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World Development Report 1997

Return of the State: Gems from the World Bank's Latest Discourse

Dipankar Bhattacharya

LIFE MAY HAVE BEEN washed away in Mars by a devastating deluge some three billion years ago. Or it may not have existed there at all. But in planet Earth the state is unmistakably alive, if only a little ailing. The mighty market has not exactly been able to swamp it. Nor has the civil society succeeded in outgrowing it into oblivion.

This is the latest discovery of the World Bank. And the Bank has put it on the cover of its 1997 World Development Report (WDR). The state in a changing world is the theme of the Report this year.

The very fact that the state has staged a comeback on the WDR cover is no small anomaly in this so-called era of the retreat of the state. At the least it shows a crying chink in the armour of post-Soviet bourgeois brouhaha. That not all is well with the triumphalist world of neo-liberalism was also indicated last year when the Bank had devoted WDR 1996 to the problems of the transition economies. This year, the frowns have grown bigger and sharper.

Growing Worries of Neo-Liberalism
Neo-liberalism, the aggressive economic doctrine of late twentieth century capitalism, began its heady journey in the Reagan-Thatcher years. With the Soviet school of 'command-and-control' socialism counting its last days, and European welfarism too having been pushed to its limit, the field was open for neo-liberalism to establish its complete sway. The Latin American debt crisis came in handy and the IMF and World Bank began to sell this new gospel of market-led growth with all the aggression at their command. Following the Uruguay Round of GATT, now the WTO has also joined in and in official circles, neo-liberalism today virtually goes unchallenged all over the world. The war-cry of globalisaton can be heard reverberating in every continent.

Yet somewhere something is wrong. The Bank is of course not unduly worried by the fact that globalisation has not yet become "truly global". The Report cites studies to tell us that roughly half of the developing world's people have been left out of the much-discussed rise in the volume of international trade and capital flows since 1980s. In fact, the share of trade in GDP fell in 44 of 93 developing countries between the mid-1980s and the mid-1990s. But the Bank has always believed, or at any rate, preached that greater integration is the best course to correct such temporary anomalies.

The Bank also does not cry itself hoarse against those 'recalcitrant regimes' which still remain "very restrictive" or "restrictive" in permitting cross-border capital flows. Even though such countries number more than fifty in a study of 102 industrial and developing countries, the Bank is hopeful that the trend is better represented by the so-called "liberal" and "mostly liberal" regimes whose number has gone up from 9 to 30 between 1975 and 1994.

The Bank does seem to be a bit worried by the growth of regionalism as symbolised by the continuing proliferation of regional blocs like NAFTA and APEC. Citing the case of the European Union, the Report points out, "Regionalism is not simply about trade ... it also reflects the desires of neighbouring nations for greater political integration in response to common security concerns, for cost sharing for infrastructure and institutions, and for increased bargaining power in international negotiations". But it feels that evidence remains inconclusive as to whether regionalism will divert attention and resources away from globalisation or it will enable states to undertake innovative market-opening measures that will eventually serve as building blocks for multilateral initiatives. It of course believes that "regional arrangements can be made more consistent with more-open and integrated world markets".

The Bank's real worry is that in country after country the state is failing to deliver. Unlike the proponents of laissez-faire liberalism, the neo-liberalists do not subscribe to absolute minimalism or unqualified withdrawal of the state. The state retains a very crucial role in their paradigm of sustainable development. The role of a catalytic agent, a facilitator, a partner, as the Bank President James D. Wolfensohn tells us in his foreword. He is categorical that if state-dominated development has failed, so will stateless development. "Without an effective state, sustainable development, both economic and social, is impossible", declares Wolfensohn. And so the Report sets out to identify those small steps in the right direction which can make a big difference to the effectiveness of the state.

The World Bank's Search for a More Effective State
There is of course no one-size-fits-all formula, we are told at the beginning. What makes for an effective state differs enormously across countries at different stages of development. An effective state need not be a democracy. For the Bank does not have conclusive evidence to suggest any positive correlation between growth and democracy - "about one-fifth of the studies find a positive relationship, one-fifth a negative relationship, and the rest are inconclusive"!

As far as WDR 1997 is concerned, the bottomline therefore is the state's ability to maintain its repressive order, to have its writ run on its people one way or another. The Report in fact also gives us a definition of the state: "State, in its wider sense, refers to a set of institutions that possess the means of legitimate coercion, exercised over a defined territory and its population, referred to as society". The definition sounds almost Marxist but for the unqualified legitimacy it lends to coercion and the deliberate suppression of the fact that the society in question is a class society!

The Report diagnoses different problems with the state in different parts of the world. In Sub-Saharan Africa, the problem is one of what the Report calls "collapsed state". Three broad and overlapping pathological patterns are identified: (i) states losing their legitimacy, and hence authority, in the eyes of the peoples concerned, (ii) states being led aground by callous, corrupt and incompetent leaders, and (iii) states fragmented in civil war. The Report however discerns an "extraordinary, if somewhat perverse, resilience" of the market even in the midst of a total collapse of the state in Somalia, but that does not affect the Bank's prescription for Sub-Saharan Africa: rescue the state and rebuild its capability. It is suggested that in the long run it pays more to undertake a comprehensive civil and political reconstruction (a la Cambodia and Mozambique) than extension of humanitarian relief (as in Somalia and Rwanda). The Report is aware of the growing dimension of the problem, it notes that the end of cold war has led to an escalation of regional conflicts and there is no effective international framework for the settlement of such conflicts. The number of refugees has suddenly shot up from 12 million in 1985 to 28 million in 1995 with Africa, Asia and Europe accounting for more than 26 million.

The situation is described as quite alarming also in Central and Eastern Europe, especially in the former Soviet republics (the CIS countries) where the state, though not yet collapsed, has fallen hostage to the "lawlessness syndrome", a dangerous admixture of crime, corruption and an unfair and unpredictable judiciary. The remedy suggested here is: the state has to steer the course and not just row along, as is currently the case.

East and South-East Asia is presented, quite predictably, as the best success story. Here the Report emphasises a second course of deeper modernising reforms aimed at developing robust regulatory structures (there is no sermon for China on "participatory mechanisms"!). Latin America, we are told, needs an institutional reinvigoration while the Middle-East and North Africa should downsize their bloated central bureaucracies. The state in South Asia is generally found to be overextended and over-regulating - the need therefore is to roll it back to its legitimate limits. Most effective democracies are of course found in the OECD countries. Yet, these countries, we are told, are busy experimenting with reforms of a higher order to get the state still closer to the people and it is too early to pass any definitive judgement.

In short, "In a world of dizzying changes in markets, civil societies, and global forces, the state is under pressure to become more effective. But it is not yet changing rapidly enough to keep pace".

Privatise and Globalise: Neo-Liberal Recipe Revisited
How does the state then go about increasing its effectiveness? On this score the Report hardly offers anything new. For states which are already implementing a typical Fund-Bank package of reforms, the Report offers some tactical tips about the designing and sequencing of reforms which do not really add up to anything more than a routine rehash of well-known Bank prescriptions. Different patterns of privatisation have been analysed and countries advised to choose and develop their own models in such a way that the potential resistance to reforms is diluted and a constituency built up in favour of reforms. Listed among ideal candidates for privatisation are not only mining and manufacturing, but even such service items as higher education, curative health services and pension and other forms of social insurance "which have somehow wandered into the domain of public provision". To justify such a privatisation package, the Report reminds us that "Today's modern education systems were founded on private - often religious - initiatives" and that "Historically, most medical services were privately provided by midwives, traditional healers, and neighbourhood doctors".

For the benefit of countries entrusted with the deregulation agenda, the Report has cited the case of Mexico's "deregulation czar". The czar was appointed by the Mexican president in 1988 with a mandate to speed up reforms. He enjoyed unequivocal presidential support and each month he reported directly to the president and his council of ministers. "The work of the deregulation czar over his first four years is widely credited with greatly accelerating Mexico's reforms", the Report tells us.

Deregulate, privatise, fix your priorities to match your capabilities, secure the fundamentals first while helping the private and voluntary sector to take care of the rest - the Bank has never tired of offering this guideline to its client countries. What is remarkable in these otherwise familiar prescriptions is the Report's model of an effective democracy. Elections held at regular intervals on the basis of universal adult franchise are of course central to the foundation of any functional democracy and the Bank is certainly not expected to go into a rigorous analysis as to how representative really these elections are. The moot question is: between two elections, how can popular pressure be brought to bear upon an elected government?

The Bank's Vision of Democracy: Contracting out to NGOs
If you thought that this was the legitimate territory of political parties, the Report could not hold you more mistaken. According to WDR 1997, "It is generally accepted that some areas of public decision-making require insulation from political pressure" (economic policy, one presumes, is the most important of these privileged areas!). So much for the West's cherished principle of openness and transparency! The agenda of popular supervision and pressure is thus confined to those areas where "public and private interests coincide to such an extent - efforts to raise agricultural production, for example, or reforming the health system - that some level of public-private deliberation is not just desirable but in fact critical to success". And herein comes the increasing role of NGOs: "In most societies, democratic or not, citizens seek representation of their interests beyond the ballot: as taxpayers, as users of public services, and increasingly as clients or members of NGOs and voluntary associations".

As for political parties, the Bank sees their only relevance in implementing reforms when in power or contributing to the broad consensus in favour of reforms when out of office. India would pass for an ideal case in point. The Report notes approvingly that "the old national consensus (in India) on socialism has given way over the course of a few years to a new consensus on liberalisation" and that the new coalition government has not only sustained the reforms initiated by its Congress predecessor, the 1997 budget has in fact taken "very positive steps in that direction".

With political parties lending their voice only to the consensus chorus, the space meant for popular protest, pressure and participation in the World Bank's model world of effective states and democratic societies thus seems to be increasingly monopolised by NGOs. A Peruvian NGO - Institute of Liberty and Democracy - is credited to have brought about a dramatic improvement in "the property rights of poor Peruvians".

The role of NGOs has also been stressed as "both partners and competitors in the delivery of public services". We are told that the Bolivian government has contracted with a church-based NGO to manage a certain number of mostly secondary schools. Of course, before agreeing to do so, the NGO concerned demanded and received "the right to appoint principals and teachers and to allow teachers to work both the morning and afternoon shifts rather than the three-and-a-half hours allotted for instruction in the public schools". "This public-private partnership between government and a religious NGO appears to be so successful that", we are informed, "the government is studying it as a possible model for national education reform".

Bolivia is no isolated example, the Report tells us that contracting out to the private sector and NGOs is a widespread practice in industrial economies. Victoria State in Australia is cited as providing a particularly dramatic example: each local council contracts out at least half its annual budget through competitive tender, including complex community care services. The Report even credits a little-known Bangalore-based NGO with bringing about a marked improvement in the affairs of the notorious Bangalore Development Authority by merely carrying out client surveys and introducing the so-called report card system asking citizens and businesses to rate the public agencies they interact with. We also learn from the Report that forestry officials, NGOs and local communities in India are now taking a variety of initiatives to promote participatory natural resource management leading to "reduced conflict and increased productivity of the land"!

The Decentralisation Dilemma: Threats and Opportunities
Decentralisation is widely considered to be an effective way of deepening democracy and taking the state closer to the people. The Report however strikes a note of caution on this score arguing that it is a double-edged sword which could work both ways: "Depending on the institutional environment, decentralisation can improve state capability by freeing it to focus on its core functions; it can also, however, undermine that capability". To illustrate the potential pitfalls of decentralisation, the Report cites the experiences of Brazil and China. Political and fiscal decentralisation in Brazil has apparently only led to a growing federal deficit fuelled by escalating subnational debt without bringing in any perceptible improvement in public sector efficiency.

In China too decentralisation had begun to threaten the country's macroeconomic stability forcing the state to respond quickly and reassert its central authority. By contributing to increased industrial competition, decentralisation had reduced the profits of industrial state enterprises, thereby undercutting the main source of Chinese tax revenue. The growing autonomy of local governments also made it difficult for the central government's investment planning system to control the investments of provincial governments and state enterprises under their control. Local branches of the central bank were also given discretionary authority over 30 per cent of the central bank's annual lending to the financial system. All this had combined to produce the problem of overheating of the Chinese economy in the early 1990s with inflation climbing to its highest level in several decades and real GDP growth reaching an amazing 14.25% in 1992 and 13.5% in 1993. The Chinese central authority responded by imposing restrictions on investment by provincial governments and state enterprises and also restricting central bank lending to state banks. Consequently, by 1995 inflation had fallen below 7% and GDP growth too hovered around a far more sustainable 9%. The Report identifies three major recent developments as key factors fuelling the growing demand for formal, political decentralisation. Apart from the collapse of centralised authority in Czechslovakia, the Soviet Union and Yugoslavia following the disappearance of "the unifying force of the Communist Party" (some posthumous recognition, this!) and persistent failure of certain central governments to provide essential services, the Report also mentions in this context the growing pressure from global markets and multinational businesses. In this context, one finds the following passage particularly striking:

"The minimum size of self-sufficient government has declined. New technological options and new demands from citizens, producers, and consumers mean that some of the advantages (security, for example) that kept countries, regions, and provinces working together under a central government have become less important. In Europe and North America the pressure from global markets is creating strong demand for local and regional governments that can better provide the infrastructure and skilled labour force that multinational businesses need." (p 120, WDR 1997)

Are not we in India also quite familiar with this emerging pattern with state governments engaging in a veritable incentive war to attract foreign investment? On their part, global markets and MNCs prefer to deal with smaller and weaker provincial governments not just because of infrastructure and labour force considerations but also because the latter have lower bargaining strength and hence are more easily susceptible to pressure.

Building Institutions and Taming Corruption
Talking about the institutional context, the Report emphasises the key role of a committed and elite central agency. This is an important institution every effective state should possess especially if it has to push through a package of reforms. The Report identifies the role of the central bureaucracy as a crucial input in the so-called "economic miracles" of East Asia. The Ministry of International Trade and Industry (MITI) in Japan; the Economic Planning Board in the Republic of Korea; the Ministry of Finance, the budget bureau, the central bank, and the National Economic and Social Development Board - the so-called gang of four - in Thailand; the Ministry of Finance and the planning agency Bapennas - the so-called Berkeley mafia - in Indonesia; and Chile's group of high-level advisers - the Chicago boys, are projected as role models for aspiring developing countries. (Haven't we in India too already come a long way from our own Macaulay's mafia and Doonocracy to the present team of Fund-Bank pensioners!)

Considering the infectious spread of the so-called lawlessness syndrome in the transition economies and corruption, the Report also stresses the importance of insulating the central bureaucracy from such problems. There is a whole chapter on "Restraining Arbitrary State Action and Corruption". Yet curiously enough, the Report refrains from making any direct reference to any of the celebrated cases of corruption in India. The only reference made is cleverly metaphorical: the readers are informed that "In India in 1996 a blockbuster movie, Hindustani, expressed an extreme form of popular outrage over corruption". Is this reticence a recognition of the fact that reforms in India remain a highly sensitive test case? Or is it the Bank's way of admitting that the present spate of corruption in India cannot be explained away in terms of the classical parameters, it is an undeniable upshot of the ongoing reforms themselves?

The Report identifies corruption as "a symptom of problems at the intersection of the public and the private sectors" and attributes its growth to a combination of factors like distortion in policies, unpredictability of judiciary, relatively low civil service salaries (the differential between public and private salaries is termed, quite temptingly, "the rate of temptation") and lack of merit-based recruitment and promotion mechanisms in the bureaucracy. The remedial emphasis, mercifully enough, is not on improving the moral fibre of civil servants ("It is unwise to deal with the possibility of corruption by assuming that government officials are of higher moral standing than the rest of the population"!) but on reducing opportunities and eliminating incentives for corrupt practice. Central government employees in India will recall a similar argument in the Report of the Fifth Central Pay Commission (FCPC). The same FCPC, which rejected the government employees' demand for pay parity with public sector workers on the ground that government service symbolises a different kind of status and power and government employees are steeped in a different ethos of dedication and service, advocated the concept of what may be called "preventive pay" for higher officials so as to attract and retain the best talent and save them from any possible demoralisation and consequent incentive for corruption.

But the most remarkable suggestion is: "Contract for services with a private company, possibly a foreign firm with no close ties to the country". We are told that when Indonesia contracted with a Swiss firm for customs preinspection and valuation and for help in collecting import duties, corruption declined.

The Short Run Answer: Crash Courses in Credibility
The Report is of course aware that effective bureaucracies take decades to develop and building or reinvigorating institutions is not something that can be fixed overnight. So what is to be done in the short run? Well, the answer is: "In the short run, while weak domestic institutions are being reinforced, stronger ties with external actors - for example, through stabilisation programmes with the IMF - can help governments signal their commitment". In other words, let "extraterritorial and international restraints substitute for limitations on the ability of national institutions to enforce rules or to signal credibly that the rules will remain reasonably stable over time". "One option", the Report tells us, "is to use extraterritorial adjudication to underpin the domestic judicial system". Confidence in the Jamaican judicial system, for example is "buttressed" by the fact that the United Kingdom's Privy Council serves as its appellate court of last resort.

A second mechanism for strengthening commitments not anchored by any domestic institution, we are told, is to join international agreements. "On the trade front, both the European Union and the North American Free Trade Agreement have been able to play this role, and many countries will find it an important reason to join the World Trade Organisation", exclaims the Report. In fact, the WTO is described as "an international mechanism for bringing credibility to national policy"! The Report cleverly provides a new "national" interpretation to the notorious Fund-Bank "conditionalities": "These conditionalities can be viewed as a sign of national commitment to the policies that are included as conditions. Countries with weak domestic commitment mechanisms can strengthen their credibility by binding themselves to pay a penalty should they violate the agreement"! Some subversion, this!

International integration or globalisation is thus held out as the ultimate strength-enhancing recipe for weak states. If you cannot rely on your own officials, contract out the job of tariff inspection, evaluation and even collection to Swiss firms! If your judiciary is deemed unfair or unpredictable, underpin it by tagging it to the Privy Council of the United Kingdom! If your domestic "commitment mechanisms" are weak, don't worry, accept some of those dreaded conditionalities of the IMF, World Bank and WTO in lieu of international certificates of credibility!

Weak States and Mighty Markets: World Bank's Catch-22 Trap
But herein lies the catch. The same World Development Report is replete with cautions that "Globalisation is a threat to weak ... states" (p 11); that "it can make countries more vulnerable to external price shocks or to large, destabilising shifts in capital flows" (p 12); that "small economies may end up having to adopt the practices of the dominant economic powers, in a process of "imperial harmonisation"" (p 132); that "the largest trading nations and customs territories continue to dominate the dispute settlement process (in the WTO), and the credibility of the system depends on their willingness to comply with judgements against them" (p 134, emphasis added)! Of course, the Report also tries in its own smoothtalking style to allay all apprehensions by selling risks as opportunities: "Increasingly, the risk (of destabilising capital flight) is regarded as a welcome source of government discipline, which discourages capricious and irresponsible policies, and many countries have relaxed capital controls". But such smoothtalking hardsell can hardly negate the grim reality that pervades almost all the transition economies and other developing country clients of the Fund-Bank duo.

The Report dwells at length on the inadequacies of the state in the changing world to drive home the point that "it is not yet changing rapidly enough to keep pace". But when it comes to the "intersection" of weak states and strong global markets, developing nation-states and mighty multinational capital, the Report only maintains an eloquent silence. It recognises that there are "plentiful evidence of ... countries and regions caught in vicious cycles of poverty and underdevelopment set in train by the chronic ineffectiveness of the state", cycles which "can all too easily lead to social violence, crime, corruption, and instability, all of which undermine the state's capacity to support development - or even to function at all". But it shies away from the equally evident fact that this vicious cycle is doubly reinforced by the neo-colonial context of contemporary imperialism, by the brazenly unequal and debilitating terms on which weak states are being asked to globalise with the world capitalist economy.

No self-sustaining "virtuous cycle" of reforms can neutralise this vicious cycle. In fact the so-called virtuous cycles only pave the trajectory of countries lapsing deeper into the vicious cycle of poverty, underdevelopment and ineffectiveness of the state. Not the kind of ineffectiveness the Report talks of, but the pathetic ineffectiveness that is born of a paralysing lack of will and strength to tackle imperialism. Ineffectiveness that is perhaps best symbolised by the world's so-called "largest democracy". India, that is, Bharat.

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