Monday, March 10, 2008

The AID Epidemic

I think the World Bank should close down.

Ok, not really but that was kind of what I suggested some time ago at the End Poverty in South Asia blog run by Shanta Devrajan, WB's chief economist for the South Asian region. Devrajan was addressing questions raised by various anti-worldbank groups. The usual criticism about "pressurizing governments" so on. His answers to those questions were quite comprehensive, but my beef with the world bank was quite the opposite of the usual lefty-criticism.

To summarize, my comment went something like this, (the original comment was a bit um. drunk, hence a summary)

The World Bank funds governments with economic policies which (by their own assertions) are just wrong. By subsidizing wrong policies, the World Bank and other droner agencies encourage more of it. It also messes up governance structures and democracy. Governments are now able to have relatively low taxes, and huge expenditure and other fiscal irrationality because they have external sources of income. Perhaps if the massive government spending is to be financed by the tax payer there will be a backlash against spending and room for political capital to build under the question of "where the money is going to come from" for all those government programs (agricultural subsidies, hand-out schemes, massive state-sector employees, failed state enterprises, etc.)

The last claim is probably only partly true. Like the present Sri Lankan administration has skillfully demonstrated, when even AID money dries up, governments will resort to costly commercial borrowing and excessive money printing. Although the recent HSBC loan did generate of antagonism from the opposition, it was short-lived and not deterministic enough to stop the practice.

Anyway, I argued since the kind of reforms the World Bank advocate has only historically occurred through a crisis (e.g. reforms in India in the early 1990s, Sri Lanka in late 70s or anywhere else) the best the World Bank can do is to put a stop to aid altogether which would lead to a form of a crisis. The bank would only engage research and policy advocacy stuff. I went on to say that the world bank should not to give "lollipops to thieving kids".

Devrajan responded through a separate post. Agreeing with the problem, but arguing that the role of foreign aid in the the situations which I described (he refers to them as government failure) is to build "climate for reform" by supporting public debate on these issues.

I maintain since these occasions of government failure are all too frequent, in fact permanent - the best possible way is to indeed cut down on aid given to governments and encourage civil society actors to engage in advocacy programs for reform.

More recently, Devesh Kapur expressed much of the sentiments in an article on Yale Global Online,
The failings of the Indian state to deliver basic goods and services are a specter that haunts the country – ignored by the hoopla of India’s high growth rates.

The World Bank’s well-intentioned efforts – and it’s by no means alone – exacerbate the problem [..]

The abject failure of the Indian state to improve the quality of life of hundreds of millions of its citizens is as unconscionable as it is deeply rooted in the country’s political economy. Any solution squarely lies there. Perhaps the biggest error the bank has made in India has been not to walk away earlier and realize that non-lending might serve the country – especially its poor – better. [link]

Devrajan has responded here to the article, again agreeing with diagnosis, but arguing "there is no guarantee that public services will improve if the Bank stops lending money", Kapur responding, disagrees.

I'm with Kapur here (obviously, or is it Kapur who's with me? smirks), sure there's no guarantee that public services will improve, but like I said in the comment there's ample evidence that market-friendly reforms, the kind that the Bank is after - will happen through a financial crisis. So perhaps the WB shouldn't try and delay this inevitability, our present-day economic policies stand deserving of one.

6 comments:

ddm said...

Ironically, a donor's ultimate aim ought to be to make him(her)self redundant. But that's a fairly perverse incentive set - I mean who would want to work towards making himself unemployed? Instead donors have over the years worked to entrench themselves ever increasingly in developing societies, moving from purely economic to deeper socio-cultural engagements. The result is governments becoming aid dependent, like GoSL - which very proudly in the last budget said that all revenue was spent on recurrent expenditure and debt was undertaken "only" for capital expenditure. Which is shit really bc capital expenditure should be what the majority of revenue should be spent on. Anyway.

I don't think the answer is for donors to just pack their bags and leave, but what is needed is a fundamental change in attitudes, away from the idea of donor entrenchment, and towards gradual detachment. But that's hard given the fact that aid has become an industry now. Where are all the Development Studies MSc's going to go if donors do their job properly? But it's something I'd like to see come into the Paris Declaration. (Sorry that was long)

Anonymous said...

Actually, All world banks IMF is from the Washington consensus. They do everything according to their masters in america. please read about this.

Sri Lanka's biggest economic problem is the open economy. every country must industralise, we have not industralise everyone can import even small things, like pencils. and even Central banks like Dr.cabral says we are importing fish when we are an island, its really silly.we must create industry. before 77 we were on the right track, but JR ruined everything.

we have import mentality, to surrender to washington consensus like you are saying, i cant believe it for a Sri Lankan you are saying to bring crisis to country. world bank is bad for the country, but we must get their loans while not surednering to conditions, you need strong leaders with back bone.

You are saying something really stupid. you want to do eveything world banks says, we will be like africa.

ddm said...

damn straight, anon. we can do this!

Anonymous said...

Hello DDm,
I am very happy about your enthusiasm . i think this blogger doesnt love the country. we can develop, if more people think positive. if we thinks like this blogger we cant develop.

aravind said...

do you mean to criticize the world bank....because of its policies....many poor people are being benifitted....

Deane said...

ddm,

The point about perverse incentives is one of the things Kapur suggests in the article. This is a problem with the NGOs as well, being sucessful in your 'cause' would mean you loosing your job.

The business of misery will remain lucrative i think, so the dev. studies will remain relevant with NGOs and what not even with aid agencies doing the job properly as you say.

Gradual detachment, yes..
But I really see no silver lining, unless the WB become more assertive and adopt a take it or leave it policy.