Political India: Engaging America

From The Hindu

During its response to the worst financial-economic crisis in a generation, the World Bank failed to adequately tailor its lending patterns to the severity of the downturn across nations and today finds itself with potentially insufficient headroom to respond to a second crisis of similar or greater magnitude to the one in 2008-09, should there be one.

These results were part of a phase-two study of the Bank’s crisis response, presented in a report, titled The World Bank’s Response to the Global Economic Crisis: Phase II. The study report was unveiled on Thursday by its authors at the Independent Evaluation Group (IEG), which is a member of the World Bank group of institutions but reports to the Bank’s Board of Executive Directors rather than its management.

Speaking to The Hindu on both the achievements and shortcomings of the Bank’s response Anjali Kumar, lead author of the report and a Lead Economist with the IEG, said that while the headroom that the Bank had in the previous crisis would have permitted a doubling of lending by the International Bank for Reconstruction and Development – the Bank division focussed on middle and lower-income nations – by around September 2008, “Today it would be in a position to undertake business as usual lending... [yet] anything that approaches the previous global crisis could not be handled.”

While equity-to-loan ratios of the Bank at the outset of the crisis were around 37.5 per cent, the most recent financial figures released by the Bank for quarter closing September 2011 suggested it had come down to 27 per cent, a “precipitous drop for two years, [and it was] projected to drop for next three to four years,” Dr. Kumar noted, adding that low market rates of interest had not helped in this scenario.

Regarding the inadequate change in the Bank’s pre-crisis lending patterns, the IEG suggested that in part this phenomenon was driven by country demand for Bank lending, and hence countries that were most engaged with the Bank before the crisis – its “good clients” such as India and Indonesia – tended to approach the Bank more and in some cases get loans more quickly.

Other factors affected Bank lending too, such as the limited fiscal capacity of certain countries and the fact that some countries went to other lenders such as Russia’s engagement with the European Bank for Reconstruction and Development and Ecuador and Venezuela’s reliance on the Inter-American Development Banks.

Yet when the IEG conducted an analysis of patterns of stress across countries using high-frequency data and mapped that to Bank lending patterns it was clear that low resource allocation at the start of the crisis and the assumption that all financing demands could be accommodated from existing patterns of lending had played a role in the Bank’s ultimate lending decisions, Dr. Kumar explained.

Responding to the results of the IEG’s assessment Angela Walker, World Bank South Asia Region Spokesperson said, “This evaluation properly recognizes the World Bank Group's unprecedented level and speed of help during the crisis and we agree with the finding that the majority of countries suffering high levels of stress benefited from [Bank] lending.

Yet in comments to The Hindu Ms. Walker noted, “However, we disagree with the evaluation's analysis of the Bank's total response.”

In this context Bank officials drew attention to the IEG report’s findings that “The unprecedented volume of the Bank Group’s response….accelerations in processing efficiency and disbursements….the positive role, in crisis-response, of well-established country dialogue and country knowledge, the greater need to balance country focus with a global strategy notwithstanding….and the Bank’s comfortable financial position at the start of the crisis, which was a key element underpinning its crisis response.”

Touching on some India-specific results, Dr. Kumar said that there were some delays in the response after the downturn had kicked off. In particular, the Government of India had sent a written request to the Bank in November 2008 for increased support, and although the Bank initially aimed for operations to begin by March 2009, the proposal did not reach the Bank’s Board until September 2009, and the funds were not released until April of following year.

Nevertheless India was one of the Bank’s “largest borrowers in crisis,” Dr. Kumar noted, adding that it was sanctioned $7 billion in lending during crisis, of which $5 billion was tied to crisis-specific operations. Despite these large-scale commitments, some of them remained unrealised, including $3 billion for the financial sector were cancelled.

The IEG also noted that while much of the “budget-support” lending that the Bank undertook in India had helped signal the strength of public sector banks in the country, yet many of these public sector banks had capital adequacy ratios conforming to Indian government norms at the outset of crisis.

This again raised the question of Bank lending priorities during the crisis – for example whether it was a priority for the Bank to provide precautionary buffer capital to banks that were adequately capitalised.

The World Bank has issued a stark warning to those who might gloat about how, under the so-called “decoupling hypothesis,” emerging economies such as India have avoided sinking into the quagmire of unemployment that post-recession Western economies are now grappling with.

In a grim forecast the Bank commented on the upcoming release of a new book on More and Better Jobs in South Asia that a “million new jobs are needed each month” to sustain growth and reduce poverty in South Asia. Yet South Asia created approximately 800,000 jobs per month between 2000 and 2010, the study said.

Given the rampant spread of underemployment, Kalpana Kochhar, Chief Economist for the World Bank’s South Asia Region, cautioned that it was “not only the quantity of jobs but the quality of the jobs being created in the region that is relevant.”

The Bank’s report on the dire job market situation in South Asian countries, including India, comes even as there is a growing recognition that the failure to create sufficient quality jobs in these economies is linked directly to failures in areas such as education and nutrition.

Speaking to The Hindu after a panel discussion on the report on Thursday Ms. Kochhar said that for children under the age of five years 48 per cent were stunted, 44 per cent were underweight and 20 per cent were wasting compared to 42 per cent, 25 per cent, and 11 per cent respectively for sub-Saharan Africa.

Given that the average number of years of education of people between the ages 15-34 is only 7.1 years “There is a stark contrast between increasing demand for higher levels of education and the educational attainment of the work force,” Ms. Kochhar noted.

The Bank’s study also makes reference to infrastructural constraints that hinder job creation by businesses in India, in particular India’s enduring struggle with power sector reforms. Ms. Kochhar said that despite rapid economic growth, India “is still a lower middle income country...[and] being average is not good enough.”

The challenge for Indian authorities to expand employment for the vast number of new entrants into the labour force over the next three decades is to enact reforms that will address both infrastructural capacity shortages and leakages from the power grid.

There were three crucial elements of these reforms, Ms. Kocchar said: first, to improve the financial and commercial viability of the power sector through increasing tariffs, better collections and curbing of theft and improving the independence of regulatory agencies; second, to improve the business environment for private investment in the power sector; and third, to strengthen the governance of utilities and institutional capacity.

There was also a strong link between inadequate job creation, political corruption and instability, the Bank’s study argued, presenting the results of its analysis of “corruption and bribe payments in dealings between firms and the state in specific dimensions of the business environment, e.g., construction permits, tax meetings, operating licenses, electricity connections.”

Ms. Kochhar said to The Hindu in this regard that “Enterprise surveys reveal that firms in India cite corruption as being the second most important constraint, after electricity, to their operations and growth,” and that the book pointed to simplification of procedures as an important step to reduce corruption that may come from such business-government interactions.

In terms of major causes of instability Ms. Kochhar noted that the Maoist insurgency in central and eastern India was been identified by Prime Minister Manmohan Singh as ‘the single biggest security challenge to the Indian state’ and “many of their grievances are related to land rights and the distribution of benefits from mining and hydropower, but also to the overall poor socio-economic conditions of the population in these areas.”

“A comprehensive approach which directly addresses their grievances and which includes a focus on developing the agricultural sector and linking it better to markets would allow these communities to improve their livelihoods and work for peace,” Ms. Kochhar said, adding that investments in infrastructure and improved security would then attract more private firms to these areas that would then generate employment.

On major government rural employment programmes such as the MGNREGA Bank position was that although the private sector had to be the main provider of jobs, public works programmes like MGNREGA in principle have an important social protection role to play. However “wages also need to be set low enough so the programme does not make it difficult for rural employers to find workers,” Ms. Kochhar said.

Even as India has been gripped by the debate on the Jan Lokpal Bill and the high-profile scandals that triggered it, multilateral organisations such as the World Bank are similarly grappling with their own anti-corruption strategies and need to do more to build institutional capacities in their client countries, according to an independent evaluator.

This week the Independent Evaluation Group (IEG) of the World Bank Group said in a just-released assessment of the World Bank's 2007 governance and anticorruption (GAC) strategy that the Bank had focused more on strengthening its own capacities and improving its standing among key stakeholders rather than on strategic issues facing client countries.

Specifically the Bank needed to address fiduciary and governance risks, measurement of governance results, and help foster the demand for good governance, said the report by the IEG, an independent body reporting to the Board of Executive Directors of the World Bank rather than Bank management.

On a positive note, the IEG report said the Bank had tripled the number of countries in which it aimed to support institution-strengthening projects for good governance, and had also increased use of governance and political analysis in project design.

However looking forward to the second phase, Ali Khadr, Senior Manager at IEG, said the Bank would need to “address the key findings of this evaluation if [it] is to more effectively help countries overcome deep-seated governance challenges such as civil service dysfunction, capture of natural resource rents, or political-institutional barriers to market entry and improved service delivery.”

Speaking to The Hindu, Navin Girishankar, a lead evaluation officer and the main author of the IEG study, said that on the one hand there is a need to foster demand for good governance by helping improve the government responsiveness to pressures through greater transparency and more disclosure policies, Mr. Girishankar suggested. The Indian experience, including the Lokpal bills, might dovetail with this type of strategy.

Such measures could be accompanied by policies to further build governance capacity, including in the budget process and for better management of extractive industries. In these regards, the IEG evaluation suggested that the Bank itself could use better instruments, new metrics to improve knowledge of what works on the ground in terms of anti-corruption, Mr. Girishankar added.

From The Hindu

In a review of strategies for building Social Safety Nets (SSNs) in developing countries, the Independent Evaluation Group of the World Bank said this week that the countries that had invested in SSNs during times of economic prosperity were better equipped to handle the current economic downturn than those that had not invested in this area.

The study, Social Safety Nets: An Evaluation of World Bank Support, 2000–2010, emphasised the temporal dimension of SSN investments by developing country governments, arguing in particular that once the downturn took hold, low-income countries with tighter budgets “expressed less demand for SSNs as essential elements of their poverty reduction programs.”

Touching upon the Bank’s role in helping spur SSN-development among its member countries the IEG study said, “While the Bank’s SSN programs generally achieved their immediate objectives, the study pointed out that many programs were not adequately anchored in a longer-term strategy for SSN development in countries.”

Speaking at the release of the study its main author Jennie Litvack said,“The World Bank needs to maintain its recent momentum and increase engagement in low-income countries, where safety nets are important to protect the poorest.” Ms. Litvack added that it was encouraging that SSNs were being addressed by the Bank’s management as part of its new social protection strategy.

The study had praise for some large middle-income countries such as India, which it noted had been at forefront of the SSN revolution. This implies that knowledge, work and South-South learning in particular [are] highly significant to the ongoing success of SSNs worldwide.”

Yet, there were also concerns regarding the distribution of the Bank’s funding for SSNs worldwide, with the top ten borrowers for SSNs over the last decade representing 70 per cent of total Bank SSN lending but only 15 percent of poor people in Bank client countries.

That this trend was a clarion call for better SSN development in some lower-income countries was underscored by the fact that when the SSN lending is compared to overall Bank lending, the results were reversed. The top ten borrowers in overall Bank lending represented 52 per cent of Bank lending and 68 percent of the poor, according to the study.

Emphasising the main lesson coming out of this evaluation IEG Director-General Vinod Thomas said, “Countries that had prepared themselves during stable times by building permanent social safety nets – such as Chile, Colombia or Georgia – were better positioned to respond than those that had not when the crises hit.”

Mr. Thomas, who in an earlier interview with The Hindu had cautioned of a spike in global poverty numbers during the economic downturn, added that the Bank had been more effective in helping countries where it was “already engaged over the past decade through lending, advisory services or policy dialogue.”

From The Hindu

An insightful evaluation of the work of the International Finance Corporation, the private-sector-focused lender within the World Bank Group, has noted that while 86 per cent of IFC investment projects “contributed positively to overall economic growth,” approximately “about 60 per cent [of the IFC’s investment projects] do not provide identifiable opportunities for the poor.”

Highlighting the positive dimensions of IFC lending, the Independent Evaluation Group [IEG] of the World Bank, an arm of the multilateral lender that is responsible for critically assessing performance across the Group, said in an evaluation report released this week that the IFC was “on the right track” in directing its efforts to fight poverty.

However the IEG also cautioned that the linkages between investment, growth and poverty reduction were “far from automatic”, given that market failures, rigidities and “built-in forces of exclusion” could limit the participation of the poor in growth, “which must be addressed more systematically”.

Specifically Vinod Thomas, Director-General of Evaluations at the World Bank Group, said, “IFC’s efforts on supporting growth are generally beneficial for the poor but the impact of growth on poverty reduction depends not only on the pace but crucially also on the pattern of growth.”

Mr. Thomas, who recently also spoke to The Hindu about the inter-related nature of the ongoing food, climate change and poverty crises, added that the IEG’s findings with regard to the IFC were of great importance especially for middle-income countries, “which have experienced robust growth in recent years, yet where the distribution of economic benefits to the poor has lagged.”

Providing country-level examples the latest IEG study described the case of Crucially, an IFC investment in a packaging and container manufacturer in Latin America, where the investment had helped the company expand its network of recycled paper collection enterprises resulting in an estimated creation of 12,000 jobs.

Noting that the project “strongly contributed to economic growth and established employment opportunities for low-income waste collectors in several countries,” the IEG report said that its project evaluations indicated that the IFC’s “poverty focus need not come at the expense of the Corporation’s financial success, and that a broad range of IFC interventions can enhance both the pace of growth and its pro-poor pattern.”

From The Hindu

With the annual Spring Meetings of the World Bank and the International Monetary Fund happening earlier this month, both institutions sought to focus the world’s attention on multiple crises affecting developed and developing nations including food price inflation, natural disasters and their links to climate and the risk of ever more people descending into poverty following the worst economic downturn in eighty years. Even as nations continue to reel under the impact of these crises Vinod Thomas, Director-General at the World Bank, talked to Narayan Lakshman about their interconnected nature and indicated what focus future policies and reforms should have if they are to steer through the volatility.


Dr. Thomas currently heads the Independent Evaluation Group (IEG) of the World Bank, a role that allows his team to critically evaluate Bank performance across all areas. He reports directly to the Board of Executive Directors.


Joining the Bank in 1976, Dr. Thomas has held numerous senior roles including Country Director for Brazil and Vice President of the World Bank, Vice President of the World Bank Institute (WBI), Chief Economist for the World Bank in the East Asia and Pacific Region, Staff Director for the 1991 World Development Report, and Chief of Trade Policy and Principal Economist for Colombia. He has a PhD in Economics from of the University of Chicago and is the author of numerous books, articles, and reports.

Food price hike

Can you begin by addressing the serious nature of the food price inflation that World Bank President Robert Zoellick spoke about this week – firstly, could you give us some background whether food shortage is due to production or distribution? Have some market players been hoarding cereals, and how serious is this crisis compared to what happened in 2008?

First of all the price level has hovered around what it was in 2008 and actually exceeded that, so the 2011 price increase is comparable to 2008, which makes it a very serious issue without a question. There has been something like 36 per cent rise over the last year and for grain export prices it has been even 70 per cent in some instances. That is signalling a very serious situation on the pricing side.

India in particular is vulnerable because food price inflation has been high and it affects a large number of people with roughly 50 per cent of consumer expenditure of the poor certainly going to food. So in that sense the first link is with poverty. One of the recent estimates is that since June of last year, probably about 44 million additional people have gone into poverty. This is in addition to the increase in poverty that was estimated, as a result of the economic crisis in the previous 18 months, so if the two are combined you are talking about 100 million or more additional people in poverty on a global scale.

The global poverty numbers had come down to less than a billion, but all of a sudden you are now back into the story of the bottom billion and more than a billion in poverty right now, if you take the definition of the poverty line as $1.25 [per day]. For the world this is a concern and for the World Bank Group, whose primary objective is to reduce poverty, its main goal is at risk. For India, which has the largest numbers – but not percentage – of poor (by one estimate it is 400 million), this is obviously a matter of great concern.

Let us go to the question of how we can break this down a bit. This time around, both demand and supply factors are present, in the sense that with steady increase in incomes over the last decade the demand for food and grains – both grain for consumption and for use as livestock feed – has been going up steadily. But that has been a contributor in a sense, to a systematic increase in price rather than a jump. More of a secular increase than a blip. So that does not explain the increases in price that we see today.

So we go to the supply factors. First, in the short term, indeed buffer stocks have come down. Where there were stocks importance could be attributed to holding and hoarding also, as factors. But there is a big factor that is truly additional to all of this, compared to anything we have seen before, and that is why the 2011 crisis is more of a concern than what we noticed in 2008 even. That factor is natural disasters and climate change.

There is no doubt that the heat waves in Europe and the Russian drought and the floods in Pakistan and the combination of floods and drought all across the world have had an effect on supply side constraints. [Especially] the big price increases for wheat rather than rice [suggest that] these have been affected by floods and drought more heavily.

For the moment I will just flag the links to climate change as a factor [in the food price crisis] and in the solutions that were discussed during the Spring Meetings, it was not just a matter of having better distribution only, but what could be, in addition, fundamental ways in which productivity can be increased and [how to] deal with the new constraints that are being placed on agricultural productivity by climate change.

As a footnote to that answer, could I ask you this – you specifically mentioned Pakistan and floods and I believe that the Bank was involved in some of the humanitarian, post-flood recovery financing. So we can understand the Bank’s thinking on this subject better, how does the Bank decide between finance allocated for development needs versus emergency financing in such cases?

Absolutely, at one level the objective is people’s well-being and so if development is really halted because of a natural disaster and emergency needs, then doing all you can to contribute to emergency relief is also related to development efforts. In that sense I would say that dealing with crisis is as developmental as anything else.

Now, what instruments can the World Bank use for that? That is where there is a difference. It is not set up to do the kinds of things that the United Nations emergency services can do, or what the Red Cross can do, and what various other intergovernmental agencies can do, in that this is a group that provides financing, knowledge and know-how. The instruments of support differ. Even with that distinction, more and more, with the food and energy crisis and with natural disasters, an emergency window was opened at the World Bank to help with that worldwide. [It comprised] an emergency effort to provide loans that would disburse quickly to help the situation was undertaken. This was done in the case of Haiti and many others including Turkey, Pakistan, India and Bangladesh. Thus there have been loans made for natural disasters, with the difference perhaps that it has not been just been about mopping up the floor but putting in systems to stop the leak, because it is not enough to just mop the floor when the tap is still running.

What can be done especially in countries where these disasters will strike again and again with the same frequency? Since you mentioned Pakistan, here the response had to include not just the reconstruction of structures but the reconstruction of livelihoods, because [the folds] hit their agricultural base. In the case of Haiti the big effort would have to be [towards] the reconstruction of structures and urban life, if you will. It very much differs between earthquakes and floods.

So the Bank is involved, but a little more in long-term recovery and prevention than in the immediate reconstruction only.

Jobless recovery

Moving to a similar theme that came up during the Spring Meetings, Dominique Strauss-Kahn, Managing Director of the International Monetary Fund [IMF], warned of a global economic recovery “without enough jobs” and also spoke of a lost generation of youth who could struggle in the job market. How do you see this playing out in the advanced economies worst hit by the downturn?

The crisis of 2008, as we all now recognise, originated in the industrial countries and that is where the recovery is also the weakest. The crisis hit the middle-income countries and low-income countries as well, eventually, but the recovery was fastest in Brazil, India and China.

In a way, today, the global growth rate is held up by the middle-income countries and the BRICs and the recovery elsewhere is proving to be essential because of the end of the day in a globalised setting the whole global economy needs to pick up. So one question is just about the recovery of growth in Organisation of Economic Cooperation and Development [OECD] countries but the other is about the nature of the recovery, because if it does not create more jobs, every country is concerned about its impact socially.

The uprisings and the unrest in the Middle East, for rightful reasons – including the clamour for greater participation – as well as reasons of deprivation – especially of the youth, who have got some skills but cannot find jobs – is a concern right across the regions of the world, and not just in the Middle East. In the Middle East several countries with 30 per cent unemployment of the youth is a concern but the urban unemployment in many countries including India would also be something of concern.

Now, the OECD [countries’] recovery projections, its uncertainty [and] the inadequate corrections that have taken place following the crisis of 2008 are of concern on the financial side. The financial sector regulatory reforms have hardly kicked in – they have not really been implemented like we would have thought. Second, imbalances in the fiscal deficits on the side of the U.S. and European countries and the surpluses in China and elsewhere have not been corrected. The hope that groups like the G-20, somehow by representing a large share of global GDP, might be an effective way to address these and climate change issues, [is misplaced as] the G-20 has hardly been effective organisational group to make tough decisions or directions on global governance which is needed.

What [Mr. Kahn] said by way of concern over the lack of recovery in OECD countries and particularly the lack of job creation, which then, through trade, also translates into difficulties for developing countries to keep going, [is that] in a setting where you have these three crises and you do not have a good enough governance mechanism to take them on, [that] leaves us with continuing concern that the outlook would be something to watch very carefully and deal with through more vigorous steps at the national level and then through international organisations.

This set of questions has dominated some of the discussions and they need more forthright attention.

In all the things you just mentioned there were two key aspects. One is stability, which the IMF deals with to a large extent. But the other is the question of jobs, for which as you said even a concern in countries like India, despite being a BRIC and leading on the growth front, there are concerns. Is the Bank in any way engaged actively with any job-creation agenda and a long-term sustainable growth process in developing countries?

Very much so. The question would be: do they add up to a strong enough response? Very much so also in the sense that education and its link to employment is the single biggest point to be addressed. There are educational investments and access to education has increased everywhere. But the quality of education and learning outcomes and its relation to jobs that are available domestically or abroad, that link is very weak.

So the World Bank’s education strategy, which was recently approved at the Board, forcefully addresses this question of the relevance of education, the quality of education and the outcomes. In other words, what do they learn at all levels – primary, secondary and tertiary? That is the way in which the Bank’s financing and its relationship with governments and countries is trying to influence the way that the educational system could be a little better geared to meeting job market gaps.

This is an issue in India and everywhere. Even in a country like [South] Korea, which is the highest in terms of achievements on education, when you ask them about the biggest constraints they have, they put education at number one. It is not like middle-income countries or high-income countries are any better. That is one way the Bank is influencing [job creation].

The second would be [promoting] labour intensive types of activities. Considerable investments from the World Bank go into rural areas. There, if you were only concerned with raising production there may be a set of policies that you would pursue. But World Bank financing is very much for small- and medium-sized industries, microfinance, with all its problems is still a very important source and agricultural livelihoods with a particular focus on the poorer segments. The growth in agriculture [should not be] prejudiced against labour use because you can imagine that you grow very fast and you need less people and they are unemployed. The World Bank’s strategy is one that tries to promote labour-using ways of growing.

Third and finally, the International Finance Corporation, which is the private sector arm of the World Bank, has a number of innovative [approaches] that try to combine small-scale activities using a lot of labour in the private sector. Jain Irrigation in India is a nice example of combining knowledge, irrigation, education and the employment of a lot of people. These examples could be scaled up. The Bank is conscious of it but the real question is the scale of all this anywhere near what is needed in view of the big crisis that we mentioned at the beginning. The gaps are so large that we need to scale [these examples] up.

Climate change

Since Copenhagen, where there was a spike in awareness of climate change issues, what kind of progress do you think has been made? Has the Bank played any role in influencing the discourse as well as the actual agenda? Also, if I had to ask you to find a sticking point, would you say that it is the question of financing – adaptation and mitigation – and the disagreement between the developed and developing country groups? Or is it something else?

I think there was some progress in the last round, at least in terms of keeping issues open, and there is an expectation that it will go further later in the year. One question is: these rounds are international actions and they are about agreements and understandings among countries about what each would do. There is recognition that everybody would be hurt by inaction, but there is no agreement on how much each should do to avoid that situation. That is the bottom line.

Historically, the industrial countries are responsible for CO2 emissions of this order. The increments that are taking place today are shared by all, equal responsibility. The atmosphere does not differentiate between how many people are [polluting it – there is only a sense of] so much is coming from India and so much from China. When you look at it that way it is a shared responsibility and no longer somebody else’s problem.

Middle-income countries have everything to gain from dealing with this as developed countries [do] and there is no scenario under which if the developed countries acted and the developing countries did not act, we would avoid the worst case scenario. You need all to act. The question then is, how could this be addressed by the major countries as if it is in their own interest – that is they are not doing it for somebody else’s benefit but for their own survival.

That is what helped when trade discussions went forward. It was not so much because everybody said “Let us do it for everybody else;” [rather] the country which had a lot of trade restrictions said, “If I liberalise I am going to gain.” India did not [undertake] liberalisation because it was good for the United States – it did so because it was good for itself. Why is it not the same for the climate? Why is it not good for me to have a cleaner environment?

So, for example, do you think it is useful to frame it the way the Indian Prime Minister Manmohan Singh did earlier when he said that a certain percentage of Gross Domestic Product [GDP] was being lost to climate change effects?

Absolutely. We have estimates for India, China, Argentina, Brazil, and Turkey. For these countries’ income levels, the estimates of the damage to the environment [and its impact on GDP] is about two or three per cent. You can think of that as the loss [of income] per year from destroying the environment and the climate. Why does that not touch us? It is because that is a public good, everyone is affected, and it is an externality. The other point is, if I took a good action my neighbour, Sri Lanka, would also benefit. What is wrong with that and why do I care? One set of steps is to do the things that are in one’s own interest, make the point and do it for yourself. And there is quite a lot we can do in developed and developing countries – energy efficiency, reducing energy subsidies, and stopping deforestation – these are all good for the climate, good for the poor and good for the finances.

Renewable energy is more difficult to put into that basket because there are financial implications. Those are areas where agreements with other partners on transfer of technology, know-how and so forth, also needs to come [into the picture]. [If that happens] then over time making the transfer to cleaner forms of energy would also be in the list of things that a country would want to do. Then there are many innovations [by] the private sector and scaling them up would be part of the answer.

One step, therefore, would be to go much further in these directions.

Since Cancun, the dramatic news or change is that the Environment and Forest Ministries of two major countries have taken a view, much more clearly, that a cleaner, better environment is good for growth – and that is China and India. So what Minister Jairam Ramesh is good for the environment but it is also good for growth and that recognition is important for India. In the long term it will not be possible to grow at 8.5 per cent if natural disasters, agricultural disasters and pollution will reduce GDP by around 3 per cent a year. It just will not be possible.

On the national side, a lot can be done, but the great news is the strong move [towards this goal] made by the Ministers for Environment in China and India. That to me is half of the lesson.

On that subject, do you think that their examples show that politics can get in the way?

Absolutely, this is true. I have the advantage of being at a distance, to not know from one day to the next what allegations [made against the Ministers] were true or not true. But the principle of it, that the environment and growth are not opposing values and they go together, is a change that these two ministers have signalled. Coming as it does from the two most populous and largest developing countries, that is significant. Then of course on the international front it is extremely important to make progress in the next round and keep going.

Arab spring

While most of the newspaper headlines focus on the political and security consequences of what has been described as the “Arab spring” what does the recent turmoil in countries such as Egypt, Tunisia and others mean in terms of development goals? Specifically could you talk about both development as economic prosperity and also what Amartya Sen has called development as freedom?

The term “Arab Spring” is appropriate because there are parts of it that are about unrest and turmoil, and parts of it that are about liberation. It is a complex phenomenon and one needs to call it in a way that signals hope and progress and at the same time desperation and deprivation too. The trigger points do have links to food prices, although that is not to say those are the most significant [factors]. Price increases in food coming in the wake of the Russian drought did have an impact on Egypt and I think climate change has everything to do with it.

Second, there is the question of inclusion. India and China have made inclusion their motto of development and that is partly because it is a good thing to do but also partly because it is a political reality. If you do not include people in your progress you are going to be voted out or you are going to be pushed out.

If that is the case it is striking that Egypt, Tunisia and others are countries that have a great deal of exclusion and inequality but not so much inequality of income even as you have in some parts of Asia and certainly not as much as you have in Latin America.

Exclusion is not just about income – it is also about whether you are included in decision-making, are you a part of society, if you are educated are you included in the employment pool or are government jobs set aside for the privileged? Every one of these [dimensions] is as important as income inequality – that is the powerful [lesson].

I was just looking at the numbers and thinking that Egypt and Tunisia must be very unequal because a lack of inclusion must be [a driving force behind the unrest] – but it was not. Income inequality [in these countries] is not worse than in China or any other place. But there is an exclusion of a different type and a different order that transcends all that and that partly is reflected in a 30 per cent rate of unemployment among youth – if you are not employed you are excluded right? The man who set himself on fire in Tunisia was desperate.

Exclusion as Amartya Sen has discussed it is fundamental and a human right to have a voice in the way your community or country is run. That democratic dimension is very much a part of the picture and so it is economic, political and social.

So you see these developments as definitely positive?

It is complex in that in and of itself it does not necessarily give you the basis for saying that the economy is going to grow and social and political inclusion will follow. There is enough experience to say that in some democratic transitions the economic reforms and changes did not happen overnight. But [it is important] to signal that it is as much about positive change that people are trying to bring about as a reflection of the deprivation and the dark side that we have seen in the past.

World Bank policies

Moving from these global macro issues to the World Bank itself, could you tell us a bit about how the Bank is placed as a leading development lender today, in terms of its own institutional strengths and weaknesses? Also in earlier comments regarding an Independent Evaluations Group [IEG] report we discussed the view that the Bank responded to the crisis with “some delay” – what lessons were learned from that experience?

The crises have brought out a bigger place and a bigger role for the World Bank Group than we had recognised in the last 20 years. It has been a much more decisive player in the economic crisis. The delay that was seen in the response on the part of all organisations including the World Bank was only offset by an infusion of capital from the World Bank – the largest of which went to India – a worldwide disbursement of $80 billion over two years. [This disbursement] put it at a level bigger than the IMF, which is primarily designed and set up to meet such crises. We have suddenly seen a World Bank that is not a small player and can be a big player on the global stage, at least in this economic crisis. In retrospect I am giving a very strong positive signal on what this institution can do.

Against the crisis that we talked about you need strong capable organisations to take on responsibilities. The experience of the World Bank’s response to the economic crisis gives me, on the basis of evaluation, to say that this organisation is a pretty strong one to deal with some of these issues.

It can, should and needs to gear up far more in being able to take on and help in the environmental, natural disaster and climate crises. In the case of the food crisis as well it has particularly geared up to support low-income countries. It is a striking revelation that sometimes it takes a crisis to see strengths, and the World Bank Group has come through as a pretty powerful organisation that needs to be utilised much more, not in terms of money, but in terms of its ability to work with the government and private sector to confront these three or four crises that we are facing today. It cannot be [achieved] alone – it really has to strike stronger partnerships with others. But it is a strong organisation on the basis of its performance during this economic crisis.

About yourself

You retire this year from IEG after a long and most successful career in the Bank through some of its most interesting times – what have been some of the memorable highlights? Also, what lies ahead for you?

On the highlights the delay that takes place in the recognition of issues that eventually prove to be of crisis proportion in the development area is one point that strikes me. There is a sense of a group mentality. Little by little, you get glimpses of a different view, but it just takes quite some time before the establishment or conventional wisdom begins to recognise them. Examples are the old style structural adjustment – it just took so long for that to be replaced. The priority for environment and climate change is still [in some ways considered] somebody else’s problem. Inclusion and poverty are important in the early stages of a financial crisis – it took three crises before that became understood. There is a momentum for simply going along with what is.

In a recent report, the Independent Evaluation Group of the IMF said that during the crisis the IMF was completely unprepared, reacted very slowly and there were warning signs that were given inside and outside. However these were not heeded because of what they called group-think. In development and in the IMF’s financial areas as well the comfort level of just going along with things and how long it takes to reverse [that] – that stands out as one highlight.

The second highlight is that I have sensed the immense strength of an organisation like the World Bank when it has worked behind countries, not in front of countries. [In this list are] countries including India, Brazil, Vietnam and Ghana, where there is a strong partnership and the countries have taken steps for which the World Bank provides support from behind and then connects people and brings knowledge and so forth. [Under this model] very interesting things happen and new ideas, new innovations and new projects and programmes [emerge]. That has been a very striking experience for me.

What do you mean by “working in front of” countries?

By that I mean saying “Here is a prescription, take it and you will be cured.” You will be amazed that that still happens but the examples [of working behind countries] are [increasing]. It may have to do with how well countries are doing, leading the way themselves a bit more. The middle-income countries seem to be doing better because they are also doing things on their own. So I gave you cause for pause with one set of examples and cause for optimism with another set of examples.

What about your own plans?

I will complete my extension in August of this year. The Asian Development Bank has made a very interesting offer that allows me to continue this in Asia. I became an evaluator five years ago and if I just stopped that it would be like an investment wasted. This is an opportunity to apply that in an organisation that is growing, it is bigger, it is very important in Asia and it is also closer to home. [I will be working as the] Director-General of Evaluation there.

From The Hindu

Even as the World Bank and International Monetary Fund annual Spring Meetings kicked into top gear, IMF Managing Director Dominique Strauss-Kahn made a strong case for reducing global inequality if economic growth was to be sustained.

Speaking earlier this week at the Brookings Institution, Mr. Kahn said, “Because growth beset by social tensions is not conducive to economic and financial stability, the IMF cannot be indifferent to distribution issues. And when I look around today, I am concerned in this regard.”

Mr. Kahn argued that because unemployment was at “record levels,” the global economic recovery under way was “not creating jobs and is not being shared broadly,” as a result of which many people across nations faced a social crisis that was every bit as serious as the financial crisis.

Arguing that the youth were being hit particularly hard by the crisis, Mr. Kahn warned that “what should have been a brief spell in unemployment is turning into a life sentence, possibly for a whole lost generation.”

The ongoing meetings of the Bretton Woods institutions also coincided with the release of several key policy reports such as the Global Financial Stability Report, 2011, which argued that despite the transfer of risks from the private to the public sector during the crisis, confidence in the banking systems of many advanced economies had not been restored and “continues to interact adversely with the sovereign risks in the euro area. Further in the United States, a “lacklustre” housing market, legacy mortgage problems, and a backlog of foreclosures continued to put pressure on the banking system, limiting credit creation and a return to a fully functioning, mortgage market, the GFSR 2011 argued.

Yet all the cautionary notes on the economic recovery notwithstanding, there were a few bright spots reported by the World Bank, which said in its Global Monitoring Report 2011: Improving the Odds of Achieving the MDGs that two-thirds of developing countries were on track or close to meeting key targets for tackling extreme poverty and hunger.

Describing the picture of countries' performance with regard to meeting the Millennium Development Goals as “diverse and often hopeful,” the Bank reported that among developing countries that were falling short on the MDGs, half were close to becoming on-track.

However even the World Bank warned that soaring food prices were affecting vulnerable sections of the world's population, particularly in developing countries.

At a press conference during the Spring Meetings he said, already, 44 million people had fallen into poverty since June last year and, “If the Food Price Index rises by just another 10 per cent we estimate that another 10 million people will fall into extreme poverty where people live on less than $1.25 a day... The world can do something about this.”