New Delhi: As chief economist and senior vice-president, development economics, at the World Bank since October 2003, François Bourguignon is responsible for providing intellectual leadership and direction to the Bank’s overall development strategy and economic research agenda at global, regional and country levels. And, as a member of the Bank’s senior management team, he advises the Bank’s president and management on economic issues. A French national, Bourguignon was visiting India ahead of finalizing the Bank’s new strategy paper that would define lending in the next few years. He took some time off to share his thoughts on a range of subjects, including the new approaches to development loans and global economic prospects. Edited excerpts:
What brings you to India now?
As the World Bank chief economist, I visit India every year. But it is a rather special purpose this time. We have been involved in the World Bank, particularly my team, in an exercise to try and figure out what we should take into account in designing long-run strategy for the Bank in the next 10-20 years. By long-run strategy, meaning what are the areas of priority, in terms of geographical areas and themes. So we will have to do more in Southern Africa, more on global public good and more on issues such as global warming. On the other hand, (we need to) think about the way in which we engage with our partners. From that point of view, we try and draw lessons learnt from the past—both in terms of the successes and those that were not. We have been doing this exercise for some months now. I am now going around the world and getting feedback from people as to what they think of these issues. We want to incorporate these reactions in the document we will give to the president, who may use it in designing his own strategy for the next couple of years.
Will there be a big shift in the strategy as to how the Bank is going to proceed globally or is it going to be an incremental change?
Probably it will be more evolutionary. In the sense that many changes that we are considering are already taking place. The problem is more about what is the weight that we want to give to those problems. Let me give you an example: When we look at the evolution of the global economy in years to come, we try to project that evolution and the likely scenario. And when we think that our mission, like the mission of global development community, is poverty reduction, we find that priority areas are obviously sub-Saharan Africa where poverty is stagnating and will continue to stagnate for a while. It is the fragile states (which are seeing conflicts) that are preventing us or the whole community to channel resources to initiate work to help those countries to overcome their poverty.
It is the issue of inclusiveness that is (priority) in high-performing countries such as India or China. We have observed that there are different groups of the population which are left behind, which do not benefit as much as others from the growth process. And this is important in this policy (statement).
Finally, there is this big thing about global public goods. It is not only trade or financial stability which are big issues in the world today but also other issues, such as migration and global warming and water sharing, which, in many regions, are big issues. So, there are areas where poverty reduction can be pursued only when some conditions are met and where the Bank may have a role to play.
All this is to be decided and what we are doing from our side is that we are putting things on the table and will tell the president, it is up to you to decide. If you want to help us in making a decision, no problem.
Is this emphasis on global public good rather new and prompted by the rapid integration of the world?
It has always been the case that global public goods or regional public goods have been important. For a long time, when we tried to look at development issues, it has largely been country focused; what will help a country reduce its poverty only with resources within the country and the policies that are incremental. What we are realizing increasingly is that the development of a country also depends on its own environment and the regional level. We see that the most important success story in the post-war era has been in countries that have (not only) been able to develop the right policies within the country but also those who could rely on markets outside the countries which enabled them to expand in an unrestrained way.
On top of that, the issue of global warming is a new issue; we were not aware of this 20 years ago but today we have to take into account that global warming will modify the conditions of development of many countries. Like, if you have flooding or more irregular climatic cycles, if the temperature is increasing, the sea level is rising, all these will have an impact on the conditions of development.
On the other hand, we know for global warming the incremental change will come from increase in greenhouse gases, from some of the fast growing countries like China and India, which means something needs to be done. At the same time, we would not want these countries to bear the entire cost of correction (curbing emissions). So we would want to curb the emission while maintaining the development potential of those countries. This requires some global interventions and we believe that this may be an area where the Bank can be useful.
On the issue of monitoring, India has had its brush with the Bank in the last year or so, especially with respect to the health loan to Maharashtra. How differently does the Bank monitor ongoing loan programmes to prevent such misuse?
I didn’t follow the issue very carefully. I do remember the crisis between the Bank and India; I am sorry that there was such a crisis. I must say I haven’t quite followed exactly what has been done since then. What I heard on my side was simply that things went well. We, on the side of the Bank, are trying to systematize the way in which we were able to monitor these aspects. It seems to me that if there is clarity on both sides on the way we want to do business together; and there is some monitoring and auditing on the side of the Bank; and that monitoring and auditing is not invasive and (if) accepted by India, then there should be no problem.
Have you in any way altered the way you evaluate targets in a World Bank loan?
There is a lot to be said in the field of evaluation. The way in which we have been functioning in the past, and still doing so, for every kind of loan or project (is that) there is an objective; there is a target and then we try to see whether the target has been reached or not; also whether the actual cost is what was expected. And this continues.
There is something else which is more important and from that point of view, the work that we do today in India is original and important for the whole community. Not only are we trying to evaluate whether the official targets—say, for instance, so many kilometres of roads have been built, so many clinics have been set up with adequate staff and supply of drugs—have been met, but are also trying to see what is the actual development impact.
So, we are moving from outputs to outcomes. So, if we help build a road, then what we are trying to see is whether this road has made a difference in terms of employment creation, whether it has been able to make a difference to people’s health, because people have been able to go more quickly to clinics, whether it facilitated secondary schooling and so on. So what we have really is a measure of the overall development impact of the project. And by doing that in various contexts, we are able, in the case of India or in the context of other countries, to tell our partners that this is the experience we had in, say, water and sanitation programme. This is the outcome of the experience where the main operator was a private firm or a public firm, where the regulator was a local government. And in this we learn the best way to proceed.
Using this evaluation process we can accumulate knowledge which can be used as a general resource for other projects in the same country or elsewhere. So, I would prefer to talk about evaluation in these terms rather than targets. Of course, when we sign a contract, we say this project is to reach these targets, then we have to do it.
How do you decide between output and outcome? Hypothetically, suppose output is not met but the outcome is good. Then, firstly, how do you evaluate, and secondly, how do you measure outcome?
It is not completely impossible to say that okay, we didn’t meet the target yet the outcome has been very satisfactory, which means that if we reached the target then the outcome would have been much better. So, there is difference in the way we measure targets and outcomes. Targets are essentially quantifiable objectives which are written in the project for which loan has been extended. Outcome is about all the dimensions of development which are indirectly linked to the project.
In the case of water and sanitation, output may be measured by the number of houses that have tap water, but the outcome would be what is the progress in health of the community using the water. And to measure that, we are doing a survey on health conditions before the project starts and then one or two years after the project has been finished. And if we want to be very rigorous, we survey communities within and outside the project. This will enable us make a rigorous comparison of the impact of the project. This is the way we are pushing things and we believe this is very promising. This is another way of evaluating the effectiveness of development policies.
What are your concerns about the Indian economy?
My concern would be whether this very fast growth that we observe is sustainable. There is a demand for Indian products but it is necessary to make sure on the supply side it will be possible to offer all those products. And from that point of view, we know that infrastructure is (operating) at a limit and there is a need improve and expand infrastructure; electricity (generation and distribution) and connectivity between cities and ports need to improved to respond to the huge demand for Indian products. This is one concern.
How fast can we go and ensure that domestic infrastructure will not become a constraint on growth. Similarly, you have human capital that we know is also important for economic growth. Again, the example of East Asian countries from that point of view is quite good. And we have to make sure that the progress is being made in India at the right speed. It is true big progress has been in school enrolment, but it is not clear on the quality of the school system is that good. It is now important to move from primary to secondary schooling. More important is to make sure that economic growth is trickling down and that everybody is benefited from the growth process. If a certain group is left behind or is not part of this fantastic growth, then this process will not be sustainable.
India is close to becoming a trillion dollar economy. How long will the Bank be able to justify to other members that it needs to lend to India when there are other needy nations in the world?
It is true India is close to becoming a trillion-dollar economy, but it is also true that India is a very big country. So when you look at per capita income...?it?is still rather low. The reason why India is still accessible to concessional lending (under the soft-lending window of the International Development Association) by the Bank is because per capita income is low. As per projections, India will double its per capita income in the next 10 years. So, at this stage, there will be no problem of relying on aid from the rest of the world,?particularly?World?Bank.
Is the US economy headed for a slowdown?
If you had asked me this qu-estion a couple of weeks ago, before start of the subprime and mortgage crisis, my answer would have been yes, but very little. As a matter of fact, 2007 is likely to be the sixth year in a row that is going to be of very fast growth at global level and in particular in emerging economies. What we are seeing is that, in all probability, there will be a very small impact of the subprime crisis and it will be over in a couple of months. As a matter of fact, we are not even modifying our forecasts. It has happened that the growth in the first half of 2007 has been much faster than expected, especially in the second quarter in the US. Because of that, the impact of the crisis will compensate the unexpected growth that has happened in the US before the crisis. Overall, global growth may be down by 0.2%.
Now, there is a more pessimistic scenario that some of the very big hedge funds have been severely hit because they were exposed to not only subprime mortgage risk but to risks in institutions which were themselves affected by subprime mortgage risk. In which case, you never know. This may result in people moving towards safety and moving out of risky markets, particularly emerging markets, in which case, the impact may be bigger. The kind of quantification we were able to make are not quite dramatic. We were expecting growth in the US could be down by 1%, which might reduce global growth by a little more than 1%; which means the global growth can be 5%. This is not bad.
But it has already led to reassessment of risk, particularly in emerging markets. So countries like India, which have been borrowing commercially, could be affected?
You are absolutely right. People tend to disinvest from areas where they believe their is more risk. So they are moving to treasury bills in the US. But for moment, this has been a very limited movement. The last time I looked into Morgan Stanley Index for emerging markets sovereign bonds that it (cost of borrowings) had increased by less than 50 basis points. You may remember that when the US economy slowed down in 2001, just after 9/11, the increase in spreads for emerging markets bonds was 150 basis points. Also, the price for emerging markets borrowing is still very low. So, we can say that the crisis has limited impact on developing countries. It may be slightly different in India. This is because there were a lot of back offices operations in India dealing with mortgage operations. So, I guess in Chennai, Bangalore or Hyderabad, some companies may be affected. But, I have not seen indication (of this trend).