As we enter the next millennium, the challenges facing the World Bank remain as great as ever. While there has been great progress in reducing poverty, continuing population growth makes it an uphill struggle: there are now more people living in poverty than there were 50 years ago.
Writing in the latest issue of the Economic Journal, Professor Joseph Stiglitz, Vice President and Chief Economist of the World Bank, examines how the Bank is and should be evolving. The World Bank''s core mission remains the promotion of economic growth and the eradication of poverty in the less developed countries (LDCs). But the instruments used to pursue these goals have changed. The balance has shifted away from large-scale growth-oriented projects toward projects, programmes and policy advice that more explicitly incorporate the goal of poverty reduction. Decisions on the allocation of funds to the LDCs are increasingly based on their impact on poverty reduction. Professor Stiglitz highlights three areas that have changed what the Bank does and how it does it:
New Views of Development
Views on development have changed in the Bank just as they have in the development community. Development must be democratic, equitable and sustainable – and concerned not only with increasing GDP but also with raising living standards. Some argue that this brings the Bank into the world of politics and beyond its charter. But issues like corruption, transparency and democratic process have profound effects on development.
Development should be seen as a transformation of society: a dual economy is not a developed economy, and many of the Bank''s earlier strategies did little to promote this transformation. Previous approaches shared the belief that solving certain technical problems would achieve a more efficient allocation of resources. Yet successful development involves not only addressing these technical issues but a transformation that puts educational and political development at its centre.
While development strategies of the last 20 years focused on market-based reforms, they often failed to establish the institutional framework required to make markets work. Economic theory emphasised that to make markets work, both competition and the incentives provided by private property are necessary. But it did not emphasise one over the other. Yet the contrasting experiences of China and Russia raise questions about reform strategies that put privatisation ahead of competition: China focused on competition and saw its per capital GDP increase eightfold in two decades; Russia ignored competition policy, and after privatisation, saw its output decline markedly.
Globalisation – the expansion of global markets for goods and capital – has had a profound effect on the World Bank. Founded in part on the presumption that capital markets are imperfect, the Bank was able to use its high credit rating to enable LDCs to tap into global capital markets at more favourable rates than would otherwise have been possible. Yet the huge increase in the flow of private capital into emerging markets meant that by 1997, some countries had access to these markets at terms similar to the Bank''s. But most LDCs, especially those in Africa, did not. What is more, the private funds that did go to LDCs went disproportionately to finance infrastructure
projects from which cost recovery was possible. Health and education received almost no private funds. This changing marketplace has led the Bank to redirect its lending to those countries and sectors that do not have easy access to the global capital markets.
With loans totalling $106 billion in 1998, the Bank has continued its role as a major source of capital. Yet it increasingly thinks of itself as a knowledge bank. Knowledge, particularly knowledge about the institutions and policies that make market economies work better, leads to higher returns and a better allocation of capital. Recent research show that in countries pursuing sound economic policies with good economic institutions, foreign aid is highly effective. Receiving assistance equal to 1% of GDP increases growth by 0.5%, reduces poverty by 1% and increases private capital flows by 1.5% of GDP.
Interactions with LDCs
The new view of development has changed the way the Bank interacts with LDCs. In the past, international agencies typically insisted on a long list of conditions in return for the provision of funds. The conditions negotiated with a country usually entailed the so-called ''Washington consensus'': trade liberalisation, privatisation and macro stability. But China accounted for two thirds of the entire increase in incomes among low-income countries between 1978-95 by largely ignoring the Washington consensus. There has been an extensive discussion of the appropriateness of these conditions, ranging from whether they were the right reforms to whether they were introduced at the right speed in the right sequence. But there is a more fundamental issue: was imposing conditionality an effective way of changing policy? There is increasing evidence that it was not: good policies cannot be bought, at least not in a sustainable way.
As the new millennium dawns, the Bank will increasingly work with each borrowing country to develop a broad development strategy. Like a corporate strategy, it should serve as a vision of where the economy is going and what needs to be done to get there. The focus must be on capacityand consensus-building: helping countries develop the ability (including think-tanks and research institutions) to formulate their own development strategies and the democratic institutions to reach a national consensus.
''The World Bank at the Millennium'' by Joseph Stiglitz is published in the November 1999 issue of the Economic Journal. Professor Stiglitz is Vice President and Chief Economist at the World Bank. The views presented here are solely those of the author and not those of any institution with which he is or has been affiliated.