Friday, 27 April 2012

Democratising the World Bank

By Carlos Fortin 

In the light of the World Bank’s avowed intention to introduce a merit–based selection process for the next president, (which until then the choice rested solely in the hands of the U.S. Government), earlier this month I signed a statement of Latin American economists and social scientists in support of the candidature of José Antonio Ocampo for the Presidency of the World Bank.

The statement referred to Ocampo’s outstanding qualifications for the post:  His academic credentials and achievements; his experience at the national level (he was Minister of Finance of Colombia); and the international level (Undersecretary-General of the United Nations). The candidature was originally put forward by the group of Executive Directors that represent developing countries and Russia in the Board of Directors of the Bank (the so-called G11).

However, midway in the process Ocampo decided to withdraw his candidature and he has now sent a message to his supporters explaining why.  It makes worrying reading. It starts by saying the he:
“decided to participate in this first-ever open competition for the selection of the World Bank President to help establish the principle that the selection process had to be different and if not on this occasion, next time around”.  “Until the interviews with the candidates” he goes on saying, “the process ran as what looked to be an open, merit-based race, except for the fact that, in contrast to the two developing country candidates, the U.S. candidate [Dr. Jim Yong Kim] refused to participate in open debates or even to give public interviews of any sort.”
But then the true nature of the process was revealed.
"After the interviews”, writes Ocampo, “the process became entirely political. The U.S. Treasury and State Departments started to put strong pressure on countries to endorse Dr. Kim and to divide the G11. The first result of the latter was the Russian endorsement of Dr. Kim on Thursday, and the news I received from very trustworthy sources that several other G11 countries would also do so. Under these conditions, I decided to withdraw from the race on Friday… on the grounds that it has ceased to be a merit-based race."
Ocampo, however, is optimistic.
"This process will not at the end fully meet the characteristics of an open, transparent and merit-based process. But it has established a strong precedent that the election of the President of the World Bank has to be different. I hope the Board of Directors will reflect on this experience and establish stronger rules for the next election. I will be fully satisfied if my candidacy has helped the road of building better governance for the world’s leading development cooperation institution."
A sentiment, and a hope, which I am sure all of us at here at IDS share.

Wednesday, 25 April 2012

How do we make business work for development... and development work for business?

By Spencer Henson

Having just taken over as Leader of the Globalisation Team at the Institute of Development Studies (IDS), I have been reflecting on the interface between business and development. Members of the Globalisation Team, as well as others at IDS, see the ongoing dialogue on business and development as a critical issue for international development, and an issue on which our research and teaching efforts need squarely to focus.

Answering the sceptics
Historically, there has been considerable scepticism (and in some quarters even animosity) towards business amongst those engaged in international development, including at IDS. The notion of commercial enterprises making profits ‘on the back of the poor’ was something that many find hard to swallow.  Thus, business has often not even been regarded as a development actor.  Such views apparently reflect the confluence of business with large (often multinational) corporations rather than micro and small enterprises (MSEs) that languish in the informal sector. This is despite the fact that many of the poor in developing countries make their living operating businesses. Perhaps a more expansive and inclusive view of business, including the portfolio of private enterprises from smallholder farmers to large multinationals, may ‘open the door’ to the sceptics. This is one tack the Globalisation Team should follow.

Whilst I am all for some ‘door opening’, I would argue it is more important to consider head-on the role of the large and formal sector corporations (including multinationals) that many in development love to hate.  Yes, such firms are profit-seeking. However, at the same time they are centres of considerable resources, skills and expertise (remember that is how they make a profit) which, some would argue, can play a key role in development. Most who have a more positive view on business and development would not deny that large corporations can undermine the quest for sustainable development. However, should we paint all large firms with the same brush? Thus, is it inevitable that large profit-seeking firms are bad for development, or can we discern instances where large corporations are integral to positive development processes? If so, how do we make this come about and ensure it is the norm rather than the exception?

Aligning the goals of business to international development 
For me, the key question for the Globalisation Team and for those with an interest in development studies more generally, is how to align better the goals of international development with the incentives that drive the actions of business. I am interested in all sorts of business, big and small, informal and formal. However, I do feel that the predominant focus of our work should be on larger formal sector firms, including multinationals but not forgetting firms within developing countries themselves.  Of course, this is a not a new area.  Copious amounts have been written on the scope for Corporate Social Responsibility (CSR) and Making Markets Work for the Poor (M4P). However, I would argue that these approaches essentially skirt around the real issue; when and how can the mainstream activities of business contribute to long-term sustainable development?

I would argue that the day-to-day activities of business (and as economies grow and transform this increasingly means bigger businesses) are critical to development, and indeed are integral to development processes themselves.  Of course, both the actual and potential impacts of business on development depend on what we think development entails (and how it is measured): economic growth, employment, poverty, working conditions, human rights, management of environmental resources......? Across those who work on international development perspectives on this will differ. That is fine. Regardless, the key question is under what conditions can business make a positive contribution to development? An even more critical set of questions then follows; how can these conditions be put in place through the actions of government, donors, civil society and businesses themselves, and in so doing what is the appropriate balance of incentives and constraints on business activities? If we can even begin to ‘scratch the surface’ of these questions I believe we can have a real and profound impact on the international development, however that is conceptualised.

Thursday, 19 April 2012

UK tax policies are the least of charities’ problems

By Noshua Watson

The UK government has proposed a cap on tax relief on personal donations to charity.  The policy places a £50,000 or twenty-five percent of income limit, whichever is higher, on the amount by which donors could reduce their tax liability with an equivalent charitable contribution.  At the moment, people can offset their entire tax liability and pay no income tax. The government aims to decrease tax avoidance by high income individuals who drastically reduce their marginal tax rates despite being in a fifty percent income tax bracket. Opponents of the policy are alarmed at the possible disincentives the cap gives to potential donors and the additional stress it will place on struggling charities as the funds they receive from the State decline. But in the rush to prevent a shock to next year’s donations, charity executives are losing sight of more important long term trends in the future of nonprofits.

There needs to be a cap of some sort.  UK charity executives say that the policy will strip funding from charities while the government anticipates an increase in tax revenues of £50-100 million from placing a cap on tax relief for donations.  But under current policy, the government is effectively subsidising donations to specific causes, rather than taking tax funds into general government coffers that benefit everyone. In essence, the government is taking money from the many and directing it to the few, although those few would be charities.  In comparison, the United States limits tax relief for charitable donations to fifty percent of income in most cases and sometimes only twenty or thirty percent, depending on the circumstances.

It’s not the Victorian age any more. Charities need to be less dependent on donations.  Non-profits need to diversify their revenue streams and have been doing so for a long time. Whether they are schools, hospitals or arts organisations, plenty of charities make ends meet by making money.  There’s nothing dirty about it. Subsisting from year to year on donations is strategically unwise.

Finally, when it comes to the need to be more transparent and accountable, charities are next. The UK government is currently targeting the lack of transparency in accounting and tax liability for private individuals and companies. But charities will need to account better for how they spend their money if they want to continue to receive public funds or the public’s benefit of the doubt. As Warren Buffett once said, “It’s only when the tide goes out that you learn who’s been swimming naked.” That goes for the UK’s 162,000 charities too.

Wednesday, 4 April 2012

Rethinking development around new structural economics: What do the World Bank president candidates think?

By Carlos Fortin

Considering the world is trying to find its way out of a deep financial crisis, the question of who will become the next World Bank president is a matter of importance, particularly for development and developing countries.

As of now there are three candidates (Jim Yong Kim from the US, Ngozi Okonjo-Iweala from Nigeria and Jose Antonio Ocampo from Colombia) and the discussion on their relative merits has almost exclusively centered on their nationality.

I believe we should move away from that emphasis and concentrate rather on their ideas on the current development challenges and their approaches to meeting them.  A recent draft of a paper by Justin Yifu Lin, Senior Vice President and Chief Economist of the Bank, entitled New Structural Economics. A Framework for Rethinking Development might provide the occasion to do just that.

A framework for rethinking development
For Latin American development economists  the term “structuralism” conjures up the name of Raúl Prebisch and the work of the United Nations Economic Commission for Latin America, which in the 1950s and 1960s put forward an alternative view of inflation to that of Milton Friedman and the Chicago monetarists. Structuralism is not an approach one would associate with the World Bank, whose endorsement of the so-called Washington Consensus would surely place it closer to the neoliberal-monetarist end of the spectrum.

Is Lin’s paper an about-face for the Bank?  Is the World Bank recognising, in the aftermath of the financial crises, that an entirely different approach from that of neoliberalism is called for?

Well, not quite.  Lin explains the similarities and differences between the ‘new’ and ‘old’ structural economics thus:
In terms of similarities, both approaches take the structural differences between developed and developing countries seriously and acknowledge the active role of government in the process of economic development; facilitating the movement of the economy from a lower stage of development to a higher stage of development. While old structural economics recommends developing country governments go against its economy’s comparative advantages and overcome market failures to develop advanced capital-intensive industries through direct administrative measures and price distortions; the new structural economics suggests that the market should serve as the fundamental resource allocation mechanism and the government should only play the role of a “facilitating” state to assist firms to upgrade to industries that are consistent with the economy’s comparative advantages.
According to  Lin, while neoclassical economics “generally assumes a minimalist state whose role is limited to protection of property rights, maintaining law and order and compensating for externality”, the new structural  economics “offers a clear rationale for having a proactive, facilitating state in the process of economic development”.

In Lin’s paper, therefore, the new structural economics seems to involve some non-negligible departures from the tenets of orthodox analysis. In one crucial respect, however, it does not.  As he himself puts it, while for the Latin American structuralists market failures are:
exogenously determined by incorrect price signals distorted by monopoly, or by labor’s perverse response to price signals, and/or the immobility of factors … by contrast, the new structural economics posits that the failure to develop advanced capital intensive industries in developing countries is endogenously determined by their endowments.
Governments can only “use industrial policy to facilitate the upgrading to industries that are consistent with the country’s comparative advantages.”

For all that, the paper represents  a significant move in the direction of finding a common ground among reasonable defenders and opponents of liberalisation and globalisation (the published version of the paper will include comments by  Anne Krueger, Dani Rodrik and Joseph E. Stiglitz).

Let’s ask what the candidates think
What the ultimate fate of the new approach within the Bank will be is unclear. Lin is retiring in June, and so is Robert Zoellick, the current President, who seemingly supported decidedly the production of the paper. So the ideas of those stepping in will surely guide the World Bank along a new path - shouldn’t we ask them?