a1319: NYTimes.com Article: As Global Lenders Refocus, a NeedyWorld Waits (fwd)

[Bob Corbett <corbetre@webster.edu>]

From: pgcharles@hotmail.com


As Global Lenders Refocus, a Needy World Waits

March 17, 2002

By DANIEL ALTMAN




Meddling relatives usually mean well but, as everyone
knows, sometimes they just make things worse.

To many critics, both expert and casual, the World Bank and
the International Monetary Fund fall into the same camp.

Created 57 years ago to reduce poverty and to stabilize
foreign currency markets, the institutions, based a block
apart in Washington, have continually struggled to meet the
expectations of their big shareholders - the world's rich
nations - as well as those of their supposed beneficiaries
in the developing world.

In Haiti, for example, the World Bank has supported 41
projects over the last 50 years with more than $1 billion
in loans, and the I.M.F. has lent the country $150 million
in the last two decades alone. Yet more than 80 percent of
Haiti's population still lives in poverty, compared with 65
percent in 1987. And the conditions on the aid from the
World Bank and the I.M.F. - including removing tariffs and
growing crops intended mainly for export, like coffee -
have allowed imports to displace food crops like sugar cane
and rice. While political upheavals in Haiti undoubtedly
share the blame for its destitution, critics say
mismanagement and economic policies mandated by the aid
packages bear some responsibility.

Tomorrow, global policy makers will convene in Monterrey,
Mexico, for the United Nations Conference on Financing for
Development; and when President Bush speaks there, on
Friday, he is expected to repeat his calls for reform and
accountability at the World Bank, which has recently been
accused of squandering billions on ineffective projects.
The I.M.F. will also have much to answer for. Argentina's
recent economic collapse, despite policy prescriptions and
billions in aid from the I.M.F., threw millions of
middle-class people into poverty.

The decades-long debate over the role of the bank and the
fund heated up in 1997, when Kofi Annan became secretary
general of the United Nations and called for a dialogue on
development financing. Since Sept. 11, as rich nations have
focused on resentment in the developing world, matters have
grown more urgent.

Those rich nations have sent the World Bank and the I.M.F.
to face down some of the world's toughest economic
problems. Yet the two institutions have often failed to
turn deep political backing, world-class brainpower and
billions in funds into good results.

Both now say they are improving their performance through
internal reforms, even as they also grasp for new
responsibilities. But the world's hunger for radical change
- in terms of which countries receive aid, how much is made
available and how it is distributed - could overtake their
efforts.

 
The World Bank makes loans to countries, usually for
specific projects, at interest rates that reflect their
fiscal conditions. Its locally based staff helps to manage
the projects, which in the past focused on building dams,
paving roads or wiring electricity grids but now deal more
with improving health and education. The I.M.F. sends teams
of economists, with billions in loans, to rescue countries
facing financial crises. But it, too, makes loans for
development.

The bank - which has lately taken to trumpeting its success
in leading fast-developing countries like China and India
to higher literacy and lower infant mortality rates -
acknowledges some failures. Its reports state that living
standards simply have not improved in much of sub-Saharan
Africa, where since the 1960's it has invested tens of
billions of dollars, some stolen by corrupt rulers and some
built into huge power and transportation projects idly
awaiting the use of foreign companies.

The bank's president, James D. Wolfensohn, is vocally
urging rich countries to increase foreign aid, disbursed
both directly and through the bank. But his many critics,
including some who question his management style, do not
trust him to use more aid effectively.

"He's not a good manager," said Nancy Birdsall, president
of the Center for Global Development, a new policy group in
Washington. "He's a visionary," she said, adding that she
respected his passion for development but that his ability
to lead the bank was limited.

Mr. Wolfensohn acknowledged that the bank had been
ineffective in the past. But he contended that it had made
significant strides. "Reform takes time in an institution
with a 57- year history," he said by e-mail. "But I
wouldn't underestimate how much change has already taken
place at the bank. Some of our critics seem to be stuck
somewhere in the bank of the 1980's."

The I.M.F., meanwhile, has been under attack for its
handling of the crisis in Argentina. Despite billions in
aid and advice, the country defaulted on about $141 billion
in public debt, froze private bank accounts and devalued
the peso, instantly destroying the purchasing power of
millions of families and resulting in mass unemployment,
hunger and civil unrest. Economists say the situation shows
just how little the fund understands economic fundamentals
of many countries.

In its defense, the fund's officials have said repeatedly
that countries must take credit and blame for their own
situations. They also said that advice offered earlier,
when Argentina did not need the fund's money, went
unheeded.

Critics are unconvinced. "It's disingenuous to say that it
was the country's own making," said Joseph E. Stiglitz, a
Nobel laureate in economics and professor at Columbia
University who sparred with the I.M.F. while serving as
chief economist of the bank. "The I.M.F. is taken seriously
in the advice that it gives."

The bank and the fund gained reputations for uncompromising
and often unsuccessful policies in the 1980's and early
90's, when they encouraged countries to pursue development
plans that were based on rigorous economic logic but failed
to consider local circumstances.

Like an emergency room doctor who gives every patient an
appendectomy regardless of the symptoms, the institutions
treated almost every developing nation the same - with a
package often referred to as "structural adjustment."
Usually, in return for aid, they imposed strict budgetary
discipline, the ending of subsidies for food and other
basics, increases in the cost of public services like
health care and the elimination of trade barriers.

With so many changes coming at once, depressed economies
struggled to grow as imports flooded in and traditional
industries collapsed. Sometimes, poverty worsened.

"A lot of the structural-adjustment agenda was right, but
was too brutally implemented," said Clare Short, Britain's
secretary of state for international development. Changes
were necessary in countries with high tariffs, big
subsidies for manufacturers and decentralized agriculture,
she said, but the bank and the fund were not mindful of
economic disruptions and eroding support for their
policies.

"The political price in resistance to any reform was a very
serious obstacle to further progress," Ms. Short said.

 
In the last decade, critics of the two institutions'
methods went on the offensive. "The signals came from
outside the World Bank that things were not going all that
well, that the structural adjustments policies were not
delivering what everyone hoped," Dr. Birdsall said. The
countries that put the programs into effect became more
stable, she said, but economic growth and a reduction in
poverty did not automatically follow. Nonetheless, the bank
continues to offer a third of its aid - $5.8 billion in
2001 - for structural adjustment.

Though both the bank and the fund engage in development,
the fund takes the lead in ushering countries through
financial crises. There, too, the policies of the last two
decades have come under fire. "They went into countries
facing economic downturns and said, `Make them worse,' "
Professor Stiglitz said.

The results were sometimes perverse. In Argentina, an
I.M.F. price stabilization program pegged utility prices to
the dollar, he said. As the peso fell in value, the cost of
electricity soared, enriching utilities while straining
ordinary families.

Professor Stiglitz said I.M.F. policies, including lower
government spending and higher interest rates on central
bank lending imposed on East Asian nations in 1998, had
never brought a country to prosperity.

The I.M.F. has also been criticized as failing to encourage
countries to make the most difficult economic decisions.
Many economists say that in Argentina, the fund focused on
nit- picking reforms of the government's budget and
financing rules instead of the harder task of advising the
country how to unhitch its currency from the American
dollar.

"Everybody knew for months that the currency board had to
go, and everybody knew that it would be a terribly messy
affair," said Charles Wyplosz, co-director of the
international macroeconomics program at the Center for
Economic Policy Research, based in London.

Yet the fund made several other conditions for aid instead,
as it had in East Asia. "The conditions often tend to be
millions of little details, and not the big picture, so
countries can pretend to fulfill part of the request," Dr.
Wyplosz said. "They fulfill the menial ones and not the
main ones, so there's a game going on that can go on for
years."

 
CRITICISM of the bank and the fund peaked in 2000, when a
commission organized by Congress and headed by Allan H.
Meltzer, a professor of economics at Carnegie Mellon
University, released a report calling for wholesale reform
of both institutions, especially the World Bank. Lately,
complaints about the bank have centered on Mr. Wolfensohn,
a former investment banker who became its president in 1995
and said he expects to remain in office until his second
term ends in 2005.

In the journal Foreign Affairs last fall, Jessica Einhorn,
a former managing director at the bank, accused Mr.
Wolfensohn of taking on too many disparate missions. The
bank's mission, she wrote, has become so complex that it
"strains credulity" to portray it as a manageable
organization. "The bank takes on challenges that lie far
beyond any institution's operational capabilities," she
wrote.

Mr. Wolfensohn acknowledges pushing the bank in new
directions and says it has made progress in areas like debt
relief, anti-corruption programs and community-driven
development. Yet on the basic goal of eliminating poverty,
the numbers show mixed results: progress in big countries
like China and India but little change in many poor,
sometimes war-torn areas like sub-Saharan Africa, which is
also ravaged by AIDS.

It is hard to distribute blame precisely or to know which
solutions will work better. That has not stopped everyone
from street protesters to world leaders from offering
ideas. Lately, many of them have come from the United
States Treasury Department. Paul H. O'Neill, the secretary,
has recommended that the bank turn half its lowest-interest
loans into grants, so that countries trying to grow do not
incur a debt burden.

Opposition to that proposal, mostly from Europe, has been
fierce. "We think it's profoundly wrong," said Ms. Short,
the British cabinet member. She argued that governments
would be more likely to use grants in wasteful ways,
because no one would ever come looking for repayment.

Professor Stiglitz said some countries should be asked to
repay loans so that the money can be recycled for other
countries to use. "If a country like Chile or China is
getting richer," he said, "they're going to be able to
repay that debt."

Some economists support the shift to grants because, they
say, private markets can now finance developing countries
where the money is likely to be used wisely. J. Bradford
DeLong, a professor of development economics at the
University of California at Berkeley, said countries that
did not attract lenders in the open markets probably should
not be borrowing at all.

Nicholas H. Stern, the chief economist of the World Bank,
counters that private markets would not finance the kind of
long-term projects that lay the groundwork for higher
standards of living. "The markets are looking at their
return," he said. "What we're looking for is the return to
growth and opportunity over a long period of time."

Though he noted that the rich countries that control the
bank would make the final decision, Dr. Stern indicated
that the two sides could be nearing a compromise on
replacing some loans with grants.

Skeptics, including Professor Stiglitz, have suggested that
Mr. O'Neill's true aim is to reduce the scope of American
aid, a sensitive issue in a time of budget deficits. But
Dr. Stern said he saw evidence that the Bush administration
was "seriously devoted" to development.

Among Mr. O'Neill's other recommendations was to shift the
bank's focus from reducing poverty to raising labor
productivity, which he says can be more accurately
assessed, to bolster the bank's accountability. In "The
Elusive Quest for Growth," a book published last summer,
William Easterly, an economist formerly at the bank,
asserted that billions in aid had been squandered on poorly
designed programs.

Critics say Mr. O'Neill's focus on productivity smacks of
1980's-style "trickle down" economics because productivity
gains among the poor can end up lining the pockets of
wealthy employers. They also say that rising productivity
may not be any easier to measure than falling poverty is
now. "I don't know how you measure the productivity of
projects," Dr. Wyplosz said. "People will produce numbers
that have no precision whatsoever, so we'll be massaging
numbers instead of massaging reports."

 
REFLECTING the historically cozy relationship between the
Treasury Department and the I.M.F., Mr. O'Neill has left
the fund to plan its own reforms. It has begun to seek ways
to help bankrupt countries without resorting to expensive
bailouts, which critics like Professor Stiglitz say were
meant primarily to allow wealthy investors to recover their
money. As a substitute for bailouts, the fund has proposed
a tribunal for restructuring the debts of insolvent
countries.

Last November, Anne O. Krueger, the first deputy director
of the I.M.F., suggested that the fund could sponsor a
bankruptcy procedure for countries in crisis. In such a
system, claims would be frozen and the fund would provide
interim aid and help work out who will be repaid and how.
Investors cried foul, arguing that the fund could not
supply money to a country and, as a creditor itself, decide
who ought to be repaid. The fund is revising its proposal.

Few people expect the meeting in Monterrey to generate new
aid pledges or innovative development strategies. But the
dialogue could speed the process. Neither the World Bank
nor the I.M.F. is close to completing its mission. More
than a billion people still live on less than $1 a day, and
crises strike developing countries with alarming frequency.
"This," Dr. Stern said, "is a long haul."