IFI governance


“Over-optimistic about trade liberalisation”: World Bank trade evaluation

8 April 2006

In the most comprehensive evaluation ever conducted of the World Bank’s work in trade, the Bank’s Independent Evaluation Group (IEG) has found that the Bank neither fully understood the implications of its “narrow focus on trade liberalisation”, nor did enough to strengthen trade capacity on the ground. In the period studied, 1987 to 2004, about eight per cent of total World Bank lending or $38 billion went to 117 countries for trade-related activities.

Analysis seriously flawed

While the evaluation shies away from challenging head-on the economics of the Bank’s promotion of unilateral trade liberalisation, it points out a number of serious flaws in the institution’s understanding of how to maximise the benefits to be had for developing countries. A survey of key trade officials in Geneva revealed that the Bank’s “push for liberalisation” does not “account for the interim stages developing countries go through, or the transitional adjustment they may face”.

Broadly accepted in the trade literature is the need for macroeconomic stability and complementary systems (such as an improved regulatory environment) to accompany trade reforms. However, the IEG found that the Bank had supported trade reforms in the absence of both. Even more damaging for the Bank is the report’s veiled assertion that over-zealous liberalisation has lead to de-industrialisation: “The speed of import liberalisation increased competitive pressures in countries that were unable to generate dynamic and sustained manufacturing growth.” This confirms research conducted by UNCTAD in 2002, which found that the Bank’s pursuit of trade liberalisation in Africa had lead to growing wage inequality, a “hollowing-out” of the middle class and widening trade deficits caused by a loss of industry.

the Bank's push for liberalisation does not account for the interim stages developing countries go through

The report finds that Bank trade-related projects “did not adequately attend to poverty and distributional outcomes”. Alberto Villarreal, of Friends of the Earth Uruguay, maintains that small-scale farmers are particularly vulnerable to market opening pressures, “but they have been ignored by the World Bank which has allowed rich countries to pursue their own trade interests at the expense of the poor and the environment.”

In its response to the evaluation, Bank management was dismissive about the poverty issue, saying only that “the message should be nuanced”, and citing the existence a “range of guidance for staff” with more “being put in place”. In contrast, the board’s Committee on Development Effectiveness (CODE) backed the IEG’s call for more analysis of distributional impacts.

Missing the point on the ground

The evaluation finds that the Bank’s narrow focus on trade liberalisation, has seen other priority areas for developing countries unattended.

  • On the lending front, the Bank has been “least effective in helping countries manage external shocks and adjustment costs related to trade liberalisation”. Existing programmes are under-used due to excessive conditionality which the evaluation says has been ineffective.
  • On analytical work, a “gap exists between activities and the needs of country economists”. A survey of Bank country economists indicated a need for more knowledge about “transitional costs associated with trade reform, greater empirical and comparative analysis, and practical research on global supply chains”. In-country, economic and sector work reports “have only rarely presented an in-depth analysis of the welfare implications of trade policies, analysed the institutional framework for trade, or incorporated political economy factors that could influence trade reform and outcomes.” The Geneva survey of key trade officials found that more time was needed “researching the impact of regional agreements and ad valorem tariffs”, and that the Bank only works ‘top-down’ and does not consult or partner with others while producing research. More attention should have been given to strengthening the interaction between the Trade Department and operational colleagues. CODE has called on the Bank to make better use of external resources and analyses, enhancing and even substituting for in-house research.
  • On capacity building, the Integrated Framework – a multi-agency initiative for mainstreaming trade in national development strategies, led by the Bank – was criticised for a lack of follow-up, slow implementation, overlap with donor activities, and no mechanism to ensure that the most critical priorities are funded first.

The evaluation calls on the Bank to:

  • Draw more on the expertise of poverty, gender, private sector development and agricultural and rural development units;
  • Do more systematic research on micro-level adjustment;
  • Design a guidance note on trade issues on a pilot basis for country teams planning country assistance strategies; and
  • Better integrate trade work done in the centre with country-level work on agriculture, economic policy, labour markets and private sector development.