Global Policy Forum

Mary Anastasia O'Grady

The recent World Bank research department paper titled "Doing Business in 2005" details the critical nexus between growth and smaller government. But over in the Bank's lending operations, the addiction to shoveling money out the door to poor-country governments shows no signs of abating.

What happens when Bank researchers conclude that Bank lending operations not only are an improbable source of development but perhaps even an impediment? Probably nothing, given the consultants, bureaucrats and politicians with a vested interest in keeping the Bank's money flowing. Nevertheless, the report is noteworthy.

Since 1945, the World Bank's International Bank for Reconstruction and Development has lent some $383 billion with the aim of "reduc[ing] poverty in middle-income and creditworthy poorer countries by promoting sustainable development." Since 1960, the Bank has lent another $142 billion through the International Development Association. The Bank says that "Contributions to IDA enable the World Bank to provide $7 billion to $8 billion a year in highly concessional financing to the world's 81 poorest countries."

Even in government fantasyland, where seven-figure handouts are dismissed as pocket change, $500 billion in poverty assistance can't be sneezed at. Yet, what rankles here is not so much the volume of aid as its failure to make people better off, a fact that explains why the World Bank refuses to allow independent, outside auditing of its projects.

Poverty's resistance to so much international largess raises logical questions. As development economist Lord Peter Bauer observed long ago, "Lack of money is not the cause of poverty, it is poverty." The cause is something else entirely.

As "Doing Business in 2005" notes, a key cause of underdevelopment is the burden that government regulation imposes on the poor who are trying to climb out of poverty. Successful economies, the researchers note, have less regulatory drag and unsuccessful countries could do better simply by reducing regulation.

Latin America is a case in point. In 2003 the Bank made new IBRD commitments amounting to $5.7 billion in that region and disbursements of $6.5 billion. It also made new IDA commitments of $153 million and disbursements of $322 million. The annual report notes that for Latin America and the Caribbean, the "portfolio of projects under implementation as of June 30, 2003, was $19.8 billion." Yet, the region's informal sectors are growing, a massive brain drain is underway and politics are turning chaotic in some countries.

"Doing Business in 2005" notes that "A vibrant private sector -- with firms investing, creating jobs, and improving productivity -- promotes growth and expands opportunities for poor people." Sound macroeconomics can be part of this but as the Latin experience of the 1990s illustrates and the report reiterates, without reform at the micro level "entrepreneurial activity remains limited, poverty high, and growth stagnant." In fact, the Bank researchers say, "Although macro policies are unquestionably important, there is a growing consensus that the quality of government regulation of business and the institutions that enforce this regulation are a major determinant of prosperity."

Ten categories are analyzed: starting a business, hiring and firing workers, registering property, getting credit, protecting investors, enforcing a contract and closing a business. A regional summary of Latin America is comprised of bar charts that compare Latin nations to the world leader in each category. The findings are dismal.

For example, in Australia it takes two business days to complete the regulatory requirements for starting a business. Brazil stands in sharp contrast to this, in next to last place in Latin America, draining 152 days for a business start-up. Haiti is last, where it takes 203 days. Denmark is the least expensive place in the world to start a business and happily, Brazil ranks third in Latin America, just behind Chile. Haiti brings up the rear again in this measurement, costing 176% of national per-capita income, or the income from almost two years of work effort. In labor rigidity, Hong Kong and Singapore rank as the best worldwide and show up Mexico and Brazil, which tie regionally at the bottom of the pile.

It can take a long time, over 500 days, to enforce a contract in Brazil, but Guatemala comes in last in this category at 1,459 days. Closing a business, which is to say going through insolvency and settling with creditors, is also a regulatory nightmare in the region. In Ireland, the world's fastest place to go through insolvency, it takes three months. Brazil is the slowest in Latin America, taking 10 years, almost twice as long as Haiti. Creditors are likely to recover the most after a bankruptcy in Japan; in the region, they recover the least in Brazil, even less than in Haiti.

The World Bank report is an indictment of Latin America's leadership, which spouts heavy concern for the poor but, in action, demonstrates a preference for keeping the bureaucracy fat and happy. The Bank exacerbates the problem by removing the discipline of the market. Why should governments eschew the high they get from anti-market populism and patronage when the Bank is there to ensure that the dollars still flow?

The Bank's Multilateral Investment Guarantee Agency throws fuel on the fire. MIGA issues guarantees to investors against such bad governance risks as expropriation and breach of contract. This raises moral hazards, reduces the incentives for government to build authentic credibility with respect to contracts, and therefore leaves locals who don't qualify for MIGA worse off.

Finally, it's worth mentioning the indefensible International Finance Corporation. The IFC says in lending to the private sector it "seek[s] to reach businesses in regions and countries that otherwise have limited access to capital." This is a joke. If there is limited access to capital the market is sending a signal that ought not be distorted. Moreover, why should the IFC's portfolio include such large and successful businesses as the airline company Lanchile, Mexico's Banorte and Brazil's Banco Itau?

It's clear that the Bank's need to lend has superseded the rationale for lending. Could it be that Bank lending is more about filling rice bowls in Washington than in the developing world?

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