Forum on Economic Reform
In recent decades the alliance of neoclassical economics and neoliberalism has hijacked the term “economic reform”. By presenting political choices as market necessities, they have subverted public debate about what economic policy changes are possible and are or are not desirable. This venue promotes discussion of economic reform that is not limited to the one ideological point of view.
Can the World Bank Be Fixed?
David Ellerman* (University of California at Riverside)
© Copyright: David Ellerman 2005
If the goal of development assistance is to foster autonomous development, then most aid and "help" is actually unhelpful in the sense of either overriding or undercutting the autonomy of those being "helped." The two principal forms of unhelpful "help" are social engineering and charitable relief. The World Bank is the primary example over the last half century of the failures of social engineering to "engineer" development. Frustration over these failures, particularly in Africa, is now leading the Bank and many other development agencies towards the other form of unhelpful help, namely, long-term charitable relief. The paper outlines some of the reasons for the failure of socially engineered economic, legal, and social reforms both in the developing world and in the post-socialist transition countries. Finally, the argument [given at book length in Ellerman 2005] is summarized in five structural reasons why the World Bank cannot be "fixed."
The World Bank (the "Bank") might be taken as the premier development assistance agency. With some exceptions, it represents much of what is wrong with the approach to development assistance in the West over the last half century. I will try to outline an alternative approach to development assistance using the Bank and related agencies (e.g., the IMF or "Fund") as the primary example of how and why development assistance in the customary mode is ineffective and unhelpful.
This is not particularly a Left-Right issue, at least not as conventionally understood. Since World War II, Communism had offered an 'alternative' path to modernization, but from the viewpoint taken here, it was only a more extreme and bone-headed version of the authoritarian and technocratic social engineering mentality exemplified by the World Bank. Our approach is to rethink development assistance from a basic principle of fostering autonomy, not to offer a critique of the Right as if the Left already had a better alternative.
The Helper-Doer Relationship
It is not a new idea that genuine help or assistance will foster autonomy, self-reliance, and self-help at all levels (individuals, organizations, regions, and countries). There is the old Chinese proverb that instead of giving people more fish, it is better to teach them how to fish—or better to help them learn how to fish. There is also the old cliché "helping people help themselves" which I used as the title for my recent book on this topic [Ellerman 2005]—with the emphasis decidedly on "people helping themselves." Even the World Bank begins its Mission Statement with a dedication to helping people help themselves (www.worldbank.org). The idea cuts across the fields of human endeavor where there is some helping or assistance relationship such as education, psychology, management, organizing, and counseling. Hence it is useful to think in terms of a generic helper-doer relationship where the teacher-learner, therapist-patient, manager-worker, and so forth are special cases each with their own particular characteristics. But most 'help' in these relationships is unhelpful in the sense of not only not fostering autonomy but of fostering subservience, conformity, passivity, and dependence. Hence a theory of autonomy-respecting help also must include a theory of unhelpful 'help'.
The assumed goal is transformation towards autonomous development on the part of the doers, with the doers helping themselves. The problem is how can the helpers supply help that actually furthers rather than overrides or undercuts the goal of the doers helping themselves? This is actually a paradox: If the helpers are supplying help that is important to the doers, then how can the doers really be helping themselves? Autonomy cannot be externally supplied. And if the doers are to become autonomous, then what is the role of the external helpers? This paradox of supplying help to self-help, “assisted self-reliance”1 or assisted autonomy, is the fundamental conundrum of development assistance. Over the years, the debates about aid, assistance and capacity-building keep circling around and around it.
There are many strategies for development assistance that may supply help in some form but actually do not help people help themselves. The forms of help that override or undercut people’s capacity to help themselves will be called “unhelpful help.”2
There are essentially two ways that the helper’s will can supplant the doer’s will to thwart autonomy and self-help:
1) The helper, by social engineering, deliberately tries to impose his will on the doer; or
2) The helper, by benevolent aid, replaces the doer’s will with her will, perhaps inadvertently.
“Override” or “undercut” are shorthand terms for these two conceptually distinct yin-and-yang forms of unhelpful help (which may be combined, as when benevolence hides the desire to control).3
The overriding form of unhelpful help is a type of social engineering. The helpers supply a set of instructions or conditionalities about what the doers should be doing. They also offer motivation to follow this blueprint through various forms of aid to override the doers’ own motivations. If we use the metaphor of the doers as trying to work their way through a maze, then the helpers as social engineers perceive themselves as helicoptering over the maze, seeing the path to the goal, and supplying instructions (knowledge) along with carrots and sticks (incentives) to override the doers’ own motivation and push the doers in "the right direction."
The second form of unhelpful help occurs when the helper undercuts self-help by inadvertently supplying the motivation for the doer to be in or remain in a condition to receive help. One prominent example of this is long-term charitable relief. The world is awash with disaster situations that call for various forms of short-term charitable relief. The point is not to oppose these operations but to point out how charitable relief operates in the longer term to erode the doers’ incentives to help themselves—and thus creates a dependency relationship. Charity corrupts and long-term charity corrupts long term.
All aid to adults based on the simple condition of needing aid risks displacing the causality. The working assumption is that the condition of needing aid was externally imposed (e.g., a natural disaster); the aid recipient shares no responsibility. But over the course of time, such aid tends to undermine this assumption as the aid becomes a reward for staying in the state of needing aid,4 all of which creates dependency and learned helplessness. Thus relief becomes the unhelpful help that undermines self-help.
Prior to the twentieth century, economic development in Europe and North America was seen as the outcome of a natural process of growth rather than as the result of a massive social engineering project. But when the lagging countries envisioned their "late industrialization," engineering and even military images came to the foreground. After the revolution in a Russia barely emerging from feudalism, real-existing socialism was seen as a socially-engineered short-cut directly to modernity and an industrial society.
In the West, socially engineered visions of development did not take hold until after World War II. The Marshall Plan was seen as an enormously successful "project" for the reconstruction of western Europe.5 With the liberation of the many former European colonies in the Third World and the advent of the Cold War, the West quickly realized that it needed to offer a non-communist path to rapid modernization and industrialization. With the newly created World Bank and International Monetary Fund (IMF) as the lead organizations and with the Marshall Plan as the mental model, economic development was reconceptualized as a social engineering megaproject rather than as an evolutionary socio-economic-historical process. The Soviet Bloc countries were not members of the World Bank or IMF (unlike the United Nations)—in spite of the adjectives "World" and "International"—so the race was on between the West and Soviet Bloc to offer the best development model to the "Third World."
With the dissolution of the Soviet Bloc and the Soviet Union in the early 1990s, the western development assistance institutions triumphed as offering the One Best Way. And the Second World, the formerly socialist countries, became new clients of the international development agencies. International development is now a huge "industry" in itself. The World Bank and the IMF are joined by development organizations associated with the UN (e.g., the UN Development Program and the UN Industrial Development Organization), by the World Trade Organization, by regional development banks in Africa, East Europe, Latin America, and Asia, by bilateral foreign aid agencies (such as the US Agency for International Development), by a panoply of operating foundations working on development issues (e.g., the Ford, Rockefeller, Carnegie, and Soros foundations), and finally by swarms of non-governmental organizations (NGOs) from both the North (developed countries) and South (developing countries).
Over the decades, the major development assistance institutions have run through a number of development foci (or fads). Initially, the focus was on provision of physical infrastructure: roads, seaports, airports, dams, and power plants. After much expensive disappointment, the emphasis shifted to education (formation of "human capital"), health, and the satisfaction of basic necessities.
These programs represented a swing of the pendulum away from the engineering-oriented infrastructure programs towards the other form of unhelpful help, charitable programs. But as these charity-oriented programs yielded neither the desired developmental results nor loan repayments, the pendulum swung back to social engineering in the form of structural adjustment programs. Here the social engineering came more from economics than civil engineering, and the slogan was "Get the prices right." But since markets require a reasonably well-functioning set of institutions, the focus on prices and structural adjustment soon broadened to governance issues including corruption, business climate, and a legal system to protect property rights and to adjudicate and enforce contracts. Hence the current slogan is "Get the institutions right" as if institutions could be socially engineered as large development projects.
Today the pendulum in the World Bank and many of the other international and bilateral agencies is starting to swing back in the direction of charitable disaster relief. Development, where it has occurred (e.g., East Asia), has been a relatively incremental process rather independent of the social engineering projects and programs offered by the Bank and Fund. The major assistance bureaucracies such as the Bank need to reinvent reasons for their continued existence. The crisis of AIDS and other diseases such as malaria threaten to undo many of the meager developmental accomplishments of the past. It is likened to a "silent tsunami" that calls for the development assistance agencies to shift into disaster relief mode to meet the crisis.
The other major factor today came forcefully into the foreground with the events of September 11, 2001. The War on Terror may eventually replace the Cold War in the rationalization of the major agencies. The ascent of Paul Wolfowitz to the Presidency of the World Bank may be a case in point. The role of the major agencies is twofold. There is the "camp-following" role of post-conflict "nation-building" in Afghanistan and Iraq that builds upon earlier post-conflict experience in the Balkans and East Timor. And there is the longer term "draining the swamp" role of fighting the poverty and desperation that supposedly bred terrorism.6
After nearly six decades of attempts to socially engineer development, the various efforts cannot be judged a success.7 Where development has been most successful in the East Asian countries, the standard model (e.g., "Washington Consensus") has not been followed and outside observers do not credit the development agencies with a key role [e.g., Wade 1990]. Where the international agencies have had the freest hand to try to impose solutions, e.g., in Africa and Latin America, there has been the least success [e.g., Van de Walle 2001 on Africa]. This was the conclusion of even the World Bank's own respected researcher William Easterly .8
The Challenge of the Transition: Shock Therapy as Ersatz Social Engineering
The transition from communism to a private property market economy presented a unique challenge to the major development assistance agencies. It was a new challenge since prior history did not provide examples of this systemic transition. The transition is a wonderful case study of the effects of 'enlightened' social engineering for two reasons. One reason is that the transition and the role of the major development agencies in it took place largely in the decade of the 1990s so that we have a little perspective of history. The other reason is that there was a remarkable natural experiment in the transition; the two major countries, Russia and China, each used opposite philosophies. Russia chose the social engineering model of institutional shock therapy offered by the international development agencies and the most prominent academic economists as advisors. China chose pragmatism after "learning the hard way" the lessons from using Bolshevik methods to try to engineer social change (e.g., the Great Leap Forward and the Cultural Revolution).
The difference in results could hardly be more striking. Since the Chinese reforms started with government support in the early 1980s, China has had around 8 percent per capita annual growth [McMillan 2002, 204], perhaps the largest growth episode in history.
Russia using the shock therapy strategy went the other way. In the first year of shock therapy (1992), production fell by 19 percent with a further 12 percent and 15 percent in the ensuing two years [McMillan 2002, 202]. In all, the country bottomed out at about a 50 percent drop in GDP. Experts can argue about the interpretation of the economic statistics, but the demographic trends tell an even more worrisome story. The population has actually declined over the 1990s in such a precipitous manner—now for every 100 babies born, 170 Russians die—that the government projects a 30 to 40 percent drop by 2050 [Feshbach 2003a, 2003b]. The causality behind these trends is very hard to disentangle—which is why the side-by-side comparison with China is so revealing.
Since the systemic transition from plan to market had never happened before in history, it surely called out for a non-dogmatic approach of trial-and-error and experimentalism, i.e., for pragmatism. Two earlier attempts to socially engineer revolutionary changes in social, political, and legal institutions—the French Revolution and the Russian Revolution—had led to disastrous results. The names "Jacobins" and "Bolsheviks" entered history as labels to describe those who eschew pragmatism to try to force historical change.
One of the most influential critiques of the Jacobin methods used in the French Revolution was Edmund Burke's Reflections on the French Revolution: In a letter intended to have been sent to a gentleman in Paris [1937 (orig. 1790)]. At the beginning of the decade of the transition (1990s), Ralf Dahrendorf (a political sociologist and head of the London School of Economics), wrote a book, Reflections on the Revolution in Europe: In a letter intended to have been sent to a gentleman in Warsaw , updating Burke's message for the coming post-socialist transition. Dahrendorf argued for the transition "to work by trial and error within institutions" [1990, 41; quoted in: Sachs 1993, 4]. Neoclassical economics has become the primary intellectual framework of today's social engineering. In the early debates about the transition, a prominent economist and even more gifted self-publicist, Jeffrey Sachs (then of Harvard and now at Columbia University), argued that he and other economists already had the answers. After quoting Dahrendorf, Sachs argued to the contrary in favor of an economics-inspired crash program of institutional shock therapy. "If instead the philosophy were one of open experimentation, I doubt that the transformation would be possible at all, at least without costly and dangerous wrong turns." [Sachs 1993, 5]
The French Revolution was not the only relevant historical example. John Maynard Keynes described the Russian Revolution and its aftermath in terms that are surprisingly apt to describe Russia in the 1990s.
We have a fearful example in Russia today of the evils of insane and unnecessary haste. The sacrifices and losses of transition will be vastly greater if the pace is forced….For it is of the nature of economic processes to be rooted in time. A rapid transition will involve so much pure destruction of wealth that the new state of affairs will be, at first, far worse than the old, and the grand experiment will be discredited. [Keynes 1933, 245]
Instead of taking these lessons to heart, the Russian reformers of the 1990s became "market bolsheviks" [Reddaway and Glinski 2001] in their attempt to use the "window of opportunity" to make the opposite transition from plan to market.
There are a number of factors that combine to yield this view of engineered revolutionary change. The question is not whether or not to make systemic change. The question is: given a commitment to basic change—to get to the "other side of an institutional chasm"—how best to get there? A pragmatic approach would emphasize incremental step-by-step change starting from where people are. Sachs often used the metaphor "you can't jump over a chasm in two leaps" but even rather radical pragmatists would argue that people "need a bridge to cross from their own experience to a new way." [Alinsky 1971, xxi].
Another factor leading to social engineering schemes is the use of simplified abstract models and a lack of experience in the give and take of practical political experience. James Scott's book  argues persuasively that states use simplified pictures of static reality to administer their affairs (e.g., to collect taxes and to staff the army) but that these simplified pictures lead to disaster when they are the basis for large-scale social engineering schemes to change societies. Academic economists and global development bureaucrats have little contact with local realities and thus they tend to be driven by such simplified cartoon models. Exiles who have not participated in the give and take of politics in a country for years if not decades also tend to have cartoon models. It is the combination of power and highly simplified models of complex social realities that is particularly lethal. In our case, the power of the international agencies together with the bureaucratic/academic cartoon models contributed to the debacles of shock therapy in the FSU.
There is a side-theme that might be explored. Youthful prodigies are typically in activities based on abstract symbol manipulation (e.g., mathematics, music, and chess) where subtle and often tacit background knowledge obtained from years of human experience is not so relevant (see Scott's discussion of pragmatic knowledge or "metis"). As economic theory has become more mathematical, there is now the phenomenon of wunderkind professors in economics (e.g., Jeffrey Sachs, Larry Summers, and Andrei Shleifer were all prodigy-professors at Harvard) who are then unleashed—with the compounded arrogance of youth, academic credentials, and elite associations—into the real world as ersatz "economic reform experts." Paul Starobin  contrasts the wunderkinder of "Big Bangery" with the mature pragmatists behind the Marshall Plan, and notes the striking difference in results. When wunderkinder cast long shadows in the development agencies (e.g., Summers as Chief Economist in the Bank, Shleifer as manager for USAID's big project in Russia, and now Sachs as a top 'development' advisor to the UN), then it must be late in the day for those agencies.
"Cargo Cult" Economic Reforms: Where is the Road to Cargo?
There is a certain self-reinforcing vicious circle that leads the Bank and other agencies to try to "install" inappropriate institutions in developing and transitional post-socialist countries. Let us begin with the supply side of this unhappy transaction.
People from advanced developed countries are, in effect, "born on third base and think they hit a triple."9 Such "natural-born development experts" may be graciously disposed to teach developing countries how to "hit a triple." The developing country should redraft its laws to describe the institutions seen from the vantage-point of "third base" [e.g., "like in America"] and then after passing these new laws, everyone should wake up next morning as if they too were born on third base.
Societies, however, tend to operate on the basis of their de facto institutions, norms, and social habits, not their formal laws–and particularly not the formal laws "pulled out of the air" with little relation to past experience. When such a gap between formal and de facto institutions is introduced, then the bulk of the population can rarely "jump over the chasm" to suddenly start living according to the new formal laws–so the rule of law is weakened. Semi-legal ("gray") and illegal ("black") activities become more prominent as the connection between legal and actual behavior is strained to and beyond the breaking point. The advice from the natural-born development experts thus becomes more part of the problem than part of the solution. More relevant institutional information could be provided by people who were only on first or second base since they might actually know how to hit a single or a double.
Now consider the demand side—the demand for impossible "overnight" jumps to institutions copied from technologically advanced developed countries. The people and the politicians of the developing and the transition economies are constantly bombarded by the mass media with images of life in the "First World." They want to get there "tomorrow" (if not "yesterday"). Consultants and academics from elite universities with no real development experience badger the government officials to have the political courage and will to undertake a shock-therapy-style change in institutions, to jump over the chasm in one leap (i.e., jump directly to third base)—as if such institutional change were actually possible. Those locals who caution against radical leaps are dismissed as only trying to protect their privileges and "rents" from the past regime. "How dare you think you know better than professors from Harvard!"10 The idea is to "escape the past," not to study the past to better develop incremental change strategies. If the scientific experts from the First World give this advice, how can the benighted officials from the Third World or the post-socialist countries resist? All people have to do when they wake up the next morning is to start behaving according to the new laws drafted by the experts!
For instance in a southeast European post-socialist country that had been particularly isolated in the past, government officials wanted to jump to modern corporations "like in Europe." This was an example of an "iceberg" institutional reform; the "above the water-line" laws could be quickly changed but the problem was the "below the water-line" long-term changes in behavior.11 They located a European foundation that was willing to fund an "adaptation" of the corporate laws of a west European country. The new draft laws were quickly passed by the Parliament so that the government officials and legislators could brag that they now had "European corporate statutes." All they needed now was a few lawyers, a few judges, a few accountants, a few regulators, a few business people, and a few decades of institution-building experience so that the new statutes could actually be used. Any attempt to get the country to adopt laws similar to those in neighboring countries that had incrementally evolved towards a market economy for several decades was angrily rejected. "Why do you try to get us to use these second-best or third-best laws when we can adopt the best European statutes?" Surely the natural-born development experts from the First World want to provide the best laws for their clients?
Thus the government officials demand that they do not want some second-best model; they want the "very best" for their people—like in the advanced countries. The third-basers in the international aid bureaucracies then can reap the seeds they have sown by "listening to the clients" and "responding to the clients' desires" by trying to set up "public joint stock companies" in Albania, a "stock market" in Mongolia, "defined contribution pension plans" in Kazakhstan, and "modern self-enforcing corporate laws" in Russia.12 Thus the circle is completed; supply responds to demand in a self-reinforcing vicious circle to waste untold aid resources on the attempted instant gratification of a non-evolutionary "Great Leap Forward" to First World institutions.13
The failed attempts at utopian social engineering might be usefully viewed from an anthropological perspective. Many of the First World institutions such as "The Stock Market" have a certain totemic or 'religious' significance. The Wall Street mentality found in the post-socialist world is reminiscent of the cargo cults that sprung up in the South Pacific after World War II.14 During the war, many of the glories of civilization were brought to the people in the southern Pacific by "great birds from Heaven" that landed at the new airbases and refueling stations in the region. After the war, the great birds flew back to Heaven. The people started "cargo cults" to build mock runways and wooden airplanes in an attempt to coax the great birds full of cargo to return from Heaven.
Post-communist countries, with hardly a banking system worthy of the name, nonetheless opened up Hollywood storefront "stock exchanges" which were kickstarted by the listing of shares in almost all companies in a voucher privatization program. Government officials in East Europe, the former Soviet Union, and even Mongolia proudly showed the mock stock exchanges, complete with computers screens and "Big Boards," to western delegations of Bank, Fund, and USAID officials (with enthusiastic coverage from the western business press) in the hope that finally the glories of a private enterprise economy will descend upon them from Heaven. An earlier generation of misguided development efforts left Africa dotted with silent "white elephant" factories, and the present generation of revolutionary reforms in the post-socialist world left the region dotted with dysfunctional "cargo cult" institutions—the foremost among them being the largely totemic stock markets.