The great Christopher Caldwell, the finest of American journalists covering Western Europe fulltime, has a column in today's Financial Times on the criminal debacle of what he calls 'adventure philanthropy' and its attempted abduction of children from Chad. Required reading for the international NGO community, I think. Here (open link for now).
Taken purely in the abstract, here are four leading international development positions, with respect to the question of what, if anything, is the most important factor leading to economic growth in the very poor world.
2. More money, more resources, or, Sachsism. This is roughly the Sachs position, at least as reflected in what it means once translated into UN policy. Sachs' book, The End of Poverty, contains much more nuance and many more qualifications and bows in the direction of other considerations beyond simply pouring in more money. But when it comes to what it means in UN policy, it reduces with astonishing speed to simply a "more money" proposal, a top down set of central planning, bureaucratized five year plans. I was much more impressed with Sachs when I read it in his book. Once I saw what it meant in practice - Sachs to Sachsism, so to speak - it just seemed like more of the same old demand for greater resouces, period. With hefty doses of European moral sanctimony at any questioning of the model, on the one hand, and rent-seeking by international agencies wanting to stick their faces in the trough, making sure they get their cut, on the other. I don't quite understand how Sachs, promoter of post-Soviet era Big Bang privatization, morphed into a Soviet-style central planner at the UN, but there it is.
3. Institutions and governance from the inside-out. Institutions and governance at the national and subnational level to ensure the rule of law, anti-corruption, property rights, political and legal stability, the political space in which to plan long term investments. This is roughly the William Easterly position - one which emphasizes the "capillary" level of development, one institution at a time. What matters, first of all, is governance at the national level, and then reaching down through the subnational levels, and the promotion of stable bourgeois institutions of government to ensure favorable conditions for investment. Not necessarily liberal - but bourgeois. On this view, the Sachs approach pours resources into the "wholesale" level, the "arterial" level, but fails to take account of the fact that the problems lie less at the wholesale level than at the highly retail level, the "capillary" level, of development. This is a slightly different point than the institution-governance point, but they are closely related and in support of each other. And on this model - very different from UN-Sachsism - governance provides the capitalist-bourgeois shelter within which long term private direct investment can take place, to provide employment, jobs, and ultimately raise incomes. Public infrastructure is important, but the engine of growth is ultimately private investment.
I may as well say, if it is not obvious, that I think the institution-governance model is by far the better approach, based on my years doing development work through various organizations. These are the two main models for debate, Sachsism and Institutions/Governance Reform. It has large practical implications. For example, the UN occupies a very particular position in this debate, having embraced Sachsism through the Millennium Development Goals - which amount to a central planning five year plan by any other name, and, as with Soviet style five year plans, in fact no one except for credulous journalists and children ever took it seriously.
The US has mostly taken the institutions-governance view - as have, when it comes to much of the actual work that they do, national European aid agencies - and has therefore wanted to fund things very differently in order to provide incentives to good governance. This produces severe clashes between the US and the UN, and the UN's enablers, the European governments. Any time someone wants to measure global anti-poverty efforts by looking merely at how much money got shoveled out the door, which is to say, anytime anyone wants to attack US policy on development - there you find Sachsism, the UN, most of the World Bank, all agencies public and private looking to extract their transaction costs, and the editorial board of the New York Times, in full-throated scold mode.
(There are many micro-level, rent-seeking connections here just in terms of who staffs the UN agencies, made mildly notorious in the last year by the hiring practices of UNDP - few Americans and relatively more Europeans with the support of their governments for their rent-seeking activities. Part of the reflexive Euro-support for UN-Sachsism is not just ideology, but convoluted personal and national ties within international organizations that facilitate rent-seeking behaviors. Dutch government support for cronyism by Dutch nationals at UNDP in ways that would likely - at least one hopes -not be acceptable in Holland itself is a good example. It is an understudied area, and likely to remain that way.)
It also bears noting that although in practice, when it comes to funding and spending money by countries, there is a relatively clear division between the two paradigms, at the level of ideas and paradigms, it is all pretty mixed up. Sachs says lots of things in support of institutions; Easterly does not deny the importance of public infrastructure. The US supports governance reforms, but spends lots of money and emphasizes public health, universal public education, many other large scale public expenditures quite independent of governance issues. European aid agencies all understand perfectly the governance and institutional issues. The most important document on this subject in recent years is a World Bank paper that monetizes the effect of institutions of social stability and the rule of law, to show the relative differences between countries of the multiplier effect such stability has on the labor of an average individual.
I labelled the above positions (2) and (3), respectively, rather than (1) and (2), because we can usefully add two more positions as "outliers" on either end of the spectrum. If we think of development paradigms as a spectrum, then we can start with something we might call the income transfer paradigm:
(1) International income transfer welfare model. Sachsism asserts that it is about ending poverty, but says that despite the vast amounts of money spent in earlier decades with little discernible effect, massive new resources are needed for that. The other way of looking at this, of course - and one which tacitly holds sway yesterday and today among more people than one might think, if everyone were honest - says, at bottom, that nothing is actually going to end poverty as a matter of development. The best one can hope for is welfare - global welfare, income support. Forget about curing the conditions of poverty; the best you can do is globalize the national welfare state model, and engage in massive income transfers. You would do well politically to call it development or anything else to make it palatable, but in fact it is permanent support on a redistribution model. If particular places do manage to grow themselves out of poverty, great, but we do not actually have a clue how to make that happen or any reason to think that we can make this happen from the outside, so really the best one can do is humanitarian relief on a global scale, and try to create the welfare state on a global scale. In the past, theories of neo-imperialism, in which the poverty of the poor world was seen as being in zero-sum relationship to the wealth of the rich world, this welfare redistribution could be justified on the basis of justice alone. Today, the plight of the world's poorest people is that they are pretty much irrelevant to the world economy - too poor even to bother to exploit - and so the justification for income transfer is one of pure pity and charity (and persuading them, in an era of mobility, not to pick up and come collect their welfare payments in person). (My personal, anecdotal sense is that lots of Europeans really, if they were honest, hold something like this view, and regard the Americans as hopelessly naive for believing that you can actually undertake development as such by improving institutions and governance.)
But there is another outlier view, on the other side, so to speak, of the (3) institutions/ governance paradigm:
(4) Deep culture, or 'embourgeoisization' - and its failure. This is a highly simplifed version of the argument by Gregory Clark in his excellent, highly provocative new book, A Farewell to Alms. It is a highly complicated thesis about Malthusianism, the Industrial Revolution, and the whole sweep of global economic history. But it contains important implications in trying to explain why much of the world has not followed the path of the Industrial Revolution, at least in income gains. The core factor, Clark says, is inefficient use of labor, even among unskilled labor, permitting society to capitalize long term on technological innovation.
Contrary to Ricardo, returns to land have been minimal and declining in places where the Industrial Revolution took hold. Contrary to Marx, returns to capital have been less than the author of Capital might have thought. The returns of the Industrial Revolution have mostly been to labor and, remarkably - given that the engine of growth is technological innovation - most of that to unskilled labor over the whole sweep of the Industrial Revolution, not to skilled labor (although I have questions as to whether that is not changing in our increasingly winner-take-all society).
The concluding chapters of Clark's book are very pessimistic. They identify the inefficient use of labor as being the fundamental reason why some societies have income growth and others do not. Innovation in technology is the driver that brings any society at all out of the Malthusian trap; but innovation spreading worldwide is insufficient to bring all societies out of it, and indeed those that remain are, in fact, worse off than preindustrial Malthusian societies, in both absolute and (of course) relative terms. The reason for that is largely the success of modern medicine, which in a Malthusian world translates increased well being into increased population, not long term increased income.
But the heart of the pessimism does not lie in the fact that Malthusianism remains present in the developing world. It is, rather, that in order to take advantage of innovation to get beyond Malthus requires the efficient use of labor, including unskilled labor. Yet the efficient or inefficient use of labor lies in cultural factors, not in Sachsian resources and only secondarily in Easterly institutional and governance predicates. Institutional and governance failures are part of the problem, of course, but mostly as effects of larger cultural patterns in the efficiency of labor, rather than as causes. If that is so - I simplify 600 pages of text into two sentences - then institutitional and governance reform is not likely to be effective in raising growth and incomes or, more precisely, is not likely to come about because they, too, require a certain underlying, precursor culture.
That culture is more or less what, worldwide, we think of as the bourgeoisie. Moreover, Clark says simply that it is completely unclear from an economist's perspective - rationality and incentives - why some cultures are or become more efficient in the use of labor, and others do not. He means by that efficiencies and inefficiencies that are not attributable to weak institutions and poor governance as causes; he sees them as underlying weak institutions and poor governance, rather than the other way around.
(Bourgeoisie is a difficult term, and it is my interpolation of Clark's text. I mean it here in its 19th century usage, its Marxist usage as a marker of production, rather than its contemporary 'lite' usage denoting merely middle income consumer society found to some extent everywhere in the world. It would be very interesting and valuable to have a Marxist critique of Clark by Robert Brenner or Josh Cohen; the historical antipathy of Marxists to Malthus combined with a thesis that seems highly unsatisfactory for anyone who wants a forward-moving view.)
(I'd note as well that Clark's conclusion, and indeed he nearly says so directly, opens the way for sociological, social theory, and anthropological (and let me add, legal anthropology and critical theory as well, although I'll try to say something about that later) evaluations of globalization and economic growth, because he freely admits that rationalist economics does not seem to be able to answer the fundamentally social question of why some societies efficiently utilize labor to income growth and others do not. It is one of the few relevant openings for such areas as social theory and critical theory in what is otherwise the relentless - because, let's be clear, largely successful - colonization by the economics of rational incentives and rational choice theory. There is a role here for social theory beyond rationalist economics, and it is one of the few places in which it is so, and perhaps more remarkable, that an economist admits this is so. )
The implication of Clark's culture-critique of development is that neither Sachsism nor governance reform will necessarily have much impact on the neo-Malthusian societies of poverty in the world today. As a matter of policy, then, what? One can do nothing, opt for welfarist income transfer on a humanitarian basis, or come up with something else. The question is what that something else might be, which will be the subject of a later post. Clark's concluding chapter, however, does not leave much as a positive development program.
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Seen from the standpoint of a taxonomy of development paradigms, we now have four programmes:
(1) Income transfer-global welfarism
(2) Sachsism
(3) Institutional-governance reform
(4) Bourgeois culture and its development - or failure
The 'outer' two, one and four, could be seen as skeptical-of-development paradigms; it might be better to call this the two-and-two taxonomy.
We could add many more, of course, some of which - like autarky - have been broadly discredited, or theories of neo-imperialism, which always seem to live to see another day, mostly because they always provide an avenue for blaming the rich world for the poverty of the poor world. I'll try to add some of those later.
But it seems to me that these four - the two interior paradigms seeing the way forward for actual growth, and the two exterior paradigms skeptically questioning whether or how much - capture the main debate today.
(ps. There is a good collection of essays by leading economists, development experts, etc., over at the Templeton Foundation website on directions for international development today. They are all far less pessmistic than Clark's analysis would suggest.)
(pps. Robert Samuelson has a column that does a reasonably good job of summing up Clark's complicated book, in the Washington Post, here. I note it provoked a irritated letter to the editor from an anthropologist protesting that all the bourgeois virtues of income growth can be found in all sorts of different places in the world. Possibly this is so; you would be hesitant to think that a demonstrated factual statement given the a priori ideological vehemence of the letter writer. But this is one of the problems with anthropology today. True of course that anthropology of yesterday was notable for celebrating white European cultural superiority; today's equally ideological anthropology engages much of the time in either showing that, when it comes to good things, all cultures are equally filled with them or, alternatively, that the West is filled with bad things. None of this is going to do much, however, to convince those of who stand outside anthropology's sternly engage political and social prior commitments of the value of its supposed empiricism. Many works of anthropology I read today are either political tracts or else little more than development work, committed to a paradigm in development work, whereas what we need is empirical research into the connections between forms of development work and its actual function and results in different cultures and societies; anthropology dwindled into engagement in development loses much ability to help see a picture beyond a particular development paradigm.)
By the way, I actually think SRIs are probably not such a great idea for Serbia at this point in time. It simply doesn't, so far as I can tell - and I haven't been in Belgrade for a while, true, so maybe it is all much improved and I haven't caught up - have a governmental culture for regulating charities that would allow it to work. Too much corruption and governmental political influence. In fact, I probably don't really think there is great room to expand SRIs into lots of countries around the world - for the same reasons, and also that most countries, really, can't do even basic charities regulation effectively, let alone SRI. Better to have SRI function internationally through countries that have effective charities regulation, and funnel the funds raised to other places in the world.
Hmm. I think I had better drop a note to the editor and amend that opening paragraph - I need some diplomatic way to phrase it, however, because the whole premise of the special issue seems to be, more or less, this is the cool thing in the Western charitable sector, let's do it here!!!! To which the real answer perhaps should be - in Belgrade, in a government containing many corrupt functionaries, the influence of gangsters, and Milosevic leftovers, are you kidding? Let's get basic charities regulation functioning, first, and then look to SRI structures.
(Also, I haven't noted the most basic arguments over SRI, except by implication: first, how do you show that the market's allocation is not the socially efficient one and, second, if it is that socially important, shouldn't government do it directly? I do think SRIs can be a very useful charitable activity, but the article is a bit too cheerleading, on reflection.)
At the media forum in Guatemala last week, I was asked by a Serbian editor if I would contribute something very short and general on socially responsible investing to a special issue on the subject of a Serbian business magazine. Something very readable for a general audience to explain what the idea is about and what kinds of laws and regulations you need to make it possible. Here's my effort - I am not very good at explaining things to general audiences, so I have encouraged him to simplify and shorten things.
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What It Takes for a Society to Have Socially Responsible Investing
Socially responsible investing (SRI) is an increasingly popular mechanism by which individuals and organizations can engage in charitable activities. It is an especially growing activity of the nonprofit and nongovernmental organization sector in the United States and Western Europe, and has great promise to expand elsewhere in the world.
But SRI is a very special nonprofit activity, and for it to be successful in a society, SRI requires some crucial legal, regulatory, economic and social underpinnings – if these are present, then SRI can be an important tool in charitable and nonprofit work in a society, and in international philanthropy. If they are not, then there is a possibility of SRI backfiring and damaging the whole nonprofit sector. It is therefore very important to get the regulatory and legal rules right for SRI, and to understand that it is a specialized tool of nonprofit activity and not an answer for everything.
Stripped down to its essence, SRI is a practice by which either individuals or organizations – which might be regular for-profit businesses, such as banks or corporations, or non-profit organizations, such as charitable foundations – invest part of their funds in economic activities that are considered to be socially valuable but which might not ordinarily receive the funding from the market that is considered socially optimal. The basic idea is that the money is not donated in the ordinary sense of given to a charity, and then it is gone from the donor’s hands. The idea behind SRI responsible investing, on the contrary, is that it is an investment in a charitable activity, usually as a loan, which is to be repaid to the person who made the loan.
This socially responsible lender, rather than receiving the full market rate of interest, however, makes a conscious decision to accept either no interest on the loan or else a discounted interest rate – something less than the full market rate of interest. The money is intended to return to the lender, and so is not a donation. What is donated is the interest on the money that might have been charged.
In the case of individuals, that money can come from one or both sources. It might be money that the individual planned to contribute to charity anyway as an outright donation, and instead makes as a loan. People who do that – who planned to donate the money anyway to charity – frequently take the repaid loan and do another SRI loan, to the same organization or to another one. Alternatively, the money might come from funds that the individual planned to save – for a rainy day, for retirement, for all the reasons people save money. In that case, of course, the individual cares a lot that the money will be safely repaid – it is not money the individual planned to give away, but only to loan for a while.
In the case of for profit businesses, the legal rules in the United States and most other advanced economies permit the boards of directors of corporations to make reasonable contributions to charity in the name of the corporation. And so instead of making a straight donation, the business might instead loan the money at no or low interest rates. Alternatively, just as individuals might take some of their savings and put them into SRIs, a business might take some of its regular investment funds and put them into SRIs – and just like an individual, the business cares a lot that it get repaid.
Of course, all this means that the charity that receives the money must be the kind of charity that can repay a loan. Most charities are not like that, as a matter of fact. If you give money to a charity that uses the money to feed poor children or buy them winter clothes, the simple fact is that that kind of charity has no real possibility of earning money to pay back a loan. It's not (we hope) planning on charging the kids for the food or clothing. It is a charitable organization all about giving. It needs donations because its charitable activity is donating things. Think of it as an “intermediary” that takes donations from you, but knows better than you do who really needs that donation and why, and then makes sure it gets there. SRIs typically don’t make sense for those organizations – and they are most of the charities in the world – because those organizations don’t generate income apart from donations.
The organizations that can use SRIs are typically the specialized range of institutions that do generate their own funds, and can repay the amounts that are loaned to them. Examples would be schools that charge tuition – even if that tuition is very reduced, to subsidize the children, for example, still, over time there is an independent stream of income that can be used to repay SRI loans. What this means, really, is that an NGO that has a stream of income, from tuition payments, for example, can borrow at a zero interest rate through SRIs rather than financing itself – to build a new school building, for example – through loans on the market at full market interest rates.
This is a very valuable economic resource, but it only works with the kinds of charities that actually bring in their own money. But the numbers of charitable organizations in the world that do have their own streams of income from which they can, over time, repay SRI loans are increasing – especially as microfinance, which makes small, “micro” loans to poor people, especially women, in the developing world to create small businesses, grows. Those micro-businesses repay their loans, which in turn can repay the SRI loans.
If that is what SRI is all about, what kinds of legal, social, and economic structures make it possible?
In the first place, there has to be in place a solid social tradition of making charitable donations in the first place. In a lot of places, this is not true – all this work has traditionally been seen as the role of government, not charitable donations. But this view is gradually changing, to accept that although government has a large role to play, so do individual charitable donations. But to help persuade individuals and businesses to make charitable donations, there needs to be a reliable, stable set of government rules to make sure that donated funds are properly used, properly accounted for, go toward strictly charitable activities, and do not simply leak away in corrupt activities.
Second, once a society has in place a solid structure of legal rules for charitable contributions – straight out giving – it needs the special structure of rules for SRI loans. What makes this special and different from regular contributions to charity is that individuals and businesses who make these loans are genuinely looking to get paid back. There needs to be a regulatory and legal structure in place so that these loans really are treated, for legal purposes, as enforceable loans, even if they carry a zero or discounted interest rate.
Remember – often the most important source of SRI funds comes, not from money people were already planning on donating, but on people’s savings, money they are counting on having back, as part of their retirements and other reasons. They will not hand over the money for SRIs unless they have strong reasons to think they are legally protected that the loan will be repaid. Even if they are legally protected, technically, the difficulty of going through legal mechanisms - lawsuits, courts, etc. - mean that they must additionally feel comfortable that the organization will repay even without the threat of the law.
And so they will additionally require assurance that the money will be properly accounted for within the charitable organization. That requires legal rules ensuring that these loans are as legally enforceable as any other loan, although it is a loan made to a nonprofit charity. But it also means legal rules that ensure that nonprofits are monitored by neutral, objective government charity agencies to ensure that they are following proper accounting rules. Problems of unaccountable charities need to be caught before they turn into financial scandals, if possible. But that requires, of course, that the government agency really be about neutral, objective accountability - not a means of political control by the government. Governmental watchdogs over charities mean one thing in Britain and a whole other thing in Putin's Russia.
These are important legal and economic requirements in order that SRIs can work. But the benefits of SRIs are becoming increasingly clear in places where the rules work well. Money can be recycled in the charitable sector, and the fact that it is recycled and not simply donated helps force nonprofit organizations to be more efficient in their work. Many variations of these basic patterns exist - an SRI investor accepting greater risk, for example, that the loan will not be repaid for the sake of the activity. SRIs are not for every kind of charitable organization but, with the right governmental regulations, they are a new and important tool of the nonprofit sector.
As I have mentioned occasionally on this blog, I serve as the board chair of the Media Development Loan Fund, a nonprofit private equity fund that supports independent media around the world. We've been around for a little more than a decade, and starting from zero, we now have a portfolio of about $50 million. We have assisted newspapers, radio stations, TV stations, and internet news operations in places ranging from Serbia to Malaysia to Guatemala. More information at MDLF. I have long known that MDLF is one of the cutting edge venture philanthropy organizations in the world, the coolest of the cool. I am delighted to see that others are starting to notice, too, including being named as one of three finalists in this prestigious New York Executive Council competition:
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MDLF has been selected as one of three Finalists for the Executive Council of New York's "Ten Award" for Best Non-Profit, apparently out of hundreds of nominees. The winner will be announced at the Ten Awards Gala to be held November 5 at Cipriani Wall Street, a famed New York banquet hall in the former NewYork Stock Exchange. The keynote speakers will be former Treasury SecretaryPaul O'Neill and Donny Deutsch, Chairman of the Deutsch Inc. advertising agency and host of a show on CNBC. The New York Ten Awards are billed as "the Academy awards of New York Business." Its goal is "to act as an annual milestone highlighting extraordinary leadership and innovation in the New York business community.
The Ten Awards is an annual selection of ten individuals in the greater NewYork business community who lead national and multi-national companies whohave, through their innovation, significantly impacted their organization and industry." One award is for Best Non-Profit and the remaining 9 awards are all for commercial business leaders. The Non-Profit Award is "presented by Saatchi & Saatchi." The judges for the awards include journalists from the Financial Times, Institutional Investor, Crain's and The Deal.
It is expected that 500 business leaders will attend the gala on November 5, where the winners will be announced. They represent "the executive teams of many of the largest organizations in New York, as well as the new and emerging leaders of the city." There will also be a special "Ten Awards NASDAQ Market Closing" with the winners & keynote speaker. Sponsors of the Ten Awards include Accenture, American Express, AT&T, Business Week, Cushman & Wakefield, EDS, Ernst & Young, Flexjet, Fortune, Google, IBM, Loews Hotels, Marsh, Microsoft, NASDAQ, Philips, The Ritz-Carlton Club, JetBlue, Sentient Jet, SoftBank, Sprint, TIME, UPS, and Zagat Survey.
More information can be found at: http://www.execcouncil.org/TenAwards/2007/index.html
I have frequently been critical of the World Bank on this blog, and will continue to be, both as to questions of governance and corruption, and as to fundamental mission. As the the second, mission, I am less and less convinced that the World Bank lending mission has any great importance anymore, and that its future lies in grantmaking to the really poor world, and in serving as a place for studies like this one, below, Where is the Wealth of Nations?: Measuring Capital for the 21st Century.
This is a quite extraordinary document, one that deserves wide, wide reading in setting policy for international development. And to give credit where credit is due, the Bank deserves considerable praise for putting out a report that, in its seriousness and depth, might be thought to raise considerable challenges to the typical international organization approach to global poverty.
Here, in pdf. Required reading.
(ps. I see that the Wall Street Journal has an op-ed piece praising the report by Ronald Bailey, Saturday-Sunday, September 29-30, 2007, "The Secrets of Intangible Wealth." It is a pretty good summary.)
(Update: See this opinion piece by the great Norman Borlaug, in the Wall Street Journal, open link here, Sunday, July 22, 2007.)
Well, I have long known about Norman Borlaug, now age 93, as I have long done international development work. But my kid has never heard of him nor, come to that, students at my law school. Good for Gregg Easterbrook for pointing out that Borlaug has saved more lives than anyone living today. Here from the Huffington Post:
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Today in Washington I was in the room as the greatest living American received a medal. George W. Bush, Nancy Pelosi and others were present. But will you ever hear this event occurred? To judge from tonight's major network evening newscasts, perhaps not. Cameras were allowed at the ceremony but I saw none from the major networks, though the international press was significantly represented. And will you recognize this great man's name when I say it?
The greatest living American is Norman Borlaug, who won the Nobel Peace Prize in 1970, and joins Jimmy Carter as the two living American-born laureates around whose necks this distinction as been placed. Do you know Borlaug's achievement? Would you recognize him if he sat on your lap? Norman Borlaug WON THE NOBEL PEACE PRIZE, yet is anonymous in the land of his birth.
Born 1914 in Cresco, Iowa, Borlaug has saved more lives than anyone else who has ever lived. A plant breeder, in the 1940s he moved to Mexico to study how to adopt high-yield crops to feed impoverished nations. Through the 1940s and 1950s, Borlaug developed high-yield wheat strains, then patiently taught the new science of Green Revolution agriculture to poor farmers of Mexico and nations to its south. When famine struck India and Pakistan in the mid-1960s, Borlaug and a team of Mexican assistants raced to the Subcontinent and, often working within sight of artillery flashes from the Indo-Pakistani War of 1965, sowed the first high-yield cereal crop in that region; in a decade, India's food production increased sevenfold, saving the Subcontinent from predicted Malthusian catastrophes. Borlaug moved on to working in South America. Every nation his green thumb touched has known dramatic food production increases plus falling fertility rates (as the transition from subsistence to high-tech farm production makes knowledge more important than brawn), higher girls' education rates (as girls and young women become seen as carriers of knowledge rather than water) and rising living standards for average people. Last fall, Borlaug crowned his magnificent career by persuading the Ford, Rockefeller and Bill & Melinda Gates foundations to begin a major push for high-yield farming in Africa, the one place the Green Revolution has not reached.
Yet Borlaug is unknown in the United States, and if my unscientific survey of tonight's major newscasts is reliable, television tonight ignored his receipt of the Congressional Gold Medal, America's highest civilian award. I clicked around to ABC, CBS and NBC and heard no mention of Borlaug; no piece about him is posted on these networks' evening news websites; CBS Evening News did have time for video of a bicycle hitting a dog. (I am not making that up.) Will the major papers say anything about Borlaug tomorrow?
Borlaug's story is ignored because his is a story of righteousness -- shunning wealth and comfort, this magnificent man lived nearly all his life in impoverished nations. If he'd blown something up, lied under oath or been caught offering money for fun, ABC, CBS and NBC would have crowded the Capitol Rotunda today with cameras, hoping to record an embarrassing gaffe. Because instead Borlaug devoted his life to serving the poor, he is considered Not News. All I can say after watching him today is that I hope Borlaug isn't serious about retiring, as there is much work to be done -- and I hope when I'm 93 years old I can speak without notes, as he did.
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What I do recall, back in the early 1980s, were complaints from environmentalists with whom I was working at the time in Colorado, that the Green Revolution was environmentally bad because it promoted monocrop agriculture and faciltated population increase. The "deep ecology" view, as I heard it at the time, was that the Green Revolution was bad because it increased the technological dependence on cereal crops, but mostly that it facilitated population growth. As Easterbrook points out, in fact the fastest way to decrease fertility is to increase wealth, including by not starving people.
As William Easterly says, it is much too soon to say whether some favorable economic growth and development trends in parts of sub-Saharan Africa will be permanent. Political instability, for example, can wipe out years of slow improvements in a historical heartbeat. Nonetheless, he says, it would be a mistake not to recognize such improvements as are occurring, in no small part because they indicate the path forward. In the LA Times, here, "What Bono Doesn't Say About Africa," July 6, 2007, opinion page:
In truth, Africans are and will be escaping poverty the same way everybody else did: through the efforts of resourceful entrepreneurs, democratic reformers and ordinary citizens at home, not through PR extravaganzas of ill-informed outsiders.The real Africa needs increased trade from the West more than it needs more aid handouts. A respected Ugandan journalist, Andrew Mwenda, made this point at a recent African conference despite the fact that the world's most famous celebrity activist — Bono — was attempting to shout him down. Mwenda was suffering from too much reality for Bono's taste: "What man or nation has ever become rich by holding out a begging bowl?" asked Mwenda.
Perhaps Bono was grouchy because his celebrity-laden "Red" campaign to promote Western brands to finance begging bowls for Africa has spent $100 million on marketing and generated sales of only $18 million, according to a recent report. But the fact remains that the West shows a lot more interest in begging bowls than in, say, letting African cotton growers compete fairly in Western markets (see the recent collapse of world trade talks).
As time goes by, Easterly is decisively winning the intellectual battle between his approach to poverty reduction and economic development and that of his main intellectual rival, Jeffrey Sachs. The two share some important things in common, true, but Sachs, over the past few years, has gradually evolved a top-down, 'aid money is the fundamental factor', Soviet-style central planning quotas-and-goals, five year plan approach that has proved so useless in the past. It dovetails with Sachs' position as UN advisor on how to create precisely such command-economy five year plans at the grand UN level. It is profoundly reactionary. And it's a great pity, because Sachs is obviously brilliant and committed - but his ideas, at this point anyway, are wrong and known to be wrong on the basis of what has gone on before in Africa and elsewhere. This is not to exaggerate the ability of markets and trade to address extreme poverty in Africa - there is an enormously important role for public investment and public goods, in such things as counter-malaria, counter-AIDS, education, public health, etc. - but without the engine of trade and markets, Africa will at best remain the world's begging bowl.
Sometimes I wonder why someone so obviously brilliant as Sachs would move in this kind of direction, against strong evidence over decades. Unlike many of his confreres in international organizations, he is not simply a reactionary socialist under an "internationalist" label. It seems to me that a certain amount of it reflects the impatience of an aging - and, let's be honest, massively egotistical - man who wants to see it happen in his lifetime - does not want to accept that the better path will take longer than he himself has got. After all, Easterly's fundamental intellectual point is that development of the kind that Sachs today advocates is essentially a strategic endeavor - one that aims to move massive amounts of money in a short period of time at the macro-level.
Whereas the fundamental problems of poverty reduction for the very poor of the world are at the micro-level. They are today tactical rather than strategic - the resources at the level of global grand strategy have been repeatedly deployed over the last few decades, but they are derailed over and over again by failures at the tactical level, at the end user, last mile (or two or three) level - through corruption, failure to follow through at the village or city level, etc. And those problems have to be addressed individually, at the retail rather than wholesale level. They have to be addressed at the level of political society, which means at a minimum the level of nation-states as well as more local levels. Which means time and more time: this is not a recipe for inaction or complacence, but for long term attention to the task at the microlevel.
Or, to put it quite a different way, Sachs, Bono, all the rest, propose to be the Wilberforce of our time. I applaud this, quite sincerely. I was profoundly moved a couple of weeks ago to see the portrait of Wilberforce in Britain's National Portrait Gallery, as well as a large scale painting of one of the founding meetings of the anti-slavery society in Britain. But what Andrew Mwenda says (interpolating freely my own views into his lines) is that growth in Africa means that its people must eventually be drawn into the global market and become "ordinary" producers and consumers in that market - whereas the most that the Wilberforce moralizing approach will accomplish for economic development in Africa is the begging bowl. Economic growth can, and should, be conceived at one level as a Wilbeforcean moral cause for Africa, but slavery and the slave trade also have certain great dissimilarities with economic growth and poverty reduction, not the least of which is that at some point, the begging bowl must end and "ordinary" market relations obtain - and under some circumstances, attachment to the former can tragically forestall the latter. The two need not be at odds - the model of public investment in vital public goods, for example, while building the connections of trade and markets that produce "ordinary" production and consumption - but they can become so.
(Whoops, as I write, Wolfowitz has resigned - WaPo evening breaking news story here. For those, especially at the Bank, who think this signals a new day dawning for the poor of the world, well, call me unimpressed. Why was it again that we need this institution?)
(See my earlier posts here (on Sebastian Mallaby defending the mission of the Bank), here (on the Bank mission and the Bush administration), here (my piece in the Financial Times criticizing the Bank's ethics committee) and here (responding to criticism on my Financial Times piece), and finally here, (arguing that the next US administration, rather than take on issues like Bank reform, will simply opt for "meek multilateralism," the go-along, get-along approach of the early Clinton administration).)
(ps. Welcome instapunditeers and thanks Glenn! I've corrected the grammar in a couple of places, and improved it in a couple of others, including some bits that Instapundit was kind enough to quote - I don't think I've changed the meaning.)
***
Of the main press stories out there in the Thursday, May 17, 2007 papers ... the Wall Street Journal news story on the front page is the best and most detailed, shows actual familiarity with the documents, reports, board reports, and does not seem merely sourced to inside sources with their own agendas at the Bank, the administration, or elsewhere. It's not that inside sources are unhelpful - but if you haven't read the underlying documents, then as a reporter, you can't really know how you're being spun, and it is 100% that you are being spun. Unfortunately, the story is behind the subscriber wall.
Bret Stephens has an opinion page story on yet another of the many ethical lapses at the Bank - yes, yes, Mallaby tells us that the Bank is no more corrupt than other international organizations, but isn't that damning with the worst kind of faint praise? - open link, here. It is about allegations of an affair by Thomas Scholar, an official of the Bank.
It isn't surprising, by the way, that so many of the ethical issues at the Bank and other international organizations involve sex. International organizations, in light of their long questionable practices concerning promotion of women and other gender issues, were forced by feminists, many of them Americans, to adopt sexual harassment and related policies which, while standard at American corporations, nonetheless have never culturally been taken on board by the rest of the world even as they mouth the proper form of words. One might hope that the kind of gender issues involving the UN and international organizations wouldn't so frequently be, for example, twelve year olds being prostituted by UN workers in Africa, but, well, there you have it. The official response is the twinned one of announcing "zero tolerance" of child abuse and rape (never, of course, actually followed) and a call for everyone to adopt a "gender perspective" - take a look, for example, at the September 2005 General Assembly UN reform document - every other line, more or less, calls upon everyone to adopt a "gender perspective" as a cure for everything from child rape by UN staff in Africa to AIDS. Seems as unlikely in the former as the latter.
One of the many ironies in the Wolfowitz affair, however, is that in many respects, the target of the Bank staff seems to have been as much Riza as Wolfowitz - she is a true believer in feminism, and as a true believer, she seems to believe that so many, many things can be traced back to misogyny - and, as a true believer in misogyny, was more than willing to throw fits to get her way by playing the gender card. She deserved, in my view, her raises as compensation for the ending of her career at the Bank, and an institution which makes as much out of gender equity as the Bank theoretically does should be prepared to have its staff demand that it do so even if, to someone outside the institution's official ideology, it constitutes playing the gender card. It seems clear enough that Riza played the gender card on the compensation issue, because she was known for playing the gender card everywhere. And everyone, starting with the Ethics Committee and the human resources department, seems to have preferred to avoid her rather than face a scene. In important ways it was the unwillingness even to face, even to have a meeting with, an angry Muslim feminist whose career, after all, was being sacrificed on the altar of her paramour that is a central reason why that political hack (now hacking away at UNDP, but then the two deserve each other) Ad Melkert would not meet with her and dumped the whole thing back on Wolfowitz. Back in those days, compared to a scene with Riza, it seemed like a good way to handle it, stuff it into the shredder and forget about it. Wolfowitz says as much when he says that everyone at the Bank sought to avoid battle with an angry Riza - people did not want a battle with her, did not want her as a supervisor, pretty clearly feared her in a Bank with Wolfowitz running it, and so would not settle for the usual recusal deal that governed other senior staff relationships. They wanted her out, and got it. Vive la sisterhood of the Bank.
So the rest of the world, starting with the staff of the Bank, may talk the gender talk - but it doesn't mean it, at least not in the way that Americans, following conditions laid down by a combination of Mackinnon and the US Supreme Court, understand it. Maybe they're right and we Americans are wrong - I'm not a feminist and see many problems with how the United States has evolved on these things. But in any case, in an international organization, these gender rules seem inevitably on a collision course with the fact that, among other things, extramarital and other affairs are socially acceptable at the Bank and the UN and all sorts of international institutions, no American puritanism for them - a collision course, that is, unless the institution reconciles them with a large, large dollop of hypocrisy and double standards. Which is the usual attitude I have found at international organizations. For that matter, I recall, while serving as a general counsel for a large transnational charity, having to deal with the outrage - much of it from very committed feminists in Western and Eastern Europe - at the attempt, in the interests of avoiding liability in NY courts, to impose an American sexual harassment standard on the global organization. They didn't buy it, and my experience of Europeans - and Asians and Africans and people from many places - is that although political correctness of the kind that infuses institutions like the Bank and oozes from its many pores and orifices is the official line, it is not really adhered to and not really believed. And since there is no recourse to American courts, which do believe it, it is honored in the time honored fashion of European diplomatic hypocrisy, an elegance of words but something quite different in the way of action.
Well. The Washington Post story is pretty good today, as well. Here, by Paul Goodman. He, too, seems to have read the documents and talked with more than just a coterie of Bank sources. The New York Times, as has been usual in this as well as other international organization scandals, fares the worst, with Steven Weisman's front page story (behind the subscriber wall) simply seeming to channel Bank insiders. Who knows, maybe he diligently combs through everything, but it sure doesn't show up in the reporting.
The reporting is shifting, with a certain relief it appears, away from factual reporting to soft opinion journalism about the mission and future of the Bank. Not investigative, not reading documents, but interviewing some talking heads on one side or the other. Mind, this is an important discussion, but it has not been very helpful to have it shoehorned into a (non) scandal that is really about corporate governance, or the lack thereof at the Bank - and I refer to the Bank board, and its ethics committee, and its former general counsel - not anything as highminded as the Bank's mission. I've posted here earlier on the fundamental weaknesses of its mission/business model, but that's not what the Wolfowitz affair is all about.
Sebastian Mallaby is very smart, and there are few people on the outside more knowledgeable about the World Bank than he, so this column from the Washington Post, Monday, May 14, 2007, A14, is must-reading. As is his 2004 book, The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations. Mallaby is a hard-headed, tough-minded journalist and policy analyst in the area of development and global poverty reduction, one of the smartest and best informed outsiders.
Sebastian - I know him a little bit - appears to have been reacting in his WP column to this George F. Will column, also in the Washington Post. Will is not an expert on the Bank or international development; his column appears to have been written after some discussion with one or more of the Bank's critics. Mallaby appears to be out to marshall a lot of facts about the Bank and its work that Will and his readers are not likely to know much, if anything, about.
In taking down Will's column, however, Mallaby sacrifices a lot of legitimate criticism and the possibility of radically rethinking the Bank - radical criticism that he himself is much more willing to consider in his book. I understand that an 800 word column does not allow much room for subtlety. Still, that acknowledged, I don't quite think the column admits what Mallaby himself otherwise would say about the shortcomings in the Bank's business model. I fear that in this column, Mallaby is, alas, simply channeling the Bank.
(I leave aside as unserious the column's opening argument that one can look at the Bank simply like any other company and therefore the board of directors should fire Wolfowitz for having lost their confidence and having lowered share price. The remainder of the column, after all, is one long argument as to why the Bank cannot be treated merely as any private company. If it were a private company, after all, well, it wouldn't exist. As to the bizarre analogy to falling share price, it is inapposite not just because the Bank doesn't have one - rather, the larger point of the remainder of the article is that the Bank cannot, by definition, be measured according to such criteria. It is nearly as idle as the analogy sometimes bandied that US voters are "shareholders" who should fire Bush as "company president.")
Mallaby points out that approximately half of the Bank's outflows last year went to poor(er) countries if one includes, as properly one must, the Bank's soft loans and grants programs - these being the general evolutionary trend of the Bank. This is his main point of attack against the Will column; the (almost certainly correct) dangling implication is that Will has no idea about this. There is, in other words, a story beyond the statistic Will cites that 27 middle income countries received 90% of the regular lending of the Bank.
Fair enough. But one might conclude that this is precisely this statistic that should cause one to wonder why the Bank exists as a bank. Sebastian defends the middle income lending - which, after all, still amounts to over half the Bank's outflows - with the throwaway line that much of it goes to countries like China or Brazil that have many, many poor people. Sure, but how that regular lending really, genuinely, measurably affects outcomes for those very poor people is very murky - perhaps someone more expert than I can explain it, but I haven't seen measurable data to that effect - in large part because of the question of what role it plays in countries that do indeed have access to private capital that far exceeds the capital flows of the Bank.
It is far from clear, at least to me, that such regular lending to middle income countries has positive longterm impacts for the very poor of those countries. In part this is because money is fungible. In order to demonstrate that these funds make a difference to these poor people, it is not enough to show that it increased aggregate capital flows. It is not even enough to show that it was, in the first instance, specifically targeted toward those poor people - because, after all, the inflow of Bank funds, might simply have allowed other funds to be siphoned away. Anyway, the incentives from a financial statement point of view for the Bank to want to make loans to those safe middle income countries is a strong reason at least to wonder what the economic benefit is for the very poor in Bank lending to middle income countries and to want to see strong, reliable evidence for it. Perhaps it is there and, although I do tend to follow this literature, perhaps I have simply missed it - and Sebastian knows this literature, I'm sure, as well or better than anyone, so I would be happy to be pointed toward the papers on SSRN or elsewhere.
But assume for a moment, arguendo, that the criticism I make above about middle income lending is so. In that case, Mallaby's argument falls back on the fact that slightly less than half of the Bank's outflows come in the form of soft loans and grants. But that fact is lukewarm at best and really cuts both ways. The argument radical reformers of the Bank make is that there is little reason why the Bank should not be reorganized to give up the private capital market-intermediation-subsidized lending to middle income countries altogether, and focus entirely on the soft loan-grant programs, to the poorest countries. Of course private capital markets cannot do everything, as Mallaby says - but that is not the argument that the radical reformers make and is surely a straw man.
The problem of the Bank qua bank is that it seeks to intermediate private capital markets (with a subsidy), to try and do precisely what Mallaby suggests private capital markets cannot do because capital markets cannot solve all of poverty's problems. The reformers would suggest that the subsidy in the case of the Bank's ordinary lending to middle income countries is not really enough to compete with the functioning of the private markets; the Bank's lending really is a fifth wheel, and it should give that up in favor of activities for which it is not merely a fifth wheel. (As for crisis lending to middle income countries that Mallaby mentions, well, what is the IMF for? And - I don't know the answer to this - how great was the role of the World Bank in liquidity terms in the Asian crisis compared to the Fed?)
In the case of the poorest countries, however, lack of capital is genuinely an issue. So is the ability to repay any loan. So is technical assistance, and so is any improvement in governance. Why not cause the Bank, therefore, reorganize without the middle-income country intermediation-banking function, and focus solely on soft loans/grants and, let us not forget, technical assistance and governance advising. And focus on countries, societies, that are the poorest. Why endorse half measures?
For if that's what the real value added is, it is far from clear why anyone needs the Bank's goldplated operations -they cost what they cost in part because they are designed to interface with the private capital markets, and to pay the people who do those functions a respectable civil servant salary commensurate with financial professionals in the public sector. In my experience, it is not what one would pay program officers in a foundation dealing with local poverty matters on a grant-making basis, who do not have and do not need the banking credentials on which the Bank prides itself. There are comparably serious skill sets that these anti-poverty program officers need, yes, but frankly they can be obtained at a lower cost, in part because they are not so readily placeable in the private sector. Why not reorganize at a cheaper cost along the lines of far more efficient, far more locally oriented (because less capital markets oriented), far cheaper in terms of transaction costs European aid agencies? (I do not suggest under any circumstances modelling anything on US AID, which is a waste of oxygen.)
If these functions were being carried out by the Dutch, the Swedes, the Norwegians, the Swiss, through their national development aid agencies, how would they do it and what would they pay? Would they pay for a whole banking staff when in fact the operation is aimed at grantmaking anyway, and the money would come from governments in any case, not from the capital markets and relent at a subsidized interest rate? They would - they do - engage in a certain amount of on-lending in which they really do expect to get repaid, but that is far from being the core, let alone over half, of their work.
Why, in other words, should the World Bank continue simply for historical reasons as a bank, a bank designed in cost structure, skill sets, etc., to interface with private capital markets? Why share the pleasure Mallaby takes in noting that slightly under half the bank's outlays went to soft loans and grants - why not think those things should essentially be the whole thing? Why take pride in half-measures that continue precisely the sins that Sebastian correctly sees in thinking that it all can all be done by capital markets? Why not sever the relationship to the capital markets altogether and concentrate on poverty reduction as such?
(ps. The column also mentions in passing that Bank salaries, once you take into the account the tax adjustment and long summer vacations, are comparable to academic salaries. I'm told there is a link to a paper by an economics professor in the online version, which I will look up. But as someone who is a college professor, and who is married to someone who used to work in an international organization with similar salary structures and arrangements and who, hence, paid very close attention to comparative salary issues - well, at least if you were not an American and not subject to tax on your salary, it was a very favorable deal. The tax break was amazing for non-Americans. I simply don't understand what Mallaby is suggesting here - it is not our experience at all. As for summer vacations - every dean and professor I know understand perfectly that summer vacation is simply the research semester, it's not vacation, at least if you plan on getting tenure, getting a promotion, getting a raise. It's a 12 month job like any other. And now I have to get back to it.)
(pps. Or consider this short op ed by AEI resident scholar Desmond Lachman, here. It argues for a World Bank that gives up the middle income lending function altogether, along with the proliferating mandates at the Bank that increase its unaccountability.)
Not being in any highfalutin' political loops about the Bank and Wolfowitz, either international circles or in DC, I have been puzzled as to why the Bush administration has been so lackadaisical in defending Wolfowitz. The occasional word from Bush, but really very little said. Sometimes I have even far-fetchedly wondered whether the Bush administration's secret plan was to appoint but Tony Blair. In any case, the message taken away in foreign capitals from the lack of visible support surely would have to be that the administration would not care one way or the other what happened, at least so long as the US retained the informal right to appoint the Bank head. The view from Europe is summed up in this Financial Times editorial, here; it is essentially a rebuttal to the Wall Street Journal's editorials of the past few days.
According to the US papers today, however, the Bush administration has belatedly started to respond and defend Wolfowitz, including State and Treasury. The Wall Street Journal news pages have a good summary, behind the subscriber wall, Thursday, May 10, 2007, A6, Neil King Jr. and Greg Hitt, "Rice Launches Wolfowitz Defense." The Washington Post has an article in the business section today, John Ward Anderson and Peter S. Goodman, "Europeans Wince, Wait for Wolfowitz Saga to End," Thursday, May 10, 2007, D1, here. The WP piece seems to have been written and researched almost entirely from the European perspective, and says very little about US lobbying efforts on Wolfowitz's behalf.
The Washington Post also has a personality profile piece that finally shows a little sympathy for the woman who has really paid the career price for this, Shaha Riza. I have never met her, know nothing about her apart from what is in the papers and the blogs. I have to say, though, a surprising number of the comments posted on Bank-staff-related blogs show an utter viciousness toward her; some of these folks appear to be not such nice people, at least when concealed behind the internet veil of anonymity. (Washington Post article, here.) Indeed, to judge only by comments on the Bank-staff blogs, one might think that this campaign is essentially about getting her, even more than getting Wolfowitz.
I am also pleased to note that my Financial Times comment appeared in Arabic today, May 9/10, 2007, in the respected Beiruit newspaper An-Nahar, for those - alas, not I - who read Arabic, here, or so I am told. I've also been contacted by Le Monde about it appearing in French, but haven't seen it so far. But of course it is a modest piece, reflecting a corporate governance lawyer's concerns about what the publicly released documents show about the process and questions of fiduciary duty.
There are larger issues of policy about the Bank, obviously. Joseph Stiglitz raised some of them in his Financial Times comment, also May 7, 2007. I myself have views on some of them, although I have kept them quite separate from the narrow, lawyerly issues of fiduciary duty and corporate governance in the Wolfowitz affair. I do have another life in development finance, however. Curiously, because most of what I do pro bono as a corporate finance professor has to do with a nonprofit development fund, a nonprofit venture fund that engages primarily in lending and investment, I have a certain appreciation for what the Bank has traditionally used as its development strategy - a combination of subsidized loans and technical assistance, because that is what the organization I work with does.
One thing is clear from that kind of activity - if you are a nonprofit with a mission, but a mission driven nonprofit that nonetheless acts like a venture fund or bank, then you have to be very careful in how you target your loans and investments, because, presumably, it matters whether you get repaid or not. That is absolutely true in the case of my organization - if we lose the money, eventually donors will get tired of this and stop funding us and we are out of business. As a consequence, the places and circumstances where we can make investments are limited - places so poor that projects will not manage to repay loans don't work, nor do places where governance and rule of law is so poor that we could not hope to enforce our legal contractual rights. That leaves a circumscribed range of countries and societies in which it fits our mission to lend, but where we have a reasonable chance of repayment on a sustainable (albeit subsidized) business model.
In the case of the World Bank, something akin to the mission/lending tensions also applies - although the prospects of it going broke because its funders give up on it are vanishingly remote. The safest thing to do is borrow on the capital markets at a discount, combine this with various additional funds from donor countries, but then lend to places where you are likely to get repaid. You lend at a subsidized rate, but you don't really risk massive default. That leads you, however, not to the poorest countries, for which loans don't make sense, but to middle income countries.
The problem with middle income countries is that although they fit the business model, they don't really fit the mission of getting to really poor people. The proof, ironically, that they do fit the business model is that these countries can today tap the private capital markets. Sure, of course anyone who can get cheaper capital through the Bank will do so - in my nonprofit venture fund, we constantly get proposals from businesses that don't fit our mission profile but naturally like the idea of subsidized loans well below local rates, who wouldn't? But as I recall from Adam Lerrick, the Bank's lending in the past five years has been something like 90% to a group of 27 middle income countries, and that Bank lending was well under 1% of the total private capital market capital tapped by those countries. The Bank's lending was entirely superfluous to what the private markets were already doing - safe from a business perspective, but largely pointless from a mission perspective.
I have long accepted the Allan H. Meltzer proposals (quick summary 2 page PDF, here) - long rejected, naturally, at the Bank, since its professional structure is largely built around the Bank as a lending institution to stand-in for private capital markets - for the Bank to focus on the world's poorest people and turn itself into a grant making/technical assistance institution. If you do that, however, you don't need much of the existing machinery or, really, highly paid, highly skilled financial professionals whose task it is to manage the interaction of the Bank with its borrowings on the capital markets. You more likely need more locally focused people who can operate much closer to the "retail" level of economic development. Wrong structure, wrong set of staff, wrong focus. To be fair, the Bank has developed the world's leading expertise in poverty reduction studies - what works, what doesn't - and the world's greatest expertise in technical assistance. Compared, for example, with the corresponding UN programs, the Bank is the most important repository of knowledge, best practices, etc. - despite my criticisms here, I do acknowledge that and the accumulated intellectual capital it represents. But that is, curiously, still adjunct to its now largely overtaken financial and banking mission.
(George Will summarizes some of this thinking, largely drawn from Meltzer and Adam Lerrick in today's Washington Post, here. I think the Bank's intellectual capital in the areas of technical assistance, best practices, etc., is considerably more robust than Will and others who don't work in the area would admit.)
In addition to the Meltzer proposals to convert to grant making, rather than middle income lending, there is a second policy issue at the heart of the Bank professionals' objections to Wolfowitz (apart from everything else, I mean). That is the question of whether the function of the Bank, the measure of the Bank's success, is to shovel money out the door in a kind of European style welfare program gone global - essentially, an attempt at global income redistribution. The alternative is to focus on governance, and condition aid on governance reforms, as Wolfowitz and the American government has generally favored, in which aid is seen as an investment in the future, including governance reform, anti-corruption, all the rest, rather than simply income-shifting today, and in particular as an investment that draws in private direct foreign investment which, in the case of those countries which have lifted themselves out of poverty, has been the economic engine. (I discuss some of those questions tangentially, in a discussion about the relationship between microfinance and globalization, free download pdf at SSRN, here.)
It seems pretty obvious that the Europeans and the Americans fundamentally differ on the approach to global poverty. The same debate figured in the 2005 UN reform arguments over the Millennium Development Goals, where, for the UN bureaucracy and the Europeans, the issue was simply more and more money. Two different approaches - yet where there is no clear evidence that the World Bank-European approach has made any positive long term, generational difference to world poverty, and, to be fair, just as there is no evidence that the American preference for governance reform in fact makes any difference over the generational long term. No one, frankly, has any evidence-based method for international public institution intervention for poverty reduction.
In that case, perhaps the best thing would be to create two different institutions and let them compete in the global poverty market and see which works better. The Europeans can have the Bank, and pay for its goldplated operations; the Americans could perhaps ramp up the Millennium Development Corporation and put the money otherwise devoted to the Bank there. In a generation, maybe it will start to become clearer which approach works better - although, to be sure, as the parties become invested in their approaches, it is unlikely that either side would admit of anything.
But despite the virtues of a policy competition in something as unknown and fraught with uncertainty as this, the exhausted Bush administration, and future American administrations, are unlikely to try anything so ambitious. The reason is that the Bank is no longer really about poverty reduction for the US government. It is, instead, a place for the Americans, and for future administrations, to demonstrate their multilateral sincerity and bona fides. Serious intellectual challenge to the policy model takes a backseat far behind the need to show that the US is a team player, even if the team's policies have little to show in the past and little reason to predict that they will pay off in the future. The US is likely to seek, for a while to come, venues in which it can show itself to be a good, meek multilateralist.
The price paid in a healthy competition over effective policy on global poverty reduction - where the questions are genuinely open on both sides, and maybe what is needed is something altogether different from either one - is unfortunately considered collateral damage alongside the short term political need to demonstrate multilateral solidarity in an arena in which the costs of multilateralism - the costs of the failures of any particular anti-poverty strategy - are paid by neither the Europeans nor the Americans.
(ps, May 11, 2007. Marcela Sanchez, in the Washington Post, here, on Latin American countries, and not only those leaning Chavist, moving away from the IMF and the World Bank in favor of other sources of capital.)
PPS, May 11, 2007. Steven Weisman's New York Times account of current pressures by the Europeans to make it impossible for Wolfowitz to stay, behind the subscriber wall, but May 11, 2007, A14, notes the threat by European governments to reduce their contributions to the Bank if Wolfowitz stays. One might have thought this ... unilateralist. In any case, one wonders what they might do with the funds instead. Weisman says they would possibly contribute them to European aid agencies, and I'm sure that's so.
Why that would be such a terrible thing, however, I don't know. They would thereby shift funds from the World Bank to European aid agencies that would do approximately the same thing with the funds - although likely those agencies would put much less of that money into middle income country lending that is good for the Bank's balance sheet but not very relevant to economic development, particularly not of the world's very poor people. And my experience of the European aid agencies is that they are closer to the ideal I mention above. In my experience, they are less goldplated in their operations because they are not paying wages tied to the presumed skill sets of knowing how to tap into the private capital markets. They tend to be more efficient, much closer to what is going on at ground level, and define ground level much more as the world's poorest people.
Again, I emphasize, as I said above, I do respect the Bank as a repository of expertise on poverty reduction even if I don't think its core lending business makes sense anymore. Still, when it comes to delivery, I think the European country aid agencies - the Nordic countries, the Dutch, the Swiss, especially, do the best job I have seen of any governmental or intergovernmental agencies. The British are a mixture of the worst of the Americans and the Europeans - European in the sense of proposing to spend lots of money and measure success by spending lots of money, and American in the sense of not actually doing it - very Blairite, in the sense of the faux-solidarity Blair, really wonderful, Churchillian speeches by the Claire Shorts of this world, but then no money and no real follow through. I prefer the stolid, stodgier, but frankly much more stick-to-it Nordics - phlegmatic but dogged.
(US AID, it goes without saying, remains the bureaucratic nightmare it has always been - a trainwreck of an aid agency. Anyone who gets involved with US AID gradually shifts their orientation away from those they are supposed to be aiding and towards the worship of the bureaucracy of Washington. US AID needs to abolished and the US start over from scrach. But reforming the US delivery of poverty reduction aid is a whole other story.)
Far from being a threat, for European governments to shift financing from the Bank to their own aid agencies seems like a good idea in any case. I don't really see the downside, except, of course, if you're the Bank.
Well, it is not exactly news now that the World Bank board committee report is out. I don't have much more to add.
Have I learned anything out of this process? One is that journalists and many other people opine freely on factual issues in which it seems doubtful that they have read the underlying documents. I have read the underlying documentary record, at least the public parts, and I am dismayed to conclude that, whether one thinks Wolfowitz is guilty as charged or not, few of the people writing the accounts that the rest of us read have actually read that record. The cautious journalists frame their reporting in ways that suggest, but don't actually affirm, that the reporter has read the stuff versus relying on someone else's account of it; the less cautious and many of the commentators simply use a Duke lacrosse-lite approach and go with what has come to be known as "narrative reporting" - frame the narrative and then select what you report in order to confirm it, and don't ask skeptical questions that might force you to have to think again.
Obviously I'm not one of the great pooh-bahs in all this - Mark Malloch Brown, Joseph Stiglitz, all the rest - the guys who seem to imagine themselves as the Big Men (African tribal style) of our planet. I'm just a humble lawyer. But I am one who is fairly good at actually, you know, reading things. I have no idea what plots and machinations and political deals lie behind all of the ethics charges. (The Wall Street Journal editorial page, here, Wednesday, May 9, 2007, suggests some possibilities.) I am reasonably experienced at going through piles of documents and reports and testimony and examining whether breaches of fiduciary duty have occurred. It's a modest skill, sure. But reading over what the Great and Good have had to say about all this, I don't see much reason to think that they have actually read the underlying documents either. I suppose I don't really expect them to, because for them all this rises or falls on political calculations in which the truth or falsity of the underlying charges is not really relevant. But in that case, honest people leave aside the charges on which they have no particular knowledge, and make honest cases on policy grounds. Naive, I know.
(ps. excerpts from the WSJ editorial, Axis of Soros, from the open link.)
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Axis of Soros
The men and motives behind the World Bank coup attempt.
Wednesday, May 9, 2007 12:01 a.m. EDT
Wall Street Journal, editorial
Mark Malloch Brown spoke Monday to a crowded auditorium at the World Bank's headquarters, warning that the bank's mission was "hugely at risk" as long as Paul Wolfowitz remained its president. Only hours earlier, news leaked that a special committee investigating Mr. Wolfowitz had accused him of violating conflict-of-interest rules. A coincidence? We doubt it.
Mr. Malloch Brown, remember, was until last year Kofi Annan's deputy at the United Nations. In that position, he distinguished himself by spinning away the $100 billion Oil for Food scandal as little more than a blip in the U.N.'s good work, and one that had little to do with Mr. Annan himself. Last week, Mr. Malloch Brown was named vice president of the Quantum Fund, the hedge fund run by his billionaire friend George Soros. A former World Bank official himself and ally of soon-to-be British Prime Minister Gordon Brown, Mr. Malloch Brown would almost surely be a leading candidate to replace Mr. Wolfowitz should he step down. Not surprisingly, Gordon Brown cold-shouldered Mr. Wolfowitz at a recent meeting in Brussels.
The bank presidency would be a neat coup for Sir Mark, and not just because the post has heretofore gone to an American. He also stands for everything Mr. Wolfowitz opposes, beginning with the issue of corruption. Consider Mr. Malloch Brown's defense of the U.N.'s procurement practices.
"Not a penny was lost from the organization," he insisted last year, following an audit of the U.N.'s peacekeeping procurement by its Office of Internal Oversight Services. In fact, the office found that $7 million had been lost from overpayment; $50 million worth of contracts showed indications of bid rigging; $61 million had bypassed U.N. rules; $82 million had been lost to mismanagement; and $110 million had "insufficient" justification. That's $310 million out of a budget of $1.6 billion, and who knows what the auditors missed.
Mr. Malloch Brown also made curious use of English by insisting that Paul Volcker's investigation into Oil for Food had "fully exonerated" Mr. Annan. In fact, Mr. Volcker's report made an "adverse finding" against the then-Secretary-General. Among other details, the final report noted that Mr. Annan was "aware of [Saddam's] kickback scheme at least as early as February 2001," yet never reported it to the U.N. Security Council, much less the public, a clear breach of his fiduciary responsibilities as the U.N.'s chief administrative officer. Mr. Malloch Brown described the idea that Mr. Annan might resign as "inappropriate political assassination"--a standard he apparently doesn't apply to political enemies like Mr. Wolfowitz.
Mr. Malloch Brown never made any serious attempt to reform the U.N. beyond the cosmetic, while doing everything he could to block the real reforms proposed by Americans Christopher Burnham and former Ambassador John Bolton. He was, however, energetic when it came to lecturing Americans about what they owed the U.N., such as joining the "reformed" Human Rights Council (whose only achievement to date has been to castigate Israel), pursuing a "new multilateral national security," and otherwise empowering the likes of Mr. Malloch Brown, his multilateral mates and their tax-free salaries.
Views like these help explain why Mr. Malloch Brown is in such favor with Mr. Soros, who has publicly suggested the U.S. will need a "de-Nazification" program to erase the taint of the Bush Administration. So close are the two that Mr. Malloch Brown lives in a suburban New York home owned by Mr. Soros. Mr. Malloch Brown says he pays market rent, though reporting by the New York Sun's Benny Avni disputes that. In any case, it's safe to assume that Mr. Soros's widely published views are close to Mr. Malloch Brown's somewhat more guarded ones.
So it's not surprising that many on the World Bank staff would cheer Mr. Malloch Brown: He's perfect for an institutional culture in which "progressive" thinking goes hand-in-glove with a tolerance for corruption. That culture has been on vivid display in the Euro-coup against Mr. Wolfowitz. This weekend the committee investigating the claims dropped 600 pages in the president's lap and told him he had 48 hours to respond--in direct violation of World Bank staff rule 8.01, 4.09, which states that "the amount of time allowed a staff member to comment [on an investigative report] . . . will not be less than 5 business days." Following protests from Mr. Wolfowitz's lawyer, the committee gave him 72 hours.
This is the same kangaroo court that last month leaked its guilty verdict to the Washington Post before Mr. Wolfowitz even had a chance to plead his case. Our sources who have seen the committee's report tell us it is especially critical of Mr. Wolfowitz for daring to object publicly to the committee's methods and thereby bringing the bank's name into disrepute. The Europeans running this Red Queen proceeding prefer that they be able to smear with selective leaks without rebuttal.
Mr. Malloch Brown warned on Monday that, if Mr. Wolfowitz stayed as president, European countries might withhold funding from the next financing round for the bank's International Development Association. We hope he's right, though we know few European finance ministers who aren't eager to throw good money after bad. Still, it's a remarkable bit of chutzpah for the man who downplayed corruption at the U.N. to seek the ouster of the man who has fought to reduce corruption at the World Bank.
If the Bush Administration now abandons Mr. Wolfowitz as he faces a decision from the bank's board of governors, it will not only betray a friend but hand the biggest victory yet to its audacious enemies in the George Soros axis.
The comments people have put up on my blog re Wolfowitz and the Bank have generally been reasoned and civil, even when they disagreed with me. Knowing the nature of much of blogosphere, I appreciate that very greatly. That is unfortunately not true of a number of the comments posted to some of the World Bank staffer blogs - David Ignatius described them as "shrill"; I would describe a goodly percentage of them as considerably more vicious than that. However, this email arrived at my office a few minutes ago, from one Mohamed Cassam, cassamm@aol.com, and while it is probably not very unusual a communication for people who write on these topics, for someone like me who teaches pretty prosaic areas of corporate finance, governance, nonprofits, business transactions, etc., it is a bit startling.
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Why such animus against Wolfie? Hostility to his "reforms"? So you ask.
What world do you live in?
Wolfie, Feith, Kristol and all the other Likudist gangsters who cooked up the Protocols of the Elders of....................................................................Neo Connery
are responsible, to date, for the murder of 1 million Irakis and smashing the lives of 22 million others by invading their country on false pretences for Israel's benefit.
You being a Hoover Institute hack couldn't give a damn how many Ai-Rabs the DoD kills, being the NAZI you are (North American Zionist+Israeli) Any way, congratulations on getting equal time with that Nobelisto JS on the FT..not bad for 3rd rate academic at a soso degree factory.
However you are on the right track regarding the spousal benefits that the senior Bank management cook up and enjoy. Go after them!
Mohamed Cassam
How the ethics committee failed Wolfowitz
Kenneth Anderson
Financial Times,
May 7, 2007
The World Bank’s ethics committee should have a sign on the door warning: “Caveat emptor –don’t rely on us.”
The absurd controversy over the tenure of Paul Wolfowitz, World Bank president, whose longstanding romantic partner was at the bank years before he was, can be traced to that committee’s incoherent advice.
The ethics chairman who proffered advice to Mr Wolfowitz when he joined the bank is now backpedalling furiously. In loosing the hounds to bay after Mr Wolfowitz and his friend, the institution has set in train a process that will inevitably draw attention to the varied personal relationships and salary levels of other bank administrators and directors.
In 2005, the ethics committee rejected Mr Wolfowitz’s workable proposal to recuse himself on all personnel matters concerning his friend. Instead, it ruled that she would have to leave the bank altogether, disrupting her career and making her forgo a promotion for which she had been shortlisted.
It was an extraordinary decision, raising important questions of gender equity at the bank.
Some have mistakenly supposed that the “advice” was a reflection of settled bank rules. But, in fact, it was quite different from the treatment accorded to some other couples who work there.
Mr Wolfowitz’s friend, Shaha Riza, whose dignity and reticence have been trampled by the bank, testified last week before an ad hoc investigating committee of the bank board of executive directors. Ms Riza said: “I could not understand at the time or now why I was being singled out for this treatment when the then managing director Shengman Zhang’s spouse . . . was working at the bank and before her . . . Caio Koch-Weser’s spouse, when he was managing director. Neither wife was asked to leave the institution.”
Mr Zhang, a Citigroup vice-president who formerly served as the second highest ranking official at the World Bank, has suggested that the analogy is unfair, arguing that wives and husbands have more latitude to work together under “circumscribed conditions” than do persons in less traditional relationships.
But the bank’s staff manual states, in rule 4.01, paragraph 5.2, that spouses and registered domestic partners are forbidden from working in any situation where one “supervises the other, directly or indirectly”, or where they will be brought by their duties into “routine professional contact”. This might seem to apply to Mr Zhang. What is more, rule 3.01, paragraph 4.02, says in the case of more informal relationships, such as that of Mr Wolfowitz and Ms Riza, simply that the supervisor “shall be responsible for seeking a resolution of the conflict of interest”.
But if the bank’s former number two manager cannot recall the rules and exceptions that actually applied to him, how can anyone else be expected to know what they mean?
With perverse illogic, after insisting that Ms Riza must leave the bank, the ethics committee directed that Mr Wolfowitz himself must take care of the terms of her departure, including appropriate compensation for career damage. It mandated the very conflict that Mr Wolfowitz had aimed to avoid yet gave no instructions on how to carry this out. He took the matter to the human resources department, and the ethics committee later issued two reports pronouncing itself satisfied with the outcome.
Ad Melkert, former ethics committee chairman, now creates the impression that the matter was handled under the table, but he ignores the plain language of his committee’s reports. Ms Riza testified that “during my negotiations with [the bank vice-president of human resources], neither he nor anyone else ever suggested to me that my compensation package might violate bank policy in any way.”
If the ethics committee was not “consulted” beforehand on the terms of the Riza negotiation, it is because Mr Melkert refused to deal directly with Ms Riza or consult the head of human resources on what to do in order to give Ms Riza an adequate, yet not excessive, buy-out. If he was unaware of terms of the compensation package, it was because he washed his hands of the matter. His complaints today are opportunistic and smack of a political agenda.
Why such animus against Mr Wolfowitz? Some say it reflects hostility to reforms and others point to the interest of European contributors in a chance at the bank presidency.
Whatever the case, the board is frothing, with many directors apparently seeking any excuse to fire the boss. Its ad hoc investigative report is due at any moment.
But the facts before the board show that the real scandal does not centre on Mr Wolfowitz. The real scandal is the arbitrariness of an ethics committee and its muddled advice, and the astonishing way in which that committee’s failures have metastasised into an ethically dubious venture to bring down the president. None of this speaks well of the bank’s internal processes, or the likelihood of effective internal reforms that would enable the bank to carry forward its important work.
The writer is a law professor at American University and a research fellow of the Hoover Institution.
The Wall Street Journal editorial page, open link here, notes that nearly 1,400 employees at the World Bank make more than Condi Rice. Not to mention that it is tax free for non-US employees, plus school and housing allowances and such goodies.
While it is true, as the Journal points out, that Bank employees are far from under a vow of poverty while presumably battling poverty, I myself am not unduly upset by the salaries. Yes, they are high by market standards. Yes, you could get at least as a good a quality of service at much lower wages; the actual quality of the Bank's work depends not merely upon the paper credentials of its staff and how happy they are with their compensation, but with the visionary esprit of the organization and its sense of vocation: it seems to have been a long time since the Bank had any sense of vocation, if ever.
On the other hand, I chair the board of a modestly sized nonprofit venture fund organization, and while our salaries are much, much, much, much, much, much, much lower than the World Bank's, ideally I would like to raise them to levels at least within eyeshot of the Bank's. (And if I could go to the US government for $7 billion or so, and to the Europeans for gazillions, too, I could.) As a nonprofit director, I want to be able to keep the people the organization needs over the long term, and that means that you seek to enable them to live a more or less upper middle class professional lifestyle - send kids to college, buy home, fund retirement. Upper middle class professionalism is not a vow of poverty and never was.
No, the real issue for me is that ordinarily the tradeoff is between tenure and salary. By professional lawyer standards, I don't get paid a huge amount as a law professor. Clearly I could make a lot more in practice, even in the nonprofit world - it's not revealing any secrets that I made more as a law firm associate than I do as a professor, and made more as general counsel to a large charity than I do as a professor. What I do have as a professor, besides a better lifestyle, is tenure. I'm pretty good at what I do, and I'd like to think my dean agrees with that, but the reality is that part of the tradeoff is a tenured sinecure that replaces salary. At the World Bank, however, you get them both - salary and tenure. That's a big problem - and a bigger and bigger problem the higher the salary and the fact that World Bank people are typically not really placeable, after very many years, anywhere outside the multilateral institutions. (The same, by the way, is true of law professors; I'm not being mean, it's just a fact of many professionals.) It's a mistake to hand out both tenure and salary.
I have long been a supporter in the nonprofit and government worlds, including the multilateral organization world, of complete disclosure of all compensation arrangements. I think foundations and charities and nonprofits should post all compensation arrangements, contracts, salaries, for each compensated person, to the web as part of their annual filings. Same for government agencies and international organizations. That transparency in organizations which deal in the public trust would go a long way. I suppose, in the real world, the best one could hope for is a going-foward rule, along with pressure on the existing staff voluntarily to do what Ban Ki Moon rather admirably did (and Annan did not - nor, for that matter, that supposed paragon of virtue, Ad Melkert, who according to Inner City Press has still not submitted his own financial disclosure forms at UNDP, quite apart from his own ethics-in-hiring issues at UNDP) and disclose his financial statements publicly.
So I think the World Bank staff who have made an issue of Riza getting paid more than Rice have done themselves and the Bank no favors. The Journal gets it right:
Mr. Wolfowitz was directed by the bank's ethics committee to find a new job for Ms. Riza, a longtime bank staffer, when he became president in 2005, despite his requests to be recused from the matter. The committee suggested an "in situ promotion" to the next paygrade or an "ad hoc salary increase" as part of a "settlement of claims." The offer was intended to be generous, given that Ms. Riza--who already had been shortlisted for promotion--was being forced out of the bank, possibly for good, for a conflict she did not create and to a job she had not sought.
Ms. Riza was eventually given an external assignment at the State Department with a salary (paid by the bank) of $193,000, up from the $133,000 she had previously made at the bank. To Mr. Wolfowitz's critics, this was improper and excessive, especially given that Condoleezza Rice makes about $10,000 less. But this is highly selective outrage given normal procedure at the bank.
Of its roughly 10,000 employees, no fewer than 1,396 have salaries higher than the U.S. Secretary of State; clearly "fighting poverty" does not mean taking a vow of poverty at "multilateral" institutions. At the time of Ms. Riza's departure from the bank, she was a Grade "G" (senior professional) employee; the typical salary in that grade hovers around the $124,000 mark. For the next level, Grade "H"--the level to which Ms. Riza was due to be promoted--salaries average in the $170,000 range, with an upper band of $232,360. No fewer than 17% of bank employees are in this happy bracket.
Even sweeter, all of this is tax-free to non-Americans. U.S. employees have to pay U.S. tax but have their income taxes reimbursed by the bank. As with any public bureaucracy, these jobs are also impossible to lose for anything other than gross incompetence or venality. Some of Mr. Wolfowitz's accusers--notably, former general counsel Roberto Danino--are angry precisely because he upset their lifetime sinecure by demanding higher performance.
These details are common knowledge within the bank itself, so it's only fair that they be made public to the American taxpayers who finance this comfortable poverty-fighting lifestyle. Alison Cave, the head of the bank staff association leading the campaign against Mr. Wolfowitz, ought to be the first to make her salary and performance reviews public--in the name of restoring the bank's "credibility," to borrow one of her favorite words.
