World Bank's "Wrong Advice"left silos empty in poor countries.

This is from Bloomberg.

Surprising that a trenchant critique of the Washington Consensus re the World Bank (and IMF) should appear at this business site. It shows the extent to which the sacred idea of encouragement of free markets and free trade has been tarnished by recent events along with the associated magical creative destruction. However recent loans to Iceland, Hungary, and Ukraine indicate that these institutions of global capitalism have not learned much.


World Bank’s ‘Wrong Advice’ Left Silos Empty in Poor Countries
By Alison Fitzgerald and Helen Murphy
Dec. 10 (Bloomberg) -- Inside and out, the rusted towers of El Salvador’s biggest grain silo show how the World Bank helped push developing countries into the global food crisis.
Inside, the silo, which once held thousands of tons of beans and cereals, is now empty. It was abandoned in 1991, after the bank told Salvadoran leaders to privatize grain storage, import staples such as corn and rice, and export crops including cocoa, coffee and palm oil.
Outside, where Rosa Maria Chavez’s food stand is propped against a tower wall, price increases for basic grains this year whittled business down to 16 customers a day from 80.
“It’s a monument to the mess we are in now,” says Chavez, 63.
About 40 million people joined the ranks of the undernourished this year, bringing the estimate of the world’s hungry to 963 million of its 6.8 billion people, the Rome-based United Nations Food and Agriculture Organization said yesterday. The growth didn’t come just from natural causes. A manmade recipe for famine included corrupt governments and companies that profited on misery. Another ingredient: The World Bank’s free- market policies, which over almost three decades brought poor nations like El Salvador into global grain markets, where prices surged.
“The World Bank made one basic blunder, which is to think that markets would solve problems of such severe circumstances,” said Jeffrey Sachs, director of the Earth Institute at Columbia University and a special adviser to UN Secretary-General Ban Ki- moon. “But history has shown you need to help people to get above the survival threshold before the markets can start functioning.”
‘The Washington Consensus’
Created in 1944, the Washington-based World Bank Group spent much of its first 35 years dispensing low-interest loans, grants and development advice to poor countries with an eye toward promoting self-reliance. In 1980, the bank’s executives began attaching conditions to loans that required “structural adjustments” in the recipients’ national economies. The mandates were designed to have poor countries cut import tariffs, reduce government’s role in enterprises such as agriculture and promote cultivation of export crops to attract foreign currency.
The philosophy, which came to be known as “The Washington Consensus,” was based in part on assumptions that importing basic grains would be inexpensive and that farmers in developing nations could earn more producing exports. Food prices had fallen for years and few economists thought that would change, said Mark Cackler, manager of the bank’s Agriculture and Rural Development Department in Washington.
Exporter to Importer
In 2007 and the first half of 2008, an index of more than 60 food commodity prices compiled by the FAO rose 82 percent. While costs have since eased, they were 20 percent higher on Nov. 1 than at the end of 2006.
The increases hit hard in countries such as El Salvador, which had adopted the principles of the Washington Consensus in return for loans. El Salvador’s Central Reserve Bank said the total amount of the lending was “not available.” The Agriculture Ministry did provide this measure of their effects: The country was a net exporter of rice 20 years ago; now it imports 75 to 80 percent of what it consumes.
The World Bank has “given consistently wrong advice,” said Jose Ramos-Horta, the president of East Timor in Asia and the 1996 Nobel Peace Prize winner.
“It is their advice -- that buying externally is cheaper than producing -- that has resulted in this,” he said.
‘More Than Underinvestment’
Current and former World Bank officials say small countries hurt their own agriculture industries by suppressing prices, taxing farms, inflating exchange rates and favoring urban development. They reject the assertion that structural adjustment loans hurt developing nations’ self-sufficiency.
“The premise that this crisis was caused by these policies is something that we don’t agree with,” said World Bank spokeswoman Geetanjali Chopra. “This crisis was caused by much more than underinvestment in agriculture.”
Still, in nations such as Honduras and Ghana, imports of basic grains climbed after governments eliminated agricultural subsidies, sold off grain stores or decreased tariffs to get World Bank loans in the 1990s, according to data from the UN’s FAO.
In Honduras, 23,000 rice farmers went out of business, and employment from rice fell to 11,200 people from 150,000 after the government trimmed import duties, according to the human rights group Oxfam International. Honduran farms now supply 17 percent of the domestic demand for rice, down from 90 percent before the tariffs changed.
McNamara’s Shift
In Ghana, the World Bank required a tariff reduction on rice to 20 percent from 100 percent. Imports tripled, said Raj Patel, a scholar at the Center for African Studies at the University of California at Berkeley.
The free-market policies were a sharp turn from the bank’s earlier efforts -- led by former bank President Robert McNamara - - to develop poor countries’ domestic agriculture and self- reliance, said Uma Lele, a World Bank economist from 1971 to 1991 and 1995 to 2005.
McNamara, who oversaw the escalation of the U.S. war in Vietnam as defense secretary under presidents John F. Kennedy and Lyndon Johnson before joining the bank in 1968, shifted his views. He introduced the structural adjustment concept in 1979, in a speech in Manila urging rich nations to open their markets to imports from poor countries.
“Developing countries will need to carry out structural adjustments favoring their export sector,” he said in the speech. McNamara, 92, declined to comment for this story.
Free Market Principles
World Bank officials were frustrated that their investment in agriculture through the 1970s wasn’t paying off, especially in Africa, said Pierre Landell-Mills, a bank economist at the time.
“There were state marketing organizations that were a complete nightmare of mismanagement and corruption,” said Landell-Mills, 69, now a principal at the Policy Practice, a public policy consulting group in Brighton, England, in a June interview. “There were unsustainable subsidies.”
The “preferred solution,” he said, was to dismantle the marketing boards, shrink governments and remove barriers to entrepreneurship. McNamara in 1980 approved the first three structural adjustment loans. By 1985, they made up more than 25 percent of the World Bank’s total lending, according to Kyle Peters, its country services director.
Free-market principles were on the rise in the U.S. and the U.K., the bank’s major funders. Margaret Thatcher had become British prime minister in 1979 with promises of privatizing state-owned enterprises. Ronald Reagan was elected U.S. president in 1980, pledging to cut taxes and government programs.
New Ideas, New Staff
Reagan appointed Alden “Tom” Clausen, a former chief executive officer of Bank America Corp., to succeed McNamara in 1981. The new bank president was convinced “that you could fight poverty better and more efficiently and more quickly if you get the policies of a country right,” Clausen said in an interview.
“I loved structural adjustment loans, and I made a lot of them,” he said.
As the bank’s philosophy evolved, so did its staff. Clausen hired Anne Krueger, an economist known for her advocacy of “getting prices right” by removing government controls, as vice president for economics and research in 1982. She “reshuffled the central economics staff,” wrote Devesh Kapur, in the bank’s official history, “The World Bank: Its First Half Century.”
“Of course the direction of research had changed,” Krueger, 74, said in an interview on Aug. 25. She acknowledged that some economists left because they didn’t agree with the bank’s focus. “Research moved away from big planning models with unreasonable incentives and swung toward things that were much more conducive to agriculture.”
‘Dysfunctional Systems’
Krueger led a five-volume study that concluded developing countries were hurting their own agriculture with tax and exchange rate policies. She said the bank’s free-trade principles boosted output and growth.
“These were largely dysfunctional systems,” she said. “It made sense to reduce tariffs so that countries could produce the goods that they were most efficient at.”
After leaving the bank in 1986, Krueger became first deputy managing director of the International Monetary Fund, which makes loans to help countries correct balance of payment problems and promotes economic policies.
As structural adjustment loans grew, the portion of the World Bank’s lending devoted to agriculture fell, to about 8 percent in 2000 from 30 percent in 1980. Last year, farm-related loans made up 12 percent of the bank’s $24.7 billion portfolio.
‘A Human Face’
“One of the reasons we have problems today is because of the cuts in agriculture,” said Montague Yudelman, 86, who was director of the World Bank’s agriculture department under McNamara. “If they’d made a continuously high level of investment, we’d have been in much better shape.”
By the late 1980s critics began saying the bank, along with the IMF, was fostering poverty and dependence. UNICEF, the United Nations Children’s Fund, in 1987 published a two-volume study titled, “Adjustment With a Human Face.” It concluded that some of the bank’s programs led to increases in malnutrition and disease in poor nations and urged new strategies to protect the most vulnerable people.
In 1995, just 30 days into his tenure as bank president, James Wolfensohn promised changes.
During a meeting with representatives of 12 non-profit organizations, Wolfensohn heard their argument that 15 years of adjustment lending had wiped out small farmers in countries from Africa, Latin America and Asia, damaging their ability to feed people. Some called for the bank to be disbanded.
‘A Different Way’
“What I’m looking for is a different way of doing business in the future,” Wolfensohn, a former Australian Olympic fencer and New York banker, told them. Wolfensohn, 75, who left the World Bank in 2005, declined to be interviewed for this story.
The bank’s commitment to free-market principles didn’t waver.
In 2000, as a condition for a $6.8 million agriculture loan in East Timor, the bank demanded that publicly funded agricultural service centers be privatized and rejected money for a public grain silo and slaughterhouse, according to Tim Anderson, a political economy lecturer at the University of Sydney. He has written several papers on East Timor’s development.
It also turned down proposals for the government to provide research and advice to farmers and to supply seeds and fertilizer because, “such public sector involvement has not proved successful elsewhere,” according to a World Bank mission report that year.
Small Farms Ignored
At the time, there was already evidence that private entrepreneurs weren’t serving so-called smallholders, who the bank says make up 60 percent of the world’s 2.5 billion farm households.
A 1998 study by Michael L. Morris, then a senior economist and project coordinator with the International Maize and Wheat Improvement Center in El Batan, Mexico, found that private seed companies in Africa focused on supplying large commercial operations and “often ignored small-scale, subsistence-oriented farmers located in remote areas.” Morris, 53, is now the World Bank’s lead agriculture economist for the Africa region.
In its 2008 World Development Report, the bank acknowledged that limiting governments’ participation in agriculture had hurt small farmers -- citing Morris’s 10-year-old study as part of the evidence.
“The expectation was that removing the state would free the market for private actors to take over these functions -- reducing their costs, improving their quality, and eliminating their regressive bias. Too often, that didn’t happen,” the bank said in the report.
No ‘Evil Force’
In 2000, Wolfensohn defended the bank to critics. During a meeting at Prague Castle that year, he told an invited crowd of 300 activists, bankers and government officials: “You should not regard us as a black and evil force. Maybe we’ve gotten things wrong. I’m sure we have in many cases.”
The next year, several non-profit groups that had worked with the bank to study its loan conditions released a report saying that the policies “have undermined the viability of small farms, weakened food security and damaged the natural environment.”
In response to the criticism from the Structural Adjustment Participatory Review International Network, the bank issued its own analysis that listed successes as well as missteps. It concluded that the required changes in agriculture were too much, too soon.
Lessons Learned
“The lessons for future policies are that agricultural adjustments are complex and require a sequence of modest steps,” the bank said in the report.
In August 2004, James Adams, the World Bank’s head of operations policy, declared the end of structural adjustments.
“We have abandoned the prescriptive character of the old policy,” Adams said in a statement. At the same time, he said, the underpinnings of the Washington Consensus “remain important themes of economic policy.”
The next year, the bank demanded that Niger privatize its irrigation systems, according to a 2007 report by Eurodad, a Brussels-based coalition of 56 non-profit groups. The requirement “has seriously damaging effects on poor farmers’ access to a precious and scarce resource,” said the report, based on an analysis of the bank’s databases. In all, the group found economic policy conditions were attached to 71 percent of loans and grants.
The World Bank in May pledged $1.2 billion for a Global Food Response Program that’s designed to speed money to the neediest countries without the usual red tape. As of last month the Bank approved $364 million for 25 countries and $541 million more is designated for 10 others.
Trade Talks Stalled
Current Bank President Robert Zoellick, a former U.S. trade representative, has promised to double agriculture spending while touting free trade as a solution to rising food prices. Zoellick, 55, declined to be interviewed.
Poor countries remained skeptical of open markets during the latest round of World Trade talks in Geneva, in July. They insisted that they be allowed to raise tariffs to protect domestic agriculture, stalling the negotiations.
El Salvador, meanwhile, has invested about $240 million in agriculture since 2004. It now gives farmers a $30 bag of the seed of their choice and a $30 sack of fertilizer.
“The World Bank had a very short-term vision; it couldn’t have been more wrong,” said Mario Salaverria, El Salvador’s agriculture minister, as he inspected corn in Sonsonate province, about 50 kilometers (31 miles) west of San Salvador.
His country must regain self-sufficiency, he said. “We can stop using our cars because of price increases, but we can’t stop eating.”
(Recipe for Famine: Part 3 of 7.)
To contact the reporters on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net; Helen Murphy in Bogota at hmurphy1@bloomberg.net. Last Updated: December 9, 2008 19:01 EST
Terms of Service Privacy Policy Trademarks