Bank.

Although important, these improvements have occurred at the margin of the BWIs' operations. The World Bank still provides loans for environmentally and socially harmful projects. IMF and World Bank structural adjustment loans still promote export-led growth, encouraging natural resource exploitation and endangering local communities that depend on these resources for survival. The World Bank's structural adjustment loans do not even follow the institution's environmental policies. And staff at the institutions rarely question how the structural adjustment loans they design will affect either the environment or the poor. In spite of these problems, the U.S. Treasury Department has been a staunch advocate of structural adjustment. Although the U.S. has played a positive role in pushing for more transparency and accountability at the BWIs, profound problems remain with how the institutions put principles into practice. The U.S. must ensure that World Bank and IMF loans comply with the institutions' policies, and remaining policy loopholes must be closed.

For example, though the World Bank has established environmental policies, its own studies find that it routinely fails to enforce them. A recent internal review revealed that the bank has failed to comply with its forestry policy, at the expense of both the forests and the poor. "Categorization" of World Bank projects also falls prey to political pressures. This process is supposed to demand detailed environmental assessments of the largest, most environmentally harmful projects, but bank staff often downgrade projects and thus evade fully assessing them. Finally, while the bank has adopted a green rhetoric, its actual portfolio fails to reflect its supposed commitment to environmental protection. Funding for environmentally harmful projects--such as for the mining, power, and road sectors---constituted almost one-fourth of the bank's total lending in 1998. More than half of all lending from the World Bank's private sector divisions was for environmentally harmful projects. Meanwhile, the resources that the bank devotes to environmentally beneficial projects are on the decline, amounting to just 1.02% of the institution's lending in 1998.

The bottom line is that most IMF and World Bank operations fail to genuinely incorporate sustainable development principles. As the single largest shareholder of both institutions, the U.S. government should play a leading role to push them to change the direction of their lending and incorporate environmental goals routinely into their approach.

Key Points

* The IMF and World Bank have failed to integrate environmental sustainability into their lending, concentrating instead on export-led exploitation of natural resources.

* Congressional funding pressure has had some success in promoting transparency, accountability, and environmentally sound policies at the BWIs.

* Despite years of reform efforts, the World Bank's structural adjustment loans still do not follow the institution's environmental policies.

Andrea Durbin <[e-mail]> is director of the international program at Friends of the Earth in Washington, DC. Carol Welch <[e-mail]> is an international policy analyst at Friends of the Earth in Washington, DC, where she specializes in international financial institutions.