Global Policy Forum

By Joseph Kahn

These days, it seems, only wild-eyed anarchists and third-world dictators believe capitalism is not the high road to a better world. Free markets, growth and globalization have been the economists' mantra since the end of the cold war. But at the World Bank, the high church of development economics, a widening schism over how to fight poverty is sending ripples around the world.

Ravi Kanbur, a top Cornell economist and the man hired by the bank to oversee the writing of its World Development Report, resigned in anger recently when he was ordered to rewrite his staff's draft. The report is extremely influential among economists, and Mr. Kanbur's version questioned how well developing countries adapt to capitalism. In fact, it questioned whether the West's standard prescription for reform does enough to help the poor.

The draft poverty report "was read by some people as hostile to growth and reform," said Nick Stern, the incoming chief economist at the World Bank, who is charged with rewriting it. "It's a matter of tone really -- a question of emphasis -- but it was noticed."

It was indeed, and Mr. Kanbur's departure shows how the persistence of extreme poverty in Latin America, the former Soviet states, Africa and South Asia, right through the roaring 1990's, has led to skepticism about economic orthodoxy.

"No one in his right mind opposes markets or growth," said Dani Rodrick, an economist at Harvard's Kennedy School of Government who counts himself among the critics. "But there is a real disagreement about how you get it and sustain it. Should every country converge on Anglo-American-style capitalism? Or should we have tolerance to let developing countries experiment with what works best for them?"

The orthodox camp, often thought to include the Federal Reserve chairman, Alan Greenspan; Treasury Secretary Lawrence H. Summers; and Stanley Fischer, the No. 2 official at the International Monetary Fund, argues that developing countries should follow a reform formula proven to boost economic growth.

The recipe often includes trade liberalization, independent central banks, more effective and less profligate governments, privatization of state assets, and investment in health and education. The World Bank and the I.M.F. are not shy of using their enormous lending power to push for these ends.

The dissenting view diverges in subtle but significant ways. Led by Joseph E. Stiglitz, an economist who like Mr. Kanbur resigned from the World Bank after clashing with Mr. Summers and I.M.F. officials, this camp -- call them the experimentalists -- believes governments can set their own path and pace to the market. And they argue that the World Bank and the I.M.F. should tread lightly when their clients face a financial crisis like the one that swept from Thailand to Russia in the late 1990's.

China is their shining star. Beijing has gradually installed market reforms like rural industry (which employs large numbers of onetime farm workers) and the stock market, but only over 20 years. China slowly privatizes state enterprises that employ large numbers of people, and its currency has remained tightly controlled. Still, its consistent growth has lifted hundreds of millions out of poverty over the past two decades.

Mr. Kanbur's draft report, which had circulated widely on the Internet, preached a more flexible free-market gospel. "Overall, the impact of reform on growth appears to have been positive, albeit much more modest than anticipated," the report says. And economists don't really understand why nations react differently to the same medicine. For example Argentina, the report notes, grew much faster after enacting market reforms than Costa Rica. Economists don't know why.

Trade reform, in particular, has been a mixed blessing, it says, citing a study that found that tariff reductions benefit upper income groups but, in nations like Turkey, Mexico and Brazil, hurt the bottom 40 percent of the population.

The report scathingly criticizes the way the World Bank and the I.M.F. responded to the Asian crisis in late 1997, when Korea, Thailand and Indonesia had to slash their budgets and enact wrenching market reforms to receive multibillion-dollar bailouts. Such Draconian crisis management instantly unraveled a generation of progress against poverty, the report says. In Indonesia, for example, the school drop-out rates for the poorest group of children surged from 1.3 percent to 7.5 percent in 1998.

Many experimentalists have applauded Malaysia for going its own way during the Asian crisis. The nation refused I.M.F. aid, slapped controls on investment flows, and arguably had a shallower recession and faster recovery than its neighbors.

The orthodox group, for its part, believes the record shows a strong correlation between reform and growth, and between growth and poverty reduction. Uganda and Poland, they say, have aggressively emulated Western market economies and done more to help their poor than their less ambitious neighbors.

Mr. Summers, who says that differences between the two camps are exaggerated, stresses that both the World Bank and the I.M.F. have constantly evolving strategies aimed at fighting poverty. Trade reform, Mr. Summers says, tends to benefit the poorest of all -- the rural poor. That's because reform tends to open new markets for the cash crops they sell, raising their incomes.

He cited Mozambique, where the World Bank recommended eliminating an export tax on raw cashew nuts. It's poor farmers, though, not the cashew processors, who want the tax lifted, Mr. Summers said.

The bottom line for Mr. Summers and Mr. Stern is that no antipoverty strategy can succeed without the growth free markets produce. Growth is "the most potent weapon against poverty ever invented," Mr. Summers said, adding that reform must be supplemented by direct antipoverty initiatives like the World Bank's funding of AIDS prevention and education programs for African girls.

Economists are still sweating the details, but this much is clear: Progress against poverty is becoming a litmus test for global economic leaders.

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