Jessica Einhorn. Foreign Affairs. Volume 80, Issue 5. September/October 2001.
Less Is More
The World Bank and the global community have learned a lot about development in the past 50 years. The bank is justly proud of its commitment to being a knowledge-based institution and has consistently responded to development setbacks with thoughtful analysis followed by new areas of lending. At the same time, critics have repeatedly faulted the bank for overlooking certain issues and constituencies, from environmental concerns in the 1980s to civil society in the 1990s. Along the way, the bank has added new tasks to its mandate. In recent years, it has been called on for emergency lending in the wake of the Asian financial crisis, for economic management as part of Middle East peacekeeping efforts, for postwar Balkan reconstruction, and for loans to combat the aids tragedy in Africa.
By now, its mission has become so complex that it strains credulity to portray the bank as a manageable organization. The bank takes on challenges that lie far beyond any institution’s operational capabilities. The calls for greater focus through reform seem to produce little beyond conferences and consternation, since every program has a dedicated constituency resisting change. To counter these problems, the countries that own the bank—its shareholders—need to elaborate a worthwhile and suitably modest agenda. The views of emerging-market countries, which have shared in the bank’s successes as well as its failures, should count a great deal; they are the ones who have lived the lessons of the past decades. Policymakers should consider a broad array of options, including devolving some of the bank’s functions to new institutions or redistributing them to existing ones. But whatever the remedy, it is time to redefine the bank’s unwieldy mission.
The World Bank, along with the International Monetary Fund (IMF), was established at Bretton Woods as part of the post-World War II international financial architecture. This system was meant to avoid future world wars by ensuring an open international trading system and global financial stability. At the founding conference, the economist John Maynard Keynes called for an institution that would focus first on postwar reconstruction and then on development in poor countries. The bank was thus established, beginning the great postwar experiment of using public loans for economic development.
Fundamentally committed to open trade, the bank initially emphasized loans to build public infrastructure—railways, roads, ports, power plants, and communication facilities. It believed such projects, accompanied by financial stability and private investment, could do the most to trigger development. The bank then learned lessons along the way. Latin America showed the deleterious effects of inflation and macroeconomic instability. South Asia demonstrated how the state could distort markets through price and regulatory controls, producing scarcity and skewed prices. Africa taught the importance of education, training, and human-resource development for economic progress. Thus the bank came to understand the importance of policy. And money became the vehicle for policy advice, displacing the old notion that foreign capital alone would spur greater productive investment and, over time, development.
Economic theory kept pace with experience. Traditionally, economists emphasized GDP growth as the motor of development and focused on the key role of capital. But over time, some began to embrace a broader conception of the inputs necessary for development, such as labor requirements, social structures, and entrepreneurship. Economists observed a correlation between economic growth on one hand and literacy and low population growth on the other, and eventually they accepted these and other social goals as essential inputs to development. As for outputs, development came to encompass not just growth but equitable income distribution and environmental sustainability.
By describing social goals as inputs rather than results, the bank cleared the path for a cumulative piling on of tasks over the decades, including issues of governance, participation by the poor, and anticorruption. This approach also let the bank pursue an increasingly democratic and humanistic agenda without appearing to be politically intrusive. Rather than acknowledging the political dimension of female education in Muslim countries, for example, the bank argued that Pakistan would reap “the highest economic returns” from educating its girls. (Many critics charged that this “narrow” economic rationale was insensitive. But the bank was probably more effective this way than when it tries to justify policy as a matter of shared values.)
From the 1970s to the 1990s, the bank’s research continued to expand the development agenda. In a famous speech in Nairobi in 1973, the bank’s president at the time, Robert McNamara, called for a new, more challenging, and complex approach to rural development for the globe’s poorest people. In a stirring conclusion, he asked all parties to seek to eradicate poverty by the end of the twentieth century, eliminating malnutrition and illiteracy, and raising life expectancy across the developing world. His speech forcefully initiated a tradition of identifying global problems, setting bold objectives, and then attempting to tackle them no matter how complicated the undertaking.
Yet McNamara’s vision proved illusory. It is a sad irony that the great post-Nairobi failures came to be identified with the rural sector that figured so prominently in his speech. In Tanzania, President Julius Nyerere’s failed rural policies proceeded with bank support as he aimed to resettle peasants in more compact communities. By the early 1980s, the bank itself took note of the exceptionally problematic record of rural development projects, particularly in sub- Saharan Africa. The failures led to further studies and more ambitious conclusions: the need for strong institutions of government, the centrality of human resources, and the necessity of more participation by the poor in designing projects. The bank had learned how an integrated antipoverty program could tax capabilities beyond capacities.
Whereas Africa required an expansion of the bank’s mission within the poorest countries, Latin America posed a different challenge in the 1980s. In the turbulent global economy of the 1970s, the oil-price hikes had created huge new requirements for global financing. Banks with major new deposits based on oil wealth had engaged in large-scale lending to developing countries, particularly in Latin America. As those countries’ economic management faltered and debt grew, however, this trend became unsustainable. In 1982, Mexico shocked the world with the news that it could not meet the repayment obligations on its debts. Many parties became tangled in the prolonged resolution of the debt crisis, which spread to other middle- income Latin American countries.
For the bank, this travail set the stage for “structural adjustment” lending, in which loans were proffered in exchange for government commitments to economic reform. This set of commitments came to be known as the “Washington consensus,” and it included trade liberalization, tax reform, realistic exchange rates, liberalization of capital markets, and privatization. Although the term has been caricatured and misrepresented as a symbol for heartless World Bank policies, the reality was much more positive. A bank study of 1980s adjustment programs in 42 countries found substantial success—with steadier growth rates, lower inflation, and improvements in current accounts and trade regimes. And although times were hard for many countries, both the bank and the receiving countries increasingly agreed on the need for reform and the realization that money is only as beneficial as the policies it supports. The bank also learned the importance of taking explicit account of the poor in economic reform discussions. The harsh criticisms of the impoverishing effects of early structural adjustment loans brought forth new commitments to mitigate adjustment’s social costs through better design of programs, especially for governmental social spending.
A Not-So-Simple Plan
By the early 1990s, the bank was ready to embrace the post-Cold War optimism on development and the global economy. The great strides in Asia and the collapse of communist regimes in the Soviet bloc opened a vista of successful economic development based on free markets and burgeoning international trade. Although poverty in Africa and South Asia stood as a sober reminder of the limits of financing development, Latin America had made great progress. East Asia was coming to be known as a “miracle” for its high and relatively equitable growth, China was moving steadily toward market- oriented reform, and the former Soviet bloc became free to embrace the Western economic model. The bank (and the IMF) geared up for the challenge of working with transition economies emerging from communism.
In short, hope was in the air. In its 1990 World Development Report, the bank promoted a two-pronged strategy to combat poverty through better market incentives, social and political institutions, infrastructure, and technology. At the same time, it called on developing-country governments to build human capital through social services such as primary health care and education. The 1991 report went further to argue for reevaluating the respective roles of the market and the state in development. Its prescriptions included more open markets and public-sector privatization accompanied by greater government activism in areas such as health, education, infrastructure, and assuring stable macroeconomic growth. Finally, the 1992 report asked how policy could promote sustainability, especially in environmental issues affecting the poor, such as safe water, safe air, and usable land. This last issue was especially prominent on the bank’s agenda as the global community prepared for the Rio de Janeiro world environmental conference in 1992.
By now, the bank’s agenda had grown hugely complex. There was a growing appreciation that policy depended on institutions for implementation—but no one had figured out how to build those institutions successfully in inhospitable political and social climates. Thus much of Africa continued to languish, and poverty in South Asia remained widespread. Moreover, just as the bank’s confidence reached its zenith, the howls of critics started to reverberate in the corridors of elected officials. These critics charged that the bank’s concern for the environment was half-hearted and belated, that its emphasis on markets and stable macroeconomic policies impoverished the poor, that its willingness to deal with almost any government was wholly insensitive to human rights and other democratic values, and that the closed nature of its deliberations and restricted circulation of its reports were nontransparent and precluded the poor’s participation.
Of course, the bank had answers for these charges. But the governments of its largest shareholders increasingly responded to the critics with calls for reform. With the appointment of James Wolfensohn as president in 1995, the bank found a leader committed to changing the human face of the bank by embracing sustainable development and reaching out to civil society and the poor. Debt relief was promised to the poorest countries, and the bank’s aspiration was movingly articulated as “a dream of a world free of poverty.”
But reality reared its ugly head. The challenges in Russia and eastern Europe turned out to be daunting, and the correct sequencing of reforms was by no means easy to divine. Africa fell into the harshest of times as weak states lost their Cold War patrons and were rocked by war and disease, especially aids. The bank was also trying to adapt to the huge private-capital flows into “successful” emerging markets, funds that were overshadowing development assistance and marginalizing the bank’s role in all but the poorest countries. Finally, there came the cruel blow of the 1997 Asian financial crisis—a watershed for the bank. The star actors in the development drama had fallen off the stage. Net private capital inflows to developing countries plummeted by more than half in 1996-98. Even more important, commercial bank lending proved the most volatile, moving from a net inflow of $118 billion in 1996 to an outflow of $45 billion in 1998. But the cold numbers do not begin to describe the earthquake that rocked the foundations of international finance—including central banks, the IMF, the World Bank, and the Asian Development Bank. Billions of public dollars were loaned against the backdrop of crisis, as the development community scrambled to understand what had occurred.
Once again, a global financial crisis led to review and revision of the objectives of the Bretton Woods institutions. The IMF, finance ministers, and central bankers tried to use their fresh understanding of the risks of liberalized capital markets to build a new international financial architecture. Meanwhile, the development community concluded that its approach had been too narrowly focused on macroeconomic policy and human resources. It called for an agenda that stressed anticorruption, effective corporate governance, banking transparency and independence, strong capital markets, and sufficient social safety nets.
Aside from addressing the big crises, the bank has persisted with its other special post-Cold War tasks, including reconstruction in the Balkans, economic management in the Middle East, and environmental challenges such as biodiversity and global warming. And the bank has labored to demonstrate the compatibility of its traditional staunch commitment to open trade and competitive markets with the goals of equitable and sustainable growth. But as it begins this century with ever-grander visions—abolishing poverty, embracing global civil society, giving voice to the poor, and pursuing sustainable growth—the harsh criticism is only increasing. From those who share the bank’s core beliefs, there are calls for focus and results. From those who have always opposed the emphasis on trade and markets, there is increased stridency in the streets and at the meetings.
That said, the bank is not the only institution that broadened its scope and raised its ambitions for development. In the 1990s, the United Nations convened a series of conferences on major areas of human development. Each conference produced a manifesto of global ideals for humanity, which the development institutions were then expected to incorporate in their programs. The U.N. Millennium Declaration captured these goals in one document last year. Keeping with the times, the bank has also embraced this rhetoric as performance benchmarks. For example, in its 1998 annual report the bank underscored its commitment to U.N. development targets. These goals included halving by 2015 the proportion of people living in absolute poverty, achieving universal primary education in all countries by the same year, and establishing gender equality in primary and secondary education by 2005. The report expressed similarly ambitious goals for reducing infant and child mortality, ensuring universal access to reproductive health services, and reversing the loss of environmental resources.
The U.N. is supported by the most idealistic members of civil society and thus can claim to voice the aspirations of humanity. But other organizations have abetted the process. In June 2000, the Organization for Economic Cooperation and Development presented a report that called for progress in achieving the U.N. goals related to poverty reduction. The OECD report was coauthored with the U.N., the World Bank, and the IMF—a first for such cooperation—and hailed as a scorecard for progress in achieving the targets of such world conferences.
Meanwhile, the Bretton Woods institutions have been called on to work with developing countries to implement codes of “best practices” in a variety of technical areas such as banking regulation and supervision, corporate governance, and accounting. The codes themselves make a lot of sense. Indeed, codifying or even just recording and disseminating best practice is the hallmark of thoughtful progress. But the question remains as to how realistic the expectations for widespread adoption are. The rhetoric of international development is deeply attached to the notion that any problem can be solved with a detailed blueprint, goodwill, and sufficient effort.
What explains this extravagant optimism in the face of harsh experience and dire reality? The bank embraces an unachievable vision instead of an operational mission because it is under pressure from many different constituencies. More important, this vision drowns out a discussion of realistic objectives and thus undercuts a much- needed drive to enhance internal management. It also weakens the bank’s perceived “professional impartiality” as an adviser and partner to developing-country governments. And because of the politics within the institution—where developing countries are both shareholders and clients—the bank will rarely admit that working within a particular country at a particular time is unlikely to achieve much lasting benefit unless a more reform-minded government takes over. Yet to address all these issues, the bank must acknowledge a series of dilemmas.
First, the bank absorbs and expounds the huge prescriptive literature on development without acknowledging that knowing the destination does not produce a road map for getting there. For decades, the bank has underscored the importance of strong institutions to successful development—without admitting that there is no magic wand that can give places such as Pakistan, Russia, or the countries of Africa that institutional infrastructure.
Second, the bank does not acknowledge that much is serendipitous about development. Different countries have developed at different times through a happy coincidence of myriad factors, including geography, immigration, political development, and the outcomes of war and peace. The Asian crisis showed that globalization has raised the bar for locking in development progress. But the idea that good corporate governance and transparent and stable financial systems are essential for development contradicts the postwar progress of western Europe. In Germany, banks and insurers have traditionally owned shares in each other and in industry, and unions have been powerful actors in a system of corporate governance that stresses consensus. Government-industry ties are equally thick in France and Italy, where corruption has also featured prominently. Yet no one would argue that these countries are “unstable” in their claim to be developed. But to say development is serendipitous is not to counsel pessimism. The revolution in technology and communication, for example, may over time permit great strides in Africa.
Third, the bank is in danger of overdetermining development to the point where it is a tautology, not a reasonable prescription. To argue that developing countries need market-friendly policies, stable macroeconomic environments, strong investments in human capital, an independent judiciary, open and transparent capital markets, and equity-based corporate structures with attention to modern shareholder values is to say that you will be developed when you are developed. It is the old debate of inputs versus outputs, where everything that development brings has become a necessary input to achieving it.
Fourth, the bank’s strength paradoxically undercuts its effectiveness. The bank is so diverse in its expertise, so professional in its staffing, and so strong in its financial structure that all the interested parties want to control it for their own purposes.
This last point leads to the fifth dilemma: the politics of support can often conflict with the politics of influence. As the bank tries to broaden its support and avoid controversy in developed countries, it refrains from politically charged lending (such as that for large infrastructure projects or sustainable forestry). At the same time, it intrudes into political processes (such as by mandating consultation with nongovernmental organizations) as part of the loan process. The checklist for getting credit may now require assessing the loan’s impact on poverty, gender disparities, and the environment; it may also call for competitive procurement and enhanced financial management. These requirements raise the cost of doing business with the bank to discouraging levels. The need for realistic management is acute.
The Vision Thing
The bank continually straddles several basic public purposes, which correspond to its separate constituencies. It has always been a key institution in the international economic architecture, helping to expand the liberal global economy. The bank has relentlessly pushed developing countries in the direction of the “World Trade Organization (WTO) system” of growth. In financial crises such as those in Mexico or Asia, the bank has been part of the attempt to prevent widespread financial panic. And it has been a key partner in helping transition countries join the international economy.
The bank is also the leading institution for alleviating poverty. It focuses on individuals, their crushing needs, and their soaring potential. In each country, the bank is expected to help the poorest citizens; it is for them that the bank pursues structural reform, trade liberalization, and the opening to the private sector. Many NGOs, much of the development community, religious groups, and parliamentarians associate themselves with the bank through this bridge, which has certainly been the hallmark of Wolfensohn’s tenure.
Finally, the bank’s role is growing in matters such as biodiversity, ozone depletion, narcotics, crime, and corruption. Postconflict reconstruction (in the Balkans and the West Bank, for example) and conflict prevention are also issues of the moment. The new century demands a new agenda for global cooperation that requires money, and this agenda can be adapted to the bank’s operating style of making loans based on policy dialogue. Like Bretton Woods objectives, these issues are rooted in a global concern. Unlike such objectives, however, they are often less focused on the global economy and subsumed instead under “development” to fall within the bank’s operating charter.
The bank has stressed vision, compassion, and charisma under Wolfensohn’s leadership. At the same time, it has tried to pursue reform through greater transparency, broadened participation in project formulation, and increased links to civil society. The bank has also been open to the emerging agenda of global common issues. Words like “comprehensive” and “holistic” have come into common use as the bank struggles to encompass all agendas.
Like many institutions, however, the bank goes through phases. It is now clearly due for a “managerial” cycle to follow its visionary one. Bank officials must admit there is a problem and move with shareholders toward broad-minded reform. Although the bank has changed dramatically with the times, its mandate has expanded continuously toward more complexity, against ever more grandiose ambitions. Now the bank needs to focus on its internal management not begrudgingly but willingly, with candor born of self-knowledge. It must grasp the opportunity to revamp itself in fundamental ways.
There is no shortage of blueprints for reform among knowledgeable staff, shareholder governments, and special commissions. Different plans might envision breaking up the bank, scaling back its activities, or distributing some of its programs to other existing institutions with overlapping missions. But whatever the plan, it must recognize that the substance of reform is condemned to fail until the bank argues for modernizing and rationalizing today’s proliferated development architecture. For example, there is no compelling reason why the bank should consider judicial reform as a development task under its umbrella rather than passing the job to an organization staffed by lawyers and judges. Of course, law is related to economics, and contracts and a functioning judiciary are fundamental to markets. But that relationship does not have to dictate organizational sprawl. Similarly, the bank’s great vision and (much maligned) adoption of cultural heritage as a development objective would stand to gain if such an objective could be farmed out to an organization with more corresponding interests.
There is no single correct approach for reforming an international institution after 50 years of great achievement as well as severe disappointment. What the bank’s shareholders can do is exchange ideas on guiding principles to achieve a new consensus. The developing world can contribute much to this dialogue, and those who have succeeded in transforming their countries in the past decades should be given a leading voice in any convocation. The following list of principles should set the process in motion.
First, the task of reforming the bank should be seen as intergovernmental. Civil society is present in every way through the democratic process, but it does not represent governments, which are the shareholders and clients of the bank. Shareholders should stop fleeing from that concept and instead exploit the opportunity to work together as state authorities. The global community needs accountable governments to establish realistic objectives for operating public organizations. A U.N.-style conference is not the venue for such a “management” agenda.
Second, national finance ministers (advised by development and environmental ministers) should lead delegations in considering reform and reorganization of the bank. Putting finance ministers in the lead will strengthen the hand of those policymakers who see the bank as a valuable central player in expanding the global economy, and they can simplify the bank’s role as a partner with the IMF and the WTO in expanding global prosperity.
Third, the bank should raise its profile of core competencies. It has traditionally viewed the world through an economic lens, as it did when it proved that education and health care are essential building blocks for development. The bank should continue to contribute through economic research and position itself as the lead candidate to undertake any major economic tasks. Lending to implement a governmental agenda for economic reform will remain a comparative advantage of the bank.
Fourth, the bank should consider scale and distance. Although it is worthwhile to highlight the benefits of microcredit lending, for example, it does not make sense for an organization headquartered in Washington and staffed by international professionals to play an operating role in such local ventures. The bank’s location, recruitment, and charter argue in favor of a wholesale, not retail, approach to development. Smaller organizations in the field are more appropriate for hands-on tasks.
Fifth, any discussion of development must acknowledge that private capital flows have decisively outpaced public assistance. The bank has traditionally lent to governments to create a “market-friendly” environment that will encourage the flow of private capital and the growth of savings on a constant basis. But it now increasingly finds itself marginalized in its capacity to finance development, except in the poorest countries. Last year, private net inflows to emerging markets exceeded net official outflows by close to $170 billion. The bank welcomes these private flows and is committed to expanding their scope. It can help by simplifying its program to take account of these flows and make sure that its funds complement them. In the poorest countries, not only are private flows unavailable, the bank’s terms of lending are inappropriate. In emerging markets, the bank has the ability to focus its involvement with governments to advance the agenda of reform and attract and enhance the benefits of foreign investment.
Sixth, as the bank narrows its focus, it should shift it as well. It should open the door to the new agenda of global common goods and still commands the human and financial resources to make the greatest of strides in this area. This is why the bank should shed areas where its comparative advantage is no longer compelling. Without the bank, for example, the importance of education to development would have been overlooked. But today there is reason to consider moving the best of the bank staff in this area to a more focused enterprise.
In sum, governments should first survey the broad agenda that has become subsumed under the rubric of development and the emerging agenda of global concerns. They should then adopt a “Bretton Woods” frame of mind suitable to the new century and establish organizations that can achieve today’s goals and align themselves with today’s challenges. The World Bank is a great institution staffed by highly educated and motivated public servants, led by a committed president with compassion for helping the poor. But the proliferation of knowledge in the last 60 years has led to a complexity of tasks that defies operational definition—and the new problems that have arisen require mature organizational attention and leadership. As the bank moves into its next stage of leadership in the coming years, its shareholders should be prepared to move both back to basics and into the modern era.