Environment and Sustainability: International Aid

Unintended Environmental and Social Impacts of Development Projects:
A Case for Policy Reform in Multilateral Development Financing
Ajay Pradhan

The multilateral development banks—such as the World Bank, the International Monetary Fund, Asian Development Bank, African Development Bank, and Inter-American Development Bank—together are the largest source of development financing in the world. As the largest source of loans for funding development programs and projects, they exercise a big influence in setting policy agenda in developing countries in Asia, Africa, Latin America, and Eastern and Central Europe, affecting the lives of hundreds of millions of people.

The main purpose of development loans given by these agencies is to encourage economic development and alleviate poverty. In many cases, such development assistance programs have yielded tremendous positive results. However, there is ample evidence that many ill-conceived development programs and projects that these financing agencies have funded have been responsible for widespread social disruptions and environmental damage in many countries.

The majority of multilateral bank loans have supported projects in various sectors such as natural resources, agriculture, rural development, power and irrigation schemes, and road building. The projects and policies of the banks have an impact on the ecological stability and environmental future of the developing world.

Observers have documented the environmental damage that bank-funded projects have caused in developing countries. Environmental problems caused by development bank activities are particularly severe because many of the projects are large and capital-intensive. This implies that local people in the project area do not get benefits from the projects.

The gravest environmental impact of bank projects may be the accelerated deforestation of the tropics. The projects have caused deforestation in two ways. First, the banks have financed projects that directly entail deforestation, such as forest colonization schemes. Second, the banks have helped promote and implement general agricultural policies that are capital-intensive rather than labor-intensive.

These capital-intensive programs have displaced great numbers of rural farmers and the poor from lands suitable for agriculture onto agriculturally marginal areas such as tropical moist forests. Capital-intensive schemes are not essentially bad, but they can have disastrous ramifications if they do not have adequate provisions for off-farm employment opportunities for displaced farmers.

The banks often design projects as a "safety valve" for the local conditions. A huge World Bank-funded Amazonian colonization scheme in Brazil removed rural poor from subtropical areas with rich soils and transplanted them to the Amazon, where deforestation is the inevitable consequence of environmentally unsustainable agriculture. The banks have funded large-scale cattle ranching projects in Central and South America, despite their obvious damage to the rain forests.

The development banks are financing projects designed to address what are essentially donor-defined problems rather than those that are real. In many cases, the traditional forest and agricultural management practices of indigenous peoples are far more appropriate to the local conditions than are those supported by the banks. Regrettably, the banks have done little to investigate, preserve, and utilize the knowledge of these native peoples. Instead, ill-conceived agricultural projects have accelerated the destruction of sound traditional agricultural methods.

The development banks are engaged in seemingly questionable projects. They are financing production and utilization of such pesticides in developing countries that are already banned or restricted in developed countries. Such pesticides include DDT and BHC. A classic example of environmental and economic collapse resulting from heavy use of pesticides promoted by aid agencies is now occurring in the Sudan's main cotton producing area, the Gezira. Some scientists maintain that the banks' pesticide financing practices also contribute to the accumulation of dangerous levels of pesticide residues in developing countries. Long-term public health consequences of tobacco are obvious. However, the banks have funded big tobacco projects in Africa and Latin America.

In India, the World Bank created thousands of development refugees—people displaced from their land by development activities. A bank-funded resettlement project in Singrauli, India, has forcibly relocated 300,000 poor rural people several times without proper compensation in 25 years. Displaced from their land, the source of their livelihood, the rural poor became landless poor.

In Nepal, Kulekhani Hydroelectricity Project displaced 1,200 villagers belonging to 235 households from their land submerged by the reservoir. Instead of land-for-land scheme, more than 80 percent of households accepted cash for land, which did not come through for two years. When the government completed the payment, the land value had gone up sharply in surrounding areas, making it almost impossible for the farmers to buy land and resettle in the surrounding areas.

With no proper government support for rehabilitation, the new landless villagers from Kulekhani quickly spent the money in subsistence or squandered their cash in ill-conceived small business ventures in Hetauda, south of Kathmandu, and became development refugees. An inadequate and delayed compensation package devoid of rehabilitation component was not successful with rural people whose only livelihood experience was in farming. Impoverishment was an unintended outcome.

On top of this, the progressive deforestation in the upper catchments of the Kulekhani watershed, which is 212 km2 with a 1980 population of about 36,000, has increased the risk of mass wasting and accelerated erosion in the watershed and excessive siltation of the Kulekhani Reservoir. Siltation and increasing sediment load has reduced the reservoir’s electricity generating capacity significantly. Deforestation has increased the risk of flash flood damage to the dam in the event of excessive rain in the catchments.

Built in early 1970s at the cost of $180 million to generate 90MW electricity, the Kulekhani dam and the reservoir has an economic life of 100 years, but with the continuing siltation and increasing sediment load, the reservoir’s lifespan can be much shorter. Apparently, the project planners had ignored the socio-economic factors that would emerge in the future to drive deforestation and watershed degradation. In the watershed above the dam, the reservoir severed many households from access to markets and watermills and enforced a long detour. Below the dam, the water retention in the reservoir dried up downstream channels, causing a loss of irrigation water and closing down many watermills.

Another example of a failed infrastructure project from Nepal is the East-Rapti Irrigation Project in Chitwan District. A huge investment by the Asian Development Bank in project development and feasibility study phase became wasteful when the project failed. A much-delayed environmental impact assessment predicted that diversion of water from the Narayani River would lead to serious environmental consequences to the ecosystem of the Royal Chitwan National Park, the precious tall-grass habitat of endangered Bengal tiger, one-horned rhinoceros, and many other wild animals. The most significant component of the project—a 400 meter-long diversion weir—was scrapped from the project, but by that time a significant amount of money had already been spent. The money could have been saved had the EIA study been done in time.

To be fair, I must point out that the World Bank did adopt a comprehensive policy on managing involuntary resettlement in bank-financed projects in 1980. The policy, as stated in the bank’s 1980 operational manual, “Social Issues Associated with Involuntary Resettlement in Bank-Financed Projects”, was a response, in part, to the criticism of social impact of poorly planned resettlement schemes.

There are examples of withdrawal by the World Bank from mega-projects following intense public pressure, lobbying against projects, and negative media attention. In India, the bank withdrew from financing the construction of Sardar Sarovar Dam of the massive Narmada Project that, its critics claimed, would displace millions of people in the Narmada Valley.

In Nepal, the World Bank is facing intense national and international NGO lobbying against the Arun III Hydroelectricity Project, a huge 204MW project in the Arun Valley in eastern Nepal. The NGOs have leveled a non-trivial charge—in developing the project, the bank violated its own policy guidelines and operational procedures on economic analysis as well as environmental and social impact assessments. They claim that the project would be economically unfeasible, environmentally damaging, and socially disruptive to indigenous Arun Valley people.

There is the concern that Arun III, at one billion dollar, is too costly. Indeed, the cost is one and a half times greater than Nepal’s entire annual budget. Furthermore, the bank ludicrously stipulated that to pay off the project loan the government would have to raise the electricity tariff by 100 percent nationally. Added to this is the charge by local hydro experts that the bank has been ignoring smaller, more viable alternatives to Arun III.

With the pressure increasing, the World Bank has now finally decided to send an independent inspection panel to Nepal to investigate the charges. Given the serious charges, the bank will find it difficult to push the costly project through if the inspection panel finds that the bank did indeed violate its own policy and procedural guidelines.

There are other examples of the World Bank’s involvement in costly schemes. In its own 1987 report “Twelfth Annual Review of Project Performance Results”, the World Bank conceded that the cost of new jobs created under bank loan schemes is occasionally as high as $500,000 per job. Such a capital-intensive scheme is nothing but a burden for cash-strapped countries with labor surpluses.

Under its Structural Adjustment Program, the World Bank has expanded its role beyond development financing into questionable interference with macroeconomic, social, and fiscal policies. By itself, SAP is not a bad concept. The bank, and its sister organization, the International Monetary Fund, initiated SAP in 1980 to sanction loans only if the governments would make macroeconomic adjustments. The main idea of such adjustment is to reduce economic inefficiencies. However, in the name of policy reform, macroeconomic adjustment, and busting inefficiency, the bank engages in unnecessary social reengineering, imposing unrealistic conditions on governments.

Although Arun III is not a structural adjustment loan, the bank’s demand that the Nepal government raise the electricity tariff by 100 percent is an unfair meddling in a government’s right to set priorities for its people. Instead of demanding unrealistic and deep cuts in public health, education, and social programs, the bank can target special interest subsidies and pet projects of corrupt politicians.

SAP typically requires countries to remove import and export restrictions, balance their budgets, lift price controls, eliminate state subsidies—policies that even the governments in developed countries are reluctant to try in their own countries for political reasons and fear of public backlash. While some of the requirements do make economic sense, others will undoubtedly cause hardships to the neediest people in the society.

Moreover, SAP generally requires the countries to adjust their currency’s exchange rate, which is, devalue their currencies against the U.S. dollar, in order to boost exports. Devaluation manifests itself through changes in input and output prices. The export sector becomes more competitive, but imports become more costly. Such macroeconomic imbalance can increase inflation, causing economic hardships to consumers of poor countries borrowing structural adjustment loans. Therefore, critics have labeled the World Bank and IMF-imposed currency devaluation requirement that favors consumers in the rich countries as their attempt to exercise, through the World Bank and IMF, economic imperialism over poor countries.

After a decade of SAP, it has now become apparent that many of the policy reform initiatives of the World Bank and IMF have not produced the anticipated changes in economic performance or policy behavior. The poor results have led many observers to question the feasibility of forced policy reform that has given rise to resentment, skepticism and sarcasm. The process of policy reform has turned out to be more complex and difficult than initially expected.

The World Bank has well-intentioned environmental guideline manuals that are publicly available. However, in case of water resource projects involving huge infrastructure development, they have not satisfactorily followed their own environmental guidelines. In the recent past, the United States Congressional hearings on development banks, particularly the World Bank, revealed many examples of projects where the banks did not adequately consider grave environmental impacts during planning phase.

More recently, the development banks have given growing attention to incorporating environmental considerations into their development aid programs. However, the disparity between official bank pronouncements on environmental policy and the environmental effects of specific projects raises questions about not only the sincerity of the bank's commitment to the environment, but also their ability to learn from errors, to disseminate new information to their staffs, and to incorporate innovations into project planning.

Review of the environmental aspects of bank activities also calls into question the ecological soundness and sustainability of the development model promoted by the banks. The World Bank designs and appraises projects largely according to modified neoclassical economic model. Cost-benefit analysis and discounted rates of return that the World Bank uses in evaluating prospective projects may be a classic instance of micro-rationality leading to macro-irrationality.

There was a leak to the press in 1991 of an internal memorandum written by the World Bank's chief economist Lawrence Summers proposing that United States and other developed countries donate dirty factories to developing countries. Many charged that while Dr. Summers may very well be a well-meaning technocrat and a competent economist, the leaked memo echoed their prevailing imperious and disdainful attitude towards aid-recipient countries. In a damage-control attempt, the bank later explained that the memorandum was written merely to generate an internal policy debate. However, the incident had already given rise to resentments in the developing world.

In some cases, the bank staffs have dramatized the borrowing government's opposition to ecological concerns in ways that are consistent with their own value preferences. As long as the banks get to give financial loan on their own narrowly defined neoclassical economic terms, why would they bother about potential negative social ramifications in the recipient countries? Makes us wonder if there is any difference between multilateral development banks and multinational corporations out to make money.

This is not an anti-development or anti-social change argument. Neither is this an argument against intervention by a democratic state in social transformation. Unlike some street-level protests or intense lobbying against development projects, my purpose here is not to make a case against multilateral financing in Third World development. The World Bank and other multilateral financing agencies ought not to consider criticisms, such as this, of their operational approach of translating policy into actions as unfair.

Rather, the policy analysts of multilateral development banks and their partners in developing countries ought to recognize that development activities will undoubtedly affect society in a complex set of ways. An understanding of such complex effects, or externalities, is largely lacking from policy planning and analysis. Those that policy analysts understand are mostly limited to formal sectors of economy, are often peripherally addressed, and not adequately internalized.

In order to prevent future unintended consequences of development, a good starting point for the World Bank and other regional development banks is to take a critical look at their own loan policy and explore room for policy reform. For example, the World Bank ought to evaluate critically their structural adjustment conditions and their comprehensive and far-reaching social and environmental consequences.

Just as the World Bank is eager to impose structural adjustment conditions requiring borrowing countries to make policy reforms and socially painful macroeconomic adjustments, so too should they be willing to put their own loan policy under critical lens. There are clear writings on the wall—loan policy needs major reform. They ought to recognize and internalize externalities in their operations and project implementation, regardless of how far into the future such damaging externalities might emerge. They should leave no major harmful spatial and temporal effects of development activity, whether to the society or to the environment, unaddressed and unmitigated.

The multilateral development banks must explore and answer difficult but important questions before any project implementation. Is the project going to cause disruption to communities? Is the project going to cause damage to the environment? Is the structural adjustment loan going to cause economic hardships to people? Does a particular policy objective make it a likely cause of social disruption or environmental damage? Because any development activity, just as any human choice, involves making a tradeoff, what policy instrument and strategy will reduce the severity of such tradeoff?

Development is as much about opportunities as it is about challenges. A skewed focus on opportunity only will invite unanticipated consequences. Development, after all, is a function of society’s capacity to organize human energies and productive resources to respond to both opportunities and challenges. Therefore, it is imperative to predict the potential benefits of a proposed project against its potential unintended outcomes that might affect people and the environment.

The World Bank, or any other multilateral regional development bank, is not a commercial money-lending bank. Therefore, the performance indicators of projects must go beyond simple economics. Project planning, management and evaluation processes must adequately consider social, cultural, demographic, political and environmental consequences as well. Only then will the people reap the benefits of development. In the absence of policies that truly care about the poor people, the multilateral banks will invite more resentment, more skepticism, and more sarcasm.

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