Global Policy Forum

By Daniel Altman

Meddling relatives usually mean well but, as everyone knows, sometimes they just make things worse.

To many critics, both expert and casual, the World Bank and the International Monetary Fund fall into the same camp. Created 57 years ago to reduce poverty and to stabilize foreign currency markets, the institutions, based a block apart in Washington, have continually struggled to meet the expectations of their big shareholders - the world's rich nations - as well as those of their supposed beneficiaries in the developing world.

In Haiti, for example, the World Bank has supported 41 projects over the last 50 years with more than $1 billion in loans, and the I.M.F. has lent the country $150 million in the last two decades alone. Yet more than 80 percent of Haiti's population still lives in poverty, compared with 65 percent in 1987. And the conditions on the aid from the World Bank and the I.M.F. - including removing tariffs and growing crops intended mainly for export, like coffee - have allowed imports to displace food crops like sugar cane and rice. While political upheavals in Haiti undoubtedly share the blame for its destitution, critics say mismanagement and economic policies mandated by the aid packages bear some responsibility.

Tomorrow, global policy makers will convene in Monterrey, Mexico, for the United Nations Conference on Financing for Development; and when President Bush speaks there, on Friday, he is expected to repeat his calls for reform and accountability at the World Bank, which has recently been accused of squandering billions on ineffective projects. The I.M.F. will also have much to answer for. Argentina's recent economic collapse, despite policy prescriptions and billions in aid from the I.M.F., threw millions of middle-class people into poverty.

The decades-long debate over the role of the bank and the fund heated up in 1997, when Kofi Annan became secretary general of the United Nations and called for a dialogue on development financing. Since Sept. 11, as rich nations have focused on resentment in the developing world, matters have grown more urgent.

Those rich nations have sent the World Bank and the I.M.F. to face down some of the world's toughest economic problems. Yet the two institutions have often failed to turn deep political backing, world-class brainpower and billions in funds into good results.

Both now say they are improving their performance through internal reforms, even as they also grasp for new responsibilities. But the world's hunger for radical change - in terms of which countries receive aid, how much is made available and how it is distributed - could overtake their efforts.

The World Bank makes loans to countries, usually for specific projects, at interest rates that reflect their fiscal conditions. Its locally based staff helps to manage the projects, which in the past focused on building dams, paving roads or wiring electricity grids but now deal more with improving health and education. The I.M.F. sends teams of economists, with billions in loans, to rescue countries facing financial crises. But it, too, makes loans for development.

The bank - which has lately taken to trumpeting its success in leading fast-developing countries like China and India to higher literacy and lower infant mortality rates - acknowledges some failures. Its reports state that living standards simply have not improved in much of sub-Saharan Africa, where since the 1960's it has invested tens of billions of dollars, some stolen by corrupt rulers and some built into huge power and transportation projects idly awaiting the use of foreign companies.

The bank's president, James D. Wolfensohn, is vocally urging rich countries to increase foreign aid, disbursed both directly and through the bank. But his many critics, including some who question his management style, do not trust him to use more aid effectively. "He's not a good manager," said Nancy Birdsall, president of the Center for Global Development, a new policy group in Washington. "He's a visionary," she said, adding that she respected his passion for development but that his ability to lead the bank was limited.

Mr. Wolfensohn acknowledged that the bank had been ineffective in the past. But he contended that it had made significant strides. "Reform takes time in an institution with a 57- year history," he said by e-mail. "But I wouldn't underestimate how much change has already taken place at the bank. Some of our critics seem to be stuck somewhere in the bank of the 1980's."

The I.M.F., meanwhile, has been under attack for its handling of the crisis in Argentina. Despite billions in aid and advice, the country defaulted on about $141 billion in public debt, froze private bank accounts and devalued the peso, instantly destroying the purchasing power of millions of families and resulting in mass unemployment, hunger and civil unrest. Economists say the situation shows just how little the fund understands economic fundamentals of many countries.

In its defense, the fund's officials have said repeatedly that countries must take credit and blame for their own situations. They also said that advice offered earlier, when Argentina did not need the fund's money, went unheeded.

Critics are unconvinced. "It's disingenuous to say that it was the country's own making," said Joseph E. Stiglitz, a Nobel laureate in economics and professor at Columbia University who sparred with the I.M.F. while serving as chief economist of the bank. "The I.M.F. is taken seriously in the advice that it gives."

The bank and the fund gained reputations for uncompromising and often unsuccessful policies in the 1980's and early 90's, when they encouraged countries to pursue development plans that were based on rigorous economic logic but failed to consider local circumstances. Like an emergency room doctor who gives every patient an appendectomy regardless of the symptoms, the institutions treated almost every developing nation the same - with a package often referred to as "structural adjustment." Usually, in return for aid, they imposed strict budgetary discipline, the ending of subsidies for food and other basics, increases in the cost of public services like health care and the elimination of trade barriers.

With so many changes coming at once, depressed economies struggled to grow as imports flooded in and traditional industries collapsed. Sometimes, poverty worsened.

"A lot of the structural-adjustment agenda was right, but was too brutally implemented," said Clare Short, Britain's secretary of state for international development. Changes were necessary in countries with high tariffs, big subsidies for manufacturers and decentralized agriculture, she said, but the bank and the fund were not mindful of economic disruptions and eroding support for their policies. "The political price in resistance to any reform was a very serious obstacle to further progress," Ms. Short said.

In the last decade, critics of the two institutions' methods went on the offensive. "The signals came from outside the World Bank that things were not going all that well, that the structural adjustments policies were not delivering what everyone hoped," Dr. Birdsall said. The countries that put the programs into effect became more stable, she said, but economic growth and a reduction in poverty did not automatically follow. Nonetheless, the bank continues to offer a third of its aid - $5.8 billion in 2001 - for structural adjustment. Though both the bank and the fund engage in development, the fund takes the lead in ushering countries through financial crises. There, too, the policies of the last two decades have come under fire. "They went into countries facing economic downturns and said, `Make them worse,' " Professor Stiglitz said.

The results were sometimes perverse. In Argentina, an I.M.F. price stabilization program pegged utility prices to the dollar, he said. As the peso fell in value, the cost of electricity soared, enriching utilities while straining ordinary families.

Professor Stiglitz said I.M.F. policies, including lower government spending and higher interest rates on central bank lending imposed on East Asian nations in 1998, had never brought a country to prosperity. The I.M.F. has also been criticized as failing to encourage countries to make the most difficult economic decisions. Many economists say that in Argentina, the fund focused on nit- picking reforms of the government's budget and financing rules instead of the harder task of advising the country how to unhitch its currency from the American dollar.

"Everybody knew for months that the currency board had to go, and everybody knew that it would be a terribly messy affair," said Charles Wyplosz, co-director of the international macroeconomics program at the Center for Economic Policy Research, based in London. Yet the fund made several other conditions for aid instead, as it had in East Asia. "The conditions often tend to be millions of little details, and not the big picture, so countries can pretend to fulfill part of the request," Dr. Wyplosz said. "They fulfill the menial ones and not the main ones, so there's a game going on that can go on for years."

CRITICISM of the bank and the fund peaked in 2000, when a commission organized by Congress and headed by Allan H. Meltzer, a professor of economics at Carnegie Mellon University, released a report calling for wholesale reform of both institutions, especially the World Bank. Lately, complaints about the bank have centered on Mr. Wolfensohn, a former investment banker who became its president in 1995 and said he expects to remain in office until his second term ends in 2005.

In the journal Foreign Affairs last fall, Jessica Einhorn, a former managing director at the bank, accused Mr. Wolfensohn of taking on too many disparate missions. The bank's mission, she wrote, has become so complex that it "strains credulity" to portray it as a manageable organization. "The bank takes on challenges that lie far beyond any institution's operational capabilities," she wrote.

Mr. Wolfensohn acknowledges pushing the bank in new directions and says it has made progress in areas like debt relief, anti-corruption programs and community-driven development. Yet on the basic goal of eliminating poverty, the numbers show mixed results: progress in big countries like China and India but little change in many poor, sometimes war-torn areas like sub-Saharan Africa, which is also ravaged by AIDS.

It is hard to distribute blame precisely or to know which solutions will work better. That has not stopped everyone from street protesters to world leaders from offering ideas. Lately, many of them have come from the United States Treasury Department. Paul H. O'Neill, the secretary, has recommended that the bank turn half its lowest-interest loans into grants, so that countries trying to grow do not incur a debt burden.

Opposition to that proposal, mostly from Europe, has been fierce. "We think it's profoundly wrong," said Ms. Short, the British cabinet member. She argued that governments would be more likely to use grants in wasteful ways, because no one would ever come looking for repayment.

Professor Stiglitz said some countries should be asked to repay loans so that the money can be recycled for other countries to use. "If a country like Chile or China is getting richer," he said, "they're going to be able to repay that debt."

Some economists support the shift to grants because, they say, private markets can now finance developing countries where the money is likely to be used wisely. J. Bradford DeLong, a professor of development economics at the University of California at Berkeley, said countries that did not attract lenders in the open markets probably should not be borrowing at all.

Nicholas H. Stern, the chief economist of the World Bank, counters that private markets would not finance the kind of long-term projects that lay the groundwork for higher standards of living. "The markets are looking at their return," he said. "What we're looking for is the return to growth and opportunity over a long period of time." Though he noted that the rich countries that control the bank would make the final decision, Dr. Stern indicated that the two sides could be nearing a compromise on replacing some loans with grants. Skeptics, including Professor Stiglitz, have suggested that Mr. O'Neill's true aim is to reduce the scope of American aid, a sensitive issue in a time of budget deficits. But Dr. Stern said he saw evidence that the Bush administration was "seriously devoted" to development.

Among Mr. O'Neill's other recommendations was to shift the bank's focus from reducing poverty to raising labor productivity, which he says can be more accurately assessed, to bolster the bank's accountability. In "The Elusive Quest for Growth," a book published last summer, William Easterly, an economist formerly at the bank, asserted that billions in aid had been squandered on poorly designed programs.

Critics say Mr. O'Neill's focus on productivity smacks of 1980's-style "trickle down" economics because productivity gains among the poor can end up lining the pockets of wealthy employers. They also say that rising productivity may not be any easier to measure than falling poverty is now. "I don't know how you measure the productivity of projects," Dr. Wyplosz said. "People will produce numbers that have no precision whatsoever, so we'll be massaging numbers instead of massaging reports."

REFLECTING the historically cozy relationship between the Treasury Department and the I.M.F., Mr. O'Neill has left the fund to plan its own reforms. It has begun to seek ways to help bankrupt countries without resorting to expensive bailouts, which critics like Professor Stiglitz say were meant primarily to allow wealthy investors to recover their money. As a substitute for bailouts, the fund has proposed a tribunal for restructuring the debts of insolvent countries.

Last November, Anne O. Krueger, the first deputy director of the I.M.F., suggested that the fund could sponsor a bankruptcy procedure for countries in crisis. In such a system, claims would be frozen and the fund would provide interim aid and help work out who will be repaid and how. Investors cried foul, arguing that the fund could not supply money to a country and, as a creditor itself, decide who ought to be repaid. The fund is revising its proposal.

Few people expect the meeting in Monterrey to generate new aid pledges or innovative development strategies. But the dialogue could speed the process. Neither the World Bank nor the I.M.F. is close to completing its mission. More than a billion people still live on less than $1 a day, and crises strike developing countries with alarming frequency. "This," Dr. Stern said, "is a long haul."

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