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Time has come for the World Bank to mould a new development model

Bhuwan Thapaliya - 12/26/2006

A World Bank study of evaluation in 2000 began with the confession "Despite the billions of dollars spend on development assistance each year, there is still very little known about the actual impact of projects on the poor." The reality is harsh and of course, there has to be incentives to do something as a result of the evaluation but anecdotally, the World Bank hasn’t noticed the differences. But why would it? Its development business has been blossoming all over the world. And we wonder why economic growth benefits only a small portion of the population and may in fact result in increasingly desperate circumstances for the majority.

There are billions of people living in the developing world, many of them in abject poverty. These are World Bank clients and helping them is it business but the World Bank is controlled primarily by developed countries, who are painfully tightening their fiscal belts and are diverting all their money in their fight against the Terrorism. This is justifiable by some means, but in principle World Bank exists to help poor countries get rich but in practice, they often succumb to political pressure, and squander money on grand uneconomic projects. So what’s the missing piece of the development puzzle?

Has the World Bank slowly but gradually transformed itself into a political institution? Nevertheless the World Bank is one of the most highly-regarded financial institutions in the world, especially in the field of development economics and related research. But the lavishly marbled headquarters of the World Bank Group in Washington D.C, still raises eye brows, and is now faced with just such a conflict between politics and principle. But that has not always been the case. In the 1950s and 1960s, when the development business began, the World Bank has an intellectual rationale and a goal.

Much has changed in the last forty years. Then; economists believed poor countries were truly different from rich ones. Markets and prices, many argue, did not work well in isolated, agrarian societies of Sub- Sahara Africa and South Asia. Some went a step further and stated that free trade would mean misery, not prosperity, for countries dependent on exports of commodities. So promoting development only meant building up subsided domestic industries behind protective trade barriers. Considering this, The World Bank saw its job as lending governments money to alleviate their capital shortages that too, to finance few projects, such as roads or irrigation schemes. That approach failed miserably.

Why that approach failed? Behind their protective barriers, poor countries built up uncompetitive industries, borrowed money they were increasingly unable to repay, and stifled economic growth with over- regulation, big budget deficits and high inflation. By the 1980s, the bankruptcy of such state led development was clear.

After that failure, a new orthodoxy emerged on the economic horizon. Development, phase two, was all about markets. Then came the most important revelation. Development economics, 1980s - style, held that poor countries were not inherently different from rich ones though there were some secondary differences. What made them poor, said new school of economic wisdom, was bad economic policy and too much unnecessary government intervention. They forecasted that fiscal prudence, freer trade, privatization and deregulation would turn the fate of the poor economics around.

The World Bank embraced this intellectual change wholeheartedly. The World Bank helped to define and justify the free market theorizing, and offered loans in return for market oriented reforms. At one level, market - based development has been remarkably successful but unfortunately, that is not the whole story. The recipe of the 1980s provides necessary, but not always sufficient, ingredients for prosperity in poor countries.

Private capital favors a small number of countries; many economics, particularly in Africa, have failed to attract adequate private money despite free - market reforms. Understanding why, perhaps, has been the central development issue of the 1990s.Superficial answers is easy. Many countries lag behind because their reforms have barely begun. In others, reform has been ineffective. In yet others it is simply that the pay off from liberalizing reforms seems slow to arrive. Such explanations are clearly not enough.

So development economics, phase three, has rediscovered that institutions matter. A batch of new 21st century’s academic research has shown how this matters for economic growth. Countries where property rights are weakly enforced, where the rule of law cannot be counted on and where governments are corrupt tend to grow more slowly, even if they claim to give their citizen’s capitalist impulses free rein. Improving institutions should therefore be a top priority. The basis idea behind all this institutional emphasis are that markets needs the rule of law to work properly, and corrupt bureaucracies can do less damage if they have less room for manoeuvre.

Nonetheless, today economists are paying more attention to the political dynamics of reform as sustaining and implementing reforms is a question of strategy and priorities. Experts are saying that the Governments not only need to do the right reforms in right order; they also need to fasten them. This means building a consensus for reform, and it also sometimes means compensating losers, often government elites themselves. The difficulty, nonetheless, is how to create the kinds of incentives that will ensure these elites want to continue reform.

Many of these issues remain unresolved. The new development model is far from complete, though it is clear that it goes beyond the solutions of the 1980s and 1990s. Does that leave a job for a development institutes such as the World Bank? In principle, yes. The Bank could be much stricter about not lending to countries with inadequate institutions, and could focus on helping them to build better ones. Mr. Wolfowitz himself acknowledges that the bank needs to move in this direction, but he has not made this the top priority. If it were, it might even warrant some investment.

Many analysts concluded that World Bank need to accelerate its activities to spur sustainable growth in the developing world. Inflation and unemployment are high, they argue: now is the time to revive another model. And the concern about building new model is understandable because the World Bank with its partner organizations and along with the respective government has the ability, the money and the power to change the world.

It must build a new macroeconomic model, and not the one implemented these days because the poor people have been robbed off by the true nature of macroeconomics: that in many cases helping an economic grow only makes those few people who sit atop the pyramid even richer, while it does nothing for those at the bottom except to put them even lower. Isn’t this a paradox, perhaps, regional conflicts, civil war, favoritism, nepotism, corruption, and bad politics is deteriorating The World Bank‘s reputation.

* References taken from The Economist.