World Bank and Economic Development

To properly assess whether the World Bank has made a positive contribution to the development of poor countries since its founding, we have to consider three inter-related questions. What has been the ultimate objective of World Bank policies and projects? What have been the main instruments used by the World Bank to achieve these objectives? Have the preferred instruments led to the desired objectives?

At the risk of some simplification, we maintain that the World Bank sees poverty reduction as its main objective, considers economic growth as the most important means to achieve poverty reduction and sees market orientation as the most important means of achieving economic growth. Furthermore, while the Bank’s understanding of market orientation is broad, covering domestic deregulation, privatization and trade liberalization, among other actions, it has historically emphasized openness to trade as the most critical measure for making economies competitive and efficient. Indeed, promoting exports and reducing trade barriers was among the most important conditions attached to World Bank policy loans when it introduced policy lending (as distinct from project finance) in the 1980s. It would not be a stretch to say that the World Bank has played a singular role among international institutions in getting developing countries to shift from import substitution to export promotion strategies over the last few decades. So, one can get a good sense of the development contribution of the World Bank in part by considering whether these mechanisms have characterized the most successful development experiences of the last six decades.

Which experiences count? Among low income countries, the growth of Korea, Taiwan, Hong Kong and Singapore would have to be considered among the most successful development examples of the first three decades after WW2. These stories were characterized by export-led growth and significant improvements in education, health and income for the majority of their populations. This happened in different ways for different countries but all these experiences were broadly associated with an increase in market orientation.The World Bank did not play a major role in influencing policies in these countries but it learnt from their experiences and applied the results elsewhere. Indeed, one of its most influential studies was entitled The East Asia Miracle. Researched in the 1970s and 1980s, the East Asia experience subsequently became the basis for much of the policy advice given by the Bank to developing countries.

Consider also the development experiences of China and India, two countries whose combined populations make up close to one third of the entire world. These countries have had among the highest (and longest sustained) economic growth rates among developing countries since 1980. They have also accounted for the majority of the decline in global poverty since 1980. Both economies have become more market-oriented in this period, in part through the efforts of technocrats who were influenced by World Bank policy advice. At the same time, many home-grown policies and characteristics also contributed to poverty reduction in these countries. Furthermore, neither China nor India is close to being an ideal model of a Washington Consensus economy. For example, both reserve an important role for state owned enterprises, especially in the financial sector. Nevertheless, the interlinked pattern of market orientation, economic growth and poverty decline is both a common and a principal element of the recent development stories of China and India. Nor does this stop with China and India. Other countries such as Bangladesh, Malaysia, Thailand, Indonesia and Vietnam have also had great success with export-orientation and growth and have seen significant declines in poverty in recent decades.

Two caveats must be introduced at this point. First, the same policy formula has not always worked in other contexts. Despite significant increases in market orientation and significant interaction with the World Bank, Africa and Latin America have been less successful in increasing exports, sustaining growth and reducing poverty. There are probably as many different reasons for this as the number of countries involved, but these two regions provide much of the evidence for those who argue that market-orientation does not necessarily lead to growth nor growth to poverty reduction.

Pakistan’s experience has been similar. Second, it could be argued that it is not economic policy that is most responsible for growth and poverty reduction but the quality of domestic governance and institutions. A substantial segment of development literature argues that the quality of governance, reflected in such considerations as government effectiveness, rule of law, extent of corruption and presence of accountability, is the most relevant determinant of historical patterns of economic growth.

If governance and institutions are key to economic growth, then the World Bank cannot be said to have made much of a contribution to the process so far. In the first five decades of its existence, the World Bank scrupulously avoided getting involved in issues related to how various countries were organized and managed politically. Issues of corruption and accountability were not brought into discussions regarding economic policy with government counterparts. This started changing in the mid-1990s, when the Bank began conducting research into the link between governance and development. It then followed up on this research with governance-related projects and policies in the last two decades. However, the focus on governance is too recent and has been too minor in terms of lending to have had much of an impact on relevant client countries.