by Piyaporn Hawiset
7 July 2000
Towards the end of June 2000, the economist writing the Year 2000 World Development Report resigned from the project. The report is the World Bank's annual flagship publication.The bank says that fighting poverty is now its main job. The report is on just this topic, so it's not just another annual issue, but a manifesto. The economist, Ravi Kanbur, walked away from the project because the US Treasury Secretary, Larry Summers, wanted to change the report's emphasis. A discussion draft of the report has been available since January. So what does it say that made Larry intervene and Ravi walk? Basically, it is a tacit admission that the World Bank's agenda is dictated by the need for American multinaitonal corporations to economically neo-colonise developing nations, much the same way the Asian Development Bank's agenda is to do the same for Japanese multinational corporations.
The last time the report focused on poverty was in 1990, and that issue became a touchstone for World Bank policy over during the 1990s. The 1990 report argued economic growth was the best way to overcome poverty; that market liberalisation was the best way to achieve growth; that export-oriented growth was best because it developed labour-intensive industries; and that governments could help by investing in education and health care. Just about all developing country governments had to do was to pass an education and health budget, and sign WTO agreements to liberalise. They could forget about any schemes to redistribute income; the trickle-down effect would take care of that. The report offered a neo-liberal heaven in which poverty reduction went together with market liberalisation and small government. Some wealth did trickle down, but less than before as the new system in effect plugged some of the leaks for wealth to trickle out and down.
This thinking has been very influential. It has shaped the Bank's policy advice and loan conditions. But the results have been mixed. Poverty has shrunk in some regions, but by much less than the bank hoped. It has increased in other regions, often spectacularly. Outside China, the number of poor increased from 916 million to 986 million between 1990 and 1998. Kanbur's report tries to learn from the 1990s' experience.
Growth does reduce poverty, the report agrees. But some growth is much better than others - roughly five times better. So what kind of growth is good at reducing poverty? Agricultural growth is best. Growth in services is not bad. An economy which is growing only in manufacturing may find that poverty declines by little or nothing as most of the wealth generated by manufacturing goes into the pockets of those who own the manufacturing plants--mainly multinational corporations. Moreover, agricultural growth is no good if land is all held by big landowners. Best of all is agricultural growth coupled with land reform.
Growth will reduce poverty more if the gap between rich and poor is smaller in the first place, or getting to be so. In the past, mainstream economists have tended to accept growing inequality as one of the costs of growth. New research disputes this. Societies which are more equal or getting more equal tend to grow faster and be better at reducing poverty. This is changing, however, everywhere, even in country that traditionally had systems that fostered better equality between the rich and poor, such as Canada. The trend is to pressure the majority of the people through economic manoeuvers discovered in the early 1980s to accept a reality of impoverishment and itinerant labouring, as in the past before the beginning of the 20th century.
So how about market liberalisation? Certainly the evidence shows that countries which liberalise tend to grow faster than those that do not. But one needs to look in more detail below the country level at which economic statistics then to be aimed. While a country as a whole may be growing after liberalisation, up to 40 percent of the population may experience exactly the opposite. That is because the efficiencies which result from liberalisation do not affect everyone in the same way. The poor may not have the resources or the access to participate in markets and reap the benefits. Liberalisation tends to favour big companies, which then grab the natural resources on which the poor depend. Typically after market liberalisation, the agricultural sector gets neglected, and typically most of the poor depend on agriculture. Furthermore, the middle class sees little real growth in income. This has been manifestly obvious in many first world countries such as Canada, Australia, New Zealand and western Europe and even the United States. Although these countries demonstrated impressive overall growth, the growth has been enjoyed by very few with the majority of the population actually experiencing decreased real incomes, as seen by the reduced spending power in that segment of the population.
Liberalisation has another hidden cost - volatility, instability, crisis. This was the tragic lesson of the 1990s. In the 1990 report on poverty, Indonesia was singled out as one of the most successful case stories of reducing poverty. But the financial crisis wiped out more than ten years' gains in poverty reduction. In Thailand, the darling tiger economy of the 1990s, it wiped out exactly ten year's growth leaving the majority of Thailand's people actually poorer, in real terms, than they were in 1986. The string of liberalisation-related financial crises in Latin America, Eastern Europe and Asia have been one major reason why poverty has not improved on a world scale.
Besides, the problem with these crises is not only the short-term effect of driving people down below the poverty line. Poverty increases rapidly when an economy contracts in a crisis, but then decreases much more slowly when the economy recovers. When the economy gets back to its pre-crisis level, the numbers of poor do not fall back to the pre-crisis level. The economic statistics only reflect the overall growth, which after such a crisis is only concentrated among the wealthy because they are the only ones who have sufficient economic and financial resources to be able to take advantage of the new economic improvements. Moreover, economies tend to grow more slowly after crises - because of the damage done, because of the loss of confidence - so again poverty reduction is more difficult.
How about the role of government? Investments in education and health are still fine. But they are far from enough. The poor face many risks. They get hurt when disasters happen, wars break out, financial crises erupt, environmental quality decline. They can get hurt, particularly in the short-term, by the processes of growth and liberalisation which are supposed to cure poverty. They do not have the savings or resources to protect themselves. While there are some who are permanently poor, there are a many more who dip in and out of poverty on the swings of risk and fate. Overall, in the lifetime of an average person within the population they die more or less in the same economic station in life into which they were born, speaking in real economic terms. Many in fact die poorer such as Canada's middle class of younger baby-boomers and down through to the generation X. The loudly lauded successes of a few from these generations only masks the reality of the grinding masses of them who increasingly struggle to economically tread water. In countries such as Thailand, Malaysia and Indonesia, most are no longer treading water but already succumbing to the rising waters.
Governments should have a role in minimising these risks, and minimising their impact. That means actions to build up the social capital of the poor, their ability to insure and defend themselves. It also means providing social safety nets: pensions, workfare, health protection, social funds, micro-finance. However, most governments, particularly in the developing countries, are instruments of the economic and political elite which only serve to protect their own interests.
The report reels off social capital building schemes and social protection techniques. But there is a hollow feeling that although all such things are good and necessary, they are only band-aid solutions--neither prevention nor cure, but containment. The report makes a stab at reaching beyond this. In the opening pages, the report contains a brief bow to Amartya Sen, the Nobel laureate economist and philosopher. Sen's core idea is that poverty is political. Poverty is a lack of rights, a lack of power. Famines do not happen in democracies because democracy enables the poor to prevent them, particularly in an era when there is a global abudnace of food--enough to feed every person on the planet. Kanbur's report does not wave Sen's ideas around like a flag. For good reason. It is one thing to give Sen a Nobel prize. It is quite another to think about giving power to the poor--those who have paid for the report would not want that. But the report makes a stab. It talks about the voicelessness and powerlessness of the poor. It laments their lack of "assets", including their lack of political access. And it brandishes one key word: empowerment.
After revealing this word, the report loses confidence, meanders, and gets lost, but because it cannot truly say what its author would like to say. Those in power would react by stepping on the noisy "insects". Democracy is good, it says, but not enough. Democratic governments tend to get captured by middle-class and, more often, wealthy class, interests that ignore the poor. The the economic and political elite should recognise that helping the poor would help themselves in the long run. This discussion goes nowhere. But the thought of empowerment lies in the middle of the report like the unexploded bomb it truly is.
At the end, the report discusses what international organisations should be doing. First, it notes that things like research on devastating diseases, breakthroughs in agricultural technology, and agreements to limit environmental decline have the biggest impact on the poor. But developing countries don't have the money or resources to create such "international public goods". And rich countries often don't have the motivation to create those which are important for the poor. Maybe, the report wonders, international organisations should devote more resources to such matters, and less to micro projects.
Second, new thinking is needed on aid and project management. Donors have become more concerned about corruption and inefficiency in aid projects. They load their project loans with many conditions and monitoring arrangements. This takes up a much time, and creates a great deal of bureaucracy. And it does not work--the corrupt officials quickly find a way around the new rules--its seems to be their mandate. A better strategy would be to ensure that the recipient countries feel ownership for projects and make sure they work. This is an old idea, but not often enough exercised. Get the government and civil society to agree to a plan. Give them the money. Stay out of the way.
So what has got Larry Summers worried? We have to guess. The Washington Consensus has emerged from the Asia Crisis with its faith in free markets only slightly shaken. Poverty eradication is now the menu, but the main dish is still growth and market liberalisation, with social safety nets added as a side dish, and social capital scattered over it as a relish. Big government is not available as an option. But this report raises serious doubts about this diet, in four main ways.
First, it suggests developing countries need to be much more careful and conditional about the way they approach market liberalisation. They need to go slower and sequence things better rather than just throwing open the door. They need to do a lot of work on institutional change to make markets work for everybody, not just the big guys. They need to give people time to adjust. They need to install social protection to contain the inevitable costs. They need to pay attention to inequality. Market liberalisation- iti s no longer easy and magically effective. It's difficult, dangerous and costly. Something for the consultants on institutional strentgehning to provide.
Second, government is back. Nowhere did the report directly argue this point. But the cumulative effect of its recommendations is very eloquent. Governments must become more capable at managing liberalisation, providing social protection, understanding and controlling risks, and increasing social capital. In all of these activities, civil society will have a major role, but the state will be key. And the state will need resources of cash, money and expertise. Again, this requires an input in expertise with respect to institutional strengthening and capacity building.
Third, the World Bank needs to rethink its role. In its current self-presentation, the bank is rushing round the world eradicating poverty by signing up countries for programs that have poverty in the headline, but all the usual World Bank conditions about market liberalisation in the small print. The report suggests the bank might be a great deal more effective in countering poverty by working on international public goods, and giving countries hands-off funding to run their own poverty programs. But if that were the case, how could the World Bank serve as an instrument of America's strategic vision?
Finally, there's the unexploded bomb. Does Larry want the World Bank talking about empowering the poor, even in rather muffled terms?
We will all have to wait a few months to find what Larry takes out. But
The overall implication is fairly clear. The US does not want the World Bank to stray too far away from the agenda of economic growth and market liberalisation where it meets the interests of its multinational corporations. Ravi Kanbur's draft raised a few too many doubts about this agenda, and has strayed too much towards politics.