World Development Report 2002: Building Institutions for Markets
Celine Tan
October 2001
The title of the latest World Development Report (WDR), Building Institutions for Markets itself speaks volumes about the World Bank’s view of the role of the state in facilitating the Bank’s brand of social and economic growth. Placing the market at the centre of any institutional framework for development ,the WDR 2002 confirms the neoliberal approach adopted by the World Bank in its policy prescriptions for developing countries.
Assuming the market to be the primary mechanism for growth and poverty alleviation, the report identifies the institutions necessary to facilitate this market-led development. It goes on to discuss the capacity of institutions, including the judiciary, the media, government institutions, and the financial system to promote and safeguard market access as well as ways to establish effective institutions for these purposes. The state, in this respect, has an important role to play in building these institutions for markets.
The WDR 2002
Markets, say the WDR 2002, are the only solutions to problems of poverty and disparities of wealth and improving access to markets will lead to the betterment of all societies caught in the poverty trap. The WDR argues that only countries with efficient and inclusive markets experience significant income growth and poverty reduction. The crux of the report lies in its assertion that strengthening “market-enhancing” institutions will lead to social and economic development
“Without effective institutions, poor people and poor countries are excluded from the benefits of markets,” say World Bank Chief Economist and Senior Vice-President Nicholas Stern who oversaw the report. “This report offers principles for reform based on the experience of people around the world who are grappling with the challenge of building more effective institutions.”
The report charges that building key institutions to serve markets enhances opportunities for poor people to operate within them and empowers them.
The report identifies nine key institutions it regards as vital to the sustenance of a market economy and categorises them under three broad headings:
- Firms
1. Farmers
2. Firms and corporations
3. Financial systems
-
Government
4. Political institutions
5. The Judiciary
6. Competition regulation
7. Infrastructure
- Society
8. Informal networks and institutions
9. The Media
The World Bank survey of these institutions in 100 countries has resulted in the WDR 2002 conclusion that all such institutions support the market by performing one or more of three functions:
1. by easing or restricting the flow of information;
2. by defining and enforcing property rights and contracts; and
3. by increasing or decreasing competition
Efficient judicial systems, for example, will lead to efficiency by simplifying procedures for the settlement of disputes and improving peoples’ access to arbitration while independent media organisations lead to greater government accountability and transparency. The strengthening of these two institutions therefore will result in the smoother functioning of the market by ensuring that commercial transactions are conducted effectively, fairly and openly.
The report claims to provide a framework for institutional development and summarises its recommendations for building effective institutions in four principles:
1. complement what exists, taking into account existing institutions, skills, technology and corruption and corresponding with the per capita income of the country to ensure access and use;
2. innovate and experiment with new institutional arrangements and abandon failed institutions;
3. connect communities through open information and open trade; and
4. promote competition between jurisdiction, firms and individuals in order to create demand for new institutions and bring flexibility in markets
Problems with the WDR‘s approach
Once again, the World Bank has unquestioningly accepted the gospel of the market as the saviour of the poor. The WDR 2002 fails offer any alternative perspective on development other than that based on a market economy. Instead, it assumes the efficacy of the market to provide essential goods and services to the world’s populace and advocates the building of institutional structures to support this prescription of growth. The report itself states that it is a follow-up from last year’s WDR which argued that “markets are central to the lives of poor people” (although this reflects a selective reading of the WDR 2000-2001 as the previous report did indicate that other factors, such as empowerment through removal of discriminatory practices, are equally important in eradicating poverty).
The WDR 2002 has, once again, relegated the role of the state to that of a servant of the market, asking states to put into place institutional mechanisms – good governance policies, private property rights, and liberalised competition laws – to facilitate the effective operation of the market. The strengthening of these institutions inevitably means a withdrawal of the public sector from the market and market-support institutions, coupled with the granting of more rights to the private sector.
The report, for instance, advocates against state-owned media for fear of government censorship of information. It addresses briefly the problems associated with private monopolies of media organisations but only does so with reference to the problem of politically-connected media owners. This limits the discussion of media freedom to issues of corruption – the example given by the WDR 2002 is that of Ukraine’s commercial media’s links to the state resulting in more media coverage of the incumbent government candidate in their elections.
Such an approach fails to analyse the censorship exercised by large multinational media corporations and even domestic commercial organisations for the benefit of big business. This limits the accountability of corporate power as large media corporations will not disseminate perspectives deemed detrimental to their existence while small media outfits are faced with the prospect of losing valuable advertising revenue.
For example, media giants, such as Time Warner and Disney – who together control almost a third of the world’s media organisations, including print, broadcast and the Internet – will be hard-pressed into publishing stories denouncing corporate power, or ones questioning the perils of a deregulated global information industry under which these corporations managed to consolidate their empires. Neither would it be foreseeable that Disney would publish stories alleging maltreatment of workers in their merchandise manufacturing plants in developing countries.
The danger with adopting a market-based approach to institution-building is that it sidelines the other more important functions of national institutions which enhance social and economic development. A free and independent media, for one, can provide a bulwark against authoritarianism and promote civic participation in governance through free flows of information and expression. But it can also provide a check on the excesses of the private sector and corporate monopolies, an issue little discussed in the WDR 2002. In this case, privatisation and deregulation of local media industries, as advocated by the report, may not necessarily lead to increased freedom of speech.
Building multiparty electoral systems and representative government can also lead to poverty alleviation, not only through mechanisms to hold governments accountable but also to hold corporate power accountable. It is through these mechanisms that the poor are able to articulate their needs and work towards reforming iniquitous government policies, including unfair trade practices and oppressive economic policies.
The problem with the WDR 2002 is that it does not offer the poor – whose cause it purports to champion – with the option of arriving at this decision. The report manages to disempower the constituency it attempts to serve by shutting off avenues for debate. Institutions, it would seem, are constructed for the benefit of markets, not people.
This deficiency is starkly illustrated in the report’s chapter on the judiciary where it focused solely on the resolution of commercial disputes and fail to mention the need to build effective judicial systems for the protection of human rights or the environment.
World Bank executive concerns over market-based approach
World Bank executive directors themselves have expressed concern over the primacy accorded to the market in the WDR 2002. A leaked summary of a meeting of the Bank’s executive directors on 24 July this year revealed a number of board members expressing unease over the approach adopted by the WDR team.
One member had pointed out that “markets did not necessarily have a pro-poor characteristic” and felt that the report failed to comprehensively address the tension between the market and the other institutions insofar as they conflicted in areas of human development. He further expressed his disappointment that the WDR 2002 seemed to favour short-term market development over other goals, including the promotion of sustainable and comprehensive development.
A couple of board members cautioned against the impression given by the report that “markets were seen as an end in themselves not as a means to the end, which was development and poverty alleviation”. The promotion of markets, argued one member, should be balanced by public sector efforts to empower the poor, through education and the creation of other opportunities for advancement.
One member even went as far as suggesting that the report should have dedicated space to the discussion of the negative effects of market-led growth. Attention, he said, should have been given to damaging market behaviour and the links between politics and the abuse of market power.
The report drafting team leader was reported as saying the WDR 2002 suggested that while markets were not the solution to everything, they were a means to an end and that a strong state was necessary for effective market development.
Institution-building
While it is heartening to note the WDR 2002’s approach to institution-building includes the strengthening of existing local institutions, including local customs – formal and informal, it is evident form the WDR report that the ideal institutional framework will be modeled on western-style institutions. This ignores the subjectivity of institution-building: what constitutes an institution to western commercial interests may not be so to people of the south.
For example, the emphasis placed on the strengthening of private property rights regimes in developing countries disempowers communities who do not possess individual land holding systems nor believe in these concepts. The report does not address the human alienation faced by displaced communities when communal land is taken from indigenous societies and compensation is granted in monetary form. This is a common practice in the construction of massive hydroelectric dams results in the forced relocation of riverbed communities to urban centres. Monetary exchange for something that constitutes an important cultural, and often spiritual, further marginalizes the community and exacerbates their suffering.
The WDR 2002 does mention the tension between transplanted colonial institutions and their adaptability to the local environment, the debate is largely confined to the viability of transplanted institutions insofar as they serve the needs of a market economy. A World Bank executive director had noted this point in their annual meeting, pointing out that colonial institutions “had never been designed to integrate local economies”, particularly in the case of Africa “where virtually every country had inherited transplanted institutions from former colonizers”.
Political economist Ngaire Woods noted however that the report was more flexible than previous World Bank approaches to institutions by speaking of the need to experiment with different institutional structures rather than providing a blanket blueprint. The mention of possibility of indigenous institutions serving as the basis for development of more comprehensive institutional structures is one example.
Nonetheless, what was not discussed in the report was the institutional framework advocated by the Bank in place of the colonial infrastructure, one that is premised on an assumption of market-led growth and western-style regulation. It fails to examine the market as an institution in itself nor does it critique the market economy as a western-styled concept that does not take into account traditional modes of exchange within different countries.
Conclusion
The WDR 2002 concludes that “development experience shows that markets can provide the means to attain sustained increases in living standards for people around the world”. It does not challenge this assumption, nor present conclusive evidence to support this proposition. The report merely proceeds to outline suggested design of institutional infrastructure to support its conclusion that market-led growth equals poverty alleviation.
In doing so, the report adopts a very narrow view of institutions and institutional actors and fail to examine how the design of an inclusive, equitable and democratic institutional framework can redress inequities and impoverishment through the empowerment, including the inequities and poverty created by a market-based economy.
Further, it must be noted that while the World Bank has called for more accountability and transparency in the institutional framework of countries, it has failed to practice what it preaches in its own bureaucracy. The Bank’s information-disclosure process remains is far from being open and accessible. Summaries of its board meetings – including the report obtained by the Bretton Woods Project – remain confidential and all information must be vetted prior to their release. The WDR 2002 itself is subject to institutional vetting with World Bank country representatives allowed to censor certain sections they deem inappropriate or which casts a bad light on the countries or policies involved.
