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Masters of Illusion: The World Bank and the Poverty of Nations and The World Bank: A Third World View

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1998
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Catherine Caufield

Masters of Illusion

The World Bank and the Poverty of Nations

Henry Holt. New York, 1997. xii + 432 pp., $27.50 (cloth).

H.N. Ray

The World Bank A Third World View

Indus Publishing, New Delhi, 1996, 302 pp., Rs. 450 (cloth).

World Bank-bashing has become a major hobby. Interestingly, many of its best-known practitioners have been women: Teresa Hayter, Cheryl Payer, Frances Moore Lappe, Patricia Adams, Susan George, and now the environmental journalist Catherine Caufield. Perhaps the Bank’s behavior, less like that of an exploitative colonial governor and more like that of an overly concerned Victorian governess, has provoked these critics. Masters of Elusion, the very well-written book by Catherine Caufield, ranges from a vivid description of the undoing of the Swedish match tycoon Ivar Kreuger, who killed himself in 1932, via a history of many of the errors of the World Bank, to the latest activities of its current and most glamorous President, James Wolfensohn.

The author’s complaints are numerous. Many projects that were launched under the banner of helping the poor made the rich richer. The debt crisis was the result of greedy lenders lending to profligate borrowers. The Bank prefers authoritarian regimes to democracies. Among her principal charges against the Bank are its violations of the environment.

Environmental errors

Under the Narmada Valley Development Plan, the Indian government was going to build the Sardar Sarovar Dam across the Narmada River. Caufield writes that “it will also take the land of at least 320,000 people, many of whom are the indigenous or tribal people known in India as adivasi.” (A more correct figure would be a maximum of 225,000 people.) An independent assessment of the project’s environmental impact that was commissioned by the Bank in 1991 stated that silting and salinization were likely to occur, destroying one of India’s most lucrative fishing grounds, and that only half the irrigation water promised would actually be delivered. It also noted that already-constructed parts of the project had become ideal breeding grounds for malarial mosquitoes. The Bank pulled out of the project in 1992.

Then there are the Bank’s much criticized transmigration projects. The Indonesian one ignored the facts that soils on the outer islands were poor; that the islands were already populated by tribal people; and that large-scale land clearing would devastate the island’s soils, water supply, and wildlife.

When discussing the dominance in the Bank’s thinking of GNP and the neglect of the environment, Caufield quotes with approval a former Bank economist, Herman Daly: “It doesn’t do you any good to have thousands of highly educated petroleum engineers if you’ve run out of oil.” But good technologists have in the past, and will in the future, come up with substitutes for oil, such as energy from the sun, the wind, the waves, or nuclear fusion. Human capital is substitutable for natural capital. The question that nobody has raised is whether the ultimate limit may not be time—for it takes time to be ever more highly educated, and to acquire, absorb, and apply the growing body of knowledge.

Debt service

Caufield writes that “the hundreds of billions of dollars developing countries borrow from abroad each year are more than canceled out by the hundreds of billions they send back each year in debt service.” This statement indicates that she misunderstands the purpose of borrowing. It is sensible to borrow only if the returns on the loan (private and social) are higher than the interest paid, and developing countries’ higher repayments are made from higher incomes and output than would otherwise have been possible. It is, however, true that transferring money across the foreign exchanges and raising public revenue to service foreign loans can present additional problems for some developing countries that a domestic borrower would not face.

She asks, “Does it make sense for a country to borrow money from abroad in order to fund its efforts to improve housing, education, health, or population control? Will such investments, however desirable, produce enough money ... to repay their cost?” It is odd that neither the author nor the Bank ever questions the production of beer or automobiles or television sets on grounds of their productivity. Since they are consumption goods serving the “sovereign consumer,” they don’t need any further justification; they are the final purpose of production. But education and health, which are at least as important and valuable as beer and automobiles, always seem to need a justification on productivity grounds.

Closing the gap

She repeatedly says that the gap between rich and poor has widened. She writes that “the developing world is getting poorer and poorer in relation to the rich countries” and that “the gap between rich and poor continues to widen.” Not so. It may be asked whether it would matter if the rich countries were to grow faster, as long as the poor countries enjoyed an adequate growth rate, particularly, but not only, if the higher growth rate of the rich were partly responsible for the moderate growth rate of the poor. But the relative gap between poor and rich countries did not widen (though the absolute gap must widen for a time if the initial difference is great). GDP growth rates per head during 1965-80 and 1980-93 were 4.6 percent and 4.0 percent, respectively, in the developing world, and 3.9 percent and 1.6 percent, respectively, in the developed world. East and Southeast Asia (excluding China) grew annually by 3.7 percent, and China by 5.7 percent, between 1965 and 1989. Although the 1980s were indeed a time of regress for Africa and Latin America, poverty was reduced in the large countries of East, South, and Southeast Asia. (In China, for example, income per head grew by nearly 8 percent a year during this period.) Average annual growth of income per head was higher between 1980 and 1989 than between 1965 and 1980:3.2 percent compared with 2.4 percent. The percentage of the world’s population whose countries enjoyed a growth rate of more than 5 percent grew from 10.6 percent in the earlier period to 33.2 percent in the later one.

The World Bank is the best institution in the world in terms of the proportion of its loans that goes to the poorest countries, far better in this respect than many bilateral aid programs. The trouble during the 1980s was that there was polarization: the proportion of people whose countries experienced average annual growth rates below 1 percent also grew. In Latin America and the Caribbean, and particularly in Africa, many people suffered from declining incomes. But the majority saw their lot improve in terms of real income per head (which increased, on average, from $950 in 1960 to $2,170 in 1990), and even more people benefited from increased life expectancy, decreased infant mortality, and the wider availability and improved quality of education. According to the United Nations Development Program’s Human Development Report for 1993, life expectancy in low-and middle-income countries was 46 years in 1960, compared with 63 years in 1990; infant mortality was 149 per 1,000 live births compared with 71 per 1,000; and the adult literacy rate was 46 percent, compared with 65 percent.

Many of the highly successful countries received massive loans and credits from the World Bank. Caufield tells vivid stories of the disasters and failures of projects, but none of the many successes. She ends her book by quoting the well-known epigram that development is “a matter of poor people in rich countries giving money to rich people in poor countries.”

An insider’s view

H.N. Ray was an Executive Director of the World Bank from 1980 to 1985 and a member of the Indian civil service. Unlike Caufield, who is a journalist, he is an insider; and unlike Caufield’s narrative, which is easily read, his style is somewhat ponderous. In contrast to the complete absence of analysis in Caufield’s book, Ray’s—though it devotes much space to description—provides arguments. Where Caufield asserts, Ray reasons. Both authors discuss the Sardar Sarovar project, but Ray states that “it is the poor masses in the developing countries who will suffer the most because of the Bank’s withdrawal from these multi-purpose projects.” He is against yielding to pressure from environmentalists, whose policies, he believes, would hurt the poor. Not only has the Bank, in his view, fully justified its existence and “been an unqualified success,” but its capital should be substantially increased. Whenever he comes up against a conflict, his recommendation is for a “proper balance.”

Decentralizing the Bank

It is, however, surprising that Ray, who endeavors to present a Third World view, does not discuss the need for the Bank to decentralize and to permit its resident missions, preferably reorganized at a subregional level, to have more influence. He endorses only a recommendation of the 1992 Wapenhans Report (an internal Bank study of project performance that was chaired by former Bank Vice President Willi Wapenhans) that greater use be made of the resident missions for supervising the implementation, and advising on modification, of projects. Nor does he mention the more controversial need, particularly in Africa, for the Bank to manage some of the projects it helps to finance rather than pulling out when construction is finished, which, in my view, is when the Bank’s full commitment becomes most important.

The Bank is surely too centralized. Only one-tenth of the staff are now located in the low-income countries. When the Bank talked in the past of decentralization, it meant decentralization of the organization in Washington. In contrast, the U.K. Commonwealth Development Corporation only began to be an effective development agency when, under Lord Reith, it decentralized its activities to regional (not national) offices, which produced proposals for projects and submitted them to headquarters in London. When agency staff members live in the recipient country, have daily contact with local people, and carry on a dialogue with policymakers, the decisions they make about projects are far more likely to reflect social and political, as well as economic and engineering, considerations. It can also help to reduce the acrimony so often created by the conditionality attached to loans. Fortunately, it seems that current Bank policy is to decentralize staff and to aim at a substantial increase in the proportion of those living and working in the field.

Project management

The other omission from Ray’s book is more controversial. It applies mainly to the low-income countries of Africa. We know that there are now more foreign experts in Africa today than there were under colonialism. Yet their impact on self-reliant development is small, if not negative. Here again, the Bank should learn a lesson from the Commonwealth Development Corporation, which is unique in that it not only lends to finance a project but also manages it initially, with a mandate to train local people and hand it over to them when they are ready. A manager’s commitment, after all, is much stronger than that of a detached advisor. The charge of neocolonialism may be raised against using such foreign managers, but a genuinely multilateral institution, with a staff that is trusted to have the interests of the host country at heart, can escape such suspicions.

Turning to the management of the Bank Group (including the International Finance Corporation and the Multilateral Investment Guarantee Agency) itself, there has long been a demand for greater openness and transparency, less secrecy, and more accountability. If the member governments were to demand these as conditions and were to ask for performance targets, they would only be practicing what the Bank and the Fund have told their borrowers for years: conditionality is good for you.

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