The reliably shrill Marcela Sanchez has an article about an apparent change in thinking at the World Bank. She goes over the conclusions of a new document issued by the Bank, in response to the failure of most Latin American countries to reverse income inequality.
Taking the "Washington Consensus" to task, she paints the report as some sort of rejection of free market reforms from the early 90's:
for more than 15 years it has focused on market reform policies, offering loans to countries that promised to lift trade barriers, deregulate and privatize industry and adopt austerity plans to stop deficit spending and reduce inflation. These reforms, which became known as the Washington Consensus, were supposed to unleash the economic potential of developing countries and spur growth. Growth, in turn, was to create opportunity for the destitute and lift them out of poverty.
Many Latin American countries took the loans and adopted the reforms. But the reforms themselves did not bring about the intended consequences. Latin America's performance has been disappointing, particularly in comparison to the dynamic economic growth and poverty reduction in Asian countries. The region now has "the highest measures of inequality in the world," with one-quarter of the population living on less than $2 a day, according to the World Bank.
But, what about countries that did not follow the so-called Washington consensus? As a leading economist pointed out, Venezuela and Cuba, had even less improvements in living standards than the rest of Latin Amemerica. But, what is undsiputed here, is the fact that the glaring inequalities of incomes continue.
Finally, Sanchez "reports" on the Banks conclusions:
Two of their main conclusions are a breakthrough for the Bank: that private sector growth is not a panacea for the poor and that inequality must be targeted directly. A third conclusion is almost heretical for the Bank: that the state needs to take on more economic responsibility than less. "Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulate growth and reduce inequality and poverty," the report says.
Marcela Is Blatantly Wrong, Part 53211
Right off the bat, Marcela is factually wrong about "changes" in the banks thinking.
From the World Bank, World Development Report 2001/2002: Building Institutions for Markets
a strong and capable state is necessary to support markets, and an arbitrary and corrupt state can impede their development.
Meanwhile..On The Other Side of the World And The Other Side of The Coin
From a stagnant Latin America and a confused Ms. Sanchez, let us now go to Chad, where the World Bank financed a pipleline project in cooperation with Exxon. The pipeline revenue was set up in a way that it would help the poor directly, by setting aside revenue in a special account that would only be disbursed in projects that provided for the nations poorest.
The Exxon-led consortium was willing to build the 665-mile pipeline from landlocked Chad to the sea only with the World Bank's backing, said Rashad Kaldany, director of oil, gas and mining for the bank and its private investment agency, the International Finance Corporation. With Chad's history of civil war, ethnic strife and corruption, its oil lay untapped for decades because no one was willing to put capital at risk here
In 2000, the bank approved the project and lent Chad $37 million for its stake in the pipeline, while its finance agency lent the companies building the pipeline $100 million. Their support was conditioned on Chad's commitment to adopting a law requiring that most of the oil revenue go to poverty alleviation.
The royalties were to be deposited in an offshore account, and an independent oversight committee was to vet, approve and monitor all spending.
At first glance, this program rubbishes Sanchez' claims that the bank had some drastic change of thinking in regards to alleviating poverty. This 2000 project was aimed at providing funds for such basics as education and healthcare.
The Corruption Thing....
But even with the best of intention and a creative design, things have started to go awry:
But once the oil revenues began to flow into the government's coffers in 2004, the model program quickly ran into trouble.
The oversight group officially charged with monitoring the oil spending laid out a damning catalog of malfeasance and bungling last May, from overspending on office equipment to bungling or abandoning entire public works projects.
In the town of Moïssala, a water tower was approved, and an advance of $360,000 paid to the builder. But when monitors checked its progress, they found no water tower, and no one in the local government had ever heard of the project.
Many of the wells that were supposed to be dug in rural areas were still unfinished, while others were dug, but not deeply enough. The builders filled them with water from a cistern to try to fool the inspectors, said Thérèse Mekombe, vice president of the oversight panel.
The group found that the Ministry of Higher Education had bought a computer for $5,300, a secretary's chair for $3,600 and scooters that should have cost $1,000 for triple the price. Companies that won contracts to make desks for schools used scrap wood, producing desks with bucked legs and tops.
The Ministry of Health commissioned a clinic in the town of Bierre, but the builder abandoned the site with no explanation.
The largest amount of money — $51 million through last year — has been devoted to public works, mainly roads. Of that, $48 million has been assigned to a partnership formed between a foreign construction company and a company led by President Déby's brother, Daoussa Déby, according to the oversight committee.
Its The State Stupid!...
Go back to Marcela Sanchez' conclusion:
If the World Bank were to make poverty reductions measures a condition for assistance, it would be a big change in the way it helps Latin America. It would be shifting from an approach that helped weaken governments to one that seeks to strengthen them.
It is the State in Chad which is making a mess! Even with the reduced scope that the program gives the state authority, they are finding creative ways of scamming it.
Reality has a way of kicking you in the teeth. This has nothing to do with ideology, it has more to do with simple observable facts. The Soviet block countries, with their state-directed economies failed spectacularly. More benign forms of statism in places like India failed. You could almost make a rule that the larger the state, as a proportion to the size of the countries economic activity, the less efficient and unwieldly it becomes.
Where States have moved into areas normally held by the private sector, more than not, they fail spectacularly. Since they do not have the price and market pressures of the private sector they can also be big drains on a nations economy and raise public indebtness. When the state has its hands directly in the economic pie, it concentrates power in few hands. Too many will take advantage, either by direct graft or by shifting riches to cronies in the private sector, if it exists. And in places where the State employs too many people, it creates a constituency of its own, that sees itself as entitled to its position.
This applies to Chad and Latin America, where corrruption, outright graft, and crony capitalism are staples. Throw in a statist and centralist tradition, inherited from Spain, embraced equally by mlitary regimes, pseudo-democrats, and populists. Across the board, Latin American countries had a large percentage of their economic activities handled by the State, and ample corruption followed. Just look at oil-rich Venezuela, which well before Chavez had a long tradition of resource rich governments, siphoning off profits directly, steering rich contracts to elite friends, throwing handouts to the poor, and funding nonesense ventures, in the process creating a constituency for itself.
Bolivia: Strengthening the State, or Hooking Up Your Buddies?
Lets take a look at a timely example of a national government "strengthening the state." Bolivia is now wanting to "refund" government offices, such as the national oil and gas company. Evo claimis he wants to 'get rid" of the "neo-liberal model" in government.
The country has a strong tradition of clientilism, Some scholars have concluded that the state existed simply to provide jobs to the middle classes. And many were employed, since the State was very large, and was involved in many economic activities. The countries public enterprises' share of total fixed investments was an astonishing 39 percent in 1969 the highest in Latin America according to CEPAL.
The economic problems of the 80's was partially the result of national government running up debts, finding itself unable to pay its army of employees and cover losses to state firms, after sources of international funding dried up, and oil prices fell. As a result of the crisis the following Bolivian governments swallowed the pill and took drastic measures to ensure that budgets were met, payrolls cut, and government companies were sold off.
Ironically, traditional parties in Bolivia, like the MNR and MIR, were weakened by their inability to offer their middle class supporters jobs, and their richer friends contracts. Those opportunities disappeared precisely due to the reductions in the State, through cuts and privatization that these parties endorsed. It was in this vacuum that the MAS movement of Evo Morales managed to gain power, with more middle class support than expected.
To recreate the national gas company, would be to present an opportunity for the ruling party to fill it up with cronies, and let it be bled. It happened in the past, given 200 years of history and ample precedent it more than likely will happen again. And they intend to do that with other ministries.
Sanchez and the anti-globalization types seem to be endorsing the simplistic view that growing the State is to strengthen it. Sanchez completely misses the point of the banks report and conclusions. Her perspective -and those who share it - is based on a complete lack of understanding on what the Washington consensus was, basic economic reality, and of the difference between institution building and bureaucracies.
More on that in the second part...