[VIEWPOINT]World Bank needs new tactic

When Paul Wolfowitz arrives in his new office as president of the World Bank, also known as the International Bank for Reconstruction and Development, on Wednesday, he will find two contending approaches for pursuing the bank’s mission of ending global poverty.
The first approach advises the World Bank to eradicate poverty by dealing with the problems causing it: provide clean water, feed children, donate medicine to fight disease, develop new vaccines for malaria and tuberculosis as well as HIV-AIDS, educate the poor (especially women), and double the level of official assistance.
This approach is simple, direct, full of good sense, and comparatively easy to sell politically.
The second approach advises the World Bank to eradicate poverty by fostering growth. This requires programs to help improve the business climate in developing countries, promote indigenous investment, attract foreign direct investment, liberalize trade policies, fund infrastructure and encourage privatization.
Of course, this second approach is not the “discredited” Washington Consensus, relying solely on “just let markets work.” Rather, the most effective method of fostering growth includes anti-corruption measures, transparency initiatives, good governance programs (public and corporate), regulatory reform and competition policy.
This second approach to eradicating poverty is less simple, less direct, and ― while full of good sense ― is much less easy to sell in this era of globalization-suspicion, with well-justified fears and anxieties.
These approaches are not mutually exclusive. Indeed, they overlap in many ways.
For example, indigenous and international firms will be most competitive ― and expand their operations and their employment most rapidly ― with healthy, well-educated workers of both genders.
The new president of the World Bank can have an enormous impact by shifting the course of the IBRD Battleship by only a few degrees one way or another.
Over the past decade, the World Bank has become too dominated by the first approach. Drawing on his previous experience in Asia, President Wolfowitz should refocus the bank in the direction of the second approach, reducing poverty via promoting stronger economic growth, while still utilizing some direct efforts to eradicate poverty.
What will be required to shift the World Bank toward a pro-growth strategy?
It does not mean launching a lot of new programs. Rather, it means realigning priorities, and drawing on lessons from Asia.
The strongest force to bring people above the poverty line is to stimulate broad-based economic growth. Average annual growth rates over the past 10 years of 5 percent in India, 6 percent in Vietnam, and 9 percent in China helped reduced national poverty in these countries by 6 percent, 7 percent and 8 percent each year, respectively.
Direct poverty reduction via aid simply does not have the power of sustained growth. The growth in value-added in the South Korean manufacturing sector alone over the past 20 years is larger than all the aid donated anywhere over the same period.
If Africa could enjoy 10 years of 4-5 percent growth ― never mind 8 percent or 9 percent ― more children would be saved and more families would be fed than a miraculous doubling of the world aid budget could ever achieve.
Korea demonstrates how contemporary economies in Africa and Latin America can climb out of the Export Processing Zone, or EPZ, “trap” that currently besets them.
As long as EPZs remain islands of duty-free assembly, like the early Masan and Iri zones, backward linkages and local value-added are certain to be minimal.
With broader nationwide trade and investment liberalization ― offering firms throughout the economy access to low cost inputs and technology similar to zone firms ― the number of suppliers to international companies, as in the South Korean case, multiplies and the ranks of indigenous exporters swell.
It takes South Korea about one-and-a-half days to produce and ship abroad the equivalent of the yearly total of manufactured exports from Egypt.
The result is pro-worker as well as pro-investor. Over a 25-year period, value-added per worker in the Korean industry increased by 700 percent even while the number of industrial workers rose from 1 million to 7 million.
Despite fluctuations, the growth of real earnings per manufacturing worker averaged more than 8 percent per year.
Korea can also be a leader in the World Bank’s new emphasis on reform in corporate governance. Korea’s recent requirements for the appointment of outside directors on the boards of major corporations and financial institutions would be welcome in Latin America, the Middle East, Russia and the rest of the former Soviet Union.
So would Korean stock exchange-listing procedures for the largest firms that mandate an audit committee with at least two-thirds of the directors from outside the firms and an outside director as chairman.
A growth-oriented development strategy provides a setting to reverse the brain-drain from poorer countries, by attracting overseas managers and engineers back to their home countries.
Such was the case in South Korea. The tipping-point in Korea’s drive to produce high performance electronics may be traced to the moment in 1983 when Samsung managed to persuade five Korean-Americans holding doctorates in electrical engineering who had work experience in semiconductor design at IBM, Honeywell, Intel and National Semiconductor to devote their skills to Samsung’s work on the 64K-DRAM.
Today, tens of thousands of Indian and Chinese expatriates are returning home to fuel the national drive toward the cutting edge of international industry.
On Wednesday, President Wolfowitz will meet an entrenched bureaucracy dedicated to trying to eradicate poverty directly. He will enable the World Bank to make a larger contribution if he brings in a new management team that understands the lessons of Asia, and adopts a strategy of eradicating poverty by stimulating broad national growth in poorer countries around the world.

* The writer is a professor of international business and finance at Georgetown University.

by Theodore H. Moran