The 2009 Minority Report on the World Bank: Peter Townsend

What would the Webbs do in 2009? In this article, Peter Townsend adopts the Webbs’ authoritative style of planning and applies some of the precepts they used to challenge the failed poor laws and domestic poverty in 1909 to the global poverty that faces us in 2009.

The 2009 Minority Report on the World Bank: Peter Townsend

In present conditions I believe the Webbs would see that 2009 offers an extraordinary opportunity to re-establish some of the values expressed in 1909 in relation to new policies. I am thinking in particular of human rights and John Maynard Keynes. Today the problem is not just regulation or reconstruction of banks – but of other global institutions, and particularly the World Bank. In debate, we have to be conscious always of alternative strategies, and advocate what is, in the circumstances, best.

The World Bank has failed to diminish poverty in the developing world. That failure is surely a contributory factor in the unprecedented 2008 collapse of the global financial system. Getting rich quick has meant exploiting many millions on the lowest incomes and failing to satisfy their basic human rights. And this can be ascribed to the reach and dominance of neo-liberal economic ideology in the last 40 years.

This ideology germinated in 1944 with Hayek’s Road to Serfdom. Despite being treated for decades as an arch conservative whose views could not be taken seriously, and despite the postures of organisations created in his name, like the Institute for Economic Affairs in the UK in the 1950s and 1960s, his free market position was given a shot in the arm by the Chicago School of economists and in particular by Milton Friedman.

Monetarism gained adherents and prospered. The objective of a free global market gathered momentum. The collapse of the Soviet Union and the protracted period of power exercised by the Republican Party in the United States through the election triumphs of Nixon, Reagan, Bush senior and Bush junior gave a fillip to neo-liberal economic policies. This led inevitably to the stark inequalities produced by public expenditure cuts, privatisation, smaller and less progressive taxes, anti-union legislation, and free trade in the interests of western-based global corporations.

The World Bank has served its masters dutifully and effectively. Its influence is all-pervasive. But lingering extreme poverty on a huge scale and realisation of the deep faults in the banking system invites an urgent review of the Bank’s work.

The failure to advise effectively about world poverty is the most compelling example.
Since 2000 the primary goal of the United Nations to halve world poverty by 2015 has been at odds with the reality of unremitting social polarisation and degrading mass poverty. There have been a growing number of reports reliably documenting both. The World Bank has nonetheless persisted with its discriminatory measure of poverty and its selective and unsuccessful policies.

Measurement Failures

For many years the World Bank made claims of a steady decline in the scale of poverty. But gradually the decline – even on the Bank’s figures – looked slow and halting and the Bank’s technical expertise was convincingly questioned. Economists have savaged the technical updating of the dollar-a-day poverty line from year to year, and the way that poverty line was translated into the equivalent purchasing power in the currency of each particular country. Thus, Kakwani and Son (2006) show that if the poverty line up to 2005 had been pitched at a level of $1.50 instead of $1.08 in the mid and late 1990s to allow for the true, and properly weighted, levels of inflation around the world, the count of those in severe poverty would have been much larger. Absolute poverty in the world would have been 36 per cent and not 21 per cent in 2001 – raising the total numbers by 800 millions to little short of 2 billions.

The second measurement fault is more fundamental. The Bank’s practice since 1985 has been to restrict the measure of a ‘poverty line’ to material needs and not include social needs – such as people’s needs to meet the costs of going to work and their obligations to family and society. In the early 1990s the Bank stated repeatedly that these were the two necessary elements in the measure of poverty (World Bank, 1990, p.26; and see also World Bank, 1993a, 1993b, 1996, 1997, 2000, and 2001). By the World Bank’s own authority, the scale of world poverty must have been routinely under-estimated ever since.

For half a century the Bank has obstructed the development of a measure of poverty that is international and scientific. The UN initiative at the Copenhagen World Summit in 1995 – which would have begun to allow rich and poor countries to be compared – was ignored. In 2008 two researchers at the Bank stated that “richer countries tend to adopt higher standards of living in defining poverty” and that the Bank has “aimed to apply a common (sic) standard, anchored to what poverty means in the world’s poorest countries” (Chen and Ravallion, 2008, p.2).

The measure is circular as well as discriminatory. Current very low income is treated as equivalent to minimum income need. But how can the choice of a threshold of poverty or a poverty ‘line’ be validated? In principle the scientific approach would be to choose criteria other than income to examine in order to provide acceptable evidence of a threshold of income that satisfies need. One such alternative is the collection of representative household information about multiple material and social deprivation. An appendix gives an example of the use that can be made of existing cross-national surveys to derive reliable indicators.

The World Bank authors finally admitted in 2008 that the celebration of the apparently sharp decline in poverty that the Bank claimed again and again in the 1990s and early 2000s had been “premature”: the results had been biased and based on “rather crude price surveys” for just 10 countries (ibid, p.3). The quantity but not quality of items had been priced. Poverty in China was underestimated, they say, by 300 millions.

But old habits die hard. For the World Bank’s researchers to admit some necessary technical adjustments, and accept minor retrospective adjustments in the figures they had published in the past is not the same as admitting the big mistakes that had been made for decades in Bank methodology. They have failed to establish a reliable basis for measuring trends in poverty in developing countries that genuinely allows for inflation. Thus, the researchers do not discuss what inflation index applies best to developing countries. They do not withdraw the $1.08 figure for inflation between 1985 and 1993 of a poverty line of $1.00 per person per day in 1985 in favour of the more appropriate $1.50 testified by critics. And this refusal of course affects the choice of the figure for 2005. The World Bank’s spokesmen say the “new international poverty line” for 2005 follows “the same definition used in our past work, namely that the line should be representative of the national lines found in the poorest countries” (ibid, pp 3, 9-10). But arbitrary choice of the number of countries and arbitrary selection of a threshold of income is not selection according to pecuniary need.

World Bank Policies

Along with the UN and all international organisations, the Bank has upheld economic growth, debt relief and overseas aid as the primary instruments of global anti-poverty strategy. More recently fairer trade, through reform of the WTO, has been added. But different policies on behalf of these four objectives have not been examined closely to reveal what are the specific effects of each of them on the scale and distribution of continuing poverty. Policies developed in their name are relatively indiscriminate and poorly designed in their distributional effect upon population poverty. Without detailed evidence of policy delivery these strategies can be regarded only as empty shells. Success depends on whether a sufficient share of additional cash income and income in kind from these sources happens to reach the poor, and quickly. Their intentions are not always clear and their consequences left uncharted. The blithe assumption that they are good in themselves has not yet been replaced with resolute determination to ensure that policies in their name are pro-poor.

From the 1980s the World Bank has followed a three-fold strategy to reduce poverty: broad-based economic growth;
development of human capital through education; and
safety-nets for vulnerable groups. But investment in children’s education can only begin to have an effect on the poverty rate years later, if at all, when the children become working adults – while the dire effects of poverty are ever-present. And ‘safety-nets’ that comprise concessions for the extreme poor through selective policies disguise the tiny scale of the commitment of resources to these policies and therefore to a problem that in many countries affects the majority of the population.

The Bank has not contributed much to the diminution of extreme poverty. In 2005 it lent approximately $22 billion but only $2.4 billion (10 per cent) was for social protection (Hall, 2007). The largest lending was for financial and private sector development and two other large allocations for urban development and environmental and natural resource management – these three making up half the Bank’s programme. The sum for social protection is less than five-hundredths of one per cent of world GDP and is dwarfed by the sum spent each year by each of the rich countries on social protection (or social security) alone. Thus, the UK Department of Work and Pensions spent the equivalent of $210 billion in 2005, compared with the World Bank’s total loans for social protection in the entire world of $2.4 billion.

The latest news carries an even worse indictment. In 2008 the Bank committed less than half of what it had committed in 2005 to social protection – 4 per cent of the total of $24.7 billion in the year – i.e. $0.9 billion, compared with $2.4 billion in 2005 (World Bank, 2008b).

The Bank’s action remains deliberately puny and has done little to change the entrenchment of free market policies: one analyst concluded that social policy had been condemned to a “residual category of safety nets” (Tendler, 2004, p.119).

Yet as much as two-thirds of the poverty that would otherwise exist in the rich countries has been ruled out by the development of their social security systems. While public expenditure on social protection, more properly named social security (such as on child benefit, sickness and disability benefit and pensions for the elderly) has continued to increase (nearly 14 per cent of GDP in 2005) in the average OECD country, it is between 1 per cent and 3 per cent in most low income countries: for example, 1.5 per cent in India (Townsend, 2007, p.9, and see also ILO, 2001). Because the redistributive mechanisms of social security are not in place, even for groups who cannot be expected to gain earnings through employment, there cannot be effective ‘trickle-down’ from economic growth. 

Overseas aid for the extreme poor in the developing countries is also miserly. The total of all the Bank's lending throughout the world each year has reached $25billion (World Bank, 2008a, 2008b) - less than half the average annual income of each of the biggest 500 global corporations (Fortune Magazine, 2008). At the top Wal-Mart has annual revenue of $379 billion and Exxon Mobil $373billion - each of them 15 times greater than the World Bank’s total lending. The Bank’s lending represents less than 1 per cent of the annual income of the top 500 global corporations. 

The Bank has done a far better job in concealing its deterrent ‘poor law’ policies and the relatively puny scale of resources committed than those who concocted or sought to implement the 1834 Poor Law Act. The Webbs of 1909 would be rising up in fury.

The World Bank and Keynesian Post-War Recovery

What would have been the alternative, successful, strategy for the World Bank to pursue during the last three decades? It would have been drawn from a different theory of economic and social development than that of the Chicago School of monetarism and then of neo-liberalism. Keynes argued for a kind of world central bank or ‘Clearing Union’ that created a deposit of new currency for every country in the world which it could count on at times of difficulty to pay creditor governments. The big countries would create a giant fund from which countries in demonstrable financial adversity could draw – up to a sizeable minimum level – without strings. Up to that minimum level they would not have to justify their policies. His was a successful precedent during the eerily similar depression years of the 1930s and the years anticipating post-war reconstruction. He believed too in the creation of jobs rather than market incentives and the protection of the unemployed and other poor by social security. His say-so was a factor lurking behind the promulgation and acceptance of the Beveridge Report – which spurred different countries into acts of re-distribution of a major kind. His strategy deserves fresh examination.

After 1944 the Bretton Woods institutions turned out to be a pale shadow of Keynes’ intentions. Total resources provided for them were less than a third of what he advised. Countries were not awarded an allocation. They had to contribute to the total Fund to be eligible for membership and hence have the opportunity to apply for loans – to which stringent conditions could be attached. Membership was conditional rather than universal; debtors had less independence, aid had strings, and the US remained predominantly in charge of those strings.

In the pages above the desolate outcome has been sketched. The consequences of neo-liberal economic thought are to be found everywhere. “Behind [the World Bank] are the economic strategies of the G8 nations and the virtually unaccountable multinational corporations. The Bank is not a humanitarian agency and its analysts usually evaluate its operations on the economic principle of efficiency. Yet growing inequality is literally a matter of life and death to many millions of people” (Turshen, p.131). 

Transformation of the World Bank

The World Bank has helped to implant neo-liberal ideology among governments, corporations and consumers, weakened the state and reinforced economic inequality and gross destitution. In 2009 its resonance has a hollow ring. As a vehicle with capacity to influence organisations world-wide by employing a large number of internationally informed and intelligent people, it has been driven by the wrong forces subservient to that neo-liberal philosophy. It advocates disastrous policies, lends with discriminatory conditions, and has little experience or resources to invest grants directly in jobs, services and people.

Altogether it has the wrong policies and ignores human rights.

Action has to be governed by motives of job creation, public service, staged international planning, accountable leadership, and collective organisation of social security and other social services.

The largest global corporations and international agencies (including the banks and insurance corporations, which in 2006-7 made up 100 of the 500 largest corporations) would attract praise by committing a very small percentage of their growing resources to social security and a larger percentage to minimum rights to wages and employment conditions in the low income countries. That would mean keeping track of activities in subsidiaries and sub-contracted employment, and extending rights to those workers. New international company law (Townsend and Gordon, 2002), and more effective international taxation, would be necessary components. ‘Corporate social responsibility’ would thereby acquire meaning.

For example global corporations could add one or two per cent of wage costs in different countries towards a universal child benefit to help banish malnutrition, poverty and premature child death, and also encourage more schooling and access to health care. Employer contributions towards domestic social insurance schemes in the OECD countries could be extended to employer operations in the low-income countries.

The creation of jobs locally and nationally would be paramount, building on some positive policies of present government. By singling out green forms of energy replacement, subsidies for domestic manufacture and farming, and expansion of some of the primary social services the lines of an employment strategy less dependent on imports would be evident.
The strategy offers the possibility of satisfying the principal UN millennium goal of eliminating poverty, and slowing or halting runaway social polarisation; a start in the necessary reconciliation of market globalisation and public ownership and control; a principled series of stages in the fulfilment of human rights; and a feasible way of properly internationalising development.
 
Fabian Society