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News Analysis/R C Murthy

The morphing of World Bank into Big Brother

"We must ensure that political considerations are not injected into the programmes and operations of the Bretton Woods institutions," India's Finance Minister Yashwant Sinha implored his fellow finance ministers and their governments at the conclusion of the International Monetary Fund-World Bank annual meetings.

In fact, economics and politics are intertwined. Politics at the international fora are varied: East versus West; within the West, Europe Vs the US; within the East, Japan Vs China; Pacific rim Vs South Asia; India Vs Pakistan, and so on.

And then, there are the clashes of concepts, theories, beliefs, models of development. For instance, growth versus holistic development as propogated by World Bank President James Wolfensohn and his Chief Economist Joseph Stiglitz respectively.

An important section of academia is up in arms against relegation of growth from the stature it now enjoys. Professor Jagdish Bhagwati of Columbia University says: "I find it puzzling that these distinguished gentlemen (Wolfensohn and Stiglitz) whose acquaintance with developmental issues is relatively recent, think that they are to be complimented for departing from the old approach of an exclusive focus on growth and on trickle-down economics. This is no more than the old fallacy of putting up a straw man. Or perhaps the answer is simpler: It is plain ignorance."

Professor T N Srinivasan of Yale University says, "What do Messrs Wolfensohn and Stiglitz mean precisely by 'democratic, equitable and sustainable increase in living standards'? Can they provide the right focus for policy-makers?"

There is a great deal of merit in what the economists say. An organisation like the World Bank cannot afford to focus on multiple objectives. That amounts to distraction of vision, energies.

The World Bank should concentrate on growth. The moment you have multiple objectives, the focus is diluted. It's not the job of World Bank to meddle with cultural aspects.

The World Bank is attempting to dominate all the agencies in the field, like those of the United Nations and regional banks in the name of coordination, degenerating into a monopoly. That leads to monopoly Vs competition.

India witnessed debate whether or not a borrower should have the right to choose the lender. In the integrated development projects under the village adoption scheme assigned to commercial banks, New Delhi had decided to allow the borrower an alternative source though a village was assigned to a bank.

Of course, competition there was theoretically. The cost of lending to a couple of borrowers is far higher than lending to a whole community. No bank will dare enter for the sake of just two customers. But the principle of competition has to be respected.

Similarly, a country should have access to an alternative if, say, the World Bank refuses to finance a particular project.

This is what Asian Development Bank president Tadao Chino said in April last. Chino, for one, challenged attempts to impose a single, Washington-influenced development model and called for "competitive pluralism" among regional development banks and other institutions.

Ethos of each institution is different. The ADB bears the stamp of Asia, especially Japan, while the World Bank has one of America. The US nominated the World Bank president. Once he stops accepting orders from the White House, he would be in trouble.

The dozen pilot projects of total development should throw light on how holistic they are. And, Wolfensohn should be ready to accept the results. The study should not be doctored.Will the President be prepared for lower growth?

Another major issue is capital controls. The Ecuador default of interest payment on Brady bonds has put the IMF and developed countries in a spot. The IMF backing, covert or overt, is unethical. That only means each one is trying to do what suits him.

The essential problem has been that many of the IMF's member-governments have decided that they do not want to send any signals that will make default easier.

While governments want to send a signal to investors that they will not automatically be bailed out of a poor investment decision, they do not want to encourage unwise sovereign borrowing because the relevant IMF article will in effect invoke a clause allowing controls on capital movements.

Some even question whether there are inherent conflicts of interests if the IMF, as a mutual institution of member governments, is to intervene in debtor-creditor disputes.

Rapid globalisation, integration and resort, quite often premature, to full convertibility of the currencies have been at best a mixed blessing.

Short-term capital outflows have hurt developing countries.

Malaysia had to impose restrictions on outflows after the Asian contagion broke out in 1997. Although the curbs were lifted about a year later, the IMF and developed countries bitterly oppose Malaysia's action.

Several studies were conducted since then on the subject. But there is no unanimity on the impact.

Theoretically, any restriction on capital flows is bad since that prevents free flows. But a study concluded that temporary restrictions encourage long-term capital flows, which developing countries want. This vindicated Malaysia's position, which has Japan's covert backing.

Malaysia's experience showed that proper infrastructure should be in place to handle the flows and the IMF will have to list out the conditions conducive for capital flows.

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