India's poor a matter of concern: Vinod Thomas

Vinod Thomas, Director-General at the World Bank. File photo  

With the annual Spring Meetings of the World Bank and the International Monetary Fund happening earlier this month, both institutions sought to focus the world’s attention on multiple crises affecting developed and developing nations including food price inflation, natural disasters and their links to climate and the risk of ever more people descending into poverty following the worst economic downturn in eighty years. Even as nations continue to reel under the impact of these crises Vinod Thomas, Director-General at the World Bank, talked to Narayan Lakshman about their interconnected nature and indicated what focus future policies and reforms should have if they are to steer through the volatility.

Dr. Thomas currently heads the Independent Evaluation Group (IEG) of the World Bank, a role that allows his team to critically evaluate Bank performance across all areas. He reports directly to the Board of Executive Directors.

Joining the Bank in 1976, Dr. Thomas has held numerous senior roles including Country Director for Brazil and Vice President of the World Bank, Vice President of the World Bank Institute (WBI), Chief Economist for the World Bank in the East Asia and Pacific Region, Staff Director for the 1991 World Development Report, and Chief of Trade Policy and Principal Economist for Colombia. He has a PhD in Economics from of the University of Chicago and is the author of numerous books, articles, and reports.

Food price hike

Can you begin by addressing the serious nature of the food price inflation that World Bank President Robert Zoellick spoke about this week – firstly, could you give us some background whether food shortage is due to production or distribution? Have some market players been hoarding cereals, and how serious is this crisis compared to what happened in 2008?

First of all the price level has hovered around what it was in 2008 and actually exceeded that, so the 2011 price increase is comparable to 2008, which makes it a very serious issue without a question. There has been something like 36 per cent rise over the last year and for grain export prices it has been even 70 per cent in some instances. That is signalling a very serious situation on the pricing side.

India in particular is vulnerable because food price inflation has been high and it affects a large number of people with roughly 50 per cent of consumer expenditure of the poor certainly going to food. So in that sense the first link is with poverty. One of the recent estimates is that since June of last year, probably about 44 million additional people have gone into poverty. This is in addition to the increase in poverty that was estimated, as a result of the economic crisis in the previous 18 months, so if the two are combined you are talking about 100 million or more additional people in poverty on a global scale.

The global poverty numbers had come down to less than a billion, but all of a sudden you are now back into the story of the bottom billion and more than a billion in poverty right now, if you take the definition of the poverty line as $1.25 [per day]. For the world this is a concern and for the World Bank Group, whose primary objective is to reduce poverty, its main goal is at risk. For India, which has the largest numbers – but not percentage – of poor (by one estimate it is 400 million), this is obviously a matter of great concern.

Let us go to the question of how we can break this down a bit. This time around, both demand and supply factors are present, in the sense that with steady increase in incomes over the last decade the demand for food and grains – both grain for consumption and for use as livestock feed – has been going up steadily. But that has been a contributor in a sense, to a systematic increase in price rather than a jump. More of a secular increase than a blip. So that does not explain the increases in price that we see today.

So we go to the supply factors. First, in the short term, indeed buffer stocks have come down. Where there were stocks importance could be attributed to holding and hoarding also, as factors. But there is a big factor that is truly additional to all of this, compared to anything we have seen before, and that is why the 2011 crisis is more of a concern than what we noticed in 2008 even. That factor is natural disasters and climate change.

There is no doubt that the heat waves in Europe and the Russian drought and the floods in Pakistan and the combination of floods and drought all across the world have had an effect on supply side constraints. [Especially] the big price increases for wheat rather than rice [suggest that] these have been affected by floods and drought more heavily.

For the moment I will just flag the links to climate change as a factor [in the food price crisis] and in the solutions that were discussed during the Spring Meetings, it was not just a matter of having better distribution only, but what could be, in addition, fundamental ways in which productivity can be increased and [how to] deal with the new constraints that are being placed on agricultural productivity by climate change.

As a footnote to that answer, could I ask you this – you specifically mentioned Pakistan and floods and I believe that the Bank was involved in some of the humanitarian, post-flood recovery financing. So we can understand the Bank’s thinking on this subject better, how does the Bank decide between finance allocated for development needs versus emergency financing in such cases?

Absolutely, at one level the objective is people’s well-being and so if development is really halted because of a natural disaster and emergency needs, then doing all you can to contribute to emergency relief is also related to development efforts. In that sense I would say that dealing with crisis is as developmental as anything else.

Now, what instruments can the World Bank use for that? That is where there is a difference. It is not set up to do the kinds of things that the United Nations emergency services can do, or what the Red Cross can do, and what various other intergovernmental agencies can do, in that this is a group that provides financing, knowledge and know-how. The instruments of support differ. Even with that distinction, more and more, with the food and energy crisis and with natural disasters, an emergency window was opened at the World Bank to help with that worldwide. [It comprised] an emergency effort to provide loans that would disburse quickly to help the situation was undertaken. This was done in the case of Haiti and many others including Turkey, Pakistan, India and Bangladesh. Thus there have been loans made for natural disasters, with the difference perhaps that it has not been just been about mopping up the floor but putting in systems to stop the leak, because it is not enough to just mop the floor when the tap is still running.

What can be done especially in countries where these disasters will strike again and again with the same frequency? Since you mentioned Pakistan, here the response had to include not just the reconstruction of structures but the reconstruction of livelihoods, because [the folds] hit their agricultural base. In the case of Haiti the big effort would have to be [towards] the reconstruction of structures and urban life, if you will. It very much differs between earthquakes and floods.

So the Bank is involved, but a little more in long-term recovery and prevention than in the immediate reconstruction only.

Jobless recovery

Moving to a similar theme that came up during the Spring Meetings, Dominique Strauss-Kahn, Managing Director of the International Monetary Fund [IMF], warned of a global economic recovery “without enough jobs” and also spoke of a lost generation of youth who could struggle in the job market. How do you see this playing out in the advanced economies worst hit by the downturn?

The crisis of 2008, as we all now recognise, originated in the industrial countries and that is where the recovery is also the weakest. The crisis hit the middle-income countries and low-income countries as well, eventually, but the recovery was fastest in Brazil, India and China.

In a way, today, the global growth rate is held up by the middle-income countries and the BRICs and the recovery elsewhere is proving to be essential because of the end of the day in a globalised setting the whole global economy needs to pick up. So one question is just about the recovery of growth in Organisation of Economic Cooperation and Development [OECD] countries but the other is about the nature of the recovery, because if it does not create more jobs, every country is concerned about its impact socially.

The uprisings and the unrest in the Middle East, for rightful reasons – including the clamour for greater participation – as well as reasons of deprivation – especially of the youth, who have got some skills but cannot find jobs – is a concern right across the regions of the world, and not just in the Middle East. In the Middle East several countries with 30 per cent unemployment of the youth is a concern but the urban unemployment in many countries including India would also be something of concern.

Now, the OECD [countries’] recovery projections, its uncertainty [and] the inadequate corrections that have taken place following the crisis of 2008 are of concern on the financial side. The financial sector regulatory reforms have hardly kicked in – they have not really been implemented like we would have thought. Second, imbalances in the fiscal deficits on the side of the U.S. and European countries and the surpluses in China and elsewhere have not been corrected. The hope that groups like the G-20, somehow by representing a large share of global GDP, might be an effective way to address these and climate change issues, [is misplaced as] the G-20 has hardly been effective organisational group to make tough decisions or directions on global governance which is needed.

What [Mr. Kahn] said by way of concern over the lack of recovery in OECD countries and particularly the lack of job creation, which then, through trade, also translates into difficulties for developing countries to keep going, [is that] in a setting where you have these three crises and you do not have a good enough governance mechanism to take them on, [that] leaves us with continuing concern that the outlook would be something to watch very carefully and deal with through more vigorous steps at the national level and then through international organisations.

This set of questions has dominated some of the discussions and they need more forthright attention.

In all the things you just mentioned there were two key aspects. One is stability, which the IMF deals with to a large extent. But the other is the question of jobs, for which as you said even a concern in countries like India, despite being a BRIC and leading on the growth front, there are concerns. Is the Bank in any way engaged actively with any job-creation agenda and a long-term sustainable growth process in developing countries?

Very much so. The question would be: do they add up to a strong enough response? Very much so also in the sense that education and its link to employment is the single biggest point to be addressed. There are educational investments and access to education has increased everywhere. But the quality of education and learning outcomes and its relation to jobs that are available domestically or abroad, that link is very weak.

So the World Bank’s education strategy, which was recently approved at the Board, forcefully addresses this question of the relevance of education, the quality of education and the outcomes. In other words, what do they learn at all levels – primary, secondary and tertiary? That is the way in which the Bank’s financing and its relationship with governments and countries is trying to influence the way that the educational system could be a little better geared to meeting job market gaps.

This is an issue in India and everywhere. Even in a country like [South] Korea, which is the highest in terms of achievements on education, when you ask them about the biggest constraints they have, they put education at number one. It is not like middle-income countries or high-income countries are any better. That is one way the Bank is influencing [job creation].

The second would be [promoting] labour intensive types of activities. Considerable investments from the World Bank go into rural areas. There, if you were only concerned with raising production there may be a set of policies that you would pursue. But World Bank financing is very much for small- and medium-sized industries, microfinance, with all its problems is still a very important source and agricultural livelihoods with a particular focus on the poorer segments. The growth in agriculture [should not be] prejudiced against labour use because you can imagine that you grow very fast and you need less people and they are unemployed. The World Bank’s strategy is one that tries to promote labour-using ways of growing.

Third and finally, the International Finance Corporation, which is the private sector arm of the World Bank, has a number of innovative [approaches] that try to combine small-scale activities using a lot of labour in the private sector. Jain Irrigation in India is a nice example of combining knowledge, irrigation, education and the employment of a lot of people. These examples could be scaled up. The Bank is conscious of it but the real question is the scale of all this anywhere near what is needed in view of the big crisis that we mentioned at the beginning. The gaps are so large that we need to scale [these examples] up.

Climate change

Since Copenhagen, where there was a spike in awareness of climate change issues, what kind of progress do you think has been made? Has the Bank played any role in influencing the discourse as well as the actual agenda? Also, if I had to ask you to find a sticking point, would you say that it is the question of financing – adaptation and mitigation – and the disagreement between the developed and developing country groups? Or is it something else?

I think there was some progress in the last round, at least in terms of keeping issues open, and there is an expectation that it will go further later in the year. One question is: these rounds are international actions and they are about agreements and understandings among countries about what each would do. There is recognition that everybody would be hurt by inaction, but there is no agreement on how much each should do to avoid that situation. That is the bottom line.

Historically, the industrial countries are responsible for CO2 emissions of this order. The increments that are taking place today are shared by all, equal responsibility. The atmosphere does not differentiate between how many people are [polluting it – there is only a sense of] so much is coming from India and so much from China. When you look at it that way it is a shared responsibility and no longer somebody else’s problem.

Middle-income countries have everything to gain from dealing with this as developed countries [do] and there is no scenario under which if the developed countries acted and the developing countries did not act, we would avoid the worst case scenario. You need all to act. The question then is, how could this be addressed by the major countries as if it is in their own interest – that is they are not doing it for somebody else’s benefit but for their own survival.

That is what helped when trade discussions went forward. It was not so much because everybody said “Let us do it for everybody else;” [rather] the country which had a lot of trade restrictions said, “If I liberalise I am going to gain.” India did not [undertake] liberalisation because it was good for the United States – it did so because it was good for itself. Why is it not the same for the climate? Why is it not good for me to have a cleaner environment?

So, for example, do you think it is useful to frame it the way the Indian Prime Minister Manmohan Singh did earlier when he said that a certain percentage of Gross Domestic Product [GDP] was being lost to climate change effects?

Absolutely. We have estimates for India, China, Argentina, Brazil, and Turkey. For these countries’ income levels, the estimates of the damage to the environment [and its impact on GDP] is about two or three per cent. You can think of that as the loss [of income] per year from destroying the environment and the climate. Why does that not touch us? It is because that is a public good, everyone is affected, and it is an externality. The other point is, if I took a good action my neighbour, Sri Lanka, would also benefit. What is wrong with that and why do I care? One set of steps is to do the things that are in one’s own interest, make the point and do it for yourself. And there is quite a lot we can do in developed and developing countries – energy efficiency, reducing energy subsidies, and stopping deforestation – these are all good for the climate, good for the poor and good for the finances.

Renewable energy is more difficult to put into that basket because there are financial implications. Those are areas where agreements with other partners on transfer of technology, know-how and so forth, also needs to come [into the picture]. [If that happens] then over time making the transfer to cleaner forms of energy would also be in the list of things that a country would want to do. Then there are many innovations [by] the private sector and scaling them up would be part of the answer.

One step, therefore, would be to go much further in these directions.

Since Cancun, the dramatic news or change is that the Environment and Forest Ministries of two major countries have taken a view, much more clearly, that a cleaner, better environment is good for growth – and that is China and India. So what Minister Jairam Ramesh is good for the environment but it is also good for growth and that recognition is important for India. In the long term it will not be possible to grow at 8.5 per cent if natural disasters, agricultural disasters and pollution will reduce GDP by around 3 per cent a year. It just will not be possible.

On the national side, a lot can be done, but the great news is the strong move [towards this goal] made by the Ministers for Environment in China and India. That to me is half of the lesson.

On that subject, do you think that their examples show that politics can get in the way?

Absolutely, this is true. I have the advantage of being at a distance, to not know from one day to the next what allegations [made against the Ministers] were true or not true. But the principle of it, that the environment and growth are not opposing values and they go together, is a change that these two ministers have signalled. Coming as it does from the two most populous and largest developing countries, that is significant. Then of course on the international front it is extremely important to make progress in the next round and keep going.

Arab spring

While most of the newspaper headlines focus on the political and security consequences of what has been described as the “Arab spring” what does the recent turmoil in countries such as Egypt, Tunisia and others mean in terms of development goals? Specifically could you talk about both development as economic prosperity and also what Amartya Sen has called development as freedom?

The term “Arab Spring” is appropriate because there are parts of it that are about unrest and turmoil, and parts of it that are about liberation. It is a complex phenomenon and one needs to call it in a way that signals hope and progress and at the same time desperation and deprivation too. The trigger points do have links to food prices, although that is not to say those are the most significant [factors]. Price increases in food coming in the wake of the Russian drought did have an impact on Egypt and I think climate change has everything to do with it.

Second, there is the question of inclusion. India and China have made inclusion their motto of development and that is partly because it is a good thing to do but also partly because it is a political reality. If you do not include people in your progress you are going to be voted out or you are going to be pushed out.

If that is the case it is striking that Egypt, Tunisia and others are countries that have a great deal of exclusion and inequality but not so much inequality of income even as you have in some parts of Asia and certainly not as much as you have in Latin America.

Exclusion is not just about income – it is also about whether you are included in decision-making, are you a part of society, if you are educated are you included in the employment pool or are government jobs set aside for the privileged? Every one of these [dimensions] is as important as income inequality – that is the powerful [lesson].

I was just looking at the numbers and thinking that Egypt and Tunisia must be very unequal because a lack of inclusion must be [a driving force behind the unrest] – but it was not. Income inequality [in these countries] is not worse than in China or any other place. But there is an exclusion of a different type and a different order that transcends all that and that partly is reflected in a 30 per cent rate of unemployment among youth – if you are not employed you are excluded right? The man who set himself on fire in Tunisia was desperate.

Exclusion as Amartya Sen has discussed it is fundamental and a human right to have a voice in the way your community or country is run. That democratic dimension is very much a part of the picture and so it is economic, political and social.

So you see these developments as definitely positive?

It is complex in that in and of itself it does not necessarily give you the basis for saying that the economy is going to grow and social and political inclusion will follow. There is enough experience to say that in some democratic transitions the economic reforms and changes did not happen overnight. But [it is important] to signal that it is as much about positive change that people are trying to bring about as a reflection of the deprivation and the dark side that we have seen in the past.

World Bank policies

Moving from these global macro issues to the World Bank itself, could you tell us a bit about how the Bank is placed as a leading development lender today, in terms of its own institutional strengths and weaknesses? Also in earlier comments regarding an Independent Evaluations Group [IEG] report we discussed the view that the Bank responded to the crisis with “some delay” – what lessons were learned from that experience?

The crises have brought out a bigger place and a bigger role for the World Bank Group than we had recognised in the last 20 years. It has been a much more decisive player in the economic crisis. The delay that was seen in the response on the part of all organisations including the World Bank was only offset by an infusion of capital from the World Bank – the largest of which went to India – a worldwide disbursement of $80 billion over two years. [This disbursement] put it at a level bigger than the IMF, which is primarily designed and set up to meet such crises. We have suddenly seen a World Bank that is not a small player and can be a big player on the global stage, at least in this economic crisis. In retrospect I am giving a very strong positive signal on what this institution can do.

Against the crisis that we talked about you need strong capable organisations to take on responsibilities. The experience of the World Bank’s response to the economic crisis gives me, on the basis of evaluation, to say that this organisation is a pretty strong one to deal with some of these issues.

It can, should and needs to gear up far more in being able to take on and help in the environmental, natural disaster and climate crises. In the case of the food crisis as well it has particularly geared up to support low-income countries. It is a striking revelation that sometimes it takes a crisis to see strengths, and the World Bank Group has come through as a pretty powerful organisation that needs to be utilised much more, not in terms of money, but in terms of its ability to work with the government and private sector to confront these three or four crises that we are facing today. It cannot be [achieved] alone – it really has to strike stronger partnerships with others. But it is a strong organisation on the basis of its performance during this economic crisis.

About yourself

You retire this year from IEG after a long and most successful career in the Bank through some of its most interesting times – what have been some of the memorable highlights? Also, what lies ahead for you?

On the highlights the delay that takes place in the recognition of issues that eventually prove to be of crisis proportion in the development area is one point that strikes me. There is a sense of a group mentality. Little by little, you get glimpses of a different view, but it just takes quite some time before the establishment or conventional wisdom begins to recognise them. Examples are the old style structural adjustment – it just took so long for that to be replaced. The priority for environment and climate change is still [in some ways considered] somebody else’s problem. Inclusion and poverty are important in the early stages of a financial crisis – it took three crises before that became understood. There is a momentum for simply going along with what is.

In a recent report, the Independent Evaluation Group of the IMF said that during the crisis the IMF was completely unprepared, reacted very slowly and there were warning signs that were given inside and outside. However these were not heeded because of what they called group-think. In development and in the IMF’s financial areas as well the comfort level of just going along with things and how long it takes to reverse [that] – that stands out as one highlight.

The second highlight is that I have sensed the immense strength of an organisation like the World Bank when it has worked behind countries, not in front of countries. [In this list are] countries including India, Brazil, Vietnam and Ghana, where there is a strong partnership and the countries have taken steps for which the World Bank provides support from behind and then connects people and brings knowledge and so forth. [Under this model] very interesting things happen and new ideas, new innovations and new projects and programmes [emerge]. That has been a very striking experience for me.

What do you mean by “working in front of” countries?

By that I mean saying “Here is a prescription, take it and you will be cured.” You will be amazed that that still happens but the examples [of working behind countries] are [increasing]. It may have to do with how well countries are doing, leading the way themselves a bit more. The middle-income countries seem to be doing better because they are also doing things on their own. So I gave you cause for pause with one set of examples and cause for optimism with another set of examples.

What about your own plans?

I will complete my extension in August of this year. The Asian Development Bank has made a very interesting offer that allows me to continue this in Asia. I became an evaluator five years ago and if I just stopped that it would be like an investment wasted. This is an opportunity to apply that in an organisation that is growing, it is bigger, it is very important in Asia and it is also closer to home. [I will be working as the] Director-General of Evaluation there.

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