World Bank, Globalization and Poverty
by Chakravarthi Raghavan
Geneva, 18 Dec 2001 - One thing must be said for the World Bank: over the last several decades and through all the twists and turns of international economic and development policy discourses, there has been a fair amount of consistency in the objectives pursued by the Bank on behalf of its major shareholders, and the policy conclusions and advices it gives to the developing world to further these objectives - opening up markets of developing countries to corporations of developed world.
The annual World Development Report (WDR) is its flagship report, but there are other reports brought out from time to time periodically to promote and influence particular debates. However, as with its stable-mate in Washington, the International Monetary Fund, there is a common policy line.
The latest publication, ‘Globalization, Growth and Poverty: Building An Inclusive World Economy,’ and described in its title page as a World Bank Policy Research Report, is no exception.
The Bank employs a veritable army of economists and, at senior levels, there is a revolving door of Bank staff moving to academia (where studies are commissioned) and vice versa. The staff economists conduct research and/or commission consultants to research and write papers on a variety of subjects, thus influencing the research agenda of academics; and through the reports the ‘agenda’ of public discussions is set and policy debates every where are sought to be influenced.
Policy advice is provided at a general level and, in discussions with governments of countries (apart from the structural adjustment and the conditional lending programmes), the Bank pushes for liberalisation of trade and capital markets to promote imports and exports. The objective is to open up the economies of the Third World (and now the transition economies) and enable the corporations of the North to sell their goods and services on the markets of the developing countries.
The Bank has pursued this agenda through successive Presidents (from Black to Wolfensohn) and chief economists. Its economists and consultants may write discussion papers and staff papers which, within limitations, explore other viewpoints; but at the level of policy advice or Bank reports and documents, there is little or no scope for a different policy advice.
For a brief period, when Mr. Joseph Stiglitz was the chief economist, different policy conclusions and advices began to emanate, particularly in the aftermath of the so-called East Asia crisis; but Stiglitz was soon out of the Bank, and things are back to the norm.
In the 1980s, the Bank argued against state enterprises and in favour of trade liberalization, though earlier, under McNamara, the need for Bank lending to state infrastructures was seen as beneficial to opening up the markets of the developing world and thus was pursued.
There was the ‘free market’ view, and the miracles of the market and the market friendly approaches, the Asian miracles and presenting the dynamic performance of the East Asia economies as due to their ‘openness to international trade’ all claimed to be backed up by individual country studies and data, using often the computable general equilibrium (CGE) models and cross-country regressions which, as any economist knows, are very much dependent on assumptions.
With every report, and ‘conclusive’ data, sceptical academics look into them (necessarily after a time lag) and publish in academic journals critiques questioning and challenging some of the conclusions. However, the Bank reports and publications, while trying later to deal with the challenges, seldom mention in references and bibliography (for any report) the countless contrary views.
After its promotion of ‘openness’ and the ‘evidence’ cited of a large swathe of countries having ‘open’ economies and thus growing fast (the Asian Miracle and the World Development Reports), other academics who looked at these noted that the various country studies used such a loose definition of ‘openness’ that comparisons across countries and generalised conclusions were faulty and erroneous and not warranted at all. The Bank view of the East Asia miracle came under challenge, including in some UNCTAD research work and its Trade and Development Reports.
Then came the ‘market-friendly’ approach in the 1991 WDR and the ‘Washington Consensus’ promoted avidly - until the ‘consensus’ was shaken by the 1994 Mexican peso crisis and collapsed with the series of crisis in emerging markets, beginning with Thailand in 1997. Since then both the Bank and the IMF have shied away from using that term, with the then IMF head, Mr. Michael Camdessus on his penultimate day in office, saying at UNCTAD-X (Bangkok, 2000), ‘What consensus, I did not sign any’.
While the usage of the term was given up, the policies pushed under it were not; they were re-packaged and presented under the ‘Globalization’ thesis - advanced by the IMF, World Bank and the WTO and even by UNCTAD - though at the closing plenary of UNCTAD-X in Bangkok in 2000, Mr. Rubens Ricupero voiced some unorthodox views on globalization.
The view about benefits of trade liberalization by developing countries - by cutting one’s own tariffs and barriers to imports as a way of export-led growth - and the old policies of the Washington Consensus were re-packaged and presented under the Globalization thesis, with some econometric models and data about benefits in growth and rising per capita incomes thrown in.
Recently, the US Trade Representative, Mr. Robert Zoellick, even touted the present World Bank study (at that time available in draft form for discussions) as showing that globalization ‘reduces poverty because integrated economies tend to grow faster and this growth is usually widely diffused.”
The thesis of the draft report - ‘Draft policy Research Report: Globalization, Growth and Poverty: Facts, Fears and an Agenda for Action’ - was challenged by several think tanks, and many civil society groups who are well-equipped with capacity to study such documents and critique them.
These critics have challenged the view of Globalization and Trade Liberalization as beneficial to all countries and across countries and the poor, and have been pointing out that while it has benefited a few at the top, across countries and within countries it has increased inequality, poverty and marginalization of countries and vast sections of society within countries. The Bank has now come out with its report, ‘Globalization, Growth and Poverty’ whose evidence, main findings and conclusions are claimed to be showing that globalization has helped poor countries (with around 3 billion population) to break into global markets with exports of manufactures and services; that the ‘new globalizers’ have experienced large scale poverty reduction; and that within countries globalization has not led to ‘greater income inequality’.
In releasing the report earlier this month in Washington, Bank Vice-President and Chief Economist, Nicholas Stern (who succeeded Mr. Stiglitz), said benefits of integration and free trade are real and powerful, and presented globalization and free trade as antidotes to poverty.
The research study and report also reduces the opposition to globalization to the ‘widely held view’ across many countries that globalization and integration would lead to cultural or institutional homogenization.
Much of the critiques and opposition to ‘globalization’ is to the economic globalization policies. However, the promoters, trivialize the debate by citing everything as showing ‘globalization’, and this report does it too - citing AIDS and even the 11 September attacks in New York and Washington as part of globalization.
In promoting the positive view of globalization and greater integration of the poor countries into the global markets and in the plan of action proposed, the Bank’s research study report also promotes the view that a ‘development round’ of trade negotiations could do much to help poor countries better integrate with the global economy, and that “this is part of our agenda for action.”
The report by and large repeats the slogan that countries that have gone further down the path of globalization (through trade liberalization and investment liberalization) are the ones that have had the greatest success in terms of economic growth and poverty reduction.
The Bank has for long promoted this view, and it has been echoed and re-echoed by ‘trade liberalisers’ and the neo-liberal economists and the WTO leaders.
In promoting and advocating the same policies in this research report, and showing that globalization and integration lead to poverty reduction, says Mr. Stern up front in the foreword: “This successful integration (by exporting labour-intensive manufactures and services) has generally supported poverty reduction. Examples can be found among Chinese provinces, Indian states, and the countries of Bangladesh and Vietnam. The ‘new globalizers’ have experienced large-scale poverty reduction.”
On page 34 of the report, in the sample of ‘more globalized’ countries, the study cites China and India in that category.
China is still very much a centrally planned and organized economy, though the country has been liberalizing its market and trade, and allowing some of the coastal provinces etc to open up and free economic controls; China has been doing this over the 15 years it had been negotiating to join the WTO. Now that it has joined, it has also agreed to undertake many changes, over a transition period. Inter-provincial commerce so to say is still not as in any market economy; China is loosening up the controls, but not so fast as to create the kind of political and economic chaos and collapse that came in the wake of the big bang approach in Russia.
In the case of India, even more than in the US, there are no restrictions or barriers on inter-state commerce and, once goods and services are imported, they can be spread or sold across the country in all its states. None of the states can control or restrict it; they can only provide ‘incentives’ for foreign investors - with clearance for establishment in the country within the Federal jurisdiction.
Stern’s citing as examples of successful ‘large scale poverty reduction’, Chinese provinces and not the country as a whole, or of Indian states and not the country as a whole is striking. At least in the case of India, citing ‘some Indian states’ (but not all) is illuminating and shows that trade and economic liberalization is not an or the key element. Much before the Indian government (since about 1990) undertook economic “reform programmes”, some of these states had been adopting policies of education and health etc to attack poverty and produce a more egalitarian society. There are some studies in India that suggest that some of these states have not fared as well in a very ‘liberal’ economy, just as others suggest the contrary.
There is no conclusive view emerging so far.
But in the vast literature about trade liberalization, it will be difficult to find any that would invariably hold up China and India as leaders and exemplars. While over the last decade they have liberalized their trade, and have been cutting down tariffs and allowing greater imports, their trade and investment regimes, and the share of trade to GDP etc, are still relatively small. They have been very cautious, and the present report itself advices caution in their opening up the capital account.
In a comment about this aspect of the report, Prof. Dani Rodrik at the Harvard University Kennedy School of Government and coordinator of the Research activities for the Group of 24 (developing country group at the IMF and World Bank), told the SUNS that the Bank citing China and India as examples is itself a startling admission.
Buried deep down in the its samples of “more globalized” countries, he notes that the Bank study says that in citing these two, the report was not implying that the two “adopted pro-trade policies.”
This really means that the Bank is acknowledging for the first time that trade liberalization may not be an effective instrument - not just for stimulating growth, but for integration into the world markets.
The Bank is admitting, Rodrik adds, “in an underhand” manner, that its constant assertions about benefits of globalization do not have direct implications on how developing countries should conduct trade policy.
This is and should be evident to any one who looks at empirical evidence, Rodrik points out. All the evidence show that rapid integration into the world markets “is a consequence, not of trade liberalization or following the WTO rules and frameworks, but of successful growth strategies.”
Rodrik also points out that countries that have achieved economic growth successfully have not followed any uniform precept or model, but adopted policies suited to their particularities and idiosyncratic characteristics.
Both in China and India, he underlines, the main trade reforms took place a decade after the onset of higher growth. Even now, their trade restrictions remain relatively among the highest.
In China, the high growth came in the late 1970s - after reforms introducing house-hold responsibility in agriculture and establishing a two-tier price system. There was no import liberalization until much later, in the second half of the 1980s and the 1990s. In India, the trend growth rate, Rodrik says, increased substantially in the early 1980s by about three percentage points. Serious trade reforms did not begin until about 1991-93 and even thereafter has been pursued in a measured way.
Both China and India have in fact focussed their scarce political capital and administrative resources to areas other than trade liberalization. Both have increased their trade substantially, and (by the World Bank’s criterion) they are both successful globalizers.
However, contends Rodrik, their examples, as those of South Korea, Taiwan and Vietnam, show that deep trade liberalization is hardly a factor in promoting faster growth and expanded trade early on.
The Bank study would suggest that its research is catching on, but it is presented with a “lot of subterfuge” and its view and evidence is buried deep in the report, and has to be dug out.
The Bank study’s chart about tariffs, attempts to suggest without saying so that the ‘more globalizing’ countries had deeper tariff cuts and hence tariff cuts would be an important determinant of global integration and growth.
There is no empirical evidence that tariff cuts lead to growth. In effect, the Bank study accepts this, by saying (p 36) “Whether there is a causal connection from opening up trade to faster growth is not the issue.”
“Why not,” asks Rodrik. If there be no claim of causal connection, why did the Bank invest so much of its intellectual capital on establishing the linkages between trade openness and growth?
The real question is what kind of a policy conclusion could be drawn from this empirical evidence. In several of its earlier reports and studies, the Bank took the view, and advocated it, that a significant liberalization of trade is a key element in unleashing all the elements for growth and poverty reduction. “The latest report suggests that the Bank is not so sure, nor should any policy-maker in any developing country be,” Rodrik comments.
The Bank‘s dubious logic linking globalization and integration to lower poverty and inequality is again challenged in a briefing paper of the Washington-based Economic Policy Institute (http://epinet.org) by Christian E. Weller, Robert E. Scott and Adam S. Hersh, titled ‘The Unremarkable Record of Liberalized Trade’.
In a critique of the Bank’s draft (not much changed in the final published version) the briefing paper notes that the USTR Robert Zoellick has used the Bank draft to argue for fast track authority. However, it says, “empirical evidence suggests that reductions in poverty and income inequality remain elusive in most parts of the world... greater integration of deregulated trade and capital flows over the past two decades has likely undermined efforts to raise living standards for the poor.”
The EPI points out that the Bank, in a reference to the evidence of rising intra-country inequality, says that the data for China dwarfs observations for other countries “To the unwary this may suggest that the rising inequality problem does not exist outside of China,” the EPI says. However, it is a problem elsewhere too. Poverty remains a large and widespread problem and the difficulties arise from the way data are assembled and looked at. If one uses the Bank’s international poverty line of $1 per day purchasing power parity, one set of data emerges.
If mean incomes or other measures including relative poverty line or ‘consumption poverty’ are looked at, the EPI points out, a different picture emerges.
An overview of poverty trends in the Bank’s own ‘Global Poverty Monitoring database’, a Bank staff study (by Chen and Ravallion, 2001) concludes that “in the aggregate and for some large regions,” all measures suggest that the 1990s did not see much progress against consumption poverty in the developing world. The IMF too in its 2000 survey said that “progress in raising real incomes and alleviating poverty has been disappointingly slow in many developing countries.” – SUNS5033
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