Eric Toussaint :
(From previous issue)
The trickle-down effect
The trickle-down effect is a trivial metaphor which has guided the actions of the World Bank from the outset. The idea is simple: the positive effects of growth trickle down, starting from the top, where they benefit the wealthy, until eventually at the bottom a little also reaches the poor. This means that it is in the interests of the poor that growth should be as strong as possible, if they are to be able to lap up the drops. Indeed, if growth is weak, the rich will keep a larger part than when growth is strong.
What are the effects of this on the World Bank’s conduct? Growth should be encouraged at all costs so that there is something left for the poor at the end of the cycle. Any policy which holds back growth for the sake of (even partial) redistribution of wealth or for the sake of protecting the environment reduces the trickle-down effect and harms the poor. In practice, the actions of the World Bank’s directors are conducted in line with this metaphor, whatever the more sophisticated discourse of certain experts.
Moreover the World Bank’s historians devote about twenty pages to discussions of the trickle-down31 theory and acknowledge that “This belief justified persistent efforts to persuade borrowers of the advantages of discipline, sacrifice, and trust in the market, and therefore of the need to hold the line against political temptation”. They maintain that the belief gradually fell into disrepute from 1970, due to cutting remarks from an impressive number of researchers concerning the situation in both the United States and the developing countries. Nevertheless, the historians note that in practice, this did not have much effect |33|, particularly since, from 1982 on, trickle-down theory made a triumphant comeback at the World Bank |34|. Obviously the trickle-down issue is inseparable from that of inequality, which will be discussed in the next section.
The question of inequality in the distribution of income
From 1973 on, the World Bank began to examine the question of inequality in the distribution of income in the developing countries as a factor affecting the chances of development. The economics team under the direction of Hollis Chenery gave the matter considerable thought. The major World Bank book on the subject, published in 1974, was co-ordinated by Chenery himself and entitled Redistribution with Growth. Chenery was aware that the type of growth induced by the Bank’s loans policy would generate increased inequality. The World Bank’s main worry was clearly expressed by McNamara on several occasions: if we do not reduce inequality and poverty, there will be repeated outbursts of social unrest which will harm the interests of the free world, under the leadership of the United States.
Chenery did not share Simon Kuznet’s point of view|, that after a necessary phase of increased inequality during economic take-off, things would subsequently improve. The World Bank was firmly convinced of the need for increased inequality. This is borne out by the words of the president of the World Bank, Eugene Black, in April 1961: “Inequalities in income are a necessary by-product of economic growth (which) makes it possible for people to escape a life of poverty”. Yet empirical studies carried out by the World Bank in Chenery’s day disproved Kuznets’ claims.
However, after Chenery’s departure in 1982 and his replacement by Anne Krueger, the World Bank completely abandoned its relative concern about increasing or maintaining inequality to the extent that it decided not to publish relevant data in the World Development Report. Anne Krueger did not hesitate to adopt Kuznets’ argument, making the rise of inequality a condition for take-off of growth, on the grounds that the savings of the rich were likely to feed into investments. Not until François Bourguignon became chief economist in 2003 did the Bank’s show any real renewal of interest in this question |39|. In 2006, the World Bank’s World Development Report subtitled Equity and development again refers to inequality as a hindrance to development. At best, this approach is considered to be good marketing by J. Wolfensohn (president of the World Bank from 1996 to 2005) and his successor, Paul Wolfowitz.
(Concluded)
