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Thursday, May 24, 2007

Jeffrey Sachs: China's Lessons for the World Bank

Jeff Sachs says the World Bank needs to learn the lessons provided by China's approach to economic development:

China's lessons for the World Bank, by Jeffrey Sachs, Project Syndicate: The China Daily recently ran a front-page story recounting how Paul Wolfowitz used threats and vulgarities to pressure senior World Bank staff. ... At the same time, while the Wolfowitz scandal unfolded, China was playing host to the Africa Development Bank (ADB)... This is a vivid metaphor for today's world: while the World Bank is caught up in corruption and controversy, China skilfully raises its geopolitical profile in the developing world.

China's rising power is, of course, based heavily on its remarkable economic success. ... I had the chance to participate in high-level meetings between Chinese and African officials at the ADB meetings. The advice that the African leaders received from their Chinese counterparts was sound, and much more practical than what they typically get from the World Bank.

Chinese officials stressed the crucial role of public investments, especially in agriculture and infrastructure, to lay the basis for private-sector-led growth. In a hungry and poor rural economy, as China was in the 1970s and as most of Africa is today, a key starting point is to raise farm productivity. Peasant farmers need the benefits of fertiliser, irrigation, and high-yield seeds, all of which were a core part of China's economic takeoff.

Two other critical investments are also needed: roads and electricity... Farmers might be able to increase their output, but it won't be able to reach the cities, and the cities won't be able to provide the countryside with inputs. The officials stressed how the government has taken pains to ensure that the power grid and transportation network reaches every village in China.

Of course, the African leaders were most appreciative of the next message: China is prepared to help Africa in substantial ways in agriculture, roads, power, health, and education. And the African leaders already know that this is not an empty boast. All over Africa, China is financing and constructing basic infrastructure. During the meeting, the Chinese leaders emphasised their readiness to support agricultural research as well. They described new high-yield rice varieties, which they are prepared to share...

All of this illustrates what is wrong with the World Bank, even aside from Wolfowitz's failed leadership. Unlike the Chinese, the bank has too often forgotten the most basic lessons of development, preferring to lecture the poor and force them to privatise basic infrastructure, rather than to help the poor to invest in infrastructure and other crucial sectors.

The bank's failures began in the early 1980s, when, under the ideological sway of President Ronald Reagan and prime minister Margaret Thatcher, it tried to get Africa and other poor regions to cut back or close down government investments and services. For 25 years, the bank tried to get governments out of agriculture, leaving impoverished peasants to fend for themselves. The result has been a disaster in Africa... The bank also pushed for privatisation of national health systems, water utilities, and road and power networks, and grossly underfinanced these critical sectors.

This extreme free-market ideology, also called "structural adjustment", went against the practical lessons of development successes in China and the rest of Asia. Practical development strategy recognises that public investments - in agriculture, health, education, and infrastructure - are necessary complements to private investments. The World Bank has instead wrongly seen such vital public investments as an enemy of private-sector development.

Whenever the bank's extreme free-market ideology failed, it has blamed the poor for corruption, mismanagement, or lack of initiative. This was Wolfowitz's approach, too. Instead of focusing the bank's attention on helping the poorest countries to improve their infrastructure, he launched a crusade against corruption. Ironically, of course, his stance became untenable when his own misdeeds came to light. ...

The good news is that African governments are getting the message on how to spur economic growth, and are also getting crucial help from China and other partners that are less wedded to extreme free-market ideology than the World Bank. ...

The Wolfowitz debacle should be a wake-up call to the World Bank: it must no longer be controlled by ideology. If that happens, the bank can still do justice to the bold vision of a world of shared prosperity that prompted its creation after the second world war.

Update: Here are two related discussion from Dani Rodrik:

Can anyone be in favor of corruption?, by Dani Rodrik: I don't know, but I certainly am not. However, this is different from believing that corruption is the most serious problem facing developing countries. Many development newbies suffer from the corruption obsession, the view that anti-corruption policies ("governance reform") is the most direct route to achieving growth and equity. Wolfowitz  exhibited severe symptoms of this, and much of the commentary around his departure has been marked by a similar misunderstanding. ...

I am not sure that it is good policy for the Bank to prioritize corruption--as a rule--over other problems that developing nations face. As I have stressed in my work with Ricardo Hausmann and Andres Velasco, the binding constraint on growth differs from country to country. In some cases (Zimbabwe?), governance problems are indeed the most serious binding constraint. In many others, the problems lie elsewhere--in low savings, poorly functioning financial markets, low entrepreneurship, poor infrastructure, and myriad other syndromes of underdevelopment.

Let me make a bolder claim.  A development strategy that focused on anti-corruption in China would not have produced anything like the growth rate that this country has experienced since 1978, nor would it have resulted in 400 million plus fewer people in extreme poverty.   

More on corruption in China, by Dani Rodrik: I mentioned in a recent post that a single-minded pursuit of anti-corruption would have probably derailed high growth in China. Bert Hofman, who is the lead economist of the World Bank in Beijing, sent me the following comment, which I thought would be useful to share with everyone.

Sure enough, an anti-corruption strategy is not a development strategy, but not having the first may derail the latter. China is actually a case where rather stern action against corruption kept rent seeking in check, rents that were abound in a gradually reforming former centrally planned state.China's central party disciplinary inspection committee and State procoratorate are credible threats against corruption: last year, according to the Procurator Office, a total of more than 40,000 government employees (0.1 percent of total) were investigated for corruption, of which 29,000 were brought to court. Perhaps as important as the control of rent seeking has been the dissipation of some of the rents through decentralization, which gave investors at least some option to avoid predatory governments. Some of the rents that did accrue were officially condoned--e.g. by means of extrabudgetary funds, which depended largely on the entrepreneurial success of local  governments, and which were at least in part used for personnel emoluments.

    Posted by on Thursday, May 24, 2007 at 12:24 PM in China, Economics | Permalink  TrackBack (0)  Comments (32)


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