Monday, January 17, 2005

Crying wolf-ensohn 

Thinking about my first post today on my visit to the World Bank this weekend and Easterly's lunch talk, I happened upon this article by Ken Rogoff on the outgoing Bank president James Wolfensohn.

Wolfensohn's best call was to notice that with the end of the cold war there was no longer any reason for Western-sponsored aid agencies to slavishly fund corrupt Third World leaders. Only the most naive observer could fail to recognize that poor governance and weak institutions were at the root of the developing world's growth problems. Wolfensohn asked his staff: Why shouldn't the World Bank president just come clean on the pernicious effects of Third World corruption? And so he did. Why not direct the World Bank's top-notch economists to try to quantify the effects of corruption on growth so that they stared people in the face? He did that, too. Bravo.

Unfortunately, not all of Wolfensohn's calls were quite so successful. One mistake was to make the bank too beholden to development fads, from microfinance to faith-based development. Indeed, the bank has followed so many trends in so many circles that these days, nobody is quite sure what it stands for. One of Wolfensohn's signature reforms was to emphasize that developing-country governments know best what works in their own countries. That's a warm philosophy and politically correct. Unfortunately, however, it contradicts Wolfensohn's own observation that poor governance lies at the root of most poverty in the world today.

This was somewhat the point on which Easterly foundered too. Given that you've decided most places that are still poorly developed economically suffer from corruption, and since the Bank and the Fund are largely government-to-government businesses, what is the right strategy? If you do business with only non-corrupt governments, eventually all the international financial institutions have no more clients in need of expert advice. Neither Rogoff, a former chief economist for the IMF, nor Easterly seems to support that.

Interested? Read the Meltzer report. It recommends inter alia development banks do no business with countries with per capita GDP over $4000 per year or with countries with investment-grade bonds sold in international markets. Who would be left?