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Review of The World Bank: Structure and Policies edited by Christopher L. Gilbert and David Vines Cambridge University Press, 2000 Arvind Panagariya No multilateral institution suffers more from an identity crisis today than the World Bank. Globalization has brought private capital to the doorsteps of most developing countries, seriously undermining the Bank’s central function—development lending. Not surprisingly, when the U.S. Congress recently appointed the Meltzer Commission to pronounce on the future architecture of international financial institutions, the Commission recommended that the Bank exit the business of lending except in Africa. In The World Bank: Structure and Policies, distinguished economists Christopher Gilbert and David Vines come to the Bank’s defence. Armed with eleven essays written predominantly by authors from within the Bank and an introduction by its recently departed Chief Economist, Joseph Stiglitz, these authors try to offer a markedly gentler picture of the institution than conveyed in the Meltzer Commission’s report. But they fail to be persuasive. Part I of the volume deals with the Bank as an institution and Part II with the effectiveness of its lending. In their main essay, Gilbert and Vines make much of turning the Bank into “Knowledge Bank” to give it a new identity. But their detailed discussion leaves little doubt that they do not seek major reform of the institution. They identify three key functions that they would like the Bank to perform: lending, research, and development agency function, which is defined to include aid, loans with conditionality and global public goods. These being precisely the functions the Bank performs currently, the authors’ main task is to defend their pursuit by the institution. The main argument offered by Gilbert and Vines favouring Bank lending relies on a syllogism. The first premise is that the market fails to provide education, health and infrastructure facilities adequately in developing countries. The second premise is that due to weak powers of the state, governments fail to take corrective action, which the Bank can take more effectively. Besides being paternalistic, this argument ignores two key facts. First, the Bank has little chance of succeeding in countries where national governments are weak. Second, countries with weak governments, mainly in Africa, can scarcely absorb $18 billion that the Bank currently lends. It is not an accident that 70 percent of the Bank’s lending goes to 11 countries that are also large recipients of private capital and, thus, perceived to have credible governments. A separate essay in the volume by Lyn Squire, a former research director at the World Bank, offers the defence of the Bank’s research function on which it spends $25 million annually, vastly more than the entire budget of National Science Foundation. Squire’s main argument is that the creation and dissemination of development research is an international public good, meaning that no country will pay for its creation in adequate amounts for the fear that its benefits will spillover to others. Frankly, this argument has as much validity in practice as the infant-industry argument did when it was invoked by developing countries to protect and subsidize industrialization in the 1960s and 1970s. One is hard-pressed to explain why so many private consulting firms are able to sell their research to country governments if spillover is a serious problem. And why does this problem not afflict developed countries? Among all of the Bank’s functions, the one that is most easily defended is aid. As Gilbert and Vines correctly point out, this function is directly related to the poverty alleviation objective on which there is little disagreement. But even here one must answer why the function cannot be delegated to regional banks at least in Asia and Latin America where these banks function effectively as recommended by the Meltzer Commission. The authors do not address this issue. A key question concerns the effectiveness of the Bank lending. During the first three decades of its existence, the Bank’s lending was almost exclusively project-based. In the past two decades, conditionality-driven, policy-based loans have acquired greater importance. In their interesting essay, Shantayanan Devarajan and Vinay Swaroop point out that when funds are fungible, a donor project may exhibit a very high return but it may be actually financing something with a very low return at the margin. To overcome the problem, they rightly recommend that aid be tied to an overall public expenditures programme that provides adequate resources to crucial sectors. Fungibility of funds would seem to partially explain the conclusion in the essays by Craig Burnside and David Dollar and Jonathan Isham and Daniel Kaufmann that aid is effective when the overall policy environment is good but not otherwise. Burnside and Dollar find this in their analysis of the effect of aid on growth and Isham and Kaufmann of the rates of returns on projects. Thus, in the ultimate, overall policy environment would seem to be the key to development. Sadly, the current President James Wolfensohn has shifted the Bank’s focus away from what are known to be good policies based on fifty years of experience to what he calls the Comprehensive Development Framework (CDF). Accordingly, the Bank projects and policy loans are to be evaluated via a CDF matrix that lists different aspects of development such as corruption, legal system, education, health, environment and even culture across columns and different participants including government, all donor agencies, civil society in all forms, and private sector at home and abroad across rows. As Roy Hopkins et al. correctly point out in their excellent essay on conditionality, priorities imposed by the CDF may conflict with priorities based on policy quality. This is not idle speculation: recently, changed priorities have led the Bank to finance research on pre-Hispanic cultures in Honduras and museums in Mauritania and to spend its scarce resources on organizing conferences of religious leaders. While the volume, thus, fails to offer a persuasive defence of the Bank’s current identity or suggest a substantially new one that will protect it from its critics, it contains a rich and up-to-date evaluation of the World Bank’s activities. Those interested in the future architecture of international financial institutions will find the book a welcome addition to the literature. Times
Higher Education Supplement February 16, 2001 |
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