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Has the World Bank made a difference?

Updated Thursday, 3rd August 2006

Trushna P. Patel looks at the World Bank's record

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James Wolfensohn, former World Bank president

Some progress in poverty reduction has been made: the number of people living on a dollar a day or less fell slightly from about 1.3 billion in 1990 to 1.2 billion in 1998 while the poverty rate fell from 29 percent to 24 percent. Social indicators for developing countries have improved. Infant mortality rates have fallen from 107 per 1,000 live births in 1970 to 59 in 1999.

Since 1970, life expectancy has risen by four months each year, on average. Food production has increased faster than population. Educational outcomes have improved with higher primary school enrolment rates and adult literacy rising, from 53 percent in 1970 to 74 percent in 1998.

Yet, nearly 1.2 billion people still live in poverty. Moreover, poverty alleviation has been extremely uneven with East Asia, which accounts for over a third of the population of the developing world, experiencing the largest fall in poverty. East Asia saw its poverty rate almost halved, with the number of people earning US$1 a day or less reduced by 174 million.

In contrast, South Asia, which accounts for over a quarter of the developing world's population, saw only a modest 4% decline in poverty rates while poverty rates were relatively constant in Sub-Saharan Africa, Latin America, and the Middle East and North Africa. The transition economies of Eastern Europe and Central Asia however have seen poverty double (Assessing Globalisation, 2002). Clearly poverty reduction efforts have yielded unsatisfactory outcomes in these regions, despite progress in some countries such as Uganda.

A recent World Bank report, Strategic Compact Assessment, reviewed the Bank's progress in implementing President James Wolfensohn's reform initiative which, among other things, promised greater efficiency and effectiveness in achieving the Bank's main goal of poverty reduction. Perhaps the most telling finding of this review was the view of many of the Bank's clients that "while the Bank is relatively effective in assisting countries in strengthening their policies and structures for economic growth, the Bank is not perceived as being strong in its main mission of poverty reduction." (CA, 10). Another finding was that only 33% of borrower government officials found the bank to be effective at helping to reduce poverty.

A study by Paul Collier and David Dollar on the allocation of aid and poverty reduction finds that actual aid allocation is not poverty-efficient, in other words the current allocation of aid is inconsistent with the goal of maximising poverty reduction. They estimate that the present allocation of aid lifts about 30 million people out of poverty annually while a poverty-efficient allocation would more than double the impact of aid on poverty reduction with an additional 51 million people affected. A major problem they identify is that "aid is being tapered out with reform when it should be tapered in with reform", as Angela Wood put it in The ABC of the PRSP. As a result, there are many unexploited opportunities for poverty reduction.

Collier and Dollar observe that aid increases the benefits of good policy while good policy increases the impact of aid. However, aid allocation does not take advantage of this relationship and instead allocates fewer resources in those good policy environments that maximise aid effectiveness.

Many other studies have highlighted the importance of a good policy environment for aid effectiveness. William Easterly suggests that debt relief can only be effective at promoting development and poverty reduction if the recipient government is committed to reform and stops "eating the future"

Easterly's argument is that many of the developing world's corrupt or predatory governments have high discount rates against the future, valuing present consumption over future growth or "eating the future".

In this situation government preferences dictate that they will borrow as much as they can (i.e. debt relief would simply lead to new borrowing) or will decumulate assets and extract as much as possible from the private sector (through high taxes, inflation, corruption, overvalued exchange rates or financial repression).

Unless these preferences change and governments lengthen their time horizons debt relief is unlikely to have much positive impact for growth, and in fact we could expect to find debt relief associated with new borrowing and worse policy environments.

A study by Dollar and Svensson determined that the effectiveness of adjustment lending depends on domestic political economy factors of the developing country. They conclude that the role of the World Bank is to identify reformers, not create them.

Another study by Burnside and Dollar found that when aid happened to coincide with good policies, it had a strong positive effect on growth; otherwise it seemed to result in unproductive government consumption. Overall many recent studies seem to suggest that aid is most effective when used to reward good policy. Thus a key factor for increasing World Bank lending's impact on poverty reduction would involve channelling more aid to those countries that show a commitment to pro-poor policies.

However, many have criticised the World Bank's focus on growth and poverty reduction for being too narrow and ignoring the issue of equity. Robert Wade has often asserted that the Bank ought to focus on inequality, not just poverty.

Wade observes that inequality is rising across the globe pointing to what he calls the "missing middle" - the fact that there are relatively few countries with average incomes between $5,000 and $11,500 in purchasing power parity (PPP) terms (PPP measures income in terms of the purchasing power it provides over a common bundle of goods and services thus taking into account differences in the cost of living across countries, e.g. considering that a hair cut in Kampala will cost less than one in London). Instead most countries fall at either of the two extremes with no evidence of convergence between the incomes of the rich and poor.

While there has been much debate on the extent to which inequality has been rising worldwide, irrespective of the figures used, there is no evidence that shows inequality to have fallen across countries. UN statistics show that the incomes of the richest 20% were 11 times bigger than incomes of poorest 20% in 1960 and 15 times bigger in 1997 in PPP terms. However, an article in The Economist points to a study by Xavier Sala-i-Martin which states that substantial growth in China (and to a lesser extent India) has resulted in rapidly rising incomes. The article goes on to suggest that "inequality measured across all the people of the world, therefore, may very well be falling" thus even if you see divergence across countries there may be convergence across people.

A World Bank study by Dollar and Kraay also points out that growth in China, India and East Asia has contributed to narrowing the gap in their populations' living standards with the developed world. Furthermore, when examining the relationship between overall gross domestic product (GDP) and aggregate growth rates and the incomes (and growth of income) of the poorest 20% of the distribution for 80 countries covering a period of 4 decades, they find that during periods of significant growth the incomes of the poor increased, approximately one for one, with the overall growth in mean income implying that substantial benefits from growth were reaching the poor. What is more, Dollar and Kraay observed that during periods of "crisis", or negative overall growth, the incomes of the poor do not fall disproportionately.

This article was originally published in 2003


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