Are Failed Infrastructure Projects Linked to the Presence of the IMF or World Bank?

Last updated on: August 11, 2005 at 3:54 am by Desh Kapoor

Are Failed Infrastructure Projects Linked to the Presence of the IMF or World Bank? 2005-08-11T03:54:35-05:00 Desh Kapoor

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Knowledge @ Wharton

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He’s heard it time and again from Western investors who have financed infrastructure improvement projects in developing countries. It goes something like this: Angry crowds protesting on the street. Political unrest. Governments caving in. Privatization failing. Money being lost. And, Henisz says, one last common denominator that made him more than a little curious: The involvement of the International Monetary Fund or the World Bank.

"When we first had investors telling us this, we thought, ‘Well, they’re just giving us a line,’" says Henisz, a Wharton management professor. "But we kept hearing it. So then we said, ‘Well, we’ve got an anecdote, and now we have to find some way to prove whether it’s true.’ The mob-on-the-street story cropped up enough times that we wanted to pursue it."

Henisz and his colleagues — Bennet A. Zelner from the University of California at Berkeley, Guy Holburn from the University of Western Ontario and Mauro F. Guillèn, a Wharton professor of management and sociology — did just that. They combed through three decades of market reform and industry decentralization projects in dozens of countries the world over, looking for a link between failed or troubled reform efforts and the presence of the IMF or World Bank.

They found one. Working on two separate papers, Henisz and his colleagues turned up striking evidence that suggests the "mob-on-the-street story" — and the idea that the IMF and World Bank were at least partly to blame for it — isn’t all that far-fetched. According to their research, the IMF and World Bank can and do play a significant role in implementing market reform and infrastructure projects in developing countries — but often in a negative way. Further, the team found that when the IMF and World Bank are involved in these projects, disputes between investors and the government, government renegotiations of contracts, and even rollback of privatization efforts can follow. The two papers are called "The Worldwide Diffusion of Market-Oriented Infrastructure Reform, 1977-1999" and "Deinstitutionalization and Institutional Replacement: State-Centered and Neo-liberal Models in the Global Electricity Supply Industry."

Lessons for Investors

Their research suggests that the ongoing criticism of the IMF and World Bank — that the institutions have strayed from their mission, that their policies are counterproductive and that they have not done enough to help needy nations — might be partially justified. It also holds a lesson, Henisz says, for potential overseas investors. "If you see the IMF and the World Bank influencing reforms in a country, recognize that there are risks associated with that. There’s risk of backlash against you and against the IMF or World Bank. It’s not a seal of approval. It’s a warning flag, and one you have to recognize and deal with."

URL of the news item:
http://knowledge.wharton.upenn.edu/index.cfm?fa=printArticle&ID=1259

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