Feature

Put Borrowers on Notice

On June 1, former Deputy Defense Secretary Paul Wolfowitz became the next head of the World Bank. His mission: to end global poverty. The trouble is, few agree on how to go about it. So Foreign Policy asked five of the world’s leading development experts to offer Wolfowitz some free advice on getting the job done.

Around the world, there is broad consensus that poverty alleviation should be the banks principal goal. However, under pressure from critics, the bank has decided its mission is to directly lend money for projects in poverty-stricken regions. Regrettably, the bank eschewed the very issue that developing countries are forced to confront: comparative advantage and the fungibility of public expenditures.

The developing world would be better served if the bank linked its overall volume of lendingsubject to broad, prespecified criteriato spending on critical institutions, such as basic education, basic health, and nondiscriminatory legal frameworks. In this way, the bank would fund the very things that drive growth, be it infrastructure or higher education.

Such a shift is essential for a couple reasons. Virtually all aspects of human development, including basic education and healthcare, are neither capital nor foreign exchange intensive. Unless the funds are grants, it makes little sense to add to borrowers debt burdens. Second, the crowding out of infrastructure can prove to be very expensive to the poor in the long run, especially because it removes an important check on corruption, which invariably hurts the poor. It also puts borrowers on notice. If a country is unwilling to act vigorously on issues such as primary education or healthcare, that country is clearly uninterested in development and deserves little support from the bank.

The only way the banks borrowers will take true ownership is if they choose projects based on their priorities and design them on their own conditions. Of course, this means they will make mistakessometimes expensive ones. But that is precisely how developing countries will learn and grow. Such a system would put a smaller administrative burden on the bank and result in considerable savings that could underwrite other projects in the public interest, such as malaria vaccine research, that are likely to have a greater impact on global welfare.

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Feature

Put Growth Ahead of Aid

On June 1, former Deputy Defense Secretary Paul Wolfowitz became the next head of the World Bank. His mission: to end global poverty. The trouble is, few agree on how to go about it. So Foreign Policy asked five of the world’s leading development experts to offer Wolfowitz some free advice on getting the job done.

Paul Wolfowitz has a choice. He can eradicate poverty directly by dispensing medicines to poor people, funding clean water, educating and empowering those with few resources (especially women), and so forth. Or he can eradicate poverty indirectly, by stimulating broad economic growth in the worlds poorest regions. This is not a return to the old-fashioned Washington Consensus of just let markets work. Economic growth that favors the poor improves the climate for business, promotes domestic and foreign investment, and reduces barriers to trade.

The two approaches are not incompatible. Local firms and international investors need well-trained, healthy workers to become competitive, expand employment, and penetrate new markets. But under outgoing bank President James Wolfensohn, the bank has overemphasized trying to relieve the problems of poor people directly. The more effective way to bring people above the poverty line is to stimulate economic growth. Seven years of growth at 5 percent in India reduced national poverty by 6 percent. During the same time period, 6 percent economic growth in Vietnam reduced national poverty by 7 percent; 8 percent growth in China reduced national poverty by 8 percent.

If Africa could achieve growth rates of 4 to 5 percent over a decadehalf the rate in Chinathe resulting poverty reduction would be far greater than what would result from a doubling of the foreign aid budget to the troubled continent.

The criticism that the World Bank does not have any priorities is misplaced. The real problem is that every country director and country strategy team at the bank have 20 No.1 priorities. Wolfowitzs real contribution will be to decideand enforcewhat the true priorities are. He can only alter the course of the World Bank by a few degrees and he should not completely eliminate direct poverty-reduction programs. But he should shift the banks priorities toward stimulating broad economic growth for the poor.

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