World Bank in search of market

THE PUBLICATION of World Development Report (WDR) by the World Bank every year is marked by a lot of publicity and fanfare. Last year's report generated controversies over abrupt changes in authorship and attempts to tutor the themes in the Report.This year's WDR (World Development Report 2002: Building Institutions for Markets) was released on September 12. The timing was unfortunate since, a day earlier, terrorists had attacked the World Trade Center, Washington and the Pentagon and news about release of WDR was also covered in the debris.

It appears that unlike Bernard Shaw's Black Girl, the World Bank continues its search for god. The black girl gave up her search after marrying a coarse Irishman and giving birth to ``charmingly coffee coloured''children. The Bank will not settle down to such a mundane life and continue its search for false gods. Not as long as Mr. James Wolfensohn continues as its President.

In a long article, Foreign Policy, September/October 2001, Stephen Fidler documents the failings of Wolfensohn. The charge is that ``under pressure from NGOs and other interested groups, and as a result of his own insecurities, Wolfensohn has surrendered the World Bank's intellectual integrity, rushing to embrace the latest fads in development thinking regardless of their substantive merit."

WDR 2002 provides convincing evidence of the lack of focus in the research work in the Bank, addiction to fads and forays into areas into non-developmental areas where it has no competence or claims to enter.

In posing the themes it is high sounding. It claims that the present WDR is a natural continuation of WDR 2000-01; and WDR 2003 will focus on other issues not covered so far such as development of human, natural and environmental capital as well as social cohesion and social stability.

Is it the case that when dealing with economic development or social transformation, issues such as social cohesion and stability are not relevant or not integral to the process? To those who work on social change, the links between social cohesion or stability and change should be clear and present and not to be relegated to later work or volumes!

WDR 2002, like its predecessor WDR 2000-01, lacks an over-arching political and social philosophy informing the themes. The present writer had dealt with the infirmities of WDR 2000-01 in a separate article. (World Development Report 2000-01, The Hindu, November 23, 2000.)

The recurring themes in the WDR emphasise the need to build institutions, complement institutions, innovate institutions or connect institutions. All these are in support of the `market' and to ensure `competition'. In all, the 193 pages of the WDR, nowhere is there any discussion of the `market', what it constitutes and how it is formed or grows. Market, in short, is the queen bee to which all other institutions have to pay obeisance like slave ants.

This is not an exaggeration. Consider the chapters and settings. Chapter 1 sets the theme. It claims to ``provide a diagnostic framework for understanding how institutions support market activity.''While it makes a plea for supporting the market, it fails to deal with the market in the larger context of societal structure and its role in different structures.

Other chapters deal with specific areas such as ``Governance of firms", ``financial systems", ``political institutions and governance", ``the judicial system", ``competition", ``regulation of infrastructure", ``societal norms and networks''and the ``media.''Each chapter weaves back and forth the concept of information disclosure, protection and enforcement of property rights leading to innovation, efficiency, productivity, trade and growth. These are attempted in a rather mechanistic way more like an impatient business executive wanting quick results.

When dealing with Government, the WDR makes the extraordinary suggestion that ``the ability of the State to provide institutions that support the market is an important determinant of how well individuals behave in markets and how well markets function.''``Successful provision of such institutions is often referred to as `good governance' (p.99). There is no other test of good governance!

``Market,''as perceived in the WDR 2002, is more a theological concept or a nirvana than an analytical tool. Market will foster growth and reduce poverty. It is now fashionable to link poverty reduction with growth.

As Easterly, one of the leading bank economists, pointed out, the International Monetary Fund and the World Bank had, during the last decade, given 36 poor countries ten or more loans each, with conditions attached and ``the growth rate of income per person of the typical member of this group during the past two decades was zero.''There have been other attacks on the World Bank from economists and journalists. The Bank has become defensive and attacks, in turn, the developing counties for their alleged failures.

For some years, the attack on developing countries was on their failure to put through the ``reform process.''When the rigid enforcement of reform process failed to show results, the tunes were changed. In more recent years, they began to talk of the need for ``second generation reforms''encompassing all aspects of society and government. The contents of second generation were not disclosed in advance or in full. The second generation army is now in retreat. The WDR 2002 therefore shifts gear and mounts an attack on weak institutions in developing countries and their failure to support the market.

Institutions evolve over long periods and support societies. Market is one among many, and, under modern conditions, it is no doubt assuming greater importance. It is indeed a valuable institution. Like all institutions, it should also serve the society and the people constituting the society. If there is a perception that the institutional matrix, including the market, does not ensure equity and justice, the structure will not survive. It is this rich and creative relationship between market and other institutions that many social theorists of the past have studied that WDR fails to capture. Or, is the Bank, by according primacy to the ``market", trying to gain confidence of the American business and Congress?

The WDR often talks of ``transaction cost''in most places and uses the term loosely in a way that would disturb Ronald Coase. Transaction cost, according to Coase, is not the cost of a transaction. It is inherent in dealings with any contracting party. There is always the risk of default and ``firms''are built to overcome this risk. A firm, according to Coase, is a negation of the market and, under ideal (costless) conditions, should not exist. Growth of big corporations comes about when they internalise the proprietary assets to capture the rents. WDR blithely assumes that there would be readiness to share information and all that is required to promote markets is to facilitate free flow of information, protect and enforce property rights, and the like. To say the least, this is a misreading of Coase and ideological delusion. Market realities are more complex than comprehended in the WDR 2002.

Likewise, there is an abiding faith on the behaviour of foreign banks and companies and developing countries are advised to seek their entry to strengthen their regulatory institutions or bring about more competition.

The WDR has the humility to concede, ``There is no size that fits all.''This was a criticism levelled against the Fund/Bank when bailout packages were administered during the Asian crisis.

When dealing with the transfer of technology to the farmers, IPR, TRIPS, bank regulation, and International Standards, the WDR makes observations, which are closer to the views held by intellectuals in developing countries. It is surprising that the WDR should come out with these findings on the basis of detailed work, but has not the damage already been done?

K. Subramanian

Send this article to Friends by E-Mail

Section  : Business
Previous : Chinese miracle: Lessons for India
Next     : New Honda Accord with all the goodies