International financial institutions: Unemployed looking for job - II

Forrest Cookson

The previous article (Holiday 27 April) noted what excellent institutions the IMF, World Bank and ADB are assessed by the quality of their staff and their diligence as international civil servants. This article examines the framework of their approach to their work and contrasts it with two other ways to approach the development problem.
   The IMF and the Development Banks have a "model" of how development takes place. There is another concept called "sustainable" development. I will deal with this in a third article. This model I will call the neutral case (N model). The N model specifies that the economic rules - tax rates etc are established so that resource allocation would be the same as if there were no rules. It further argues that there should be low inflation, limited Government deficits, no subsidies, and reliance on the private sector rather than the government to own and operate business establishments. The key point is to allow the economy to function by responding to prices established by supply and demand.
   The argument for the N model is the core intellectual basis of economics: Individual economic agents acting in their selfish interests produce the most for the society. The interventions by Government distort and should be avoided or formulated in a way that do not distort price relationships. Doing good hurts not helps. Attempts by Government to change the market outcomes fail and make things worse not better. Income distributions can be changed to some extent by non-distorting taxes. Problems of income redistribution are political and one should not distort the resource allocation for such purposes. What is essential is competition. Without competition, resource allocation quickly deteriorates.
   The empirical support for N model rests on three observations: First, all empirical economics proves that markets work. Although there is a great deal of uninformed claims of market failure, generally in the absence of government interference markets work effectively to balance supply and demand and to send signals to producers as to how much should be produced. My "definition" of an economist is someone who sees prices and markets as empirically proven to allocate resources correctly. Second, efforts of governments to own and operate enterprises generally fail. Of course there are some successes but virtually all government enterprises are unsuccessful. It is hard to identify a single enterprise owned by the Bangladesh Government that covers its costs, pays it loans, increases its productivity, earns a profit and invests in directions that produce the highest returns. Third, acceleration of growth requires investment and saving; to obtain this higher level of investment the developing country should borrow from abroad and to obtain favorable terms the development banks became important sources of capital. The essential relationship between the rich and the poor is that the rich lend to the poor so that the poor can grow faster. The empirical support for this is based on what happened before World War 2.
   Hence, the N model calls for reliance on markets, privatisation and borrowing from foreign sources [including importantly private direct foreign investment] to increase the rate of investment. This is a simple version of the model that the IMF and the World Bank have used for analysis of the economies with which they work. In a world of impaired market access to private capital sources through bond issues in developed countries raising capital on world capital markets was very difficult. The development banks filled this gap. Gradually this access has become feasible opening the opportunity to use such private capital markets. The N model sees this as the natural evolution of world capital markets and looks to increasing use of private sources of capital to finance development.
   The second model I will call the development economists or DE model. This model calls for high levels of protection for local industries to enable shift of the source of the production from import to domestic production. Since the size of the markets compared to the size of efficient factories is small, competition is difficult, so the Government nationalisdesd the ownership of these factories. Third funds will be borrowed from the World Bank and ADB to finance a higher rate of investment. Of the three tenets of the N model two are violated by the DE model.
   This model was very popular in development economics for many years and still seems to be influential in Bangladesh. The strategy followed by Bangladesh has more or less followed this model for the first 20 years after liberation. Since the late 1980s there has been less investment by the Government in the industrial sector leaving this to the private entrepreneurs. However, relatively little has been done to divest some of the important enterprises owned by Government in transportation and energy sector. The arguments over protection of local industry continue. The import bias studies show continuing, but declining bias towards imports. Protection levels remain very high. The business community that competes against imports always argues for higher tariffs.
   This approach to development is characterised by overvalued exchange rates, extensive capital controls and high tariff rates. In the past there were extensive direct control of imports and export taxes. India and Bangladesh have gradually moved away from this approach. The IMF and World Bank fight continuously against these ideas. The DE model essentially rejects markets and prices, works to restrict international trade, and generates substantial profits for privileged businesses; the argument is that since much of the companies that benefited from this policy are owned by the Government, it does not cause income inequalities. This model encourages government ownership of enterprise. But the model does support the transfer of resources from the rich world to the poor world. Politically this viewpoint generates a campaign demanding more resources at favorable terms from the rich world. Usually, while simultaneously demanding self-sufficiency the proponents of this model argue for increased flow of capital into poor countries to enable higher levels of investment. However, the emphasise is on capital from rich countries' Governments, not private capital markets.
   The third model we call the East Asian or EA model. This model focuses on increasing exports rapidly. The exporting companies earn high level of profit and reinvest a large proportion into additional production facilities. While the approach relies on markets to a large extent, there is aggressive intervention to ensure that rapid export growth is achieved. Such intervention takes three major forms: The exchange rate is undervalued. In contrast to the N model where the exchange rate is meant to clear the market and the DE model where the exchange rate is overvalued, the EA model features strongly undervalued exchange rates. The second form of intervention is to ensure low interest rates for the exporters. Interest rates in poor countries are always systematically higher than in the rich countries but such high interest rates discourage the extensive use of capital in production processes. In export industries there is less flexibility in replacing capital by labor so the competitiveness of the industry relies significantly on the depth of capital. Sectors with high labor to capital ratios will be developed first but high interest rates still threaten competitiveness. Interventions in the EA model force the cost of borrowing to be low.
   The third intervention is to protect some industries marked for expansion. The industrial development of a nation involves a sequence of levels of complexity. Each country has a different set of problems to solve in this respect but for countries with substantial populations there is a broad similarity to the sequencing. The problems of management, labor discipline, technological improvements, productivity increases are all ones that are learned from experience, trial and error, and often help from Government. In this sense the EA model does not accept the unquestioned reliance on prices and markets of the N model. But the emphasis is the exact opposite of the DE model; rather than encourage import substitution as the lead, export of industrial goods are the main objective. Other types of exports (agriculture and mining) are less transforming of the economy. This strategy relies heavily on private foreign investment not so much for the resources as for the marketing and production skills.
   The EA model relies on the private sector to drive the economy and generally avoids government ownership. In nations such as China there is not so much privatisation as letting the government side become small compared with the private until it becomes irrelevant. But the underlying preference is for the private sector. East Asia has learned that governments cannot run enterprises. Finally, more remarkable is that successful growth requires that capital be sent abroad. The successful East Asian growth countries have built up very large investments in developed countries. In effect capital is sent from the poor to the rich. This largely takes place as it is imperative to keep the exchange rate undervalued and the mechanism for doing so is to accumulate large holdings of foreign exchange.
   The EA model differs from the N model in accepting the need for extensive market interventions and recognising that exporting capital is required, not importing it. It agrees with the N model in downplaying government ownership and management of enterprise.
   The EA model works while the other two do not! The proponents of the N model believe it ought to work since it is consistent with economic theory as it is now formulated. Its failure must therefore be attributed to other factors; corruption is a favourite candidate, more generally with bad governance. This remains theory however. The East Asian countries have ignored the N model with the exception of the Philippines, the one country that has failed to make the progress that those who adopted the EA model achieved. The development banks and the Fund have little influence in those countries that have followed the EA model. When the financial collapse came the wrong response by the IMF and the limited resources the development banks could mobilize quickly resulted in the N model being even more irrelevant. While it is not yet entirely clear I suspect that the deteriorating performance of the Thai economy is due to adoption of some of the N policy prescriptions.
   China is a good case - China of course works with the two development banks. This is done for a number of reasons: First, the staff of these institutions is extremely smart and knows a lot about specific areas and China is happy to learn. Projects help to bring this knowledge in. Most projects are, however, not focused on really key aspects of China's rapid development. Second, China wants to be involved in the Banks; these are influential and important organizations with excellent reputation and we can see that a number of very excellent Chinese civil servants are now working for the development banks. But this does not mean that there is any serious influence over the key Chinese development decisions. For the Fund it is even more the case; the central issue of the Dollar-Yuan exchange rate is an issue that the Fund can comment on, but is not a player at the table when this is fought over.
   In the real world there is no conflict here. The EA model countries go their own way. The struggle between proponents of the DE model and the N model goes on in the rest of the world, particularly in South America and South Asia. In Bangladesh the argument is particularly sharply drawn. Unhappily there is no real proponent in Bangladesh for the EA model, the one that really works. Vietnam, far poorer than Bangladesh only a few years ago, follows the EA model, uses the development banks in limited ways and grows rapidly. None of these development institutions has a strong influence on their macro-economic policy. India determined to follow the DE model has only recently begun to grow rapidly because they moved almost by accident towards the EA model. Not all the way it must be said, but then their growth has been higher for only a few years.
   The difficulty facing the development banks is that the model they support-the N model-is not very successful. There is no way that they can bring themselves to support the successful EA model. On the other hand in Bangladesh the Government bureaucracy has not been able to shed its love for the DE model, resent the efforts by the international financial institutions to force them to buy the N model, and along with their colleagues from these international financial institutions continue to be unable to comprehend the EA model. Bangladesh will do okay with the approach that is being hammered out between the different viewpoints. But the loss from ignoring the EA approach is staggering. We conclude reminding readers of the "50 year theorem." When an organisation reaches 50 years it should reinvest itself or close shop.

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Water, water everywhere
but not a drop to drink!

Nasrine R. Karim

War: first, one hopes to win; then one expects the enemy to lose; then, one is satisfied that he too is suffering; in the end, one is surprised that everyone has lost.: Karl Kraus (1874-1936)
   It is predicted that if there is the 3rd World War will not be about oil - but water!
   Have we in Bangladesh ever thought of how to preserve fresh water for rainy days, which according to experts, are not very far away. With India seriously planning of linking rivers and our water dangerously microbe ridden and polluted by industrial waste, also not to forget the "silent disaster" arsenic contamination... First was the "quick fix"- the shallow tube wells to stop children dying from infected surface water. (Nobody thought of running soil tests). Simply put, our shallow aquifers are now severely contaminated with heavy metals and arsenic. Since NGOs like ours (Earth Identity Project along with Stevens Institute of Technology, NJ, USA) did such a good job making people aware that they were in danger of drinking poisoned water, the politicians came to the rescue with another "quick fix". They took to "giving away" deep tube wells at random! Now our deep aquifers are in danger. When that goes, we will have to turn to the rivers. Since ponds were considered contaminated, they were filled up and houses came up instead. Therefore we have very little option except for the rivers failing that, the sea! (Desalinization plants are very expensive!)
   Unrestricted exploitation of groundwater has resulted in grave problems such as arsenic poisoning and increased salinity in areas of Bangladesh. High fluoride levels are also assuming threatening dimensions. Unless there is focused attention to this sector, millions of people will die in the next decade. The task is a mammoth one and cannot be tackled by the Government alone. Natural contaminants and the rising level of chemical pollutants such as pesticides and insecticides in groundwater the distribution of safe water has become very important the rural areas. We now have mobile phones, but we need water too.
   In the absence of any credible data on the quality of water from taps in the urban areas, one really cannot comment on the portability of the existing supply considering the water distribution and sewage systems were built by the British and has not been upgraded since! However unrestricted permissions are being given to build high-rise buildings in plots meant for one family but now is replaced by circa forty! I also confirm that there are areas in the cities that do not get enough water for weeks! Planning for water is archaic!
   Many wonder why Israel won't give back the occupied territories in return for peace. One reason is that more than half of Israel's water supplies now come from the Mountain Aquifer and Jordan River basin, which are situated deep within them Jericho used to be one of Palestine's prime agricultural spots. The abundance of springs made the land surrounding the ancient town fertile and famous for its oranges, bananas, strawberries, and other fruits.
   Things have apparently changed. Fields have dried up, crops are dying and farmers are out of work. The reason is simple: water. Israeli settlements get priority access to water and as they expand and new ones are built, the amount of water available to Palestinians decreases. Because of its strategic location between Jerusalem and Jordan, the Jericho region has been particularly affected. It helps Israel divide the north and south of the West Bank from each other, and creates "facts on the ground" that preclude the establishment of a viable Palestinian state. But its water crises are repeated across the Palestinian Territories.
   Since seizing the West Bank in 1967, Israel has illegally exploited the Mountain Aquifer and Jordan River basin. Many historians believe this has been the underlying reason for the invasion and occupation of the West Bank in the first place.
   One of the first military orders of the occupation was the confiscation of almost all West Bank wells. Since then, drilling for new wells has been banned and quotas have been imposed. The amount of water allocated to Palestinians has been capped at 1967 levels, despite the subsequent growth in population.
   Water has been a source of conflict in the Middle East since time immemorial. Israeli attempts to divert water from the Jordan-Yarmouk river basin into the Negev were a key source of the 1967 war. And the Golan Heights, which Israel still refuses to give back to Syria, is another source of water.
   Today, Israel uses 79 per cent of the Mountain Aquifer and all of the Jordan River Basin-bar a small quantity that it sells to Palestinians in Gaza. While Israelis get some 350 litres of water per person per day, the Palestinians get just 70 litres! The minimal quantity of water recommended by the World Health Organisation is 100 litres.
   When supplies run low during the summer months, the Israeli water company, Mekorot, simply shuts off the valves that supply Palestinian towns. This means settlers get their swimming pools topped up while Palestinian villages a few miles away run out of drinking water.
   When tensions are high-as an every day phenomenon - the situation becomes truly unbearable, especially for the Palestinian villages that were never connected to a water supply in the first place!
   Since the start of the Intifada, Israel has made it almost impossible for water tankers to enter Palestinian areas or for villagers to get to nearby wells. Some Israeli human rights group says Israeli soldiers sometimes beat and humiliate tanker drivers or deliberately spill their water. Water is so scarce, that to willfully destroy it is a sin.
   According to a report from Palestine, Yunis Muhammed 'Abd Tim Jabarin, a father of eight from a village in southern Hebron described how, in hot weather, "often we don't have water for ten to twenty days. In such situations, my wife and daughters ask the neighbours for water, but they can only give enough for drinking and cooking. As for washing, we have got used to showering once every five to seven days. The situation is intolerable, especially in the summer."
   But towns with connections also face problems, according to Ayman Rabi, of the Palestinian Hydrological Group. "Settlers attack the Palestinians' water supply, severing pipes and switching off valves," he said. "They dump untreated sewage on Palestinian land, polluting wells and aquifers." The Israeli army has also routinely destroyed water supplies, an activity defined as a war crime.
   Part of the problem is that the Oslo Peace Accord tried to institutionalize Israel's withdrawal of Palestinian water, and it's potential discriminatory allocation system. Yehezkel Lein of B'Tselem said, "Comments from Israeli offices give the impression that Oslo transferred responsibility (for water supplies) to the Palestinian Authority."
   "However, Israel continues to maintain almost total control over water in the occupied territories. Every new project, from drilling a well to laying pipes or building a reservoir, requires Israel's consent."
   Israeli reluctance to relinquish control of West Bank water is not surprising. More than a quarter of its water supplies now come from the West Bank aquifer-and over a third comes from the Jordan Basin. It has no legal right to the water and it's not using it regularly either. Private swimming pools and green lawns should not be a priority in desert areas!
   Over-extraction from the Jordan River is the main reason the river flow has dropped nearly 90 per cent in the last 50 years. It is now just a small stream, too small to replenish the Dead Sea, which is also fast-disappearing. Many hydrologists predict that it won't exist in 50 years. So how will the population of Israel and Palestine-predicted to double in 25 years-survive?
   Israel boasts about how it made the desert bloom, how the original inhabitants of Palestine were "wasting" the land. But far from wasting the land, the Arabs lived in harmony with its realities and within its constraints. By forcibly greening of its desert, Israel has simply turned parts of Arab land into desert, unable to provide its inhabitants with basic water, the most fundamental pre-requisite for life.
   Who is taking care of ensuring safe water for our future? We have to look at the ground realities and our immediate "surroundings" for solution! Whoever controls the source, controls life. Water is the essence of LIFE.

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Barrister Harun ur Rashid

The scandal with which Paul Wolfowitz, the President of the World Bank since 2005, is deeply involved demonstrates two things: first how the WB President is appointed and secondly, how the Bank is governed. It is as much a crisis of governance as a crisis of leadership.
   The World Bank is exposed by this scandal where the girl friend of the President of the Bank gets transferred from the Bank to a plum job with a fantastic salary at the US Department of State at the initiative of the President without going through the due process of the Bank including the Ethics Committee.
   It is ironical indeed that developing countries get lessons on good governance and accountability from the WB President off and on but he himself suffers from bad-governance and accused of nepotism and cronyism. So much rot is found in the governance style of the President, he should not dare say on the relevance and necessity of public morality in the conduct of Third World leaders.
   
   Undemocratic appointment
   The victors of the Second World War divided among themselves the booty. This means that the US will nominate the President of the World Bank, while European powers for the head of the International Monetary Fund. This system is most undemocratic and it is continuing in the world's two biggest financial institutions for more than sixty years.
   Although different voices have been heard by various member countries including Japan and Germany, (the second and third largest economies in the world) on the restructure of the institution, both the US and Europe remain complacent about the method of appointment of the heads of these two influential organizations. This is because the current method favours them, to the exclusion of others.
   Although Wilfowitz is an intellectual and known as "bull dog" among his colleagues, his judgments are proverbially poor. He has been a die-hard neo-conservative, believing in military power to achieve America's goals. He does not believe in soft power, winning hearts and minds of people.
   Furthermore his decisions had been tainted by lack of public morality and in such circumstances his friends and colleagues get appointed to positions of responsibility and high income regardless of merit. No wonder his girl friend, Shaha Riza, a World Bank employee, landed in a job in the Department of State with a salary higher than that of the US Secretary of State!
   The interesting fact is that he wants to continue in the Bank as its head, irrespective of the fact that his integrity and leadership quality has been in the mud. He even has appointed a lawyer to argue his case before the Board.
   Observers believe that he can only stay on the job if European powers remain quiet with the US nominee because if Wilfowitz goes, they may lose the privilege to nominate the head at the IMF.
   
   How did he come?
   President Bush's practice of bestowing better jobs on those who bungled the Iraqi war is well known. Paul Wilfowitz was promoted from his position to the World Bank in 2005, despite a Pentagon record that as the number two at the Pentagon, his judgment was appallingly poor.
   For example, Wilfowitz's hype of bogus intelligence about WMD and a nonexistent 9/11-Saddam connection; his assurance to the world that Iraq's oil money would pay for reconstruction and his public humiliation of General Eric Shinseki after the General dared tell Congress correctly that seven hundred thousand troops would be needed to secure Iraq after the invasion, are instances in point.
   Once the war began, Wilfowitz cited national security to bar businesses from non-coalition countries (including Germany) from competing for major contracts in Iraq, ensuring the monopoly of Halliburton (Cheney's old firm) and other White House- connected companies, including the one that employed his girl friend, Libyan-born Shaha Riza.
   
   How the Bank is run?
   The President of the Bank has almost unfettered powers, although its executive board monitors and decides policy decisions. Wilfowitz brought two former White House aides to the Bank as senior advisers to run it, as if the World Bank is a part of the Bush administration's implementation cell of US policies.
   His gung-ho policies against bad governance and corruption fell into trouble. Although his policies were apparently laudable, his decisions to stop Bank aid to some developing countries unilaterally and without the approval of the Board have caused concern among many member-countries.
   The recent events generated at the World Bank have brought to the surface that the President himself is accused of bad governance and cronyism (a kind of corruption). His leadership is in tatters and the managing director of the Bank Wheeler (an Australian) came out publicly that Wilfowitz had to go for larger interest of the Bank.
   
   Reforms
   Deeper questions as to the fragile structure of current governance and about relevance of the Bank are being raised, including whether the post-war settlement under which the Bank and the IMF is led by the US and European powers should be revised now.
   There seems to be a vocal demand that the both these institutions must be free from influence of the US and European countries. Both the institutions should undergo reforms and move into the 21st century. For example the sharing of heads of the Bank and IMF by the US and European nominees should go, giving chance to candidates of other countries, such as Japan, Germany, China or Brazil. The existing system of appointment does not reflect the realities of economic power in the world.
   Whether or not Wilfowitz goes, the World Bank needs drastic reforms. The scandal has provided opportunity for the member-states to carry out the necessary reforms in the voting system of the Bank including the method of appointment of the President.
   It is surprising that such an undemocratic global institution exists at the 21st century. The World Bank should be a "shining city on a hill", not to be exploited for American interests, rather broader interests of the world as a whole.
   With regard to the current situation of the World Bank, it reminds me of a quote of US author and humourist Mark Twain (1835-1910) who once said: " It is by the goodness of God that in our country we have those three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them".
   The writer is a former Bangladesh Ambassador to the UN, Geneva.

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