Does India need the World Bank?

The Independent Evaluation Group (IEG) of the World Bank released its Annual Report of Development Effectiveness 2006 on December 8. Among other findings, the IEG states that the World Bank has consistently overemphasized growth rates at the expense of poverty reduction measures, especially in rural areas.

Only two in five borrowing countries have recorded continuous per-capita income growth over the five years 2000-05, and just one in five did so for a full ten years, 1995-2005…The Bank has found it challenging to help countries formulate and implement strategies that effectively reduce rural poverty. About half of the Country Assistance Strategy reviews carried out by IEG over the past four fiscal years concluded that the Bank’s assistance in rural areas had either not led to satisfactory outcomes or that rural poverty reduction required increased attention. [link]

The report is written in careful bureaucratese that refrains from strongly linking the policies of liberalisation and privatisation that the World Bank advocates to the failure in reducing poverty. Independent though it may be, the IEG is still closely affiliated to the World Bank and shares the latter’s ideology. The implicit assumption throughout the report seems to be that the policies advocated by the Bank are not in themselves to blame. The problem lies in inadequate preliminary studies of the consequences of reform measures and development interventions. Thus, the report states:

The Bank has not always paid sufficient attention to the distributional effects of growth enhancing reforms. As a result, the effects of the pro-growth reforms it supported were not always cushioned by safety net intervention. In trade reform, for example, the Bank often failed to conduct sufficient analysis to inform its policy advice and lending about the employment and poverty effects of reforms. Consequently, trade-related projects did not adequately attend to these effects. Similarly, in many transition economies, price and exchange rate liberalisations were not accompanied by the necessary offsetting measures to protect food security and provide social safety nets. In its support for reforms of pension systems, the Bank’s assistance focused primarily on improving the fiscal sustainability of pension systems, but it often failed to sufficiently address the pension system’s primary goal of reducing poverty and providing adequate old-age income within fiscal constraints.

Later:

To support growth strategies that more consistently translate into poverty reduction, the countries, the Bank, and their partners will need to further strengthen their understanding of what keeps the poor from participating in growth in each country, what prevents growth from reaching particular regions and sectors, and how urban-rural linkages and intersectoral mobility can be enhanced. [link]

The report states that the bulk of reduction of the world’s poverty over the past decades has taken place in China and India. Yet even in India: “The Bank had limited impact on fiscal and other structural reforms and failed to develop an effective assistance strategy for rural poverty reduction through much of the 1990s.”

The management of the World Bank objected to the IEG report on the grounds that it “paints an overly bleak picture of developing country growth and poverty reduction, failing to fully reflect both strong global growth trends over the last five years and broadly favourable prospects.” They go on to state that they have developed a new development strategy that is more sensitive to the rural poor in recent years. The results of this strategy will take some time, they believe, to become evident.

I am sceptical that the World Bank can incorporate more of the poor into the growth process by being more sensitive to their needs and conditions. The ideology of liberalisation and privatisation is so powerful that in many cases these processes will be pushed forward almost instinctively. In any case, many cost-benefit analyses that the World Bank has undertaken, as in the case of the Narmada Dam, have been revealed to be heavily biased towards the benefits while understating the costs. The presence of vested interests in most World Bank projects – local business elites, international consultants and construction companies etc. – is a well known fact.

The controversy that surrounded a proposed water supply and sanitation project in Delhi in 2005 is instructive. The aim of this World Bank funded project was to make water supply in Delhi reliable and available at all times to most of the city’s population. Parivartan, an Indian NGO, used the Right to Information Act to gain access to documents relating to the project. What they found was that the project aimed to do little to remove existing inequalities in water supply. Instead, the project offered “plenty of scope for super-profits for a few water companies.” [link]. The operational expenses were to be picked up by the consumers through their water bills. Parivartan estimated that “if the project is accepted, a typical family may find its water bills increasing five times over.”

As if that was not bad enough, other reports in the press show that the World Bank repeatedly interfered in the tendering process, to ensure that PricewaterhouseCoopers (PwC) gained a contract. To this charge the World Bank has responded that they interfered because the original shortlist did not contain any consultancies from the developing world (under World Bank procuring rules, they state, at least one firm from a developing country has to included in any shortlist).

Whatever be the case, the fact remains that in this project, as in most of its other projects the World Bank was primarily concerned to recover the costs spent on the project as quickly and efficiently as possible, without regard for the burdens placed on the consumer. The Bank has stated that while the tariffs on water would increase, these increases would not "remotely approach" 800-900% as quoted in the press. They have also advocated targeted subsidies to ensure that the poor have access to water.

The Bank, then, advocates a balancing between efficiency and the recovery of costs on the one hand and targeted subsidies on the other. Because the emphasis, as evident from the IEG report quoted above, is heavily tilted towards the former, there are grounds to believe that in this project as in others, considerations of equity have been obscured.

After all, heightened sensitivity towards the poor would not have eliminated either the World Bank’s tendency to quickly embark on the road to profit or the vested interests in search of those profits. Without a thorough shake-down of the ideologies and vested interests that dominate the World Bank, it is difficult to see how simply paying more attention to rural-poverty reduction can bring about more inclusive growth.

I am not one of those leftists who perceive only the negative aspects of globalization and condemn the World Bank as an imperialist organ that enters poor countries to suck profits from the masses. And I am sure that the World Bank has good intentions when they speak of showing more sensitivity to the needs and concerns of the poor. What I am saying, however, is that the World Bank may be structurally incapable of ensuring broad-based growth. After all, their host of consultants and other firms often do not often come from the places they serve and may lack the requisite incentive to ensure that the benefits to society and the growth it allows are broad-based. In a world where quantitatively respectable growth rates are difficult enough to produce, institutions like the Bank which are under great pressure to achieve results, are dazzled by volume of returns alone.

Noone but the governments of individual countries can ensure that growth is inclusive. And it is their responsibility to ensure that this remains so even in World Bank funded projects. Because it is not always easy to dictate terms to the World Bank it is perhaps wise to accept loans only when they are absolutely necessary and there are no other options open. In the case of India (and China), where the state is financially solvent enough to fund many development projects, projects from the World Bank should be considered on the grounds of whether it can provide something that other, locally funded projects cannot. This may involve locally-unavailable technology or knowledge. Eventually perhaps, as this editorial from the Hindu argues, it may be in India’s interests to phase out borrowing from the Bank altogether.