World Bank: Predictions through Rose-tinted glasses

No this is not about Wolfowitz and his girl friend but actually about what the world bank does!

The global economy through rose-tinted glasses

Robert Wade

FT Published: April 30 2007 18:29 | Last updated: April 30 2007 18:29

Talk of the future has been dominated by climate change and the mood is one of alarm. But among those who focus on economics the mood is upbeat. Climate change worries aside, the future to 2030 looks quite rosy.

According to the World Bank’s recent Global Economic Prospects, output will probably double in real terms by 2030 and developing countries’ output will triple. In much of the developing world, average incomes per head will converge with those in high-income countries and the number of people living in poverty (on less than $2 a day) will fall from 2.7bn today to 1.9bn. These trends will be driven by increasing integration of trade and finance and diffusion of technology. If they continue on beyond 2030, Bangladesh will have a chance to become as prosperous as the Netherlands.

It is worth taking a closer look at the World Bank’s model, for projections are only as good as the assumptions. The model assumes, first, that globalisation has been and will continue to be the main driver of improvements in economic performance – provided there is no protectionist backlash.

In reality, much of the success attributed to globalisation is in fact the success of one giant country: China. The picture of the past 25 years would look quite different if we took the typical developing country rather than the average for all of them (which is pulled up by China). For example, the fall in the number of people in extreme poverty since the early 1980s is due entirely to the fall in poverty in China. Take out China, and the number rose.

Many developing countries have gained little from globalisation and export-led growth and it is unclear whether they will gain more by continuing on the same track. The World Bank’s model also assumes that free-trade norms will continue to prevail. This is doubtful. In affluent countries, a lot of evidence suggests that further affluence is reducing people’s capacity to enjoy it. Throughout the west, rates of over-eating, family breakdown and addiction are rising. It is possible that electorates will respond by seeking to "embed" certain markets more firmly in a framework of political controls, even at the cost of slower growth.

In developing countries, disillusionment with the paradigm of maximum openness is growing, as those that have moved towards free movement of goods, finance and enterprises have not experienced substantially improved economic performance. The focus on export-led growth has created intense competition between developing country producers to lower costs – including labour and environmental costs – and the exchange rate.

Developing countries’ governments may begin to pay more attention to the growth of domestic demand and less to export demand as it becomes clear that export-led growth is not delivering. Commentators in the west will misrepresent this shift as a "protectionist backlash". But the task for analysts is to figure out how to do import substitution well, and subject to multilateral disciplines, rather than just less.

The Bank’s projections assume, third, no significant interruption from war. But the rise of important new economic states has almost always raised the level of conflict between them and existing dominant states. China’s rise is likely to generate further tensions between it and the US. The US may reassert its dominance by invoking China and Russia – flanked by Iran, North Korea and other non-compliant states – as a threat far beyond their "real" threat.

The other impetus for conflict comes from the tendency for global supply capacity to run ahead of demand and for profits to fall. In response, the west has pushed for market liberalisation and infrastructure investment in developing countries, which help to expand demand by bringing in more consumers and producers. But their efforts have often generated conflict over the ownership of the newly liberalised assets and over the terms of exploitation. We saw western companies buying bankrupted Asian companies at rock-bottom prices after the Asian financial crisis of 1997-98, prompting a strong anti-western reaction. The emergence of China only adds to the tendency for supply capacity to run ahead of demand and for global financial instability to rise as payments imbalances accumulate.

None of these less-than-rosy dynamics features in the World Bank’s projections to 2030 or in the prevailing optimism about the economic future. But we would be foolish to ignore them.

The writer, a professor of political economy at the London School of Economics, is the author of Governing the Market


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