Blog of Q's

By George Melloan, Wall Street Journal, March 22, 2005; Page A15

… [T]he amount of private lending flowing into the developing world
practically exploded in the 1980s when governments began to welcome
private investment. John Taylor, U.S. undersecretary of the Treasury
for International Affairs, told Journal editors last week that too many
countries that are rich enough to be graduated from World Bank lending
are still getting support.

Governmental institutions have a different incentive structure from
private firms. Private-sector workers are rewarded for problem solving.
The public sector has no such incentive because the continued existence
of the problem keeps them budgeted and in business. That’s why aid
efforts by nongovernmental organizations like Doctors Without Borders
are often more effective than those of governmental bodies.

The desire to maintain funding is why the World Bank and other aid
agencies are disinclined to graduate borrowers. It also accounts for
the fear that a bright new president might start peeking under the
rocks. Mr. Bush clearly isn’t putting one of his most talented
officials out to pasture.

The president is embarked on a crusade to spread political freedom
throughout the world. Economic freedom is the handmaiden of that
attempt because it empowers individuals, through the economic security
they achieve, to demand their political rights. If socialism is
crumbling throughout the world, as it appears to be, the multilateral
agencies that have given it so much support in so many places will have
to be reconsidered.

That is not to say there will be no place in the future for government
directed foreign aid. The Meltzer Commission recommended that lending
be replaced by direct grants to the poorest nations contingent on the
achievement of measurable results. That seems like a good idea. Paul
Wolfowitz will probably come up with some others.

By Sebastian Mallaby, Washington Post, Monday, March 7, 2005; Page A19

“… But the Fiorina rumor raises other questions. Does the Bush team
understand that private-sector experience is only dimly relevant to the
World Bank challenge? Corporate bosses are used to firing people,
measuring performance by profits and dominating their boards of
directors. But the World Bank, like most public institutions, is an
entirely different beast. It’s hard to fire people. Performance is
measured not by the clear metric of profits but by poverty reduction,
which takes years to occur and is hard to track precisely. And the
board is composed of interfering governments that are forever
rearranging the bank’s development priorities. So it’s not just that as
a private-sector manager, Fiorina did so badly she was fired. It’s that
her experience doesn’t fit what’s needed in a World Bank president.

Equally, the Fiorina rumor forces the question: Does the Bush team mean
to choose someone who knows nothing about development? Of course, this
wouldn’t be a first; witness the Barber Conable appointment. But
newcomers to development are easily muddled by the magic-bullet claims
that stalk this field — claims that the key to development lies in
micro-credit or female education or property rights, to cite three
common examples. If you don’t understand how to sort the snake-oil
salesmen from the truth tellers, you can’t set a sane course for the
World Bank and stick to it….”

By BOB DAVIS, WALL STREET JOURNAL, February 23, 2005; Page A15

… the “Washington Consensus” … identified government as a roadblock
to prosperity, and called for dismantling trade barriers, eliminating
budget deficits, selling off state-owned industries and opening Latin
nations to foreign investment. Latin America took that advice and
during the following decade shucked many of its protectionist ways.
Nevertheless, the region slipped further behind Asia and the
industrialized world, while poverty remained high. “Deep reforms; lousy
growth,” says Mr. Hausmann, who is now at Harvard University. “There
must be something wrong with the theories of growth.”

Mr. Hausmann and a handful of development economists are rethinking the
free-market orthodoxy for Latin America. They argue that government
isn’t any longer the main drag on growth; indeed, it may often be the
solution. They advise governments to subsidize entrepreneurial projects
throughout Latin America, in the hopes of developing new businesses and
igniting growth. Given Latin America’s history of subsidies lining the
pockets of the rich, they also are devising policies to help
governments limit political influence. Even restricting free trade is
an option. “Industrial development for 200 years has involved the
selective use of trade protection, and it wasn’t captured by special
interests,” says Columbia University economist Joseph Stiglitz, a Nobel
laureate.

… Mr. Hausmann defends his policy flip-flop. “The role of the
scientist isn’t to commit to consistency but to the perception of
truth,” he says.

… [A] country economist for Bangladesh blanched at industrial policy.
“I’d be very scared of putting it in place” in a country with high
levels of corruption, he said. … [A]n economic adviser at the
[World]bank … says … development ideas have been stuck in a rut.
“This forces us to think of different hypotheses,” he says.

By MARY ANASTASIA O’GRADY , Wall St. Journal, March 4, 2005; Page A15
“When Stanley Fischer stepped down as deputy managing director of the
fund in 2001, he gave an interview in which he defended his liberal
bailout strategies during his tenure at the fund. ‘Those who emphasize
that IMF lending should be smaller and less frequent are implicitly
saying there should be much less international lending and reliance on
international capital markets,’ Mr. Fischer said.

Well, not exactly. What we are saying is that capital flows should be
proportional to the credibility earned by adhering to liberal
economics, limited government and respect for institutions. But that
makes demands. Why go there when IMF largess will paper over policy
mismanagement?

Closing down the IMF may be too much to hope for. But it is at least
important to note that Argentina provides two priceless lessons. The
first is that IMF largess not only damages reform momentum but also
exacerbates risk. The second is that borrowers and lenders can work out
bond defaults on their own, and when they do, incentives are likely to
return to the emerging markets, raising accountability in governance.”