Tuesday, July 21, 2009

Notable and Quotable

By the late 1970s, I had concluded that, for all the good intentions and abilities of its staff, the [World] Bank was a fatally flawed institution. The most important source of its failures was its commitment to lending, almost regardless of what was happening in the country it was lending to. This was an inevitable flaw since the institution could hardly admit that what it could offer -- money -- would often make little difference. But this flaw was magnified by the personality of Robert McNamara, former US Defence Secretary, who was a dominating president from 1967 to 1981. McNamara was a man of ferocious will, personal commitment to alleviating poverty and frighteningly little common sense. By instinct, he was a planner and quantifier. . .

I had worked on India as senior divisional economist for three years. During that time, my chief function, so far as the Bank was concerned, was to justify the provision of significant quantities of aid, even though this money was helping the government of India avoid desperately needed policy changes. As it turned out, those changes were made in the midst of a deep foreign exchange crisis in 1991, almost two wasted decades later. The changes were made under the direction of Manmohan Singh, then finance minister, with the assistance of Montek Ahluwalia as economic secretary and later finance secretary. This experience confirmed three lessons: policy changes could make a huge difference to economic performance; such changes could be put into effect by relatively small teams of intelligent, motivated and well-disciplined individuals; and, most important of all, those changes could not be imposed from outside.

Unfortunately, lending too much was not the Bank's only fault. It also had to lend to governments. This had two undesirable consequences: it had to assume that the government represented the interests of the country; and it reinforced an unjustifiably collectivist view of that national interest. Bank lending made it easier for corrupt and occasionally vicious governments to ignore the interests and wishes of their peoples. By the end of my time at the Bank, I came to the conclusion that its borrowers fell into three categories -- those that did not need the help; those that would not use the help; and those that needed the help and would use it. The Bank was constitutionally incapable of concentrating its efforts on this third, often quite small group. As a result, its efforts were often either unnecessary or wasteful. I therefore came to agree with most of the criticisms of aid that had long been made by the late Peter (Lord) Bauer.

From Financial Times columnist Martin Wolf's 2004 book, "Why Globalization Works"