The story of Deng and McNamara

Mahmoud Mohieldin
Thursday 27 Apr 2023

Cooperation of developing nations with international financial institutions is only worthwhile if it yields better and faster results.

 

In his first meeting with the then Chinese leader Deng Xiaoping in 1980, Robert McNamara, then the president of the World Bank, said that the bank could not truly be called a “world bank” without China, and added that he looked forward to working closely with China on future developments.

By that point, China had indeed become a member of the World Bank, replacing Taiwan on its board of directors. However, both sides had had to overcome various constraints in order to make this possible. In response to ideological hardliners at home, Deng, the architect of China’s economic reform and modernisation, famously said that “it doesn’t matter whether a cat is black or white, as long as it catches mice.”

This saying, which meant that what matters is that the economy works, not what you call it, epitomised his consummate pragmatism.

During his meeting with McNamara, Deng laid out three guiding principles for his country’s partnership with the bank. First, ideas would matter more than money. Second, modernisation in China was inevitable, but working with the World Bank would make it happen faster. Third, on the question of who would serve as chief representative of the Bank in Beijing, Deng said that what mattered was not where the person from, but that he or she should be the best person for the job.

Under McNamara’s leadership, the bank lived up to its commitments. According to American author Ezra Vogel’s biography of Deng Xiaoping, McNamara assembled and sent over a team of 30 of the world’s leading experts on economics, agriculture, engineering, and health and education to study development conditions in China.

A counterpart team of Chinese experts was selected to work with them, with one notable member of this being Zhu Rongji, subsequently the Chinese premiere. This mode of cooperation between China and the international institutions still exists today. The China 2030 Reports that the World Bank has prepared for Beijing over the last decade were the fruit of a collaboration with a counterpart team coordinated by the Chinese Development Research Centre, for example.

The reason I am relating this history is to underscore the fundamental idea behind the cooperation of developing nations with international financial institutions – namely, that cooperation is only worthwhile if it yields better and faster results than would have been obtained without those organisations.

These institutions should also realise that much has changed since their birth in the 1940s. Yet, it seems that the closer they have got to grasping the realities of a multipolar world gripped by multiple and protracted crises, and the consequent need for greater economic and financial knowhow, flexibility and acumen, the more they have been encumbered by restraints and political forces that drag them back to a distant past and arrangements that have grown ineffective and obsolete. These only survive in the imaginations of those who live in a realm of their own, aloof to the many transformations and innovations taking place in a rapidly changing world.

In a recent US Brookings Institute study, economists Homi Kharas and Amar Bhattacharya argue that it would take around $5.9 trillion of annual investments a year up to 2030 in order to meet the pressing sustainable development needs of the developing countries and help them to recover from the Covid-19 and Ukraine crises.

This is nearly double the $2.4 trillion called for in 2019. About half of the investments would be needed for climate action, which requires massive investment in the clean energy sector and infrastructure. The rest would go towards meeting the other Sustainable Development Goals (SDGs), Kharas and Bhattacharya argued. Most of the finance would presumably come from domestic sources, but at least $1 trillion would have to come from external sources.

Such findings expose the huge gap between what the international development agencies provide and what is actually needed to reach the targets of the SDGs. The number of people suffering from extreme poverty rose by 70 million in 2020 alone, for example, according to the World Bank, and another 130 million are likely to be added to this figure before 2030 due to climate change, meaning that the number of people suffering from extreme poverty could surpass 600 million by that time. This has led some independent research institutions to predict that the poverty rate will return to the level it stood at in 2015 when the SDGs were launched.

The world has seven years to go to reach the goals of the SDGs, the first of which is the elimination of extreme poverty. Hopefully, they will be seven prosperous years, instead of the lean years we have seen recently.

 

CLOSING THE GAP: In his summary of a recent UN report on the financing of development, Navid Hanif, UN assistant secretary-general for Economic Development in the Department of Economic and Social Affairs (DESA), addressed the importance of closing the finance gap by means of a new generation of sustainable industrial policies that prioritise the transformation to a green economy after a major scaling up of investments into new and renewable energy sources.

The report also stresses the need to boost international cooperation in financing the required development investments, towards which end it calls for a $500 billion per year sustainability incentive. It further urges stepping up reforms of the global financial institutions with an eye to making them better able to perform their designated functions.

It thus appears that calls for developing the financial and technical capacities of the international finance and development institutions are coming from all sides. However, the most urgent appeals still come from the developing nations. I have previously discussed how financing development and climate action are too often mired in insufficiency, inefficiency, and unfairness, with financing falling far short of development needs as a result. Moreover, despite the promises of advanced economies to increase development assistance, levels of aid are falling, and despite their pledge in Copenhagen in 2009 to provide an additional $100 billion a year for climate action, a significant chunk of the pledged amount has never reached the developing nations.

Even presuming the best of intentions, decision-making processes in some financial organisations are so slow and cumbersome that it takes long periods for vital development projects to be approved. Financing that is presumably facilitated and intended to stimulate development then arrives with various costs attached, encumbering the developing nations with other burdens. The IMF also imposes additional costs ostensibly to incentivise countries to repay loans more quickly.

Not only are such costs unwarranted at a time of rising interest rates, but they also add insult to injury to the developing nations that are forced to borrow under conditions that are largely outside their control. The Nobel Prize-winning American economist Joseph Stiglitz and others have strenuously argued against such additional costs and criticised the ways in which they end up penalising those countries whose people desperately need the funds.

Venerable financial institutions such as the World Bank also do not receive the support they require from many of their founders. Should it request an increase in its capital in order to be able to continue carrying out its operations, it will find itself thrown into a bureaucratic maze on the grounds of the need to study its capital adequacy, or to formulate a better vision, or to streamline operations. By the time any increase in capital is approved, the development problems it wanted to address will have evolved into intractable crises.

The foregoing is the product of a vicious cycle that one can call it “paralysis by analysis”. Such discussions have no set timeframe or identifiable aim, and they may involve the drawing of a dichotomy between financing climate change and financing development, whereas in fact no real dichotomy exists. Any funding for climate action, if based on a well-formulated policy and feasibility studies, goes into either renewable energy or climate adaptation in agriculture, food production, water management, coastline protection, fighting desertification and deforestation, and any other number of areas that constitute the very essence of sustainable development.

Another example of such obstruction is to be found in the inordinate amount of human and financial resources that some institutions have wasted in studying responses to pandemics, climate change, and other challenges as “global public goods” versus country level responses to such challenges, only to realise after considerable thought and effort that there is no inherent contradiction between the two approaches. Anyone serious about addressing such challenges understands the need to enter into partnerships in development projects and investments at the country level in order to achieve progress at the global level.

In a similar vein, some imagine that stimulating greater private-sector contributions is a way to avoid increasing the capital of the international financial institutions. Such thinking ignores the fact that stimulating increased private-sector investment requires mitigating the risks that private sector firms could face when financing development projects at a time of increased risk and uncertainty, and that this in turn necessitates the existence of international financial organisations that are both efficient and sufficient in terms of their available capital so that they can offer the private sector the leveraging and guarantees it needs.

I have no doubt that competent experts are familiar with such technical and policy issues. Unfortunately, it is the geopolitical tensions between the incumbent and emergent powers that are obstructing avenues for multilateral action. The World Trade Organisation (WTO), which, after an entire era of stimulating trade by getting all on board on an agreed-on set of rules, has had to watch the system compromised thanks to the politicisation and weaponisation of the instruments of trade and economic cooperation, for example. As a result, tensions have been driven up to the point where “economic rivalry” does not even begin to express the scale of the deterioration that has taken place in international relations.

If all this tells us anything, it is that we should not make generous assumptions about international aid to the developing nations. If someone volunteers the praiseworthy example of the Marshall Plan to rebuild Europe after World War II, that person should be reminded that the Marshall era is long gone.

This article appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat.


* A version of this article appears in print in the 27 April, 2023 edition of Al-Ahram Weekly

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