World Bank's Bad Boy
Bill Easterly dared to speak out about what was wrong with the World Bank. Soon he may be looking for a job.
William Easterly, 44, is one of the World Bank's most respected economists and for now the senior adviser in its development group. Perhaps it was insensitive to ask him, as we dined with him in Manhattan, about his possibly leaving his 16-year job under the cloud of "a disciplinary review." The bank is unhappy that Easterly wrote a newspaper article without its permission.
The bank's unhappiness may also arise from his book, The Elusive Quest for Growth, which skewers World Bank policies. In it Easterly definitively states for the first time that there is no correlation between the trillions of dollars spent on aid since the 1960s and economic growth.
It probably hasn't helped his career that Easterly says that the World Bank's call for more aid after the Sept. 11 attacks, to avert the deaths of tens of thousands of children, isn't based on good economic science. The bank's estimate of the potential number of dead children is an extrapolation of how GDP growth will slow in the short term, which is impossible to predict, he says.
One might have expected that Easterly would end up studying the developing world. As he tells it, his father, a botany professor, took his family to live in Ghana in 1969. When the family returned, education continued for the young Easterly around the dinner table in Bowling Green, Ohio, where guests included graduate students from around the world. Easterly eventually earned a Ph.D. from MIT.
Easterly's research discredits many of the policies championed by James Wolfensohn, the bank's president, which have long driven the billions in zero-interest loans to the developing world. One is known as capital fundamentalism, which he disparages as the "build-it-and-they-will-come" approach. The rationale is that poor countries need just machines and bridges and dams to grow. The result of this $28 trillion infrastructure windfall from 1968-90? No GDP improvement.
"Machines [or bridges or dams] are not inherently productive," explains Easterly. He recalls a 1980 World Bank project to build a shoe factory in tropical Tanzania. An aluminum building was built with no ventilation. In its best year the factory never got past 4% of capacity. By 1990 it was dust.
Educational funding is another popular sinkhole into which the World Bank and developed nations have poured more than $30 billion since 1963. Look at the data: From 1960 to 1985 Africa expanded education more rapidly than East Asia did. Yet the Asian Tigers began to charge while sub-Saharan Africa continued to crawl. Why? In the developing world teaching positions are often given away to political cronies, who may have no incentive to teach, he says.
Since poor government policies were a recurring theme, a new, improved loan policy was devised: We'll lend you money, but you will have to change your ways. This carrot-and-stick approach was the driving force behind $566 billion in lending from 1980 through 1999. We know the outcome, but what was the problem? Plenty of carrots but no stick.
In Mexico's financial crisis in 1994-95, World Bank officials insisted that its banks improve their inadequate deposit insurance rules. The response: "No." The World Bank response: "Sorry. Would you write us a report then?"
Chart A trillion here... Next came the Dalai Lama, the pope and Bono, the rock star. In 2000 these great economic minds campaigned for debt relief. Wouldn't wiping the ledger clean allow indebted countries to start pumping money into health care, education, employment and development? Well, no.
"The irresponsible policies that created the high debt in the first place didn't go away," says Easterly. What did 41 highly indebted countries do when $33 billion in debt was removed from their books in 1996? They went out and borrowed $41 billion more. Per capita income remained stagnant.
Easterly advocates tough love. Cut off countries that don't spend wisely and reward those that do. Let the countries compete for aid based on the best plan for poverty reduction and GDP growth.
He doesn't buy excuses, such as bad climate or a recession, for the failure to repay a loan. Easterly says: "These shocks of nature or climate, even of a global recession, are not the reasons countries wind up rich or poor. Other countries with the same circumstances end up growing. The difference is good or bad government."
Another proposal: When low-interest loans are awarded, they should go to help countries develop the institutions they lack, such as bank regulation and property-rights protectionthe missing ingredients for luring private investment. New research shows a correlation between aid and economic growthwhen countries have good policies in place.
He tells a story of development with little in the way of big loans. In 1979 the South Korean conglomerate Daewoo made a deal with Desh Garments, a hreadbare shirtmaker in Bangladesh. Daewoo took 130 Desh workers to Korea and trained them. In exchange, Desh paid Daewoo 8% of its sales for a period of time. Of the 130 workers who went to Korea, 115 returned to Bangladesh and set up their own garment-export companies, eventually creating a $2 billion textile industry. That formula has worked in India, China and Mauritius.
"Ideas can spread to other people at zero cost," says Easterly. If knowledge has a big economic payoff, people will respond by gaining knowledge. But it helps, as in Bangladesh, to have a government that is friendly to foreign investment.
Speaking of friendly, Easterly is trying to work out his differences with management. If he can't, what does he want to do after the bank? "I just want to continue my research, but without being censored by an incredibly large bureaucracy."