Hamlet with the prince

An analysis of the just-released 2000-2001 edition of the World Bank's World Development Report.

In a speech last March, Mr. Lawrence Summers, U.S. Treasury Secretary, said “discussions of poverty reduction that do not lay primary emphasis on economic growth are like Hamlet without the prince”.

That was a thinly-veiled attack on a consultation draft of the WDR which saw redistribution as essential both for more rapid growth and for this growth to have a positive impact on poverty. The argument in the draft WDR was not that poverty could be reduced without growth, but that greater asset equality was necessary for higher poverty-reducing growth. That, however, would not do for the U.S. Treasury.

In the intervening months, the head of the team preparing the WDR quit because of pressures from inside and outside the World Bank to change the emphasis in the report. We now have, in a manner of speaking, Hamlet with the Prince of Denmark. The WDR in its final form has travelled some distance towards making (market-driven) growth central to poverty reduction even as it makes the appropriate noises (but no more) about inequality. It retains the original three-pronged emphasis on opportunity, empowerment and security in the formulation of its comprehensive approach to poverty reduction, while giving economic growth - as represented in ‘opportunity’ - far more importance than in the draft. (Even the ordering has changed, the discussion earlier was of empowerment, security and opportunity.)

The language of the WDR may be different from that usually associated with the World Bank but it says far too many things, which is why it is unlikely to please anyone. To give just a few examples: “(The poor) must be brought centre-stage in designing, implementing, and monitoring antipoverty strategies.” (p12) “Markets are central to the lives of poor people... The evidence shows that on average countries that are open to trade and have sound monetary and fiscal policy and well-developed financial markets enjoy higher growth.” (p38) “...there can be no general lesson that reforms are good (or bad) for all people all the time.” (p67). There are positive references (p 126) to affirmative action programmes such as India’s laws on job reservations, while those looking for arguments against full convertibility will not be happy with the call to merely be prudent in opening the capital account (p8) and so on.

But if there is a core message in the WDR, it is that “Much of the difference in performance across regions and countries (in income poverty reduction and human development) can be attributed to differences in economic growth.” (p 29). The Prince of Denmark does then finally hold centre stage.

The first version of the WDR may or may not have given us a better understanding of what causes poverty and how to remove it. But what makes the published WDR unconvincing are three features: One, the lack of sufficient data to support some of the core arguments. Two, the disconcerting manner in which research not supporting the WDR’s arguments is given only cursory treatment. Three, the “change in emphasis” which results in a weakening of some of the arguments.

First, the Prince of Denmark.

An important component of the larger argument of the WDR is that market reforms have paid off in the form of higher growth. The second and more significant observation is that these reforms “have had little effect on income distribution”. In other words, “these policies (openness to international trade, low inflation, a moderate-size Government, and a strong rule of law) on average benefit poor people as much as anyone else.” (p66) That is everyone - rich and poor - benefit equally from economic growth.

Clear the fog of arguments and the mass of detail in the WDR and where is the evidence that the poor have benefited equally from reforms in the numerous developing countries which since the late 1980s have been practising “market-friendly” policies? No tables, no pie charts, no bar diagrams and no detailed text boxes - as fill the WDR - are available to illustrate this very important argument. All that we have by way of evidence is a reference to just two research studies. (One of the two - “Growth is Good for the Poor” - was prepared at the World Bank in March 2000, i.e. after the draft WDR was put out, and is widely believed to have been an in-house criticism of the Hamlet-without-the-prince version.)

There are more curious aspects to the research cited in support of reforms delivering on poverty reduction. A consequential argument in the January 2000 draft was that trade liberalisation may not have led to low-skilled labour-intensive growth in the developing countries and that the experience, “if anything... suggests the opposite” (para 8.20 in the consultation draft).

A study of trade liberalisation in many countries that was conducted at the World Bank by two economists, Lars Lundberg and Lynn Squire, was cited then in support of the troubling observation that “The costs of adjusting to trade reform are ... borne exclusively by the poor.” (para 8.9, draft)

But what happens to this paper in the final version of the WDR? Its fate is to be relegated to a footnote with the observation: “There is some debate, however, over the cross-country evidence on the distributional impact of trade liberalisation. See for example Lundberg and Squire (1999).” (Footnote 16 to Chapter 4, page 209). Nothing more. A study which casts serious doubts on the developing-country experience with trade liberalisation may or may not be methodologically correct. But it does not say much for the value of the WDR if such research is an important part of the argument at one time but is pushed aside on another occasion, perhaps only because it runs contrary to the larger argument of reforms benefiting the poor as much as everyone else.

An entire chapter is devoted to a discussion of the connections between growth, inequality and poverty. The WDR even goes as far as to argue that if inequalities are addressed, not only will a larger share of the benefits accrue to the poor, but the pace of growth itself may accelerate.

But where earlier (in the draft) the focus was on making redistribution central to growth and poverty reduction, (the “inextricable” link between equity and efficiency) there is now a definite change in emphasis. Now the argument is more that while growth is important for poverty reduction, “low and declining inequality enhances the impact of growth on poverty”. (p59). And after studying all the caveats, ifs and buts, and country examples with diverse experiences in growth, inequality and poverty, no one can come away with a richer understanding of why similar rates of economic growth can have such widely differing effects on poverty reduction.

A good example of a watering down of the argument on the importance of redistribution is in the discussion of land reform. The report does talk of the benefits of land reform and even has a good word for West Bengal’s Operation Barga. But where earlier (Paras 7.33 to 7.37 in the draft) the discussion gave just as much importance to land redistribution as to “negotiated land reform” (an experiment in some South American countries wherein the landless and the landed enter into contractual agreements overseen by the Government), the focus now is almost entirely on the latter. The point is not that the printed WDR is different from the consultation version. A draft that is put out for consultation will naturally be modified depending on the feedback. The point more is that in the end we are left with a WDR that contains unconvincing, unsubstantiated and seemingly selective arguments about how poverty can be reduced in the developing world.

(Mr. Rammanohar Reddy is the Deputy Editor of The Hindu, India’s leading daily newspaper. This article first appeared in that paper, and is reproduced by SUNS with acknowledgement and permission from the Hindu)