Reforming Paradoxes of Socio-Economic Development: Modeling Change and Continuity at the World Bank

Abstract

In 1995, James Wolfensohn became President of the World Bank. He inherited an institution at a time of crisis and drift. The crises were triggered by the sustained backlash against the so-called “Washington Consensus,” a strong wave of anti-globalization sentiment and a shocking lack of evidence that Bank policies have had any real impact in generating growth or reducing poverty. His two-term presidency (1995-2005) oversaw the creation of an ambitious agenda for socio-economic development. The truth is, however, that this is not the first time the Bank has undergone radical policy shifts. In the past, the Bank has cycled through phases shifting from physical capital, to human capital, to macroeconomic structural adjustment policies.

This article examines the paradoxes inherent in Wolfensohn’s socio-economic agenda and the general question of change and continuity at the World Bank. Part II provides a basic introduction to the Bank and to Wolfensohn era reforms. It is intended to provide the uninitiated reader with sufficient literacy to understand the fundamentals of the debate. Part III develops a framework for modeling World Bank behavior, focusing on political, organizational and epistemic constraints. A key insight from the model is the dominant role that neoclassical economics plays in limiting the Bank’s conception of what types of policies are or are not imaginable. Significant aspects of the socio-economic agenda directly challenge these traditional epistemic constraints. Part IV applies the framework to examine three episodes of reform, each framed to distill a different set of lessons. First, the Bank’s experiment with debt relief and the participatory Poverty Reduction Strategy Papers is examined to assess the Bank’s ability to learn, change and adapt. Second, the Bank’s experiences with social capital theories are examined to assess how the Bank deals with internal reform efforts, where the intellectual core of the idea comes from outside the epistemic domain of economics. Finally, the Bank’s experiences with institutional economics and governance are examined to assess how the Bank deals with reforms where the intellectual core of the idea reflects a challenge from inside the epistemic domain of economics. The analysis demonstrates that change can and has happened at the Bank, but that such changes are typically modest, incremental and intellectually path-dependent. Part V argues that lasting change, if possible, will likely start outside the World Bank, where such efforts are free from the Bank’s organizational and epistemic constraints. For real change to take place, new interdisciplinary approaches to development will have to be established and such policies will have to be implemented by a more professionally diverse staff than currently exists at the World Bank. Such approaches, if they are to be successful, must develop a more open, process-oriented framework for policy making, a framework capable of facilitating meaningful learning and adaptation.

Keywords: world bank, economic development, social capital, institutional economics, worldviews

JEL Classification: A11, A12, O10, O19