New World Man

NWM, a few weeks ago, posted a short piece reviewing a TNR article by G. Pascal Zachary which made the liberal case for Wolfowitz as the head of the World Bank. TNR, showing why they are one of the best periodicals out there, has now printed an article by Sebastian Mallaby that contradicts many of the contentions made by Zachary. His position: the World Bank has been very successful as of late, and reform must be done intelligently.

But the Bank has done more than merely survive. Over the course of the past decade, it has proved its continuing relevance. The United States and its allies have used the Bank to lead the reconstruction of Bosnia, East Timor, Kosovo, and, to some extent, Afghanistan; the Bank provided bail-out funds during the emerging-market crisis of 1997-1998; it has helped shore up weak and failing states; and it has generally spearheaded the rich world’s efforts to combat poverty. Its 10,000 employees continue to form the brightest concentration of development experts anywhere; they pump out around $20 billion in loans and grants each year and run projects in almost 100 countries. Its economic research is first-class and its projects have a decent success rate, considering their ambition and the challenge of operating in the developing world.

The Bank weathered the anti-globalization protests of 1999-2000 and is now enjoying a rare moment of popular support. People seem to understand that poor countries are harmed not by trade but by wealthy nations’ trade barriers; the public debate is influenced less by anti-globalization campaigners and more by pro-trade figures like Bono.

Mallory goes on to praise Wolfowitz’s lifelong commitment to spreading democracy and opposing autocracy, and notes that his leadership has great potential to bring th bank’s administration more closely in line with its most current research findings.

Two decades ago, the World Bank was unsympathetic to democracy. Research suggested that democracy was inimical to development: In multi-country analyses, authoritarian governments seemed to reduce poverty faster, a finding that fitted with the idea that development was mainly about imposing tough economic prescriptions–kill inflation, close budget deficits, privatize state firms–more easily meted out by autocrats. But, starting in the ’90s, the research consensus shifted. New multi-country analyses, notably by Adam Przeworski of New York University and Fernando Limongi of the University of São Paulo, who examined growth rates in 135 countries between 1950 and 1990, found no authoritarian advantage after all; meanwhile, the nature of the development challenge was reinterpreted. Tough economic prescriptions were now said to be only one part of the answer. The other was to fight corruption and establish the rule of law in order to attract private investment. This new emphasis on good governance cast democracy in a fresh light. To fight corruption, after all, democratic virtues–transparency, accountability, a free and lively press–are all but indispensable.

Malleby then turns to criticisms of Wolfowitz. The obvious and well-travelled one is that Wolfowitz has committed panglossian errors about the ease with which reform can be achieved in Afganistan and Iraq. However, Malleby notes that the World Bank has necessarily shifted it’s focus from one of attempting wholescale reform of government (since it’s nearly impossible to have a corrupt organization reform itself), to one of incremental change. Designing metrics to measure government performance and increase transparency of government programs, bringing corrupt practices out into the light and allwoing citizens and the press to bring pressure to bear on government. Malleby encourages Wolfowitz to track the banks own transition and take on the mindset of a doctor rather than an engineer. Since successful incrementalism has been achieved and adopted by the WB in the area of governance there is good hope that Wolfowitz’s presumed focus on this area will respect the track-record of this style of reform.

Malleby really shines when he looks at the organizational challenges facing the bank, and the need to maintain its finances. Previously, when NWM covered the Zachary article, we agreed with the case that debt forgiveness, substituting grants for loans to the poorest countries, and eliminating loans to “middle” countries such as Mexico, Argnetina, Brazil, and China were all points of reform that both liberals and conservatives could agree on. Malleby disagrees with this dogma on pragmatic grounds.

First, concessional loans to the poorest countries can be of a greater volume than simple grants would be since there is an expectation of repayment, and a, regretabbly spotty, history of such. Many countries such as China have successfully graduated from this stage and are paying back the original loans. This money goes back into the system and provides more captial to loan out. Malleby notes, “The ability to offer more new money gives the Bank important leverage. It can command the attention of government officials in developing countries. And it can dominate the committees of donors to many poor countries, allowing it to impose a measure of coordination on the infuriatingly duplicative aid business.”

The Bush administration has pushed for straight grants to an especially poor subset of countries, and the WB has acquiesed by increasing its grant programs. Bush has also argued for debt forgiveness to the poorest countries, but this threatens to snowball and ultimately put a squeeze on the bank’s ability to offer loans to all deserving countries.

Blair’s government has proposed an alternative strategy which would see bad debt payments assumed by richer countries, thus maintaining the banks solvency. It’s unclear how this would avoid the ’snowballing’ problem of more and more countries asking for and expecting debt relief, but tieing such reforms to a greater focus on governance issues could prove effective nonetheless.

There is a strong case from Washington arguing that middle income countries are able to raise money in private markets and that the WB should not be concentrating on this market segment, but Malleby argues that loans to these countries are low-risk, and repayments cover the WB’s administration budget. He notes that they WB has managed to assemble a very impressive staff over the last decade, and that it’s important to maintian the morale of these 10,000 employees.

It’s an interesting argument. One could counter it by suggesting that if donor countries made long-term guarantees of increased funding to the bank, that we could have the best of both worlds, but one has to be realistic about such a prospect, and understand that taking one or the other action may be sufficient to maintain the oganizational integrity of the bank, but that eliminating the current source of money without guaranteeing another is probably not a good idea.

If it cannot address these threats vigorously, the Bank will lose its current superiority over U.N. agencies. It will no longer be able to afford a staff of driven PhDs, and it will no longer dominate development practice and thinking. The world will then have lost one of its best tools for managing globalization, and an opportunity to turn the World Bank into an effective champion of good governance in the developing world will have been forfeited. Wolfowitz, of all people, must want to avoid that.

(it’s probably within my fair use rights to click ‘email this article’ for a few regular readers, let me know if you would like to read the whole thing)

This entry was posted on Monday, April 11th, 2005 at 13:14 and is filed under general. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.