Does The World Bank Need To Rethink Its Policies?

Does The World Bank Need To Rethink Its Policies?

Banks  Economy News - Follow-up  For nearly eight decades, the World Bank—founded in 1944 to finance reconstruction and development after World War II—has been the largest international public agency ever. By 1973, as the need for reconstruction receded and many newly independent countries had joined the bank, President Robert McNamara outlined a revised mission.

The bank’s goal was “to accelerate economic growth and reduce absolute poverty.” At the bank’s headquarters in Washington, that goal was engraved on the lobby wall for all to see: “Our dream is a world free of poverty.”

The World Bank's initial approximation of the target was an annual estimate of the number of people living on less than $2.15 a day, the amount deemed necessary to avoid hunger, Paul Collier, a professor at Blavatnik College at the University of Oxford, wrote in an opinion piece for Foreign Policy.

This is a very conservative measure of the bank’s performance, Collier said—it could be achieved if the world’s poorest could reach the bare minimum necessary to survive even as the income gap with the rest of humanity widened. But even by this inadequate measure, the bank was a failure before 1990.

That is no longer in dispute: from 1960 to 1990, the incomes of the poorest countries diverged from those of the richest by standard statistical measures.

The number of people living in extreme poverty peaked in 1980 and then stabilized until the early 1990s, when China, India, and other emerging Asian markets took off.

Since 1990, China and India have largely lifted many millions out of poverty, but that was because of domestic reforms that opened their economies to trade. It was not because of the World Bank’s meager aid to these countries, which went disproportionately to Africa, along with policy advice.

But while the Bank cannot claim responsibility for China’s and India’s successes, it must accept responsibility for Africa’s failures. Yet the Bank and its leadership have been reluctant to confront or draw conclusions from their failures.

“When I first worked on the problem of global income inequality in 2003, I found that there was another problem within the problem that had not been noticed at the time,” said Professor of Economics and Public Policy at the Blavatnik School at the University of Oxford.

“A group of 60 poor countries, concentrated in Africa and Central Asia but with pockets elsewhere, had failed to spark economic growth and were gradually falling behind everyone else.”

“These countries had a population of about a billion people—I called them the bottom billion.” China and India were initially much poorer than most of these countries, but since the 1980s China has been growing rapidly, and since the 1990s India and Latin America have also been taking off.

In 1990, these three regions dominated global poverty statistics, but now they are favored by investors as emerging markets, and by 2035 their mass hunger problems will be a thing of the past, according to Collier.

The growth of these regions has helped global poverty begin to decline—both as a share of the world’s population and in absolute numbers, perhaps for the first time in human history. But this success has not extended to the bottom billion. As a group, their incomes have continued to diverge from those of the billions in emerging markets and the privileged billion in rich countries.

The divergence among the bottom billion continued until 2003, when global natural resource prices began a decade-long boom so extraordinary that it became known as a supercycle. Because economic growth never really caught on among the bottom billion, the exploitation and export of their natural resources became their dominant form of participation in the international economy, and the supercycle boosted their incomes.

This was their golden decade, and it lasted until 2014, when commodity prices collapsed; prices have been extremely volatile since then.

After 2014, the global economy entered a period known as the “new normal,” a term coined by economist Mohamed El-Erian. For the bottom billion, the new normal looked a lot like the old normal, the long period until the golden decade during which they were left behind.

Only during the golden decade did the bottom billion as a group briefly interrupt the tragedy of falling further and further behind the rest of humanity.

If the trend since 2014 continues, the global poverty headcount will soon return to its grim pre-1990 upward trajectory. Starting in 2035, after adjusting for inflation, the number of people living below the World Bank’s $2.15 poverty threshold – those so poor that they are starving – will increase relentlessly.

And they will be concentrated in very different places than in the past. Instead of China, India, and Latin America, the new poverty hotspots are Africa and Central Asia. Given the World Bank’s mission, the prospect of rising poverty rates in these long-focused regions should spur the Bank to action.

“Of course, there are many reasons to be skeptical of these forecasts. But we can supplement the projected trends with evidence of changes in national wealth per capita, including private assets such as homes and public assets such as infrastructure,” Collier said.

As imperfect as this measure may be, by looking at how assets have changed, we get some clues about how incomes will change in the future. In both the old normal and the new normal, the assets of the bottom billion remained virtually flat, while assets per capita in emerging markets grew rapidly, at 3% or more per year. The assets of the lucky billion living in the developed world grew comfortably, at about 2% per year.

People in the bottom billion are poorer than the rest of humanity. By 2020, the average fortune billion had $500,000 in assets per capita. The emerging market average had jumped to $85,000, and was on track to catch up with the fortune billion within a generation.

But people in the bottom billion have less than one-thirtieth of the fortune billion’s assets, and the fortune billion’s assets are growing only slowly.

Rather than prompting questions about why its approach was failing to achieve its stated purpose, in the early 2020s the Bank decided to change its stated purpose. The World Bank’s goal would no longer be a world free of global poverty – nor would it even be able to measure it.

Its goal would simply be to reduce the number of people living below a certain country-specific income threshold. If that number was falling, the Bank would declare victory: its programs in that country must be working.

This was not demanding enough that most programs would get a passing grade most years—even in Africa and Central Asia—so that everyone could relax. To avoid a troubled career, an employee assigned to one country that was not currently getting a passing grade would simply need to move to another country as quickly as possible.

Because everyone would be playing this game, the less experienced employees would end up working with the less capable in the more difficult countries.

Clearly, as the premier global institution, the World Bank must aim for global convergence: that is its core mission. The countries that have fallen behind to become the poorest must not merely avoid hunger or meet a low bureaucratic threshold—they must grow faster than other groups.

The failure of these programs, with the exception of one golden decade that had nothing to do with development projects, should be cause for serious soul-searching and sober reassessment at the Bank, reinforced by genuine concern about the prospects of the world’s poorest countries.

The World Bank might look to its sister institution, the International Monetary Fund, for an example of this kind of soul-searching. It happened in 2018 under then-IMF chief Christine Lagarde, now head of the European Central Bank. In an independent evaluation of its performance, the IMF found that in fragile states, only one in seven of its support and advice programs were successful.

This led to a major research study, published in 2021, that concluded that programs should last longer and be better tailored to the local context. The first fruits of this work were the agreement just reached with Ethiopia last month.

But in its policies toward persistently slow-growth countries in Africa and Central Asia, the IMF is hampered by a mandate that focuses solely on financial stability, not economic development. The development mandate falls to the World Bank—and that’s where it stops.

But instead of acknowledging a half-century of failure, discovering its causes, and launching a process of comprehensive institutional change, the World Bank made the sinister choice of redefining its purpose into something more easily achievable than economic development and income convergence.

It simply changed its poverty measures so that it would no longer have to report rising global poverty rates. Before the bank had finished this scandalous exercise, international outrage over its failure to respond to the multiple crises engulfing poor countries had reached its board of directors.

The board correctly judged the bank to have been slow to disburse funds that could have enabled the governments of the poorest countries to prevent their economies from collapsing. In February 2023, under humiliating circumstances, World Bank President David Malpass was forced to resign.

The move may finally prompt the bank to engage in the same soul-searching that the IMF has undergone. With its vast financial resources and highly skilled staff, the World Bank has a noble mission to fulfill.

Will its new president have the ambition to chart a bold new course—or will he retreat to the defensive amid a beleaguered bureaucracy?   08/25/2024 - https://economy-news.net/content.php?id=46711