IA-Forum discusses issues about the World Bank/IMF with Dr. Dennis de Tray, Vice President at the Center for Global Development. Dr. de Tray also served as World Bank Country Director for Indonesia, IMF Senior Resident Representative in Vietnam, and Country Director for the Central Asia Country Unit (Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan).
International Affairs Forum: Are the World Bank and IMF still relevant in today’s world?
Dr. Dennis de Tray: Yes, though in different ways than when they were founded. One of the problems is that both institutions look too much like they did when they were founded. It was a very different world in the 1940s and 1950s.
In some sense, the greater struggle is with the IMF. The IMF is partially a victim of its own successes and partially a victim of globalization. There are no current financial crises in the world that require IMF assistance. So without lending, the IMF doesn’t have income and without income, the IMF doesn’t have a budget. There’s a lot of soul searching within the IMF to determine what role it should be playing in this brave new world that we face today.
The debate within the IMF revolves around two issues. One is its surveillance role which is essentially a report card about all the countries in the world. It has done this for a long time but the debate is about strengthening that role and using it as a basis to try to ensure that global imbalances result in ‘soft landings’ and not ‘hard landings.’ The other continuing discussion is its role in low income countries. Much to its credit, the IMF has achieved reasonable success with most weak and fragile states in achieving macroeconomic stability, reasonable levels of inflation, and reasonably stable currencies. The issues in these countries are really less macroeconomic and more structural.
Technically, the division of labor between the IMF and the World Bank is that the IMF deals with the macroeconomic framework and the World Bank deals with structural issues. The IMF’s Poverty Reduction and Growth Facility, which is their low income concessional growth facility, has a tendency to overlap with the World Bank’s lending – particularly with that of the International Development Agency (IDA). While Mr. de Rato (Managing Director, IMF) has said that the Fund will stay relevant in low income countries, it seems to me that that discussion is not over yet. Certainly on the surveillance role – yes; on the macroeconomic stability side – yes; but the shared responsibilities between the IMF and World Bank on the more structural issues remains an issue of discussion.
The World Bank faces a different set of issues. The pace of reform has been very slow. As Mr. Wolfowitz indicated at the beginning of the Spring Meetings, it needs to refocus – or, more importantly, needs to focus. It has become much too broad in its development agenda, it is too big, and it is probably also very inefficient. Reforms need to be instituted. It is struggling to find its role in middle income developing countries such as Brazil, Mexico, China, and India (soon to become one) – the big countries that clearly have access to international capital markets. That struggle takes the form of what role does the World Bank play with countries that have clear and decent alternatives in terms of capital they can borrow from the international markets at a rate not that much higher than what they could get from the World Bank.
The Bank remains encumbered by a host of oversight issues among them environment, gender, resettlement, and human rights. These are things that most countries view as important but see them as internal issues and not something that should be imposed from outside. They also make the Bank cumbersome and slow and a more expensive place to manage. So the middle income agenda is very much in flux.
Why is that important? Because the bulk of the World Bank’s income generating lending is through its more commercial window – IBRD (the International Bank for Reconstruction and Development). Through this window, the Bank floats bonds that are backed by the guarantees of its shareholder nations. Those bonds are floated around U.S. Treasury, a very secure institution, which allows the Bank to lend to countries with the margin that covers its costs at rates that are less than what the countries would have to pay if they were going to borrow from commercial capital markets.
As these middle income countries find alternatives the income flows to the World Bank will decline; the same budgetary issues that engulf the IMF are also prevalent at the Bank. Yet, for the Bank this not as major an issue as the Fund, because it has other sources of income – it manages the money that it holds in float to service the loans that it makes, for example. Nonetheless, it raises the issue that if the project focus of the Bank in middle income countries declines rapidly, does one need as many staff members? This is particularly serious with the regional vice presidencies that are dealing with Latin America, Europe and Central Asia, and some parts of East Asia.
On the other side of the World Bank’s agenda are the low income countries and IDA, the concessional window of the bank. There is little debate that IDA has an important role to play in the international aid architecture. But with the rise of other sources of concessional financing, the so-called vertical funds – such as the Global Fund for HIV/AIDS, Malaria, and TB, large philanthropic funds like the Gates Foundation, increases in bilateral aid flows that are going into many countries – there’s a real question of IDA’s comparative advantage. What should IDA do in this larger context relative to the new players, relative to UN agencies, relative to the regional multilateral banks? That’s a difficult question because it requires not only a strong focus on IDA’s part but a division of labor between a very complicated, highly political, and badly coordinated system of aid agencies.
There’s no doubt, however, that most governments think that IDA is an important element of that process. It will be interesting to watch the discussions that have begun on the fifteenth replenishment of IDA – every three years IDA needs to be replenished because it’s a concessional window. Those discussions are where the rich countries of the world set the policies for IDA. They also establish the amount of money they are going to give to IDA and provide a framework where it might be spent with particular priorities. Those conversations are taking place right now and will continue through the rest of this year. They will tell a lot about what countries providing money for development assistance think about what role IDA should play.
IA-Forum: Should developing countries have more of a voice in the Bank?
Dr. de Tray: Yes, but a voice that recognizes that the World Bank is a bank – it is other people’s money, being either granted or loaned to second parties. No bank is going to let the borrowers dominate their board. More voice and democratic voice are two different things. It’s not realistic to have a more democratic voice on bank boards.
One of the great lessons of the last fifty years is that we recognize that there are many aspects of institution building and sustainable growth; development cannot be imposed on countries. It’s not that we don’t know what countries need to do but if countries don’t want to do those things – even if they say they do – it’s not going to work. In that sense, countries need more voice.
Also today, the IDA countries have alternatives to secure development finance so they will get more voice. There is more competition out there in the form of provision of development assistance – the rise of China as an investor - Official Development Assistance (ODA) type investor and as a commercial investor. These competitive pressures will force the Bank to listen to its clients more, and it needs to do that.
IA-Forum: The 2007 World Economic Outlook said that a foundation had been laid through technology, financial systems and macroeconomics for sustained global growth. But countries are not doing enough to prepare for financial challenges. How can the international community best work in this regard?
Dr. de Tray: That’s the sixty-four million dollar question in a way. Under the leadership of the IMF, the international community has been quite successful in achieving a reasonable degree of macroeconomic stability in countries, which is necessary for sustainable development.
The barriers to growth in many countries are both external and internal. At a substantive level, it is what the Bank is struggling with. For the most successful countries – even the low income ones, ones that might qualify for the Millenium Challenge Account funding, for example - it is more a matter of investment money and time. They’re going to make lots of mistakes and there will be ups and downs but that’s the nature of development and they’re on a course for development over the next several generations.
But there’s a spectrum of countries ranging from failed, fragile and post-conflict states to stable, effective states…about forty, fifty countries. The so-called weak and fragile states are places where the development community has had very little sustainable development success to date. It needs to think much more boldly about how to operate in those countries. In the past, the international community, and World Bank in particular, have in some ways substituted for weak governments or weak institutions – going around them, building parallel operations, building projects that were ring fenced and protected from corruption. That’s okay if you want to deliver a road but it doesn’t deliver sustainable development. That’s why the road collapses later because it wasn’t maintained, and wasn’t an integral part of the system in the country; country ownership is key.
Ownership goes back to the issue of ‘voice’, there has to be a more modest agenda in these countries that is driven by developing countries. It is not possible to impose Western, rich country institutions on very weak states. The process of development, particularly that of state institutions, has been gradual throughout history, even for rich countries. It is a matter of creating a longer term agenda. The best people to determine the pace of that agenda are often people within those countries, not people in Washington or other capitals.
That’s not a good answer to the question but we don’t have good answers to the question. I think we need to move to a process of dealing with countries in which the World Bank and international community stop doing the job of governing and start creating incentives for governments to do their own work. This is not conditionality, it is an insistence that if outcomes are not being achieved, it should be hard to argue that you should get more money. If you agree you want to expand your education system and are given fifty million dollars to do that and nothing happens, it’s hard to expect another fifty million dollars in the future. ‘We’re willing to help anyway you want but let’s agree that we’re not going to throw good money after bad.’ So it should be a more performance based process in which governments, even weaker governments, are held much more accountable for output. Right now the donor community is accountable because they take over - that’s a mistake.
IA-Forum: Mr. Wolfowitz has put anti-corruption at the forefront of the World Bank agenda. You’ve been critical of that….
Dr. de Tray: At the fundamental level, I’m not in favor of corruption. It’s a bad thing for countries and for development. But it’s everywhere – in Washington, D.C., London, in every country I’ve ever worked in. It’s just a matter of degree, not direction. My criticism of the Bank’s current anti-corruption agenda is that if you listen to Paul Wolfowitz, you could be left with the impression that the Bank’s objective is to reduce corruption. But the objective is development and poverty reduction. This must remain the World Bank’s objective. It is a development institution.
Corruption is one of many constraints to development. Poor countries have bad infrastructure, low human capital, bad institutions, civil services that don’t work, weak financial structure, and corruption. If you are trying to figure out what to do in a country and one of the constraints you see is poor infrastructure, you don’t’ say “we’re going to fix infrastructure”. No we can’t do that because we have limited resources. So you have to make some critical choices about where to put your resources to improve infrastructure – where is it most important, where do you think the economic returns/development impacts are likely to be highest.
My only argument is that’s the way you need to look at corruption. A new corruption commission or anti-corruption laws will have virtually no effect unless governments are serious and, given civil service salaries of twenty dollars a month and very weak legal systems that are going to be weak for decades, corruption is not going to be squeezed out of these countries soon. So we should step back and look at corruption in the same way other constraints are viewed.
I can argue that ensuring the President’s son doesn’t get a particular concession that he should have gotten in open competition may have much less development impact than the fact that there are seventeen different processes to get licenses for a small business and each requires a bribe. The development impact of the second may be much larger than the first even though the first is much more visible. I want to know on the things we care about – provision of public services, development of the private sector, creation of jobs, growth in real wages – where is corruption entering those production equations? At those spots, where in the relatively near future, are there opportunities to change things? Some are more analytic and evidence based and less morality based about corruption. I have no concern about the objective but I have been critical about the Bank’s approach to this issue.
I think we need some bold new thinking about this. For example, if you really focus on development, focus on output. Tell governments we have a real program, we’re going to build roads and finance them with half the money up front. They build the roads and then a fiscal audit would be done to make sure the roads were built and built to specifications: that costs (that have already been determined feasible) are in accordance. If the government fails those tests, additional money won’t be provided. I feel much less concerned whether my brother-in-law does it. It’s not a good thing but it’s not a fundamental problem. The fundamental thing is that the road needs to be built.
My experience is much shaped by my time in Indonesia. I was there from 1994 to 1999 and saw the peak of Indonesia’s development and its decline. From 1966 to 1996 Indonesia had the best record of development of any large country in the world including China. It grew faster, reduced poverty quicker, wages grew more, exports grew faster… everything that economists want. Was it a paradigm of clean government? No, it was corrupt throughout that time.
The President’s children got rich. But somehow, unlike Nigeria, they contributed to national economic growth rather than choking it off. The President’s oldest daughter had a virtual monopoly on building toll roads but she built toll roads and built them quite well. There were lots of them and a major force in the development process. She could cut through the red tape because she could say, “dad, fix it”. I’m not in any sense condoning that kind of nepotism of special interests, I’m just saying we need to have a more balanced view that says in the long term we need to get rid of these things: we need to have more transparency, a better legal system, and a civil service that works.
But if you wait for those things to happen you will postpone development for a long time. It doesn’t happen overnight. These are long term institution building issues that we know historically will take decades and generations. In the meantime, we should be doing something about the development agenda. We should be practical and look for ways to create incentives for governments to, as autocratic leaders would say, “leave this sector alone because we want results in this sector”. We need to create incentives for them to solve their own problems, not try to influence solutions from the outside.
IA-Forum: You directed the World Bank’s Mission in Central Asia (2002-2006), a region comprising many countries that don’t have excellent records of anti-corruption. Yet there was significant progress, some countries achieved double digit growth. What did you experience there?
Dr. de Tray: Kazakhstan is very much the Indonesia story. It was a government that had serious corruption problems but had a lot of oil and, in a relative sense, managed its oil wealth well. They accumulated a lot of reserves offshore but managed the classic ‘Dutch disease’ problem and avoided massive leakages by trying to push money through weak ministries. The country grew very rapidly.
Tajikistan, on the other end, is a very poor country. But from a very low base, it grew in double digits for a long time. It faces corruption, largely due to drug transit issues.
We were faced with a moral dilemma in these countries almost every day. The worst case in my judgment was the Kyrgyz Republic. It was running okay at five to seven percent. At that time, President Akayev, who was later deposed, was our counterpart. He was very urbane, a nice man, ex-academic, easy to deal with, loved the international community, loved Mr. Wolfensohn (then President of the World Bank). His wife was reputed to be one of the most corrupt people in the country. His son was director of the public investment program and was said to drive a very large Hummer home every night on a government salary of about thirty dollars a month. For me, it was a much more difficult choice than Kazakhstan because I thought the international community looked foolish. There were lots of donors active in the Kyrgyz Republic. The development impact for our work was still quite good. We did some very innovative work in the health sector; we had a very good community development village improvement project that was creating real accountability on the ground. These were major successes on the development front because the Kyrgyz Republic was more or less a democratic place with lots of NGOs, a reasonable amount of voice, a relatively open press. Even though all these other things existed, there was no pressure on us not to work there.
Uzbekistan was a very different story. It had a government that was very autocratic, very unpopular internationally, accused of a number of human rights violations from torture to the Andijan tragedy. There were programs in which we and the government agreed on objectives – for example, in the health and education programs – that were achieving real advances in terms of the quality of service provision to the poor, the lower half of the income distribution. But it was much less tolerated and harder for us to work there because of the nature of the regime.
In Turkmenistan, there was no program. We could not find any way to operate that would come close of letting us believe that we were having any impact on the people. Mr. Niyazov, the famous “Turkemenbasi”, he of renaming the months of the year after his family and other strange things, was President. It was like North Korea, a total cult of personality. His policies were crazy.
Where there are corrupt regimes, autocratic regimes, not nice regimes but you are able to do some good for the people, it is a real moral tradeoff. Are you, as a development practitioner, going to concentrate on anti-corruption and withdraw assistance thereby letting people’s lives decline? Do you help build up their health and education systems that inevitably will make the corrupt government look better? It’s a very difficult issue but everybody that does development in these countries faces it daily.
IA-Forum: Turning to the recent Spring Meetings, were there any surprises outside of the controversy surrounding President Wolfowitz and the salary raise given to Shaha Ali Riza?
Dr. de Tray: I think they were going to be a non-event Spring Meetings until this issue broke. It’s indicative of why this issue needs to be resolved. Virtually nothing else got to the surface outside of the Wolfowitz crisis. Mr. Wolfowitz’s attempts to address substantive issues were drowned out by concerns over his ability to lead the institution. It’s an indication of the distractions of those sets of issues that I think it would be hard to write down what came out of the Spring Meetings for most people. There is a compelling need to get this issue resolved quickly.
IA-Forum: Do you think the controversy is, in any way, a backlash of sorts against Mr. Wolfowitz’s past?
Dr. de Tray: It’s not possible to understand what’s happened if you don’t take the context into consideration. He came in as an unpopular President, the vast majority of the staff were extremely upset when he was appointed. He also has a difficult management style and has surrounded himself with people who have a similar management style. This has created a great deal of animosity at the Bank – at the senior level particularly – because there is a sense that he doesn’t trust the professional staff. So that was all festering underneath. He had some very serious run-ins with the Board, particularly with the European members. He appears to have made some arbitrary and not entirely well founded decisions all on his own, unilaterally, without consultation with his professional staff, without consultation with the Board. All of that is background.
It’s a bit of a case that the particular issue with Shaha Riza is the large plank that broke the camel’s back. I suspect people were looking for something because they were quite unhappy. If it hadn’t been this, it would’ve been something else because I think things were coming to a head. There were too many well documented anecdotes of things that just didn’t look good and were beginning to trouble the staff. This included issues with (Juan Jose) Daboub, family planning, reproductive health – of course, now everybody denies it but it was there, it happened. This was the match that lit the fire but the bonfire had been built long before this. It’s why I think it’s going to be very hard to step back. There is no going back at this time.
IA-Forum: So you support Mr. Wolfowitz leaving the office?
Dr. de Tray: It’s not a crisis of Mr. Wolfowitz, it’s a crisis of governance. The executive directors, in some artificial sense, hired him. The U.S. appoints the World Bank President but they technically hire him, they are they governance of the Bank. Either they have to endorse him and give him the authority to run the Bank and say why they’ve done that or have to fire him. What they cannot do is leave the current situation the way it is.
The Bank is dysfunctional right now. Nobody’s focusing on development work of this huge, crucial development agenda that is growing by the day. It’s very hard for me to understand how you’re going to create a set of circumstances that will allow Mr. Wolfowitz to continue to run the Bank. The chasm between himself and the staff, between himself and senior management was exemplified by reports that Grant Wheeler, in a meeting of the Bank Vice Presidents, said that he believed it was time for Mr. Wolfowitz to step down. These are extraordinary things, in the true sense of the word – they have never happened before.
I don’t see that there’s a choice. At this stage, I really don’t think the details of the case are any more relevant. We are who we are. Humpty Dumpty has fallen off the wall and I don’t see how the pieces can be put back together. If somebody can tell me how that can happen, I’m prepared to listen. I’ve certainly thought about it and I don’t know where to start on it.
Martin Wolf had a nice piece in the Financial Times where he ended it by saying that the World Bank is a much more important institution than one person. What he meant is that Mr. Wolfowitz needs to go so the Bank can reform and make its development agenda more effective. I find it hard to think of an alternative at this juncture.
IA-Forum: Thank you, Dr. de Tray.
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