Global Policy Forum

By Charlotte Denny

When Jim Wolfensohn, the head of the World Bank, was asked last week why he has lost his second senior development economist within the space of a few months, the former Wall Street banker was unflustered. The explanation for the resignation of Ravi Kanbur, an eminent academic brought in to edit the Bank's high profile World Development Report, was simple, he told reporters. It was all an argument about the order of the chapters in the WDR.

Outsiders are unconvinced. The departure of Kanbur, following last year's resignation of the bank's chief economist, Joe Stiglitz, has exposed a growing rift at the Washington-based body, the world's largest development fund. On the one side are the ultra-orthodox economists who believe that if poor countries adopt a set of tried and tested policies - conquer inflation, slash government budgets and open their economies to trade - they will reap the benefits in economic growth. According to this school of thought, growth is good for everybody, and even the poorest households share in rising wealth.

On the other side are those like Prof Kanbur and Prof Stiglitz who argue that growth alone is not enough. The quality of growth matters and policies should make sure that the poor get the most benefit from rising prosperity. With 1.2bn people living on less than a Dollar a day, the current patterns of global growth will not halve the numbers living in poverty by 2015 - the internationally agreed development target - unless there is radical redistribution of income between rich and poor. Rich countries, and rich people in poor countries, will have give more of their incomes to lift the poorest out of destitution.

Under Mr Wolfensohn's rule, the bank has leaned toward the latter school of thought. It has made much play out of repositioning itself as the 'listening bank', not just a bunch of macho economists but a sensitive pro-poor institution, unlike its neighbor the IMF. But with the departure of Mr Kanbur, a supporter of pro-poor policies, the ultra-orthodox school appears to be triumphing. According to former colleagues, the Cornell University professor left after the bank's research department, the bolt hole of most of the ultras, tried to interfere with the forthcoming World Development Report to put the emphasis back on growth as the most important factor.

A taste of the research department's views can be found in a recent World Bank report by David Dollar and Aart Kraay which uses statistical evidence from a study of 80 countries over four decades to claim that the poor benefit equally with the rich from rising incomes, that reducing government spending and cutting inflation are even better for the poor than for the rest of the population and that neither democracy nor spending on health or education makes any difference to growth.* 'Contrary to popular myths, standard pro-growth macroeconomic policies are good for the poor as they raise mean incomes with no significant adverse effect on the distribution of income,' the paper notes. It has been described as the most aggressive assertion yet of the ultra's position and its timing, right in the thick of the row over the WDR, was surely not an accident. The debate has now spilled outside the walls of the bank and is polarizing opinions across the development community.

Dollar and Kraay's critics focus on three areas. First, while the statistical case they present appears watertight, most of their evidence stops in the first half of the 1990s - before the rapid acceleration of globalization which critics argue has skewed the benefits of growth in favor of the rich. 'You wouldn't expect to see the real big distributional shifts happening until after 1994,' says Kevin Watkins, senior policy adviser at Oxfam. The Dollar-Kraay argument also depends on the quality of the data. As Watkins notes the quality of the statistics from most developing countries is dreadful.

Second, a closer inspection of Dollar's own data suggests that in many cases, the poor are not benefiting on a one for one basis, despite the headlines. The use of broad aggregates obscures a more complex reality.

Third, the critics argue, even if the conclusion that the poor benefit equally is correct despite the data, it is still wrong to ignore income distribution for the simple reason that reducing poverty takes much longer in a country with a wide gap between rich and poor.

'Highly unequal countries are bad at converting growth into poverty reduction, because they have to grow faster than more equal countries to achieve the same level of income gain for the poor,' says Mr Watkins. In other words, if the poor have a smaller slice of the pie to begin with, then even if the overall pie is growing, their slice will not expand by as much as it would in a country where the pie is divided up more equally. To take a simple example, in Brazil the poorest fifth of the population account for just 2.5% of national income, whereas in Indonesia the same group accounts for 9%. Even if the incomes of all groups are growing at the same rate, Brazil has to grow four times as fast as Indonesia to deliver the same rise in living standards.

Oxfam argues that the World Bank paper represents a hankering for certainties of the golden era of free markets policies in the 80s when policymakers on both sides of the Atlantic assumed that the benefits of growth would trickle down to the poorest. The ruined inner cities of America and the sink estates of Britain are a testament to how shortsighted those policies were. But while new governments in Washington and Westminster have rediscovered redistribution, social security safety nets and the importance of health and education spending, they seem content to allow the institutions which set policies for the world's poorest countries to continue to impose the old, failed nostrums of the past.

*Growth is Good for the Poor, David Dollar and Aart Kraay, Development Research Group, the World Bank, March 2000.

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