Why Wolfensohn Mattered [Archives:2005/842/Business & Economy]

May 16 2005

By Joseph Stiglitz
At the end of this month, James Wolfensohn's ten-year tenure as President of the World Bank comes to an end. Though much remains to be accomplished and consolidated, his achievements as leader of the international development community are noteworthy and provide a strong foundation upon which to build.

Perhaps Wolfensohn's most important contribution was to clarify the Bank's mission – to promote growth and eradicate poverty in the developing world – while recognizing the massive scale of that task and the inadequacy of previous approaches.

At one time, it was thought that since developing countries had less capital than more developed countries, merely supplying more capital would solve their problems. Indeed, this view provided part of the rationale for the World Bank: if a shortage of funds was the problem, clearly a Bank would have to be a key part of the solution.

In the 1980's, there was a switch from projects to policies – structural adjustments, involving trade liberalization, privatization, and macroeconomic stabilization (typically focusing on prices rather than employment or output.) But these policies proved neither necessary nor sufficient for growth; the countries of East Asia, which followed different policies, achieved faster growth and were far more successful in poverty reduction.

Under Wolfensohn's leadership, the Bank began to look for multifaceted strategies, framed by what he called a Comprehensive Development Framework. Many of the links were obvious, but had been given insufficient attention. Improved rural productivity or better market access would do little good if roads and harbors were lacking. In a malaria-infested country, mosquito eradication programs can boost production and even increase effective land usage, as acres that were almost uninhabitable become livable. The returns from education, too, can be increased, if more individuals live longer because of better health care.

The Bank began to recognize that developing countries differed from more developed countries not just in their lack of resources; there was also a knowledge gap. This was particularly important as the world moved into what we call the “knowledge economy.” Among the success stories were India and East Asia, which invested heavily not just in primary education, but also in secondary and tertiary education, and especially in technology and science. This represented a major change in the Bank's approach to education, which previously focused on primary schooling.

Wolfensohn's campaign against corruption also represented a major change in thinking, a shift from downsizing the state to improving the State. Failed states, it was now acknowledged, were no less an impediment to development than were overbearing states. The Bank's 1997 World Development Report reflected this new attempt at finding a balanced role for the state, and showed an understanding of the limitations both of markets and government.

Under Wolfensohn, the Bank repeatedly stood up to the United States, where both the Clinton and Bush administrations might have preferred a more pliant President. When then US Deputy Secretary of the Treasury Lawrence Summers tried to change the Bank's Decennial report on poverty – to downgrade concerns about insecurity and empowerment and to focus more narrowly on income – the Bank prevailed. When the US tried to suppress the Bank's call for a more balanced intellectual property regime – one more consonant with the interests of developing countries – the Bank prevailed yet again.

Both the Bush administration and the EU would undoubtedly have preferred less criticism of their trade regimes, which have such adverse effects on developing countries. It would have been helpful for Bush if the World Bank quietly accepted proposals to finance debt relief for the poorest countries by depleting its reserves, thereby making poor countries pay for the poorest by reducing the Bank's lending capacity. But it would have been wrong, and the Bank again stood up for the interests of the developing world.

Changing the relationship between the Bank and the countries seeking its help was no less of an achievement. In the past, the Bank was seen as a purveyor of neoliberal orthodoxy – an approach to development whose credibility had weakened by the time Wolfensohn arrived, and whose standing has eroded further since. That orthodoxy often went hand in hand with the national, corporate, and financial interests of the advanced industrial countries, or so it was perceived.

Worse, the Bank typically demanded myriad conditions in return for assistance, an approach that undermined democratic processes and domestic ownership of policies, thereby enervating their effectiveness. When Bank research showed that conditionality did not work, the Bank under Wolfensohn moved away from it.

The Bank began to realize that on many key issues there were legitimate disagreements among economists about the right course of action. Democracy requires active debate about economic policies, not the suppression of discussion or the delegation of decision-making to experts, whether domestic or foreign. The Bank's attempt to open the debate was not well received, by either the US Treasury or the IMF, but its influence was undeniable. The Fund, too, began to reduce conditionality, and eventually it began to question the desirability of capital market liberalization, which previously had been central to its agenda.

Gradually the Bank came to be perceived, at least in many quarters, as a partner in the joint quest for growth and poverty reduction, not an adversary attempting to promote a Western economic agenda or ideology. Wolfensohn meant it when he said that he wanted to put the country in the driver's seat, though not everyone within the Bank was as enthusiastic about this (or some of his other) initiatives.

James Wolfensohn presided over the World Bank at a time of enormous change, tumult, and opportunity, an era marked by the end of the Cold War, the postcommunist transition to market economies, and the East Asian – and then global – financial crises. His commitment to those in the developing world has been contagious. He has left an impressive legacy for his successor to take up.

Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at Columbia University and was Chairman of the Council of Economic Advisers to President Clinton and Chief Economist and Senior Vice President at the World Bank. His most recent book is The Roaring Nineties: A New History of the World's Most Prosperous Decade.

Copyright: Project Syndicate, 2005.