World Bank and Economic Growth

It is quite intriguing that the World Bank has, all of a sudden, begun worrying about economic growth. It has announced a high level body-Commission on Growth and Development-headed by Michael Spence, a Nobel laureate and former Dean of the Stanford Graduate Business School. It has twenty members, drawn from government organizations as well as private corporations. Montek Singh Ahluwalia, presently deputy chairman of India’s Planning Commission and Prof. Solow, a Nobel laureate and well-known name in economics are among the members. Financial support for the Commission will come from the Swedish, the Dutch and the UK governments and the William and Flora Hewlett Foundation, besides the World Bank. The suspicion about the real motive behind the setting up of the Commission deepens when one notes that the prime mover in the matter has been the World Bank President Paul Wolfowitz, a prominent neo-con and one of the authors of the US invasion of Iraq.

According to the World Bank handout, the Commission will, over a two-year period, “deepen the understanding of economic growth for development and poverty reduction.” It claims that the Commission is independent. It may be true literally, but the ideological complexion, as reflected in their writings and speeches of the members, does not leave any scope for their deserting neo-liberal strategy of economic growth. As Paul Wolfowitz testifies, the members of the Commission are committed to the World Bank’s positions vis-à-vis the nature, direction and strategy of economic growth. In the words of Wolfowitz, “We hope the wealth of experience and the diversity of views represented will bring a fresh and practical perspective to our work on economic growth and reveal new tools for helping countries to achieve and sustain future growth.”

To understand the compulsion that has forced the World Bank to appoint this Commission, one needs to have a look on what has happened since the beginning of the 1990s when John Williamson came out with Washington Consensus, comprising ten propositions. These propositions were: fiscal discipline, a redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, tax reform to lower marginal rates and broaden the tax base, interest rate liberalization, a competitive exchange rate, trade liberalisation, liberalisation of the inflow of foreign direct investment, privatization, deregulation to abolish barriers to entry and exit, and secure property rights. Obviously, they rejected the state’s activist role and believed that once the government got out of the way, market forces would allocate resources efficiently and generate vigorous growth and, then, development would automatically follow. In 1989 when the Washington Consensus was formulated, it was meant for a specific region, i.e., Latin America, but its enthusiastic backers proclaimed it to be valid for all countries of the world irrespective of differences in their social, economic, political and historical circumstances. “One size fits all,” became the motto. In the wake of the collapse of the Soviet Union and the socialist camp and the withering away of the NAM, it appeared, though superficially, that the United States could dictate to developing countries what path to follow and how to behave. Did not Francis Fukuyama proclaim “the end of history”?

The turn of events, however, soon disappointed the United States as country after country in Latin America rejected the Washington Consensus and spontaneous protests arose against globalisation based on it. Several Latin American countries have since turned left and more are to follow suit. Even in European countries like France, Spain and Germany there is a great deal of opposition to the Washington Consensus. The romantic ideas about globalisation presented by Thomas Friedman, The New York Times foreign affairs columnist now stand discredited. Economic disparities among the nations as well as within nations have increased. The army of the unemployed has swelled enormously in size. The instances of destitution and the cases of suicides by farmers in a country like India have gone up manifold. As Mark Davis has underlined in his recently published study, the slums are expanding all over the world. As many as 500,000 people come to Delhi every year in search of jobs and become mostly slum dwellers. Increasing incidence of criminal activities and terrorism reflects the growing frustration especially among the youth. The lot of common people has worsened as public services have deteriorated in both quantum and quality. The state has been finding it difficult to increase its spending because of the lack of financial resources as fiscal discipline has been clamped on it under the Washington Consensus.

All these developments have been worrying the World Bank and the IMF and other sponsors of the Washington Consensus. They want to bring about some cosmetic changes in it. To a query whether the initiative in the form of the Commission was an attempt to create a second Washington Consensus, the reply by the World Bank was quite revealing. To quote the reply in full, “No. The Washington Consensus is a set of sound principles. We all agree that markets are at the basis of the successful and durable development experience we know. We all agree that openness improves growth prospects. And we all agree that macro stability improves the incentives for investment and growth. The problem is that these principles have in some cases been applied mechanistically, as a formula, rather than principles cognizant of country specific realities. They have justified all sorts of changes in principles and institutions, rather than the ‘binding constraints’ that are preventing countries from achieving growth. There is one formula that applies to all countries. With this as a background, the objective of the Commission is to bring forth the possible understanding of growth we have today.”

Thus the constitution of the Commission is aimed at exploring tactical changes in the strategy of economic growth, i.e., the Washington Consensus, so that growing discontent and frustration are contained and developing countries are assured that they are on the right path of their salvation. Aberrations that have cropped up are going to be suitable corrected as per the advice of leading experts of the world. The World Bank thinks, this exercise will benefit “Mainly policymakers and practitioners in developing countries and the international community concerned with sustainable development.” It has now realized that it was wrong in thrusting a uniform standard prescription of economic growth on all developing countries. The Commission is an exercise in making changes in the Washington Consensus. It admits, “This will not be a ‘one-size fits all’ approach but a framework within which strategies can be designed to address key issues related to development and poverty reduction for the coming decade.”

The Commission has been mandated to take a look at the current state of knowledge and understanding of economic growth, examine the most important features of successful growth experiences, spot new and evolving trends that are relevant to future growth strategies, and evaluate the most effective ways of dealing with the problems of growth in developing countries. To quote a document of the World Bank, “This exercise would look at the coming ten years and beyond, in light of the economic uncertainties that affect international environment. The Commission is expected to shed light on the long-run forces underlying growth experiences, and highlight the actions-at the national and international level-most likely to improve developing countries’ prospects. The aim is to foster well designed policies for shared and sustained growth that leads to improvements in the well being of the poor.”    

It is high time that developing countries and economists and activists interested in fostering economic growth in developing countries that can go a long way to secure their political freedom and make it meaningful to their masses examine all brands of growth models from Harrod-Domar, and Solow onwards to John Williamson of the Washington Consensus fame, touted by the Fund-Bank lobby and other Western quarters. They should make it obvious how they have been basically aimed at serving the interests of foreign capital.


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