Accounting Bits

The ethics of World Bank lending

The topics of corporate social responsibility and ethical investing have received increasing attention over the last two decades. Journals such as Accounting Forum, Accounting, Auditing and Accountability Journal and the Journal of Business Ethics have been at the forefront of this movement, publishing over 100 articles that deal explicitly with the topic of corporate social responsibility and/or ethical investing. This research has helped us to understand not only the dimensions of corporate social responsibility, but also the role that ethical investing can play in encouraging socially responsible behavior on the part of the corporations that receive such investment funds.

Initially, studies of corporate social responsibility focused on the types of corporations that provided such disclosures (Trotman and Bradley, 1981; Cowen, Ferreri, & Parker, 1987). This research was then supplemented by studies examining the market reactions to disclosure (Freedman & Stagliano, 1991; Patten, 1990, Patten, 1992a and Patten, 1992b), the linkages between social performance and social disclosures (Buhr, 1998; Herremans, Akathaporn, & McInnes, 1993), the influence of the external environment (Neu, Warsame, & Pedwell, 1998; Patten, 1992a and Patten, 1992b; Roberts, 1992) and the normative aspects of social responsibility (Gray, Owen, & Maunders, 1988; Gray, 2002). It is only recently that the social responsibility literature has ventured beyond the corporate world, attempting to understand the positioning of social responsibility within democratic processes (Lehman, 1999, Lehman, 2001 and Lehman, 2005) and within other organizations (Llewellyn, 1998 and O’Dwyer, 2005).

Despite this broadening of the social responsibility research agenda, we still know very little about the role that supranational organizations such as the World Bank play in encouraging social responsibility via their lending activities (for exceptions see Amba-Rao, 1993, Rahaman, 2004 and Szablowski, 2002). On the one hand, this lack of attention is not surprising given that the World Bank lends to governments rather than to corporations and that these loans are often targeted at social sectors such as education and health. But on the other hand, it is surprising. In the most recent fiscal period, the Bank lent $22 billion in support of 440 different projects. These monies, which often required matching monies from borrower governments, then flowed to private sector corporations in the form of contracts for goods and services. Furthermore, the loan conditions not only specified how the borrower governments could spend the monies but also how procurement, tendering and disbursement processes would operate. In these ways, the social responsibility vision and practices of the Bank directly and indirectly impact the conduct of business worldwide.

The current study examines the linkage among the social responsibility visions of the World Bank, the social responsibility requirements that are contained within Bank lending agreements, and what happens when these requirements are implemented. Our starting presumption is that this vision plus the resulting practices and ways of implementing Bank projects are key components of the ethics of World Bank lending. Our analysis consists of three parts, each adopting a different institutional level of analysis. First, we review the World Bank’s website and promotional material to infer the social responsibility vision of the Bank. We then concentrate on a subset of Bank lending agreements – in this case lending agreements pertaining to education in Latin America – to see how this social responsibility vision has been translated into a series of concrete lending requirements and accounting practices. Finally, we consider a single lending agreement and through the use of 40 indepth semi-structured interviews with participants we examine what happens when such requirements are implemented.

Our analysis highlights that the social responsibility vision of the Bank consists of two aspects. The “social” face focuses on eliminating poverty via building social and human capital, emphasizing participatory and “grassroots” approaches. In contrast, the “financial” face emphasizes the importance of efficiently using financial resources, the minimization of corruption and need for accountability. These two faces were present not only in the Bank’s social responsibility vision as contained in website materials but also within the lending agreements themselves. However, as the interview material highlights, the translation from abstract lending principles to concrete field practices is an uneven and uncertain process given both the tensions that exist between the social and financial faces of responsibility as well as the ways that the Bank chooses to implement and administer projects.

The current study contributes to our understanding of social responsibility in at least two ways. First, the study illustrates the importance of supranational organizations such as the World Bank in the diffusion of socially responsible practices. The types of projects that the Bank supports, the specifics of the lending agreements as well as the ways in which the projects are implemented and monitored directly impact on the borrower governments and indirectly impact on the corporations that provide the required goods and services. As a consequence, the potential of the Bank to encourage and facilitate certain types of social responsibility practices is enormous. At the same time, the study highlights the ambiguities of World Bank practices, for example, the difficulty associated with using truly participative approaches when designing projects, the ways in which the introduced financial and administrative systems encourage inefficiencies for the borrower country, and the tensions that exist between the social and financial faces of the Bank’s social responsibility vision.

2. The World Bank and its social responsibility vision

In terms of its history, the World Bank emerged near the end of the Second World War as part of a web of institutions whose purpose was to promote multi-lateral cooperation and international stability. Although the Bank was initially capitalized with nominal subscriptions from its member governments, the majority of its financing is raised through capital markets (Jones, 1992). Since its formation, the Bank has grown to include a series of three primary lending institutions: The International Bank for Reconstruction and Development was established in 1945, has had cumulative lending of $383 billion over this time period, and lent $11.2 billion during fiscal 2003 for 99 new projects in 37 countries; The International Development Association was established in 1960 to provide financing (including interest-free credits and grants) to the world’s 81 poorest countries, has had cumulative lending of $142 billion over this time period, and lent $7.3 billion during fiscal 2003 for 141 projects in 55 countries; and The International Finance Corporation was established in 1956 to promote economic development through the private sector, has had cumulative lending of $23.4 billion, and lent $3.9 billion during fiscal 2003 for 204 projects in 64 countries (World Bank, 2004). As these statistics highlight, the Bank provided more than $22 billion in loans in the most recent fiscal period, supporting over 440 new projects. Not surprisingly, given the magnitude of these statistics, the Bank is the primary provider of development assistance loans in the world. The Bank operates in “more than 100 developing countries” and has more than “some 10,000 development professionals from nearly every country in the world” working in its Washington, DC headquarters or in its 109 country offices.

Before turning to the Bank’s social responsibility visions, it is useful to briefly review what we mean by social responsibility. Although a myriad of different definitions exist, the majority of the definitions start from the recognition of interdependencies among humans and other things. As a result, humans – and their forms of social organization such as corporations – have obligations to current and future generations as well as to the other things that co-inhabit the planet. While the actual words used to define corporate social responsibility vary across individuals and organizations, the recognition of obligation forms the basis for defining responsibility. For example, the World Business Council for Sustainable Development defines corporate social responsibility as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large” (WBCSD, 2005 WBCSD. (2005). Corporate social responsibility. http://www.wbcsd.org/templates/.WBCSD, 2005). Likewise the OECD states that:

Tags: Ethics lending