A fanciful World Bank manifesto

Analysing the growth performance of Southasian countries, a new World Bank report published in June argues that, despite some major roadblocks, the region has managed to maintain fairly high levels of growth for more than a decade. Furthermore, that the pattern of that growth has led directly to a significant reduction in poverty. Attributing this success to the reforms undertaken by regional countries, authors Shantayanan Devarajan and Ijaz Nabi claim that maintaining a 10 percent rate of growth for roughly another nine years is the key to bringing poverty levels down to single digits. But achieving steady high growth will be a challenge. Drawing out a list of possible obstacles, "Economic Growth in South Asia" suggests policy prescriptions to tackle these constraints.

This is a strange piece of work: a mix of analysis, hypothesis, make-believe and wishful thinking. While it is hard to understand the purpose of this report*, it does throw up interesting issues that must be contested

First of all, the growth indicators of SAARC countries are reviewed only for the last five years. The timeframe seems inadequate, particularly because the authors want to attribute high growth rates to policy reforms that, even according to them, the "governments undertook in the last two decades". More importantly, was it really the reforms introduced under the structural adjustment programmes that led to this growth? In that case, which specific reforms were the most crucial?

The lack of analysis in terms of connecting the reforms to the high growth, the extremely short period under review, the tendency to downplay other factors that might have helped achieve this growth – all this makes the analysis more speculative than anything else.

There is a possible explanation for such a flawed hypothesis: the Bank was involved in financing most of the reforms under discussion, and both of the authors are employees at the Bank. Devarajan is the Bank's Chief Economist for Southasia, while Nabi is Sector Manager for Economic Policy for the region. It seems that the authors have carefully selected the five-year period to confirm the success of Bank-sponsored policies. This would provide legitimacy to the reform programme, as well as create the intellectual atmosphere for a follow-up.

The authors attempt to prove that, over the same period of growth, poverty has decreased in Southasian countries. This seems to be supported by the data provided. To take the example of Pakistan, however, the argument that poverty has been reduced cannot be allowed to go unchallenged. Some argue that, while the absolute number of the Pakistani poor may have come down, the severity of poverty for some has increased in recent years – due to the structural transformation occurring as a direct result of the reforms. In addition, the connection between growth and poverty reduction is surely not automatic and pre-specified. In other words, there must be ways of ensuring that growth has the largest poverty-reducing impact possible, but the work by Devarajan and Nabi fails to address this issue.

Even with these debates aside, to assume that the underlying relationship between poverty and growth would remain the same if similar growth rates were sustained for another decade requires a leap of faith. As significant structural transformation occurs, there is the elasticity of poverty vis-à-vis income to consider, and negative trends in the pattern of income distribution.

Ideological blinders

The authors do acknowledge that income, asset and wealth inequalities have increased substantially over the identified period of high growth. But conveniently, they fail to attribute this to the reform process. Given that the increase in inequality has been even more persistent than either the sustained high growth or the reduction in poverty, the connection between 'reforms' and inequality should be obvious – especially to those who have a penchant for drawing quick linkages when it suits them. The authors have predictably chosen not to comment on this aspect, which can be ascribed to ideological blindness or institutional loyalty.

The work identifies a number of constraints that can curtail high growth rates in the future. These include increasing inequality, an absence of openness and export-orientation, low technology-intensity, scarcity of skilled workers, lack of quality infrastructure, high cost of doing business, and low savings and investment rates. The authors then derive policy recommendations that are likely to ensure higher growth rates. These have to do with increasing incentives for savings and investment, attracting foreign capital and technology, reducing inequality, resolving conflict, upgrading infrastructure, improving human capital, and increasing openness and regional integration.

While there are some country-specific suggestions, the focus remains on this generalised set of recommendations, which throws up some interesting issues. For one, many experts have already enumerated the role of these factors as contributing to growth. In that sense, there does not seem to be much added value in this literature. At the same time, there are many factors that scholars have previously emphasised but which the Bank authors have chosen to ignore; for instance, the role of institutions of justice, and fair and transparent governance. Or, the issue of land reforms, which has a clear linkage with income and asset inequality.

It can be instructive to try and understand why certain areas have been selected by the authors, and others neglected. For example, while highlighting the importance of bringing backward regions to the fore, the authors confine themselves to suggesting growth and investment strategies. Issues related to distribution through national taxation, land reforms and social security networks are not mentioned. Similarly, the work strongly emphasises the idea of service delivery, but there is almost no discussion of how services for the poor are to be financed, and what the responsibility of the state should be in this regard.

In general, both the procedure for the selection of issues for discussion, and the policy identified for addressing those issues, is either whimsical and ad hoc, or based on criteria that are not shared with the reader. Once again, it is hard not to ascribe these lacunae to ideological and/or institutional prejudice.

Unanswered questions

There are other, more critical, problems with this effort. Growth and poverty reduction are important goals for all countries, and economic expansion is widely considered to be a necessary condition for poverty reduction. But surely there needs to be some debate on the sources of this growth and its linkage with improving livelihoods.

Structural adjustment programmes forced Southasian governments to, among other things, cut expenditure. More often than not, the cuts happened in the development sector, which led to relatively lower investments in health, education, infrastructure and service delivery. It is important to recognise a possible link between this reduced expenditure and higher inequality, and the low human development indicators across Southasia today. Privatisation, de-regulation and liberalisation, as well as the other components of the reform programmes promoted so assiduously by the World Bank, have in all likelihood contributed to increasing inequality.

Now that inequality and low productivity are being recognised as constraints to maintaining growth, the obvious solution is to accelerate the efforts of the state in improving these conditions. But will an expansion in these areas not lead to higher state expenditures, possibly larger fiscal deficits and some of the very things that will go against the much celebrated 'reforms' process of the past? For instance, what if settling conflicts requires more active intervention in markets, or more elaborate taxation structures? How do we square these circles?

The authors ignore the possibility that some of the 'constraints' they have identified might have been created or exacerbated by reforms themselves. The more important question is whether addressing human development, infrastructure needs and inequality is possible with the policy space available under the Washington Consensus and the 'structurally adjusted' economies. There is a fundamental incompatibility between such social welfare initiatives and the Bank's prescription of a one-size-fits-all blanket reform package.

"Economic Growth in South Asia" can be understood as an attempt to claim success for Bank-supported programmes, and as a tool for identifying areas that the Bank might be interested in financing in Southasia in the coming years. As an analytical or academic effort, however, it is quite forgettable.