Originally published with the headline “Growth is Not Enough”
The Wolfowitz crisis at the World Bank and now the resignation of Rodrigo de Rato from the IMF have stirred larger debates in Washington on broader issues. Washington Post columnist George Will was drawn into the debate regarding the World Bank presidency of Paul Wolfowitz, seeing the real crisis to be the World Bank itself rather than the former president. “The Real World Bank Problem” is thought to be that “the bank is losing its battle to retain whatever relevance it once had” due to the fact that capital markets are now willing to lend private funds to emerging market economies whereas the purpose, according to George Will, is to lend to countries unable to attract private capital.
If this need is evaporating, then the Bank should evaporate with it, according to Will. For, after all, “the great prerequisite for curing poverty is, however economic growth, and the world has learned, during a 63-year retreat from statism, that the prerequisite for growth is free markets allocating private capital to efficient uses.” If markets can work, why have institutions? is the argument. If governments are persuaded to withhold funds from the bank because a lack of confidence in its leadership, so much the better, even if it is for the wrong reason, since the bank itself is irrelevant, so his argument goes.
Economics above politics, it would appear. But alas, it is simply another attempt to mask a political argument in an economic one. What has been learned since the 1980s has been that an attempt to rely exclusively on market forces and getting prices right through unfettered competition and liberalization is that institutions matter in market economies. The lack of strong institutions affecting growth and poverty reduction is evident in the emerging market economy crisis in Asia in the late 1990s as much as it is in the poverty trapped countries in Africa and elsewhere. And if institutions matter in domestic market economies, institutions matter in the new global economy as well.
But a market fundamentalist lens blocks out the critical role of institutions in the regulation, oversight, rebalancing and adjustment to market distortions and failures. Unfettered market forces are more attractive to the journalist, theorist or academician than it is to the poor, the unemployed, or those living in countries experiencing financial crises. Hardly anyone anymore is arguing that market fundamentalism by itself is an idea worth trying to implement in practice.
Not since the 1960s have economists and professionals believed that development is economic growth. Growth is a necessary, for sure, but not a sufficient condition. But development, to the chagrin of outside critics, has gotten more complex. Development is no longer solely economic. Health, education, gender equality, environmental sustainability, governance and institutional development are now critical elements in spurring poverty reduction and development. The new insight is that none of these elements of the poverty puzzle can be realized without the others. This new vision of development as multifaceted and multidisciplinary increases the complexity and the challenges, but enhances the chances of being effective in what is admittedly a daunting task.
What is missing from Will’s critique, and the Meltzer-Lerrick perspectives that lie behind it is an appreciation for the fact that the importance of the World Bank in reducing global poverty does not just revolve around the money, which is crucial, but also around ideas. The World Bank is also a knowledge bank, as well as a source of finance.
In fact, the bank’s loans are the conduit which catalyzes the conversation about policy ideas. The World Bank is a forum in which professionals from a variety of disciplines and countries join in an international effort to surmount complex problems by pooling knowledge, experience and best-practice. Without the World Bank, we would have fragmented efforts by a variety of actors operating independently to address specific problems in isolation rather than a global focal point where integrated, holistic approaches can be forged and where a dialogue among actors and agents can occur to learn from experience and from each other. The World Bank is an intense locus for international cooperation, with all its tension and tarnish, in behalf of common goals without which we would be left with regional blocs, geopolitical competition, and frictions from fragmentation.
Without the large emerging market economies, global problems can not be solved whether in health, environment, finance, growth or trade. The Lerrick numbers cited by Will that seem to show an excessive concentration of bank lending to middle income countries is the flip side of the argument of the Meltzer Commission in 2000, of which Adam Lerrick was senior adviser, which argued that the bank should retreat to its primary mandate (economic growth) and that it should focus on poor countries. A smaller bank focused on less important countries would succeed in their goal of making the bank less important. But, since 40% of the world’s poor people live in middle income countries, reducing loans to them deals the bank out of addressing 40% of the global poverty problem. The bank is in fact an important means of engagement of the middle income economies in the world economy and global governance, when they are becoming crucial players in addressing all global challenges. Scaling back bank dealings with them would weaken the integration of Asia with the rest of the world at a crucial juncture.
As Mark Leonard has pointed out, “if the United States represents the ultimate symbol of a rights-based culture and a focus on individual wealth, Asia is more interested in the idea of ‘responsibility’ and the creation of common good. Europe … can offer the best of both worlds; a synthesis of the dynamism of liberalism with the stability and welfare of social democracy.” This is, in a nutshell, illustrates why the bank is a good bridge to Asia and why the Europeans are crucial brokers in the current reform process at the World Bank. The Europeans are fighting for a concept of multilateralism where international institutions constitute mediation points between cultures, between development paradigms and between policy ideas, in a world of diversity.
Losing the World Bank to false notions of irrelevance is a bad idea at this moment in history. For a world in which global challenges include and drive national challenges and in which there is an urgent need for international cooperation to overcome distrust, discord and disorder – as David Ignatius has discussed – strengthening the World Bank’s finances and governance can be seen as fortifying the primary focal point for the world’s hopes and possibilities for working together on poverty and development rather than as an irrelevancy relegated to the sidelines by market forces.