The bank that won’t reinvent

The bank that won’t reinvent
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First Published: Thu, Oct 04 2007. 01 26 AM IST

ADB’s problem is that it needs advice from successful Asian countries more than need advice from it
ADB’s problem is that it needs advice from successful Asian countries more than need advice from it
Updated: Thu, Oct 04 2007. 01 26 AM IST
Pity the Asian Development Bank (ADB). It is trying to come up with a reason to exist for an Asian continent that already is achieving development and doesn’t need a Development Bank. Given all the success stories in today’s Asia, you’d think ADB could pat itself on the back for a job well done and then pack up and go home. But not so fast, says ADB, which is desperately trying to find new things to do with its 2,000 employees and $6 billion of annual lending.
ADB’s problem is that it needs advice from successful Asian countries more than need advice from it
To that end, ADB is working on a Long Term Strategic Framework 2020, a project best read as bureaucratic jargon for ADB’s promise to keep producing bureaucratic jargon through the year 2020. For help with the framework, ADB commissioned an Eminent Persons Group to tell it what to do with itself. The learned committee was chaired by Supachai Panitchpakdi, secretary general of the United Nations Conference on Trade and Development, a body that has long distinguished itself by promoting all the bad ideas that stifle both trade and development. The end result was a report called Toward a New Asian Development Bank in a New Asia. The eminences have pointed out to ADB what should be obvious to anyone who reads The Wall Street Journal: ADB’s original raison d’etre of providing capital is obsolete in a capital-surplus region with a large excess of saving over investment.
But rather than urging that ADB shut down, the eminences posit that ADB should focus on transmitting “sophisticated, up-to-date knowledge… on major development issues.” That would be a good idea, but it’s tarnished by the poor quality of ADB’s current knowledge efforts. To take two recent examples, consider ADB’s recent report Inequality in Asia, and its Aid-for-Trade project.
The inequality report is a good example of an iron law of aid: Aid agencies need bad news to justify their existence. Frantically trying to find some bad news in the greatest mass escape from poverty in world history, the quarter-century-old Asian boom, ADB complains that economic growth worsens “absolute inequality.” This is true, but meaningless. If I had a 10-fold income increase and Bill Gates only a 10% raise, such economic growth would still worsen the “absolute” income gap between Gates and me because billionaire Gates’ raise is larger in absolute size. But I think most of us would take this growth anyway.
Even ADB concedes the poor are growing richer with economic growth. But this obsession with inequality leads to bad policies, since the only way to avert rising absolute inequality is to stop growth. And anyway, if indeed that’s the goal, we don’t need ADB to tell us how to accomplish it—the Burmese junta has done an admirable job of avoiding growth, and the resulting “absolute inequality,” without much advice from ADB at all.
Then there is Aid-for-Trade. The programme is intended to give poor countries financial assistance to “prepare” themselves for trade. But there’s evidence that aid inflows actually make exporting more rather than less difficult by fuelling currency appreciation. And even setting aside this inconvenient fact, ADB seems to be rather at sea as to how aid would increase trade. It has produced a lavishly illustrated Aid-for-Trade brochure, which says that aid will result in recipient countries’ “mainstreaming trade in national development strategies.”
But any Asian leader who hasn’t already figured out that trade should be mainstream after Asia’s world-historical trade explosion is past the point of rescue anyway. Successful trade booms come about through letting free market entrepreneurs run wild to find things foreigners want, rather than consulting ADB bureaucrats on designing a “national development strategy.”
All of which goes to show that ADB’s fundamental problem is that it needs advice from successful Asian countries more than they need advice from it.
The strategic framework suggests creating “prioritized sectors”, distinguishing between “core operational areas” and “sectors from where ADB should plan to move out of operations.” Unfortunately, the document fails to mention any sectors in the latter category, even while it has scads of ideas for new “operational areas.”
Indeed, ADB is currently following and will surely continue to follow another iron law of aid: Not only do old aid agencies never die, neither does any single old department of an old aid agency. ADB’s focus has if anything gotten less “prioritized”, not more, over the quarter century that Asia has been booming. The foreign aid part of ADB, for example, is currently operating in 14 different sectors, each of which averages about 7% of the budget. A summary measure of this kind of splitting up of the budget into many small pieces at ADB shows it getting steadily worse over the past quarter century.
Given the emergence of Asia as a development success story that doesn’t need development banking, ADB must change or die.
Edited excerpts fromThe Wall Street Journal. William R. Easterly is professor of economics at New York University, visiting fellow at the Brookings Institution. Comments are welcome at theirview@livemint.com
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First Published: Thu, Oct 04 2007. 01 26 AM IST
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