Global Policy Forum

By Ken Ringle

For most of its 50-odd years of existence, the World Bank has been almost obsessively thin-skinned: so much so that its public relations department once tracked down a reporter's ex-wife in Africa in an effort to discredit his article on the stretch-limousine lifestyle of bank executives.

On another occasion, it attempted to halt production of a Monopoly-like board game called World Bank.

So imagine the teeth-gnashing as bank officials gathered this week in Monterrey, Mexico, with 50-odd heads of state and more than 300 finance ministers and other moneymen. Just as bank President James D. Wolfensohn and his team are lobbying for billions more to help them lift poor countries from global poverty, a new book proclaims the bank's half-century of such money-planting efforts a spectacular failure.

Not only has the bank, with 10,000 employees in more than 100 countries, wasted untold billions, says economist William Easterly in "The Elusive Quest for Growth," economistsare no closer than they were 50 years ago to figuring out how to accomplish the bank's basic mission: making a poor economy grow.

"We have learned once and for all that there are no magical elixirs . . . [and we] should leave aside some of our past arrogance," writes Easterly, a 43-year-old senior World Bank economist now on leave. "The problem of making poor countries rich was much more difficult than we thought."

While leftist protesters in recent years have denounced the World Bank as the heartless face of global capitalism, environmentalists haveattacked its developmental excesses and conservatives have chided its plutocratic hubris, such critics are usually shrugged off by the bank as naive carpers, unattuned to the heady responsibility of financing a better world.

What makes Easterly's critique differentis that the bank itself helped sponsor it. Easterly wrote much of it on bank time and circulated its chapters to bank economists before publication.

Furthermore, it comes on the heels of a devastating 1999 critique of the bank and other international development and finance institutions by the Meltzer Commission, an independent study group appointed by Congress, as well as an exodus from the bank of prominent economists similarly disenchanted with what Easterly calls "less than meaningful reforms."

"The World Bank is an overstaffed, ineffective, bureaucratic institution," commission Chairman Allan H. Meltzer of Carnegie Mellon University wrote after issuing the panel's report. "It has . . . dedicated professionals . . . committed to development and poverty relief. Yet . . . by its own admission, half its projects are unsuccessful, and the failure rate is even higher in the poorest countries.

"The bank's management must stop its current public-relations flimflam and start improving its effectiveness in reducing poverty."

Easterly agrees. "What strikes you as you look back over the decades," he says, "is this repeated cycle where we've all thought there was one key factor that would transform poor countries into growth economies. At one point, it was family planning. At another, it was education. At another, health care or capital investment or 'adjustment loans.' And none of these have had any sustained effect on economic growth. . . .

"And when critics have pointed this out, the bank has acknowledged that 'mistakes were made' but insisted that 'we understand now. We're changing policies, and from now on things will be different.' But the bank's basic approach doesn't really change in any fundamental way. The genuine success stories, where poor countries have achieved long-term sustained growth, have been pitifully few. And in some of those, it's far from clear that bank aid was a major factor, or even any factor at all."

As might be expected, the bank responds to Easterly's criticisms with the institutional irritation of an elephant waving away a pesky bee.

"Bill's a little behind the curve" in both his appraisal of past World Bank performance in the Third World and his understanding of how things have changed, says Nicholas Stern, the bank's current chief economist and senior vice president.

The proof that World Bank aid is effective, he says, can be found in World Bank documents that say so, including one by Easterly's former boss, the incomparably named economist David Dollar.

The bank's current approach, Stern says, is to recognize that poor countries require a certain level of governance and accountability to be able and willing to use World Bank loans effectively. Countries with governments too corrupt, too predatory or too weak to ensure public safety won't get bank loans in the future, he says, because the money would never reach the poor people for whom it's intended.

But aren't the poorest of the poor -- the very people most in need of help -- the ones who live in those very countries, the Rwandas and Congos and Sierra Leones of the world? "That's true . . . but it's all about changing the environment" of governance, Stern says. "And aid can be a valuable part of that story as part of a longer-term relationship with a partner government to change that environment."

Interestingly enough, that's the same approach Easterly recommends. But he's a lot less sanguine than Stern that it's enough. Throughout most of its history, Easterly says, the World Bank has measured its own performance and those of its departments and professional staff largely by the number of loans they make, not by the success of the projects those loans make possible.

"If the money is stolen by the local government, or wasted on a white-elephant project, or otherwise misspent, by the time that awareness dawns on the bank, if it ever does, the bank employee who made the loan is somewhere else. He's moved up or somewhere else in the bureaucracy and is never held to account. So ultimately nobody is responsible for anything."

Vision vs. Mission

Founded in 1944 to be the financial arm of the future United Nations, the World Bank and its affiliate agencies use the credit of their member countries, including the United States, to borrow money on world financial markets at better rates than commercial banks charge. It then lends the money at slightly higher rates to developing countries too poor to borrow from commercial banks.

The money is supposed to finance projects that will help jump-start lagging economies. In the 1960s and '70s, they were usually large projects -- giant dams, irrigation schemes, electric power plants and the like. But over the years, the bank has taken a wider and wider approach to "development," lending money for schools, hospitals, family planning programs, AIDS research and even legal planning -- effectively overlapping the jurisdictions of UNESCO, the World Health Organization and other agencies.

So diverse has the bank's focus become that its former managing director, Jessica Einhorn, now a consultant on Wall Street, complained last year in the journal Foreign Affairs that "mission creep" had led the bank to embrace "an unachievable vision" of conquering global poverty instead of an "operational mission" to do so.

She called for the bank to get "back to basics" of the sort envisioned by its founders, adding: "Its mission has become so complex that it strains credulity to portray the bank as a manageable organization."

That is also Easterly's concern. From 1988 to 2001, he was senior adviser to the World Bank's Development Research Group, the in-house brain trust charged with gauging the success or failure of the bank's development efforts around the world. In the process, he's trekked through slums from Karachi to Cairo and wears the good-humored but weary resignation of a lifetime idealist mugged at last by reality.

He rejects the notion that he's any kind of whistle-blower. He still believes in both the World Bank ("there are a lot of really smart, really committed people there") and aid to developing nations, which he would like to see increased from the current level of $56 billion. In fact, foreign aid has been declining in recent years after peaking at $64 billion in 1991. Although private capital has taken up some of that slack, Wolfensohn has been calling for a $10 billion increase from the bank's member countries in each of the next five years.

But even though he doesn't want to stop trying to help the Third World, Easterly says the most depressing aspect of the development picture is the tiny number of Third World countries that have managed to pull themselves out of the mire of global poverty.

The only ones with sustained growth for more than 15 years are those he calls "the Gang of Four" -- Singapore, South Korea, Hong Kong and Taiwan. Before 1997, it was thought that Malaysia, Thailand and Indonesia were equally secure. But Indonesia fell off the charts in the Asian economic crisis that year, and he says Thailand and Malaysia remain question marks.

On the other hand, Chile, China and India have been growing respectably since the mid-1980s, despite occasional setbacks, Easterly says. They may end up success stories. "But then we thought Argentina was a success story until last year," he says. "When is any country safe?"

And for all the social and humanitarian good that many bank projects do -- like water wells and medical clinics and schools -- they have not been shown to spur economic growth. Expecting them to do so, Easterly says, is putting the cart before the horse.

It is governmental factors -- a climate of public safety, a working financial system, courts to enforce business contracts, security against economic predation, governmental or private -- that "we've belatedly learned are the most important factors in permitting economic conditions to improve," Easterly says. "They're far more important than investment alone. But how do you devise and employ the incentives that lead a country like Mali or Sierra Leone to create those governmental factors? That's the big question. . . . It's going to take a lot of humility and a lot of patience, two factors one doesn't associate with the World Bank."

A Tale of Two Books

While Stern and the bank speak of Easterly's book condescendingly, they enthusiastically endorse an official in-house book published in 1998 that says almost the same thing.

That volume is "Assessing Aid," a 148-page World Bank analysis of its own foreign assistance efforts, as well as others, public and private. Easterly's book is a broader appraisal of economic theory for the general reader, while "Assessing Aid" is more technically analytical. But both pull few punches about what has gone wrong. So why the sensitivity about Easterly?

"What you have to understand is that the PR people at the bank are insanely paranoid," says a bank economist acknowledged as a source in both books. The economist spoke on condition that he not be identified by name. "They believe any admission of mistakes by the bank will be used as fuel by right-wingers in Congress who hate the whole notion of foreign aid. Bank officials are just terrified of Jesse Helms."

The difference between the two books, the economist says, "is mostly one of nuance. Bill comes out a bit more negative." After writing an 800-word condensation of "The Elusive Quest for Growth" for the op-ed page of the Financial Times last year, Easterly was permitted by the bank to go on "external assignment" with the Institute for Global Research, an independent economic think tank.

Most people at the World Bank, the economist says, while appreciating the reason for the PR paranoia, think it is ultimately counterproductive. "No one can be happy with the bank's performance in Africa," he says. "The area that's received the highest percentage of bank aid is an obvious basket case. Anyone can see that. Who do they think we're fooling? We've poured millions into Zambia, and the living standard today is half what it was 30 years ago. Realities like that won't just melt away."

Unless the World Bank admits its failures, the economist says, it forfeits any credibility about what it's done right. He says Easterly was contributing to "Assessing Aid" even as he was writing his own book. But as an official bank publication, "Assessing Aid" had to be "massaged" for optimism in places.

"We walked a pretty fine line," the economist says. "I think we pushed the bank about as far as we could in admitting its mistakes . . . maybe right up to the line. Bill's book went over that line, as far as they're concerned, which is why they're afraid of it."

Yet a bank spokesman, Lawrence MacDonald, says the concern is that the debate over economic growth will drown out more hopeful messages about foreign aid.

"If you go to poor countries today, you see many more old people," he says. Longevity in developing countries has risen by 20 years in the past 40. Illiteracy has been cut nearly in half. The absolute number of people living on $1 a day has begun to fall even as the world's population has vastly increased.

"These are not meaningless statistics," MacDonald says. "They represent real changes in the lives of real people all around the world. And they were supported by foreign aid."

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