From Minimalist to Market-friendly to "Effective" State

The World Bank, in its latest annual report on global development, appears to have embraced the notion of an "effective State" role in development policy. This is an apparent departure, within a period of less than two decades, from its promoting a development policy in the Third World based on the idea of a minimalist, if not, a "no State" role, to a market-friendly State. In its report, the Bank has also now rebuffed those who favour minimal government presence and role in the economy.

by Chakravarthi Raghavan

GENEVA: From promoting and pushing a development policy in the Third World based on the idea of a (laissez faire) Minimalist, if not, a No State role, and then modifying it to a Market- friendly State, the World Bank has now moved to preaching an effective State role.

And all this within a period of less than two decades.

In the 1950s, the 1960s and early 1970s - before it embraced structural adjustment, neo-liberal economics and the "Washington Consensus"- the lending and development policy advice (produced and packaged from MIT and other US development academia) was for developing countries to get out of their colonial heritage and (arrested industrial revolution) through an active State role, to create and set up the infrastructures of economic development.

In its World Development Report, 1997 (WDR-97), the Bank has now come out against those who want a minimal government presence and role in the economy.

From an institution, set up as a lending institution, intermediating between the market and governments, the Bank over its 50-year history, has gradually appropriated to itself the role of setting and defining development policy and economics.

The WDR is a flagship publication of the Bank, with a budget outlay of $3 million, with some 150,000 copies in nine languages, distributed free to politicians, academics and so on.

With its vast publicity apparatus, media briefings and release at various centers, and outreach to policy-makers and influential opinion-makers in developing countries, the Bank claims to present "mainstream economics" and has managed to crowd out other views, dubbing them as "heterodox" and thus not credible.

In the WDR-97, while coming out against those pushing a minimalist State role, the Bank also criticizes governments in which policies, it says, "devised by technocrats (are) accorded pride of place" at the expense of responsiveness and accountability to the public.

But the Bank itself is quite coy about its own role, despite the efforts of Bank President James Wolfensohn to start a dialogue process with NGOs.

If one reads the Report (and earlier ones), it might appear to the unwary that the problems of development failures over the decades have all been that of venal Third World governments.

No discussion of role of Bank

There is no discussion in WDR-97 of the role of the Bank, its lending policies and the policy advises (even though some of its own internal studies show the glaring faults and failures).

Perhaps one of these days, the Bank may still get around to disclosing fully how its own technocrats, economists (staff and revolving-door economists, shuttling as Bank consultants, and academia) and top executives (and its Executive Board), formulate policies (and accommodates to the views of the US and other G-5 countries) and provide policy "advises" to the Third World governments, and now the transition economies.

At the moment, one has to rely on former-insiders turned critics, and "leaks" - not always an objective view.

"Development - economic, social, and sustainable - without an effective State is impossible," says WDR-97.

This is no departure from the earlier views, but merely "an amplification of what it means to be market-friendly," according to the Bank's chief economist, Joseph Stiglitz.

An "effective State", according to the Bank now, is one which "harnesses the energy of private business and individuals, and acts as their partner and catalyst, instead of restricting their partnership."

The Bank's nearly two decades of "travels" over the role of the State is itself part of a history that may or may not get recorded in its official views of itself. In the 1980s, with the election of Ronald Reagan as President (when the IMF and the Bank accepted the US electorate's mandate to its single largest shareholder, as a mandate to themselves), the Bank and the Fund, along with the burden of adjustment, pushed structural reforms on the developing world.

At that time, the Bank economists "discovered" the South Korean miracle, presenting it as a case of a "free market" and an "open economy" approach producing high growth rates and industrialization.

But numerous academics from the US "researched" the Korean experience, and noted it was a case of success, based on several external conditions that did not exist for other developing countries, and a case of a highly interventionist State role.

One academic writing of that time even suggested that the government of "free market" Korea had more command and controls over an enterprise setting itself up in business than even in the Soviet Union.

Then came the 1991 WDR and its view of a "market-friendly" approach by the State, with a modified view of the Korean and other miracles.

The East Asian miracle study

But the changing Anglo-Saxon fashions of economics and the role of the State were challenged within its board room by the Executive Director from Japan, who presented a detailed paper on the role that the government had played in Japan in promoting industry, fostering public savings and directing it through credit policies and differing interest rates.

This resulted in the Bank undertaking a study of the Far Eastern economies - whose individual factual surveys of countries, did not seem to add up to the final volume of policy conclusions.

Nevertheless, Japan organized a seminar in Tokyo where the Bank economists presented their views and reasons for the conclusions of the East Asia miracle study, while finance and planning experts of these countries, contradicted the Bank view of what they had done in their countries. While Japan summed up the seminar in terms of the start of a good dialogue between the Bank and its critics, and hoped it would continue, the Bank effectively walked away from the debate - arguing that the Bank's priority was now on Africa and its problems, that the Bank had done all that could be done to study the East Asian experience, that many of the conclusions of the State role in East Asia would anyhow not be possible in the new Uruguay Round trade regime.

Japan then funded several independent studies and research work - including the UNCTAD project on East Asian experience, and some continuing research work on Africa. Japan has also similarly encouraged research work at the Asian Development Bank, though the AsDB is more circumspect.

But Japan's development cooperation ministry and experts work at cross-purposes with their trade officials at the WTO, who take on an uncompromising neo-mercantilist view of developing country policies and measures.

After Wolfensohn took over, and the failures of the Bank's structural adjustment programmes (SAPs) are becoming clear, particularly in sub-Saharan Africa, a search for some solutions appears to have been set in motion.

Consultation with civil society

As a preparation for its WDR-97, instead of its usual practice of sending a draft for comments, the Bank initiated a policy of sending its economists and experts to contact "civil society" and discuss with them development policy.

The report also claims to draw on the history of Western industrialization and the "important role of the State in the 'miracle' economies of East Asia." A range of NGO groups and people, and businesses, appear to have been consulted, and comments were elicited from NGOs via internet.

According to one of the Bank officials, Ajay Chhibber, who led the team of Bank staffers charged with writing the Report, the Bank's views are based in large part on a survey of some 3,600 local businesses in 69 countries.

According to an NGO briefing paper, posted on the internet by the UK branch of the Bretton-Woods-Reform-project, the Bank had planned to undertake a "citizen survey", but decided against it on grounds of costs and the time factor. The NGOs have welcomed the Bank's move to "pre-consult" them, but according to the briefing paper, several NGOs (from Japan, India, and Britain) have expressed their "deep dissatisfaction" with the process and the way their comments were used. Several have asked the Bank not to portray the WDR as based on views of civil society.

The NGO briefing paper says that Isagani Serrano, of the Philippines Rural Reconstruction Movement and Rajesh Tandon, of the Participatory Research in Asia (who chaired a sub-group on participation of the NGO-World Bank working group) had presented a paper to the Bank team last October (issued as an appendix in the WDR). But Tandon has complained that most important points made by them have not been addressed in the Report, the Bank team, when they visited India, had not contacted him nor was any draft of the WDR sent to them for comments.

Issues of globalization & TNCs not fully addressed

The WDR is seen as having ducked key issues, such as globalization and transnational corporations. While an initial outline had planned to deal with how actions of States are constrained by globalization of capital and increase in power of TNCs, and how global markets can be governed, the Report could not apparently achieve a consensus and dropped the chapter.

While disclaiming efforts to enunciate a single policy for an effective State, in many parts, it nevertheless seems to be generalizing. While nuancing its views about the State role, nevertheless, the Bank sticks to its main line of privatization and liberalisation.

In fact, the entire discussion on privatization and globalization is one full of simplistic analysis such as that employees and managers of public enterprises will oppose privatization, while tax-payers will welcome it. But with those who pay direct taxes in developing world a small minority, what does such a view really amount to in terms of democratic polity?

It cites the case of Uruguay where the people in 1989 rejected privatization in a plebiscite, and then tries to put it in juxtaposition with the view that inefficiencies in public utilities adds 30% to the average Uruguayan's electricity, water and telephone bills.

This appears to be a case that people can be consulted, but if their views go against economic doctrines of efficiency, the people's views should not prevail. The Bank also argues that the merits of globalization and privatization should not be debated but people should be persuaded to accept benefits of the reforms through "consensus-building" and "compensation". (TWE No. 164, 1-15 July 1997)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.