Development aid and international politics: Does membership on the UN Security Council influence World Bank decisions?

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Abstract

We investigate whether elected members of the UN Security Council receive favorable treatment from the World Bank, using panel data for 157 countries over the period 1970–2004. Our results indicate a robust positive relationship between temporary UN Security Council membership and the number of World Bank projects a country receives, even after accounting for economic and political factors, as well as regional, country and year effects. The size of World Bank loans, however, is not affected by UN Security Council membership.

Introduction

Founded in the aftermath of the Great Depression and World War II, the World Bank was created to help rebuild war torn Europe. In the years following its inception, the focus of the World Bank gradually shifted to developing countries. Today it is the primary international institution responsible for promoting economic development in the world. Sponsoring projects of various scopes in both emerging market countries as well as the world's poorest countries, in 2006 alone the World Bank provided $23.6 billion in loans and grants through 279 projects around the globe. Critics (e.g. Easterly, 2005) allege that the World Bank has fallen far short of its goals of improving living standards and reducing poverty. Many argue that failure is due to the imposition of misguided policy conditions through the development projects.
One possible reason for this is that instead of enforcing sound development policies, the World Bank has been used as a tool of foreign policy to funnel money to corrupt governments in strategic positions who ally themselves with the major shareholders of the World Bank — the United States, Japan, Germany, France, and the United Kingdom. The World Bank itself freely admits that during the Cold War its lending was politically driven.1 With only a few notable exceptions, however, researchers have not systematically investigated this claim.
Do international political imperatives guide the so-called development lending of the World Bank? Anecdotes are plentiful, but only Schneider et al. (1985), Frey and Schneider (1986) and, more recently, Andersen et al. (2006) and Dreher and Sturm (2006) put this question to a large-n test. They use clever proxies to capture the importance of developing countries to the major shareholders of the World Bank, such as the quantity of exports from major shareholders to developing countries, their former colonial status, and voting patterns at the United Nations General Assembly.2 These studies present some evidence that political imperatives do influence the Bank. In this paper, we offer the first systematic study analyzing a new measure of the international importance of a country: temporary membership on the United Nations Security Council (UNSC).
Recent evidence indicates the importance of temporary UNSC members to powerful countries. Kuziemko and Werker (2006) find that US foreign aid increases when countries serve on the UNSC, as does UN Development Program aid, and Dreher et al. (2006) find that the ten temporary members of the UNSC are more likely to receive IMF assistance than other countries. They attribute these increases in various forms of foreign aid to vote-trading activities: temporary members can trade their Security Council votes for cash.
There is reason to believe that foreign aid is not only provided to help countries in economic distress but also to achieve the donor's political objectives. In fact, since the late 1940s, every US administration considered foreign aid to be important in achieving foreign policy goals (Ruttan, 1996). It has even been claimed that the primary purpose of US economic assistance is in promoting overall US policy objectives (Zimmermann, 1993). According to Morgenthau (1962: 302), “the transfer of money and services from one government to another performs here the function of a price paid for political services rendered or to be rendered.”
Our question is whether World Bank lending is used by the institution's major shareholders for a similar purpose. While nearly all countries in the world are members of the World Bank and all have votes, these votes are pegged to economic size, and the G7, for example, has an inordinate amount of power at the Bank as a result. They control well over 40% of the votes. When they coordinate, they have veto power over certain important decisions that require supermajorities. Alone they constitute a near majority, and need the support of only a handful of allies to guarantee control of the Bank's loans and grants to developing countries. Clearly they control the World Bank. Do they use this control purely to help developing countries in need or do international politics also play a role in how they choose to guide the development institution?
To anticipate our results, we find that temporary Security Council membership does increase the number of World Bank projects a country receives. The qualitative results are robust to the inclusion of economic and political factors, as well as regional, country, and year specific effects.
We proceed as follows. The next section provides some background on the UNSC and the World Bank and develops our hypothesis. Section 3 presents anecdotal evidence, while Section 4 presents rigorous analysis of large-n data where we test alternative hypotheses. We discuss extensions in Section 5. Section 6 concludes.

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Section snippets

The argument

The Security Council is the principal organ of the United Nations with responsibility for the maintenance of international peace and security. Its duties include taking military action against aggressors and investigating disputes or situations likely to lead to international frictions. The Security Council has the power to make binding resolutions and may adopt legally binding measures in order to maintain or restore international peace — including the use of armed forces.
Ten of the fifteen

Anecdotal evidence

Examples of G7 countries manipulating International Financial Institutions to achieve foreign policy goals abound. Consider the Gulf War period. In 1991, the US supported a World Bank loan for China in exchange for China's support of the Security Council resolution to deploy armed forces in Iraq (Eldar, in press). A similar exchange transpired in 1994, when China agreed to abstain on the Security Council resolution to restore democracy in Haiti. The US again facilitated a World Bank loan for

Data

Consider what we observe21: Our dataset includes a maximum of 5690 country-year observations of 157 countries22 from 1970 to 2004. The panel is unbalanced because countries enter and leave the sample in different years — this includes all independent countries for the time period (according to Cheibub and

Extensions and tests for robustness

In this section, we present several extensions to our basic analysis.
First, we investigate the timing of UNSC membership influence on World Bank projects in greater detail. Recall Fig. 1, where we display the development of new Bank projects during the two years of UNSC membership. The number of new projects appears to slightly increase in the second year. How significant is this increase? Following Kuziemko and Werker (2006), we employ a series of dummy variables to examine the trend over

Conclusions

Our results contribute to the growing literature showing that International Financial Institutions have been employed as a tool of foreign policy by their major shareholders. Whether used to bribe or reward, the World Bank's projects have been funneled to politically important developing countries, such as those serving a term on the UN Security Council. Given the nature of our large-n study, we do not know who took the initiative – whether the temporary UNSC members increased their requests

Acknowledgements

We thank David Bearce, Terrence Chapman, Pamela Chasek, José Cheibub, Donald Daniel, Han Dorussen, Michael Doyle, Ofer Eldar, Songying Fang, Christina Fattore, John Freeman, Martin Gassebner, Joanne Gowa, Birger Heldt, Nathan Jensen, Christopher Kilby, Ilyana Kuziemko, Thomas Markussen, Katja Michaelowa, Bessma Momani, Pablo Pinto, Bruce Russett, Holger Schmidt, Friedrich Schneider, Randall Stone, Shawn Treier, Burcu Uçaray, Erik Voeten, and seminar participants at Bond University, the Free

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