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Pragmatic approach

In defence of the World Bank / Book review

Fatal consensus


01/2005 		 

Pragmatic approach

The World Bank no longer adheres to a strict set of principles. Experience has shown that the roles of state and market have to be reconciled. Local ownership and public participation are essential for developmental success – and have even been so under the conditions of dictatorship in the People’s Republic of China, World Bank chief economist François Bourguignon argues in his interview with D+C/E+Z.

Why does the World Bank no longer rely on a clearly defined doctrine?
In analysing the evolution of development thinking over the last forty years, one can identify two broad periods. The first was influenced by state intervention and state planning, the idea that development would be achieved by mobilizing resources to carry out a state-led plan. This was prompted, in part, by the approach in socialist countries that, in turn, influenced the developing countries. This doctrine ran aground, though, first with the oil crisis in the late 1970s, and then with the subsequent debt problem.

That is when the role of markets began to be stressed.
Yes, these developments led to a new emphasis on macroeconomics, to the need for developing countries to modify their economic structures to repay their debts. The second period began, dominated by market liberalism. Structures developed in the first period were found to be inappropriate to the need for macro-economic adjustment. The new focus was then on markets, on the need to get prices right, and so on. This shift was reinforced by the urgency of economic transition in the former socialist-bloc economies. These two strands are what I would call doctrines. State intervention on the one hand, market liberalism on the other. Now, we find ourselves at the end of this sequence. We realize that neither states nor markets can do the job alone. Markets are important, the private sector is the driving actor of the development process, but at the same time, markets do not function perfectly. We need the state to facilitate the role of the private sector. I would not call that a doctrine. I would call it pragmatism.

But isn’t a new doctrine evolving with issues such as institution-building and good governance at its core?
Because of the relatively modest achievements obtained with structural adjustment policies in the 1980s, and through liberalization and privatization policies in the 1990s, we have learned that institutions are important. In many cases, the policies failed to deliver the results we wanted because the institutions were not strong enough to enable markets to function properly. Governance itself was one of these institutions. Corruption – let’s say the word – resulted in money being diverted from its targets, policies hurting specific interests not being effectively implemented, and creating inefficiencies. So it is true that, as a result of this experience, there is an increased emphasis on governance, and a conviction that the economy would work better if governance were improved. At the same time, however, good governance by itself is not sufficient. You also need access to global markets, you need resources for infrastructure, you need investments in health and education.

Is there a recipe for good governance?
There are many, of course, but I would single out transparency as a critical aspect of governance. Any government seeking to improve its governance must be transparent. Good examples are Uganda and Mozambique, where transparency was at the core of effective reforms in governance. When in Uganda, parents and local officials started posting the amounts of funds they received on the doors of primary schools, it wasn’t long before the proportions they received from the central government doubled to what they should have been in the first place. In Mozambique too, commissions have been created that analyse public spending and announce their conclusions. Improving governance involves enabling citizens to provide feedback on the services they receive, on giving them voice.

Ownership is a much-mentioned buzzword. But it seems doubtful that developing countries are really in control. They depend on fresh loans and debt relief. They know what rhetoric is in vogue. Don’t they just pay lip service without doing much improving institutions and governance?
A country’s poverty reduction strategy is designed by the country – by its government, its civil servants, by the private sector, by civil society. The idea that aid donors control the whole thing is simply not true. The country has to make fundamental decisions about the aid it receives, and it has choices. This is ownership. Ownership goes hand-in-hand with budget support, as opposed to project funding.

Participation is often listed among the requirements for development and poverty reduction. However, China, by many measures the most successful developing country, is not known for letting it’s people participate in decision-making. Why does the World Bank stick to the participation rhetoric despite this empirical fact?
Participation and ownership are two different things. Participation is about empowerment of people, about everybody having a voice in public decision-making in their community. There is little doubt that China fully “owns” its development strategy. But it is also true that China is a country where participation is limited. When you say that China has been able to develop without big progress made on participation, and therefore that participation is in general unimportant, you might be overlooking an important possibility, namely that China might have done even better if there had been more participation. Maybe increased public participation in policymaking would have made China’s development progress even more impressive, and probably more equitably distributed.

Nonetheless, the People’s Republic is a dictatorship with little transparency and no participation.
It is debatable whether or not it is true that there is no public participation in policymaking in China. When you look at the creation of the town and village enterprises in China in the 1980s, you can say that this was a form of participation at the local level. You may say that the Party imposed everything, but still, there was a decentralization process happening there, as localities were free to choose how to diversify. I would not characterize the Chinese development approach as being one absolutely without participation. Beyond the Chinese example, participation is widely seen as a positive value in itself, and with good reason. There is also evidence to suggest that a freer flow of information that usually accompanies enhanced participation actually contributes to growth, as good information improves the quality of investment and other economic decisions.

Let’s return to the question of development doctrines and the emphasis on macroeconomics. What was right about the Washington Consensus?
Many things were right about the Washington Consensus. Some are obvious. I think all will agree, for example, that macroeconomic stability is a good thing. I don’t think anybody would recommend a monetary policy to any country that generates a 25 or 40 percent inflation rate. There is no doubt about the validity of these principles. But some aspects of the Washington Consensus were applied in an overly rigid way and didn’t produce the results that were sought. In the areas of deregulation and privatisation, we now know that what works in some circumstances, may not work in others. Privatisation can work where there is enough competition and regulation for the private sector to behave efficiently and equitably, and to prevent public monopolies from simply being transformed into private monopolies. But that is not always the case.

So what was learned from experience?
On regulation, we’ve learned that we need it, but that the regulatory institutions need to be strong enough to do the job, and that this is not always the case. Also, the Washington Consensus focused mostly on the efficiency side, without accounting enough for the distributional or social side of the equation.

Should central banks in developing countries focus on price stability or on a competitive exchange rate?
Certainly, you want to have a monetary policy that keeps inflation under control. So, of course, price stability is the most important objective for most governments and central banks, most of the time. On exchange rates, the best way is to rely on competitive mechanisms where such mechanisms indeed are in place. In countries having a flexible exchange rate, and a market for foreign exchange that is deep enough, there is no reason for the monetary authority to intervene. Having said that, in some cases, notably in some low-income African countries, these conditions do not exist. In general, though, I would say that exchange rate issues arise less frequently than price stability issues. Exchange rates become an issue when there has been a terms-of-trade shock that is expected to be persistent, and some adjustment is needed. Then, devaluation may be needed. But a typical central bank’s day-to-day work will be more focused on price stability.

Questions by Hans Dembowski.




Prof. Dr. François Bourguignon
is chief economist at the World Bank. As an economics professor in France, he specialised on poverty issues.
http://www.worldbank.org