The Hindu Business Line : Soul-searching needed on Bank impact

While the controversy over roping in foreign expertise for the mid-term Plan review has been laid to rest, it has thrown up certain questions, such as: "Who is in the driver's seat and who sets the national priorities?" It is on this that there are gnawing doubts among the Left parties. The economic advisers would do well to assuage the Left's fears by drawing instances from the Chinese experience with aid agencies and its record growth despite such association.

THE controversy over the Planning Commission's proposal to associate the World Bank, the Asian Development Bank (ADB) and private consultant firms with the mid-term appraisal has been laid to rest. All the same, there is continuing uneasiness among the Left partners of the UPA coalition. The ghost of the Bank will continue to haunt them.

It is sad that economic advisers in the Government did not take into account or anticipate the Left's sensitivities to a move of this nature. Perhaps, there was an assumption among them that any criticism could be managed. They paid a heavy price, as the matter had to be resolved at the highest political level. Sadly, planning is not a matter to be settled by economists trained in Washington.

The issue is not over the association of foreign experts in the mid-term review exercise. It has been done in the past, and several reputed economists, including Nobel Laureates, have advised us on our performance, or the lack of it. Rather, the issue is: "Who is in the driver's seat and who sets the national priorities?"

It is on this that there are gnawing doubts among the Left groups. In the past, when the Left critics were not in power at the Centre, their doubts were overturned by the TINA (there is no alternative) argument. But in the changed context, when new coalition partners challenge those assumptions, it is necessary to do some soul-searching.

It is fashionable these days to lean on the Chinese experience, whether in defence of foreign direct investment (FDI) or to step up investment in rural infrastructure. Is there a lesson that China offers us in dealing with aid agencies?

There are several research studies on the Chinese model of development. Some economists call it "transition miracle". Joshua Cooper Ramo, former Foreign Editor of Time magazine, has developed a new formula named `Beijing Consensus', which is threatening to replace the "Washington Consensus" (Financial Times, May 6).

Surprisingly, the World Bank itself has released a very significant document. Its Operations and Evaluation Department has evaluated the Bank's role in China in "China — Country Assistance Evaluation, July 30, 2004, Report No. 29734". It is a frank and fair evaluation even as it glosses over some sensitive issues or accords undeserved credit for China's success where it is not due.

The Report concedes that the Bank's impact on China was not through lending. It refers to low levels of lending and confesses that "resource transfer was never seen as the main instrument of Bank strategy or a major objective in its own right". It confirms that China was reluctant to accept strong conditionality: "China was particularly sensitive to conditionality because of its associations in the minds of some with unequal treaties and extra-territorial concessions".

China did not accept the World Bank's conditionalities in its dealings with it or other agencies. This was because, unlike India or many other developing countries, which negotiated assistance with economic or financial crises hovering over their heads, China had no need for balance-of-payments support. It secured only one adjustment loan.

Even this was reimbursement for an agricultural programme that had been completed. If there was any conditionality at all, it was project-specific, and "sector-wide conditionalities were rare."

In contrast, the Indian experience and that of many other countries in Asia and Latin America was that assistance for sectors such as power, fertilisers or `financial reforms' led to wholesale attempts to change initial conditions such as pricing, subsidies and ownership, including emphasis on privatisation, public procurement, public distribution system, and so on.

China had insulated itself from "across-the-board' conditionalities by external agencies such as the World Bank. Where reform was necessary in its judgement, China had the autonomy to decide the contents and also the phasing, spatially and temporally.

In a later section, the document narrates how the Bank's role was one of `persuasion' such as through economic and sector work, analytical and advisory services, working with willing partners and by what is called "demonstration effect" — creating a favourable model in another area/state which was sought after by others. As the document admits: "The approach... fits well with China's preference for gradual and pragmatic reform. It clearly left the government `in the driver's seat' with all that it implies for country ownership."

Another important area dealt with in the document is aid co-ordination. For many countries, including India, aid is co-ordinated through consortia such as Paris Clubs, with the World Bank serving as the ringmaster. As the document puts it: "China fits the Comprehensive Development Framework Model of donor coordination more closely than most countries.

Donors, including the World Bank, play a negligible role in aid coordination. China sets its own priorities and tries to match those with individual donor interests through agreements on sectors and location of projects."

China was selective in seeking assistance. It did not rely solely on the World Bank or donors. In a 2001 study on World Bank Energy Projects in China, Eric Martinot of the Stockholm Energy Institute found that: "In the 1980s, the Bank's money was important for attracting foreign investment to China. By late 1990s, it had become less so. For example, private investment in power development was approaching an installed capacity of 26 GW (operational or under construction), more than the total from all the Bank assistance."

China began to lean more on FDI and assessed that financing of power projects through loans from its own banks was cheaper than through World Bank loans.

Moreover, China was keen to establish smaller, coal-based projects regionally. The Bank came under pressure from environmental groups to move away from these projects. China proceeded with them regardless. Chinese officials argued that the terms of local banks were cheaper!

China could evaluate one source against another in deciding to finance its projects. It is on record that China financed its infrastructure projects mostly out of domestic savings, which were secured from its state-owned banks. Foreign aid played a minor, supplementary role.

Mr Zhou Xiaochuan, Governor of the People's Bank of China, is a legendary banker whose name does not figure often in the columns of western financial papers.

In May, he delivered a lecture as part of the World Bank's Practitioners in Development series. He explained how the Chinese Government drew on its own fiscal resources, the banking sector and the capital market to fund its reform programme.

Mr Zhou said that it became clear that if the Government was to adopt the gradual approach, it needed to find additional resources to maintain the subsidies to allow a slow adjustment to take place and minimise shocks. Some of the steps resulted in a fall in the Government's fiscal resources.

As he put it: "The government then encouraged the banks to fill the gap by lending to companies with no capital at all and to state-owned enterprises "for them to survive in production, to maintain employment, for them to renew technology and to import new equipment, for them to slow down lay-offs, for them to train new skilled workers."

The banks were asked to support the government's fiscal over-drawings. As he concluded, "It seems that all of these things are what we should not do, but in a larger scope of consideration, actually China did that."

What China did would have horrified the pundits in the Fund/Bank . Had China been dependent solely, or even substantially, on the World Bank, they would have cut off drawals from tranches and sent economists post-haste to Beijing.

Viewed against the China model, how relevant is the TINA argument? It seems that there are other alternatives or options open to countries such as India.

In a World Bank Conference on poverty reduction held in Shanghai in June, several representatives from Africa and Latin America were excited over the China model and evinced keen interest in following it. In a recent article, Mr Alfonso Prat-Gay, Governor of the Central Bank of Argentina, has explained how shock therapy is neither necessary nor affordable ("How Argentina defied the analysts", Financial Times, September 13).

If a country like Argentina, which has passed through one of the severest financial crises, decides to stand up to Washington (and defy bondholders), a country such as India, with vast human, industrial and export potential, and backed by substantial foreign reserves, can strike out a development path of its own.

Surely, the Left partners would be comfortable if they are assured that, like China, we are still very much in the driver's seat.

(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)