You Can’t Buy Reform

When India went bust and started reforming in 1991, leftists predicted a decade of lost development. They pointed to much of Africa and Latin America, where growth had stalled or reversed in the 1980s after years of structural adjustment programmes financed by the World Bank and IMF. Yet the reforms succeed in India. Why? Because India was serious about reform and the failed countries were not.

Take a look at the World Bank’s latest publication, Assessing Aid.

Its main message is that aid works only where committed reformers create good policies and institutions. Where not, aid goes down the drain. In such countries, donors should cut aid, and focus on supplying ideas instead.

They should provide a cogent vision of how policies and institutions can be improved, support local champions of reform, support decentralisation to local communities and elements of civil society that are fed up with poor service provision by venal governments.

The study shows that structural adjustment programmes in many countries were charades, where governments paid lip-service to reform in order to extract money from the World Bank and IMF. Many years and billions of dollars later, policies and institutions remained distorted and unreformed. Yet donors doled out fresh billions to try and buy reform. experience shows this is silly. The Bank can nudge countries in a certain direction, it can boost the impact of genuine reform efforts with aid. But it cannot buy reform. Only where governments themselves are committed to reform will aid help.

Conditional loans were originally criticised by the left as unacceptable dictation by foreign usurers. The picture that now emerges is very different. Conditional aid was often a con game where Third World dictators extracted money from gullible donors by making false promises.

Besides, donor agencies were constantly under pressure to keep lending, even if their money was wasted. Traditionally, they measured success by the sums they lent, not the development impact. A focus on aid-effectiveness would mean less aid, “ewer jobs in aid agencies, fewer profits for rich-country exporters. This powerful combination of forces kept up the pressure to lend.

A farmer World Bank staffer, Ashok Khana, describes the scene thus: “At the beginning of the year, we would talk tough’ about using aid efficiently. But halfway through the year managers would find that loan commitments were down. Falling loans were seen as failure on the part of managers rather than the countries concerned. No manager wanted to see next year’s budget cut because of fewer loans. By the fourth quarter, we were simply shovelling out money as fast as we could.”

The Bank has in recent years recognised the problem and tried to check it. Yet for decades. Third World governments took advantage of this mixture of gullibility and pressure to lend. The Economist has describes the outcome in its issue of August 19,1995.

“Over the past few years, Kenya has performed a curious mating ritual with its aid donors. The steps are: one, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on economic reform and behaving in an authoritarian manner. Three, a new meeting of donor counties looms with exasperated foreign governments preparing their sharp rebukes. Four, Kenya pulls a placatory rabbit out of its hat. Five, the donors are mollified and the aid is pledged. The whole dance then starts again.”

I remember another piece in the late 1980s in The Economist on Zambia.

Only where governments themselves are committed to reform will World /IMF aid help, says

Swaminathan Anklesaria Aiyar

The Zambian government had gone through seven loan programmes financed by the IMF and World Bank, and reneged on every one. A Zambian minister was asked if he was worried about the bad publicity. No, not really, he replied: “they always come back”.

The accompanying chart from Assessing Aid tracks aid to Zambia and the country’s policies. The policy index (which measures openness, fiscal prudence, inflation, institutional quality). declined almost continuously for decades, testimony to Zambia’s unrepentant socialism. Yet aid as a percentage of GDP kept rising.

This shows that (a) structural adjustment was a sham (b) donors continued pumping money to an established breaker of promises, even in an era of supposed aid-weariness. Independent corroboration that structural adjustment was often a sham comes from the Fraser Institute’s publication ‘Economic Freedom of the World, 1998-99’.

This measures economic freedom in different countries, and identifies the ten least free countries as Myanmar, Zaire, Guinea-Bissau, Rwanda, Albania, Sierra Leone, Malawi, Ukraine, Algeria and Central African Republic. Many of these got structural adjustment loans, yet ended with the least free economies.

By contrast, Ghana, which went downhill for years under socialist regimes, finally decided to reform in the 1980s. Its policy index shows a steady rise since then, and aid went up too. The result: GDP grew 5 per cent per year, one of the highest rates in Africa.

If all today’s aid is focused on countries with good policies and high poverty, it will raise four times as many people above the poverty line, says Assessing Aid.

Finally consider the evidence of Anatoly Chubais, former special representative of President Yeltsin, who in an interview with Kommerstat Daily on September 8 admitted that his government had fiddled its data to fool the IMF into believing Russia was on the right track and so releasing more money. Mr Chubais said it was the patriotic duty of ministers to lie for their country, and anybody else in his place would do the same!

But when Kaundas and Chubaises lie, do they really help their countries? In the short run they get a few billions more. But these billions have to be repaid, and without genuine reform the countries will not be able to repay. They will slide into bankruptcy and misery.

Could the Bank and IMF have done more to ensure their loans were properly used? Yes, but only up to a point. Assessing Aid shows that most aid is fungible. That is, money given for one purpose can be diverted to other purposes without leaving tracks.

Consider a government contemplating 10 projects, ranging from excellent to lousy. The government has money for only nine projects, so it drops the 10th project (the lousiest). Enter the World Bank, anxious to help. It will not finance the lousy 10th project, but agrees to finance the excellent first project. But by doing so, it releases governments funds to be deployed in the 10th project. Thus in trying to finance the best project, the Bank ends up financing the worst.

This means that no matter how many conditions the Bank lays down, their impact is diluted by tangibility. The more reason to aid only convinced reformers.

What are the implications for the Bank’s operations in India? It is currently negotiating loans with many state government to support reforms in tricky areas like power, canal water and education.

The lesson from Assessing Aid is clear. Stick to genuine reformers like Chandrababu Naidu.

Do not put pressure on waverers like Bhairon Singh Shekhawat. Do not try to buy reform.

What do you think?