Would Korea Have Developed Following World Bank?

Although more than a few colleagues tend to view the World Bank in quite a negative light no matter what they do, I have come to a more ambivalent position. (Newer readers should note potential conflicts of interest since they gave me not-insubstantial prize a few years back when I was still a PhD student.) Yes, their policies tend to follow what's in vogue among American elites. Yes, their policies too have in the past been less than considerate of the particular circumstances of developing nations in attempting to transplant foreign models of development. But ultimately, I do not think that more sinister motives attributed to them hold. Rather, "America knows best" has often been combined with off-target advice for mixed results in more than a few circumstances.

Which brings me to today's post. While proctoring exams, I've had more time to read Kim Chung-yum's firsthand account in From Despair to Hope: Economic Policymaking in Korea: 1945-1979. Although it's common knowledge that the West didn't rate South Korea's chances for becoming a development success after the Korean conflict, what's starkly evident is how World Bank personnel readily lumped it in as another case of overreach. While the Pohang Iron and Steel Company (POSCO) eventually became regarded as the world's most efficient steel producer in the world, it bears remembering that it could not even avail of any lending whatsoever from the US or the World Bank at first:

[The] KISA [Korean International Steel Association] conducted negotiations with the World Bank, the Export-Import Bank of the United States (EX-IM) and other creditors from the UK, West Germany, Italy, and France, to secure financing. However, there was little progress in the negotiations. 

The world frowned upon developing countries that sought to construct an integrated steel and iron mill. At an annual general meeting of the IMF and the World Bank, this view was made clear by Eugene Black, the President of the World Bank (1949-1963), when he said (to paraphrase): “There are three myths in a developing country. The first is construction of expressways, the second is construction of an integrated steel and iron mill, and the third is construction of a monument for the head of state” [pp. 159-160].

And speaking of expressways, it should come as no surprise either that the World Bank didn't think much of them despite paving the way for South Korea's success. As ever, the best way to silence DC-based bigwigs is through success:

In light of the IBRD’s reluctance to assist in the construction of expressways, Korea pressed ahead anyway with the construction of the Seoul-Busan Expressway, the Daejeon-Jeonju section of the Honam Expressway, and the Shingal-Saemal section of the Yeongdong Expressway with its own financial resources. After Korea showed it was able to build the Seoul-Busan Expressway with its own financial and technological resources at half the time and a fraction of the cost, the IBRD began to rethink the economic feasibility of expressways in Korea [p. 312].

Other agencies also dispensed bad advice. USAID didn't help matters by far underestimating the energy requirements of South Korea:

The electricity shortage of 1967 was due to underinvestment. The initial investment proposed in the First Electric Power Development Plan had been reduced based on the recommendations of a US research team (Thomas Research Team) commissioned by US AID to conduct a study of Korea’s electricity requirements in September 1964. The study conducted by the research team concluded that the electricity demand forecasted in the First Five-Year Electric Power Development Plan during period of 1962 and 1966 was too high, recommending to the Korean government and USOM to lower the projections. As such, the downward revisions to the initial investment plans reduced electricity capacity by 224,000 KW [p. 152]. 

It's interesting to see how sceptical the World Bank was of South Korea at the outset. I do this not to poke fun at World Bank advice, but to again reinforce the point that the World Bank is ultimately just another source of input and finance among others. Ultimately, developing countries are responsible for their own development or otherwise, generally well-intentioned outsiders notwithstanding.

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Palace Coup? World Bank Vets Pick Okonjo-Iweala

News is becoming sparser as most of the Christian world slows for the Easter holidays. However, in the run-up to the selection of the next World Bank president which should happen in a fortnight or so, we've had ringing endorsements of Nigerian Finance Minister Ngozi Okonjo-Iweala. (See a previous post for further ruminations.) We begin with an interesting counterblast to the current climate of economist-phobia at development institutions post global financial crisis. While it may be trendy to put non-economists at these institutions, the Economist (surprise!) slams this trend in endorsing her as the best candidate for the job:

Okonjo-Iweala is an orthodox economist, which many will hold against her. But if there is one thing the world has discovered about poverty reduction in the past 15 years, it is that development is not something rich countries do to poor ones. It is something poor countries manage for themselves, mainly by the sort of policies that Ms Okonjo-Iweala has pursued with some success in Nigeria.

While I am nowhere near as partial to economists as a publication dedicated to them in name, I did enjoy the insinuation that the United States which encouraged World Bank lenders to avoid corruption was doing so by choosing its favoured candidate to yet again fill a top (international) job.

Meanwhile, the Financial Times seconded the motion, accentuating the positives of extensive work at the World Bank:

Its new leader should have a command of macroeconomics, the respect of leaders of both the funding and the funded countries, and the management skills to implement his or her vision. These requirements make Ms Okonjo-Iweala the best person for the role.

Having served as managing director under outgoing World Bank president, Robert Zoellick, she also has a unique knowledge of how the institution works. While one risk could be the temptation not to challenge the status quo, she might find it easier than other candidates to gain the respect of staff and build on Mr Zoellick’s legacy.   

More importantly for me, however, is that many World Bank veterans have come out in a strong show of support for Okonjo-Iweala. Lest you think that its employees don't matter, remember how the Ameriscum Paul Wolfowitz was eased out as World Bank president even during the Bush administration. From the Vanguard of Nigeria:

As the World Bank gets set to interview the three candidates vying for its presidency from April 9-11 before announcing its decision the following week, a group of former World Bank officials, including one-time chief economist, Francois Bourguignon, said it supported Nigerian Finance Minister, Dr Ngozi Okonjo-Iweala’s candidacy to become the lender’s president even as Governor of Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi said Nigeria’s nominee was the best candidate for World Bank top job.

The 39 former managers, in a letter to the bank’s members, cited Okonjo-Iweala’s “deep experience in international and national issues of economic management” and said she had the ability to increase the bank’s effectiveness. Okonjo-Iweala, who was a managing director at the bank until last August, “would hit the ground running and get things done from the start,” the letter said.

According to the former World Bank officials, “challenges for the future president range from international fundraising to brokering agreements on global issues and while all the three presidency candidates, including former Colombian Finance Minister Jose Antonio Ocampo, have strong qualifications, Okonjo-Iweala’s skills cover the full spectrum of criteria. Uri Dadush, a former World Bank director of policy and one of the 39 signatories, provided a copy of the letter.

Before concluding I should also point out that an assortment of heterodox economists (including the LSE's own Robert Wade)--many from the Global South besides--signed on to a similar petition for the Colombian candidate Jose Antonio-Ocampo. Although they're both long shots given the history of the institution in question, Okonjo-Iweala is more of an insider to it and Ocampo an outsider.

Still, the IPE Zone comes down in favour of Okonjo-Iweala if previous merit is the criteria. Nevertheless, what's obviously fascinating about the succession race is that it not only pits vested Western interests against rising ones from the Global South but it is also a trial of sorts for mainstream economics' place in development practice. Go ask Jagdish Bhagwati.

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World Bank Boss: Kim, Okonjo-Iweala or Ocampo?

I'd like to say the competition to become the next World bank president is heating up if it weren't for the common understanding that it will be another American stitch-up. While I'd have preferred the term "whitewash," the White House has thrown those of us who are critical of Western domination of these institutions a curveball by nominating an Asian-American candidate in Jim Yong Kim. Thinking it over, I can offer a number of pros and cons. Starting with the good stuff I can think of--I am a charitable lad, yes...

1. Global health is one of the areas where multilateral development institutions have actually made significant strides. Disease prevention is usually a large-scale intervention, and it is here where top-down efforts have shown promise. Witness the eradication of smallpox and the near-eradication of river blindness for instance. Since Kim's global advocacy is more on TB and HIV/AIDS, the more tentative results there are not really indicative of a lack of skill but of the increased difficulty in addressing the illness at hand;
2. Becoming a university president--especially at a venerable Ivy League institution like Dartmouth--involves no small amount of political skill (Larry Summers notwithstanding);
3. It will be a welcome change to have a physician by training head the World Bank instead of yet another economist or political scientist;
4. It is also good that Jim Yong Kim is not a loyal party figure alike Zoellick and his American predecessors but rather someone who does not really come from the inner circles of US politics.

On the downside, though...

1. This "pick a non-Caucasian to silence the critics" strategy would work better even as a token if he came from an LDC. Remember, South Korea famously joined the OECD in 1996 just before the outbreak of the Asian financial crisis a year after. We kicked it out of the G-77 after acceding to this rich country club, so he's not really someone who comes from today's Global South;
2. His post as a university president aside, he will need to juggle conflicting interests from rich countries wishing to keep their hegemony at the World Bank as is and poor ones that are interested in being more involved in global governance but have found it hard to be among the big boys. There is not much from his previous experience that may prepare him for the rough-and-tumble of development politics.

Let's now turn to Ngozi Okonjo-Iweala, the Nigerian who's put her name up for candidacy via her supporting countries' World Bank representative. Also there's Jose Antonio Ocampo, the Colombian candidate put forward by a number of Latin American nations. Alike the bid by the Mexican Agustin Carstens to replace the infamous Dominique Strauss-Kahn at the IMF, it's probably best not to take these two bids very seriously (unfortunately)...

1. The Jim Yong Kim ploy aside, the US shows no signs of breaking its stranglehold on World Bank leadership anytime soon, so both bids are forwarded more as "protest" votes;
2. Alike Carstens, both LDC candidates are hampered by iffy support from disunited developing countries. After all, they've again failed to rally around a single candidate. Alike the Americans with their blinders, those that have volunteered someone have chosen a person from their own region. Not much "third world solidarity" here, eh? United we stand, divided we fall it is once more;
3. Moreover, many other LDCs would probably be dissuaded from backing someone other than the US pick in justifiable fears of retribution from the West through vetoing future World Bank loans and grants;
4. What's more, many "realists" would prefer to just aim for the backup spots alike being a World Bank managing director (the #2s). Indonesia's Sri Mulyani Indrawati probably understands this glass ceiling more than most. Call it the Zhu Min strategy;
5. Okonjo-Iweala and Ocampo are hardcore development persons familiar with those working in this area and many LDC grandees. However, this status may actually detract from the idea of bringing in new blood in development work.

So in some (symbolic) ways Jim Yong Kim marks a real break as the American nominee--in terms of being a doctor by profession and an outsider to US politics. That said, these token gestures are unlikely to comfort the likes of yours truly since the guy probably knows who butters his bread when push comes to shove. At least U2's Bono was non-American. The more things change, the more things stay the same.

UPDATE: There is a lot of relevant material on the succession debate from the "World Bank President" site co-authored by my colleague Peter Chowla of the Bretton Woods Project.

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White Man's Burden 2012: World Bank Succession

Take up the White Man's burden--
Have done with childish days--
The lightly proferred laurel,
The easy, ungrudged praise.
Comes now, to search your manhood
Through all the thankless years
Cold, edged with dear-bought wisdom,
The judgment of your peers! 

Well here is more discouraging news for those wishing for more diversity and better representation of LDCs at key international organizations. Just a few months back, the unexpected departure of Dominique Strauss-Kahn from the IMF revealed the hollow rhetoric behind calls for change in the tradition of Europeans having discretion over choosing the IMF head. While perhaps sudden, the unceremonious departure of le grande seducteur showed that when the opportunity finally came for change at that IO, none was forthcoming. The excuse then was that having several European nations in dire financial straits made it only natural to have a tried-and-tested European figure as IMF managing director.

Again, PIGS countries are not suffering primarily from balance-of-payments problems the IMF was meant to address. Even Wolfgang Muchau, euro-hater, concedes as much:

However, it is hard to understand why everybody feigns surprise at the fact that current account imbalances can be financed indefinitely in a monetary union. Is this not one of the characteristics that distinguish it from a fixed-exchange rate system?

As long as banks have access to the central bank, and can provide good collateral, countries can run current account deficits for an infinite period. A friend of mine once remarked – when I asked about the significance of intra-eurozone current account imbalances – that the way to solve the problem sustainably was no longer to publish the figures. He was only half joking.

And so we come to the announcement of current World Bank head Robert Zoellick that he will leave that institution shortly. While he is departing neither under inauspicious circumstances nor at an entirely unanticipated moment, the jockeying to keep the status quo intact is similar to the DSK situation. That is, pressure to keep the World Bank head an American choice remains. This time, the excuses are as follows:

• It is politically unlikely that the US, which remains the World Bank's largest funder, would countenance a non-American head during an election year;
• The United States is wary of relenting on World Bank leadership lest it be perceived as yet another sign of American decline;
•  The implicit understanding that the US will insist on having its way means that no LDC candidates have put their names forward (which in itself indicates regression from the IMF succession race in which some at least entertained the notion of an LDC head despite the inevitable outcome)

Alan Beattie further suggests that the same fig leaf covering yet another whitewash at a Bretton Woods institution may be of nominating a woman. Again, this sort of compromise is unlikely to placate LDC grievances. Honestly, though, it would be equally unlikely that LDCs themselves would agree on a single candidate to back. It's not as if there is a scarcity of viable candidates alike Indonesia's Sri Mulyani Indrawati--currently #2 at the World Bank and formerly Indonesia's finance minister.   


Also see John Kerry on this matter. The more things change, the more things stay the same, indeed.

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The Race is On to Succeed Zoellick at World Bank

I have to run but it's going to be very interesting going with the current World Bank President Robert Zoellick indicating that he is about to resign his post. The search is on for a successor with the US naturally in the vanguard. However, given the controversy of yet another European succeeding the ill-fated Dominique Strauss-Kahn with Christine Lagarde at the IMF, it is high time that representation at the Bretton Woods institutions became at least as cosmopolitan as changes in the leading players of the world economy. That is, non-European leadership at the IMF and non-American leadership at the World Bank where both jobs have been stitched up ever since. From Reuters:

World Bank President Robert Zoellick said on Wednesday he will step down in June and Washington pledged to put a replacement candidate forward within weeks for a job that has always gone to an American. The Obama administration said it would open the process to competition [to non-Americans], marking the first time it has shown willingness to loosen its grip on the world's top development lender...

Developing countries have for years pressed for a greater voice in leading global financial institutions and are likely to stress the importance of a competitive process, but the United States is still widely expected to retain its hold on the job.

"It is very important that we continue to have strong, effective leadership of this important institution, and in the coming weeks, we plan to put forward a candidate with experience and requisite qualities to take this institution forward," U.S. Treasury Secretary Timothy Geithner said in a statement.

There is also supposedly a "hostage" situation of US congressional funding being contingent of selecting yet another American for the top post:

While Geithner called for an "open and expeditious process," analysts say Washington can ill afford to give up the post without risking the U.S. Congress cutting funding for the Bank. Zoellick, who discussed the selection process with the board in a two-hour meeting on Wednesday, said the first step was for the board to call for nominations. "An open process is important," he said...

Speculation has been rife over who might take the job when Zoellick departs. Possible U.S. candidates include Secretary of State Hillary Clinton and former White House economic adviser Lawrence Summers, but the State Department said Clinton would not be taking the job. "She has said this is not happening," spokeswoman Victoria Nuland said.

Emerging market and developing countries have campaigned hard in recent years to break Europe's grip on the top position at the International Monetary Fund and the United States' hold on the presidency of the World Bank.

Officials from large emerging economies like Brazil said on Wednesday the selection process for Zoellick's successor should be based on qualifications and not nationality. However, they acknowledged that given U.S. congressional pressure the job will probably remain in the hands of an American.

But there are always excuses based on American political expediency--again, as if the world stops to wait for what America does:

Last year, emerging market economies made an aggressive push to fill the IMF top job in a bitter contest won by France's Christine Lagarde. On Capitol Hill, lawmakers said the World Bank job should stay in U.S. hands. "I think it ought to be (an American) given the balance between that and the IMF and the interests that we have right now," said Senate Foreign Relations Committee Chairman John Kerry, a Democrat from Massachusetts.

Senator Richard Lugar of Indiana, the committee's top Republican, echoed that sentiment: "Ideally I would like to see an American replace him ... That would be my preference."

Nancy Birdsall, who heads the Center for Global Development in Washington, said that while the United States was committed to an open process on paper, domestic politics necessitated a American successor. "The election year timing puts the White House in an especially unenviable position. There is a risk that the World Bank could become a highly partisan, U.S. hot-button issue, as the UN has too often been," she wrote in a recent blog.

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Hugo Away: Chavez Ignores World Bank on Exxon

File this under: pre-emptive strike. It appears that the indefatigable Hugo Chavez is back on the warpath against all things American. A few days ago he publicly suspected the United States of unleashing cancer on fellow left-leaning Latin American leaders. In less improbable news, however, we now understand that his Venezuela will not abide by subsequent rulings that find the country liable for nationalizing ExxonMobil oil fields in the Orinoco Belt. At the end of last year, forum shopping ExxonMobil received a favourable $746.9 million verdict against state oil company PDVSA at the International Chamber of Commerce (ICC) Court of Arbitration over the expropriation. While a victory nonetheless, ExxonMobil believes that this sum amounts to less than a tenth of its original investment.

Now, as most of you know, the International Court for the Settlement of Investment Disputes (ICSID) is a World Bank body that does what it says on the label. That is, it addresses legal conflicts over the handling of international investment--most often cases of expropriation alike what Venezuela is said to have done to ExxonMobil. ICSID is currently set to pass judgement on ExxonMobil's investment in Venezuela alike many others who've similarly complained about expropriation at Chavez's hands.

Anticipating a more negative ruling, Chavez is already signalling that Venezuela will not honour the decision of the Washington-based institution:

Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp.’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. The Washington-based court is considering Exxon’s claim in one of about 20 suits filed there against the Venezuelan government. Chavez, a self-professed socialist revolutionary, has taken over assets in the energy, metals, cement and telecommunications industries.

“We won’t recognize any decisions from the ICSID,” Chavez said on state television yesterday during his first Sunday program since announcing he had cancer last year. The company is “seeking the impossible, that we pay what we will never pay.” Exxon, the world’s largest oil company by market value, was the first to abandon Venezuela after Chavez expropriated industry assets in the Orinoco heavy crude belt in 2007. The president forced foreign oil producers into joint ventures as minority partners that year and is also in arbitration with ConocoPhillips, which rejected the terms...

Despite being a buffoon in many respects, Chavez logically assumes that the World Bank's ICSID and its usual American influences will result in a less favourable outcome. Here's a thought for you, though: What if the ICSID awards ExxonMobil an even smaller amount than the ICC's International Court of Arbitration or even finds in favour of PDVSA? The willingness of PDVSA to compensate ExxonMobil for what the ICC adjudged means it believes that it's as good as it gets:

In a separate case, the New York-based International Chamber of Commerce, an arbitration court, ruled last month that state oil company Petroleos de Venezuela SA must pay a net $746.9 million for the nationalization. Venezuela will compensate Exxon for the Cerro Negro project as ordered by that court, Chavez said yesterday.

“If Exxon gets an award in the ICSID, the enforcement mechanisms are strong,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy who has represented clients in arbitration with Venezuela, said in a telephone interview last week. “There’s a treaty.” Exxon in 2010 reduced its claim to $7 billion from $12 billion, according to PDVSA, as the Caracas-based company is known. The Venezuelan company said Jan. 2 that it would pay $255 million in cash for the International Chamber of Commerce judgment, after accounting for about $300 million in a frozen New York bank account and $191 million of Exxon debt that it will cancel.

Perhaps unsurprisingly, ExxonMobil is again forum shopping for the best result. Having been disappointed by the ICC ruling, it now awaits that of the ICSID which is supposedly considering a more strictly enforceable bilateral investment treaty (BIT) as evidence as opposed to a contract between just ExxonMobil and Venezuela. On the other hand, PDVSA is also looking for the best deal to get ExxonMobil off its back for now which it believes can be done by promptly (or at least by Venezuelan standards) paying at least part of the $746.9 million. I leave you to (enjoy?) more Hugo-isms:

“It’s insane!” Chávez said. “It’s such an insane position taken by this company than the decision [of the court] recognizes less than 10 percent of what they were asking for. How much must these companies have robbed in the last hundred years? They stole from us; they had to pay us back for damages made in the last hundred years; the capital they have wouldn’t be enough,” Chávez said.

Even Hugo knows a good deal when he sees one (perhaps). Still, I would be gobsmacked if the average Venezuelan knows what the ICSID is when most persons don't. Moreover, permanently blowing off those with the actual know-how to extract extra-heavy sour crude may not be the best course of action insofar as PDVSA does not necessarily have this expertise on its own.

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The IMF, (Hypocritical) Dispensers of Bad Advice

Just so you know, I've regularly been receiving (print!) newsletters from the Bretton Woods Project whose most famous campaign was "Fifty Years is Enough" concerning the aforementioned IMF and World Bank outlasting their usefulness. Though I sometimes think BWP can be a little overcritical and tends to overestimate the influence these institutions exert, perhaps it's rather timely to consider whether dismantling the IMF in particular is overdue.

I needn't go over my longstanding objections concerning the misappropriation of emergency funds meant for balance of payments crises going towards bailouts of troubled European peripheral states not primarily suffering from such problems. Moreover, think of how various regions of the world are coming up with their own bailout funds expressly designed to make IMF borrowing superfluous to a certain extent: Europe has its European Financial Stability Facility (EFSF). Asia has its Chiang Mai Initiative Multilateralization (CMIM). Meanwhile, Latin American countries have mooted a Banco del Sur. It is not inconceivable that every key global region will soon have its own rainy day fund. You also have to consider the mounds of reserves individual developing countries have accumulated since the Asian financial crisis.

For this post, though, let's focus on one of the most annoying things the IMF does which is peddle rather poor, hypocritical advice. Alike with questions of succession tilted towards Europeans and what it means for emergency lending, the IMF being headquartered in DC also has deleterious consequences. For, it has continually been the case that the IMF has prescribed austerity...except for "special cases" (like its host country). From a recent Lagarde speech I am pained to hear this refrain once more:

For the advanced economies, there is no question that fiscal sustainability must be restored through credible consolidation plans. But we also know that consolidating too quickly will hurt the recovery and worsen job prospects. So the challenge is to find the pace of adjustment that is neither too fast, nor too slow.

The precise path of fiscal consolidation will differ by country. Those that are facing considerable market pressure, or could face it in the absence of upfront adjustment, must press ahead with fiscal consolidation now. But in others, there is scope for a slower pace of consolidation, combined with policies to support growth [my emphasis]. The key is to clarify a credible medium-term strategy to first stabilize, and then lower debt ratios. Within this strategy, fiscal measures that reliably deliver savings tomorrow will help create space for supporting growth today—by permitting a slower pace of consolidation.

Lagarde repeats this common story that near-term stimulus--for those who markets haven't punished--can accompany medium-term consolidation for the best of both worlds. Bah humbug. Take the case of the IMF's darling America. To be perfectly accurate, once federal expenditures increase, they tend not to decrease. Nominally, the last time US federal outlays went down year-on-year was 1965--nearly 46 years ago. This fiction that federal spending is like a tap whose floodgates can unleash a torrent and then be made to drip soon thereafter is highly unlikely. There's no saying that it can't be done, but the weight of history is certainly against doing so.

Another qualifier here is the judiciousness of embarking on expansionary policies while not currently "facing considerable market pressure." Sure, such a situation may hold for now, but for how long? This point is not a churlish one from my point of view. Consider the market for Euro-denominated sovereign debt in the aftermath of the implosion of Lehman Brothers. Well into 2009, spreads of troubled PIIGS economies' bonds over their German equivalents were nugatory. If they had followed the Lagarde prescription, they'd have borrowed freely alike in years past at this point. Which they of course did and suffered from in the months to come. The idea is that markets are flighty, and we cannot really know if and when they will take flight. I for one certainly didn't expect such a harsh reaction to the likes of Greece et al. or I would be a very wealthy man by now instead of a mere blogger.

Who's to say when a similar fate will not befall America? I say stick on the safe side and just stop drinking that Kool-Aid. With IMF "advice" like this, who the heck needs to watch CNBC to delude oneself to no end? To paraphrase John Bolton, if the IMF was done away with overnight, I don't think there will be many lamenting its disappearance since, well, sixty-five odd years are probably enough.

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