Of the 6 billion people on earth, 1 billion—primarily in North America, Europe, and East Asia—receive 80 percent of the global income. Meanwhile more than 1 billion people subsist on less than one dollar a day. Despite billions in development aid, many Third World nations are no better off than they were half a century ago. Why are developing countries still so poor? And what can international development agencies such as the World Bank do to help?
Peter Robinson: Today on Uncommon Knowledge: why money might not cure poverty...
Announcer: Funding for this program is provided by the John M. Olin Foundation.
Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: what to do about poverty in the third world. Of the six billion people on the planet, only about one billion, mostly in North America, Europe and East Asia possess eighty percent of the globe's resources, which of course means that the remaining five billion must share among themselves only twenty percent of the globe's resources. And despite tens of billions of dollars in economic assistance over the past three decades, many nations in the third world are no better off. If we're so smart, if economists and policymakers have made so much progress in recent decades, why is the developing world still so poor and what, if anything, can international development agencies such as the World Bank do to help?
Joining us today, two guests. Douglass North is a senior fellow at the Hoover Institution and a holder of the Nobel Prize in Economics. James Wolfensohn is President of the World Bank.
Title: The Best Made Plans...
Peter Robinson: From an article by economists Stephen Haber, Barry Weingast and Douglass North, "The past two decades have witnessed two large scale experiments to transform centrally planned economies, that of the Soviet Union and Latin America, into economies with efficient markets. The economy of the former Soviet Union collapsed in 1998. The economies of Latin America performed only somewhat better." I put it to you, Doug North and Jim Wolfensohn, that when it comes to promoting economic growth in the Second or Third World, we understand so little about how to do it that the World Bank and other international development agencies might as well just give up. Doug?
Douglass North: I sort of agree with that.
Peter Robinson: You do? I rather suspect you don't but let's hear your answer.
James Wolfensohn: I significantly disagree with that.
Peter Robinson: All right. Now let me quote you to yourself, Jim Wolfensohn. "In our world of six billion, five billion have about twenty percent of the global resources while one billion have eighty percent of the global resources." And I quote you to yourself, "By any standard of measurement, much of the world's population is still poor, with individuals subsisting on less than two dollars a day." For the layman, the most basic of all questions, why? Why do we look at the world and see such a tremendous imbalance of resources? Doug?
Douglass North: Because essentially the institutional structure is one that does not provide incentives for people to be more productive.
Peter Robinson: Productiveness. Jim?
James Wolfensohn: I think the institutional structures are not complete in many of these countries. In that sense, I agree with Doug. But I think that we are in a moment of change in the world. We have a significant problem in the numbers that you have which half the world living under two dollars a day. But I don't think that it is a terminal problem. I think it is a problem where we can move forward.
Peter Robinson: Can I ask--it seems to me there are two fundamental ways in which people tend to look at the problem. Number one, the third world is poor because in one way or another, the first world exploits it, takes resources away from it. Number two, the first world is rich because the first world simply is more productive. By and large that one billion who have eighty percent of the resources have it because they produce roughly eighty percent of the resources. Of those two models, which better fits reality? Which best fits reality? Jim?
James Wolfensohn: Well, I would say that the developing world has not been as productive significantly because of its history. It was colonized. If you take Africa, they left Africa with forty-seven separate countries and six hundred million people, no infrastructure, no governance. And so it takes time to rebuild it. Russia was the same, by the way.
Douglass North: Well, I think it's clearly just a question of productivity. You're rich because you're productive and you're poor if you're not productive and it's as simple as that. Now one could argue that the rich countries may have in some ways inhibited development of the poor countries and colonialism is an instance that Jim has just raised. And that's a correct one in the case of Africa. But what the problem is, we know the institutions and so on that make for productivity. What we don't know is how to get them.
Peter Robinson: Some case studies in wealth and poverty, beginning with Latin America.
Title: (Basket) Case Studies
Peter Robinson: 1980s. The major countries in Latin America, the ABC countries, Argentina, Brazil, Chile, others also though, see their military juntas or dictatorships replaced by democratic governments and hopes run high that they're going to develop healthy market economies with sustained growth to parallel the change in their governance structures. Here we are a couple of decades later and one country, Chile, has done pretty well. And the others have not. Give us the lessons. What did Chile do right? What did Argentina and Brazil do wrong? How do we tease out enduring lessons from that experience?
Douglass North: Well, Chile essentially, I don't like how they got there since I'm not an enthusiast over the Pinochet dictatorship but essentially they did put in place a set of institutions, property rights and rules of the game that…
Peter Robinson: Property rights, rule of law, independent--more or less independent judiciary…
Douglass North: Right. And that made an immense difference. Contrast that with Argentina and I'll give you just one story, which will illustrate it. When I--I knew Menem very well and when I…
Peter Robinson: Carlos Menem, the former President of Argentina.
Douglass North: Former President. And when I went and saw him one time he said, Doug, he said I'm going to come up for reelection. I said you can't. It's illegal. He said, oh that's all right, I'm going to just change the law. And he did. He--now as long as you can have a strong executive that doesn't like the law and therefore is going to go on and, in this case, restructure the Supreme Court, you've made economics really a dependency on the whim of politicians. And I think that's a disaster.
Peter Robinson: So you've still got fundamentally rule of--rule by a single man, strong man government rather than rules of law, objective, transparent rules by which an economy can operate. That's the point?
Douglass North: That's the point.
James Wolfensohn: Well, I agree with Doug very much and our approach in all these cases now is to try and establish the institutional framework. It was not only recognized by us but by the countries themselves and Monterrey and in Johannesburg. Developing countries said we must have strengthened government in terms of the people, the strength of the cadre of people that govern. We must have legal and judicial systems that protect rights and we must seek to implement those. We must have financial systems that are transparent and offer finance to the whole range of people from micro credit through the industry. And finally we must fight corruption because corruption in terms of the issue of productivity and the capacity to get these countries going is a cancer. Now this is not imposition from the bank or the fund. This is what the countries themselves agree. And so in this sense, I totally agree with Doug on the need for the necessary structures in place before you can move forward.
Peter Robinson: Explain the case of Argentina, rich resources, educated populous and even within its history within the past century, a rich, productive economy. What's going on there?
James Wolfensohn: Well, I would personally say that the centerpiece of that is bad governance and corruption. I think the country has been poorly run and corruptly run and that there has been a tradition in Argentina, as there have been in many countries in Latin America, that a few families and a few people around power deserve the resources and the others are not taken care of. You have the broadest--the widest gap between what the rich make and what the poor make in Latin America than almost any country in the world.
Douglass North: Well, I sort of agree with Jim. I think that the issue is what I would call a persistence of what I call personal exchange in the world. As long as you have…
Peter Robinson: Explain that term. You've got me there. Personal exchange.
Douglass North: Well, you have personal exchange, you have exchange whether political or economic based on personal knowledge and intimate knowledge, knowledge of the other player.
Peter Robinson: So this is where the family rule comes in. You know people in your own family, you trust them.
Douglass North: To get to be a rich country, you've got to have impersonal value. You've got to create through the rule of law and a judicial system and a structural property rights, a system that is independent of personal ability to be able to modify…
Peter Robinson: Markets that you trust?
Douglass North: Now it's not that we'd succeed completely you understand. In the United States, we're always trying to do this. But we have in effect, in the Western world, created a structure that has made it possible to have people make long distance trade, not know the other players, engage in large scale exchange and that's a necessary condition.
Peter Robinson: This brings us to the continent with perhaps the most persistent poverty in the world.
Title: Nowhere in Africa
Peter Robinson: I'll quote Haber, Weingast and North once again. "Most African countries," this is almost unbelievable, "most African countries are poorer today than they were in 1980. Of the continents' three dozen countries, only two, Botswana and Uganda have managed to grow at rates exceeding three percent a year since 1980. Two-thirds of African countries have either stagnated or shrunk in real per capita terms since the onset of independence in the 1960's. How come? What is the special case of Africa?
Douglass North: Well Africa, I think--I think the colonial heritage is certainly a part of the story.
Peter Robinson: But wait a minute. They're poorer now than they were when England and…
Douglass North: Wait a minute. The colonial heritage only means that you didn't put in place a set of institutions that would have--would have encouraged growth. You left them in a vacuum in effect.
Peter Robinson: I see.
Douglass North: And having left them in a vacuum and without the kind of human capital of knowledge, what's happened is tribal dominations and so on, have produced all the worst kinds of institutions which inhibit economic growth, encourage income redistribution.
Peter Robinson: Strong man rule, tribal rule…
Douglass North: Right. And the result is that where the World Bank's given money and it gave some money to African countries earlier on, gave them to governments say it ended up mostly in Swiss bank accounts in Europe but didn't do any good to the countries themselves.
James Wolfensohn: Well, I think certainly the colonial history is damaging. Just to give you an idea, the other day I was with the President of Mozambique. He told me that when the Portuguese left Mozambique, they didn't have a train driver, they didn't have a taxi driver, they didn't have a crane driver. They had no one who had any form of experience. They were running their trains with the guys who had previously shoveled the coal in because they'd seen what the train driver did. So when you're talking about leaving these countries without institutions, they left them almost barren in terms of people. So they've had to build this up. And the second thing was in terms of Africa, that until the end of the Cold War, it was a pawn in the Cold War. And the United States and Russia and other countries were looking at Africa not as a development institution but as a political chess board. And that led to huge transfers of funds without any checks, without any balances, which was stolen by people at the time. And it's only really since the oncome of independence in a number of these countries that there's first of all, unfortunately, a number of the people that were elected were not that great either. But we're now gradually seeing an emergence in the last ten, fifteen years of African leadership that is more of a type that I think is likely to succeed.
Peter Robinson: Special case, South Africa. You have in the British and Dutch white business establishment. There you have human capital, about how to run a modern economy, you have a respect for and experience with impartial institutions, impersonal institutions and so forth. You also have apartheid. Comes the revolution and the white leadership is subjugated or overthrown. You have in place black leadership. How is South Africa doing? Can the new black--is the new black leadership grasping the importance of the institutions?
James Wolfensohn: I think personally that they have continued their tradition.
Peter Robinson: So it's in pretty good shape?
James Wolfensohn: I think institutionally they're in good shape. The change that is coming is the move to have more black Africans in positions of importance and in the private sector. There is a growing black African entrepreneurial class that you cannot…
Peter Robinson: So they're working their way up rather than by fiat?
James Wolfensohn: There is no question but there is still a significant difference between the old white South African companies in terms of their existing power and the newly emerging black companies. What is happening in South Africa is a lot of expectations of pace in which the change is likely to come about. And Thabo Mbeki, the President who took over from Nelson Mandela, is in a situation where the language is very positive in terms of the change but the pace is not as fast as it should be.
Peter Robinson: Are you generally optimistic about sub-Saharan Africa?
Douglass North: No.
Peter Robinson: You're not.
Douglass North: They are a long ways from being able to get a viable political economic system. Now the beginning of development is you got to create a polity, a political system that will put in place and enforce rules of the game that will make it viable. And in most of sub-Saharan Africa, that doesn't exist. And creating order and then creating from order a political system that will provide the stability and the conditions is a long ways from being realizable at this point.
James Wolfensohn: I think that you could easily make that case and I…
Peter Robinson: His pessimistic case?
James Wolfensohn: I know but I think that the one thing that you have to say in the interest of sub-Saharan Africa is that the Africans are now trying to take a much more active role with peer review in relation to the NEPAD Agreement. You have a dozen countries that are now showing each other what they're doing against yardsticks on corruption in terms of governance. There is a recognition of exactly the institutional frame that Doug was expressing. And you have to remember that its' a relatively few number of years. So I don't think you can expect a miracle overnight but the numbers of young Africans that are getting educated, the tone of the young Africans. I have a thousand Africans working for me in the Bank and these are remarkable young people, many of whom are going back to their countries.
Peter Robinson: And they're well-educated?
James Wolfensohn: Well-educated. They're even at Stanford.
Peter Robinson: We come now to the effectiveness of the World Bank itself.
Title: Taking It to the Bank
Peter Robinson: The World Bank, special agency to the United Nations, established in 1944 at the Bretton Woods conference, in its earliest years, makes loans to Europe for reconstruction after the Second World War but it--certainly beginning by the late 1960s, most loans go to the Third World countries. Let me quote to you from a study by the Heritage Foundation, "Of the sixty-six countries receiving money from the World Bank for more than a quarter of a century, thirty-seven are no better off today than they were before." And the countries that have made advances owe their progress to factors other than World Bank loans. Your institution has proven largely irrelevant.
James Wolfensohn: Let me just quote to you Japan, Malaysia, Indonesia, Thailand, Singapore, China, India, just for openers in terms of countries that have improved their situation in the last period we're covering. There may be in numbers Central African Republic and other countries and there are some also--some larger middle size countries--that have done this well and others. But the statistics show that standard of living has gone up, that the anticipated lifespan has gone up twenty years in the last fifty years, that infant mortality and maternal mortality is down. I'm not by any means sanguine as to where we are now, I am very worried as to where we are now but to say that the institutions of the World Bank and other development institutions have had a negative or limited impact is just not right.
Peter Robinson: The nub of the argument against the World Bank and the IMF would run as follows, I think: that for much of their history and indeed according to--some would argue even today--they give money in the wrong places. That despite the best intentions, they're giving money to tin-pot dictators who flip it over to the--to banks in Switzerland or at a minimum, they fail to create incentives for lasting institutional changes and reform. So the question I put to you is do you grant that argument for part of the World Bank's history, but you've made chan--do you reject the argument out of hand? How do you grapple with that argument?
James Wolfensohn: I think if you take the last ten years, the statement is nonsense.
Peter Robinson: Nonsense.
James Wolfensohn: Because I have been there, I have seen the weight that we put into legal and judicial reform. I've seen what we're doing on institutional building exactly as Doug North described. I've seen that we understand these arguments, that there isn't a Washington consensus which is imposed. If you go back beyond ten years, I am certain that there are examples of misperceptions and misapplication of rules and I'm also certain that in the period of the Cold War, our institution was to some degree, used as a political instrument by the United States. And I don't think you can deny that.
Peter Robinson: You grant all that?
Douglass North: I think certainly the World Bank has changed dramatically in the last ten or fifteen years and for the better. I still think that if you ask yourself the tough question and I think the World Bank has done its own study on this, which is how successful has been the Bank in improving the rate of growth of economies, the answer generally is that the rate of growth of economies has been something that if it's already growing then the World Bank's addition to it is okay, but if it's not growing, it will--World Bank funds have not done a thing for it.
Peter Robinson: So then, how would Douglass North reform the World Bank?
Title: Capital Ideas
Peter Robinson: We'll swap jobs for a moment. You're President of the World Bank. What reforms would you make Doug?
Douglass North: Well, I think this is a tough one…
Peter Robinson: I'll take notes for you.
Douglass North: We don't--we do not know enough about the process of economic change but you've got to inculcate and put in place institutions that provide incentives for people to be productive. And that's a lot harder to do than just sitting here talking about it. It's more than the rule of law. You've got to have a rule of law that works which means you got to have norms of behavior in addition to formal rules that put in place--make it so that people do those things. And that's very hard to do.
Peter Robinson: Let me suggest a minimal argument for the existence of the World Bank to see what you make of it. It can make and in the last decade or decade and a half has been making very useful experiments. You try to prompt institutions this way and then you try that way. Do you buy that argument? Has it been doing a good job of that?
Douglass North: I think it's been doing that. I'm not sure it's been terribly successful at it. And certainly I'm much more pleased with what the World Bank's doing now than I was ten, fifteen years ago.
James Wolfensohn: Well that's marvelous. Am I taking the role as an economist or am I…
Peter Robinson: Well, actually I'd like to--what reforms would you still like to make at your institution?
James Wolfensohn: I'd like to continue what we're doing which is to try and bring together private sector, public sector, civil society. I think if you're talking about incentives and job creation, you must engage the private sector to a greater degree, particularly in small and medium size enterprise of which we're putting a great deal of effort now because the big provider of jobs is in fact small and medium size enterprise as distinct from international investments. You need to create that environment which is dependent significantly on what Doug said which is the structure, property rights, contract rights and so on. We are seeking to do this. We're seeking to strengthen the capacity in these countries. And the most important thing is that you should be there to assist these countries whenever they need the assistance, which is most of the time to try and put together an integrated approach. But the last thing that I would say is that the big change that we're making now is to try and move from what I call "feel good" projects, smaller scale projects where we've had a good experience or in some cases, where we had a bad experience--but where you had a good experience, to scale them up. All of us, Bank included, and every other development institution I know comes to you with a list of their successes. Ten schools here, half--by the fifty kilometers of highway there, three hospitals here, when the need is not ten schools but a thousand schools or the need is not fifty kilometers but five thousand kilometers. And so what we're looking at now is how you can scale up the effective ways in which you have of developing which involves you in a longer period of time and different management issues. This issue of scaling up is I think the cutting edge that I think we need to be looking at and that requires consistency in terms of policy and support.
Peter Robinson: Final topic, is the United States doing enough to help developing nations?
Title: (Legal) Tender Mercies
Peter Robinson: President George W. Bush's most recent budget calls for in development and humanitarian aid about ten billion dollars. Too big, too small, irrelevant?
Douglass North: Irrelevant. I think it's important--well, the key is how it's used. I mean, if you're going to use it for ways that, given the way we've talked, would improve productivity and work in the ways that Jim was talking about…
Peter Robinson: You find him impressive--are you warming to the World Bank listening to its President?
James Wolfensohn: Never. He'd lose his job as an economist.
Douglass North: Thank you. No I mean, I think that makes sense, the things he's been saying. I'm not sure that the Bank has done that--as much of that as I'd like but I think that the Bank is fumbling around on something--we don't know how to create economic development. I've spent the last twenty years actually getting my hands--or playing God, as I say, around the world and we are just beginning to learn, you know, what it takes.
Peter Robinson: Enough? Ten billion in humanitarian and economic aid from the United States?
James Wolfensohn: I think not enough. I think that the world is spending something around fifty billion dollars on development and which by the way only half goes in cash, the rest is for consultants and various other things. We're spending three hundred and fifty billion dollars a year on agricultural subsidies and tariff protections.
Peter Robinson: In this country?
James Wolfensohn: Globally.
Peter Robinson: Globally.
James Wolfensohn: But we're spending close to a thousand billion dollars a year on military expenditure. And it strikes me that if you're trying to deal with the question of stability, to spend one-twentieth of what you have for development, for making people's lives better, than you spend on military expenditure is a form of nonsense that needs to be arrested.
Douglass North: Now Jim and I agree for once.
Peter Robinson: You do?
Douglass North: I like that.
Peter Robinson: You do? But you just said there's no real co--we don't know how to spend the money.
Douglass North: Even though we don't know, if we're concerned with trying to find out, we're going to do better than we have in the past.
Peter Robinson: Okay, so you're content then with the use of this money as experimental?
James Wolfensohn: It's not experimental.
Peter Robinson: Well I mean, but as from the economist's point of view, Doug has said several times now we don't know how to build these institutions but you think it's worthwhile spending the money to keep trying…
Douglass North: I think it's worthwhile spending--if that's what we're going to do, too much of it historically as Jim said has gone for…
James Wolfensohn: Let me explain in one particular thing. The world has agreed that all kids have a right to go to primary school. It was done in the Declaration of Human Rights. It was done at the Millennial Summit. There isn't a leader in the world that wouldn't say that if you want to have development and peace, you've got to give every primary school kid a chance to go to school. Have a hundred and twenty-five million kids in the world out of school, we have to raise three billion dollars a year to get those countries to a level that need additional funding to put them into school. So far we've managed to raise three hundred million for three years. Three hundred million for three years. And this is not an issue that anyone is arguing about the objective. We know how to educate kids in school. We know what about teachers; we know about schools, we know about the curricula. Now here is a perfectly simple, straightforward example that every American would say in his heart all kids should go to school. We cannot raise that money.
Peter Robinson: Okay. It's television, gentlemen so I have to wrap it up. We said at the beginning of the world's--quoting you--of the world's six billion people, five billion share just twenty percent of the world's resources. In two decades, what will that proportion be? The poorest four-fifths of the world will share what proportion of the world's resources?
Douglass North: I don't think it'll be much more.
Peter Robinson: Unchanged? You don't think it will be much more?
Douglass North: No.
James Wolfensohn: I think it'll be a bit more because they'll be seven billion out of eight people on the world in two decades' time, seven billion in developing countries, the same billion plus fifty million in the rich countries. And we estimate that by 2050, that number may between thirty-five and forty. So it's going up if you talk about a three and a half percent average growth. But the real question is…
Peter Robinson: Going up relative to the rich world?
James Wolfensohn: Yes, but if you have seven billion out of eight in developing countries in the year 2030, which is a reasonably conservative estimate, we need not just to be looking at today. We need to be looking at what is likely to come down the line. And if we do not have hope for those people, you're not going to have global stability.
Peter Robinson: Douglass North, James Wolfensohn, thank you very much.
James Wolfensohn: Thank you.
Peter Robinson: I'm Peter Robinson for Uncommon Knowledge, thanks for joining us.