The phenomenal economic, social and technological accomplishments since World War II will come to nought if the comity of nations does not evolve institutions to address global concerns. Repurposing World Bank is a case in point.
For the times, they are achangin. That was more than half a century ago, Bob Dylan calling on the powers-that-be to change or change will overtake them.
The last 75 years has seen enormous global progress in many dimensions. Yet we live in an age of anxiety. The reasons for this are a host of national and global challenges which threaten to swallow our steady march of progress despite the phenomenal achievements of the last 75 years.
The chasm of iniquities between countries has narrowed but within countries, the rich-poor divide has widened. This causes anxiety about what is in store for the 25 to 50 years.
This calls for repurposing global institutions, and creating new ones to address a host of issues that cross national borders.
The world as a whole during the last three quarters of a century after World War II has seen “the best of times”.
(Economists categorise the Golden Age of Capitalism (1945-1973), when welfare state capitalism was the dominant political order in the west)
It took 1,000 years up to 1950 for world per capita GDP to multiply by 15, but it took only 60 years for it to multiply by almost four between 1950 and 2008. Life expectancy has increased from just above 50 years in 1960 to above 70 years half a century later. Over the same half century infant mortality has fallen from around 120 per 1,000 live births to around 30 per live births.
The global Gini Coefficient, a measure of inequality fell from 72.2 per cent in 1988 to 70.5 per cent in 2008. Global poverty ratio fell from 42 per cent in 1981 to 11 per cent in 2013.
And yet, the sense of anxiety in our time is palpable. Trump, Brexit, Scottish Independence, Catalan Independence, Far Right parties in Western Europe and subversion of democracy in Eastern Europe are some in the chain of events arousing the anxiety level.
Conflict and threats to democracy in Africa, Hindu fundamentalism in India, Islamic fundamentalism in Middle East and elsewhere, Buddhist fundamentalism in Myanmar and elsewhere, authoritarianism, states in conflict, refugee flows, South China Sea, North Korea… Environmental damage, climate volatility and extreme weather events trigger apprehensions.
Let there be no doubt that progress can be brought to a shuddering halt.
Inequality is also a “best of times-worst of times” story, but ultimately, it is the chasm facing the world in the coming 25-50 years.
The story is that inequality in the US fell for 35 years after World War II, but after that started rising and has continued to do so. Inequality has also risen in the UK, in parts of Europe, China, India and Bangladesh.
What’s the good news? It is that inequality in Latin America (Brazil, Mexico, Argentina and Chile) fell during this same period.
China, India, Bangladesh and Vietnam grew faster than the US and the West. Thus inequality between countries fell.
Putting all this together, inequality among all citizens of the world taken together fell.
The big worry is a massive technological trend, displacing basic labour in favour of skilled labour and capital. Unchecked, this will lead to increasing concentration of market income and accentuate income inequality.
Its manifestations are already felt in the US and UK where, mixed with a toxic blend of xenophobia and fear of immigrants, it has led to Brexit and Trump.
Governments in East Asia have already started worrying about the potential for inequality, and those in Latin America will have to keep running on policy to stand still on inequality.
This is the sense in which we are living in an age of rising inequality. But there is a second sense in which we are also living in an age of rising inequality — the global constraints on domestic policy towards mitigating inequality are greater.
Some constraints: The mobility of capital and skilled labour leads to a race to the bottom on these taxes, lowering revenue in every country, revenue which can be used to increase education and skills, or transfers. Even if illicit evasion was overcome, the basic problem remains, requiring global minimum tax agreements.
The mobility of low income unskilled labour. If increased transfer benefits at the lower end, induce in-migration of basic labour, this will increase the fiscal costs of the redistribution policy. This requires global, or at least regional, management of migration. No global institution to address the question.
Regulation and labour standards are a standard way of ensuring fairer distribution of gains from technical change. ILO is meant to address these and does a useful job, but has no teeth.
Finally, consider incentivising and public investment in Research and Development (R&D) to shift the tide away from labour-saving to labour-using technical change, as proposed by the late Tony Atkinson.
Managing national inequality is difficult because of cross-border spillover effects. But these spill-overs occur in many other settings-greenhouse gases, financial contagion, infectious diseases, refugees flows and economic migration.
The world clearly needs institutions to address cross-border spill-overs, especially at the global level; institutions to provide Global Public Goods (GPGs).
But what we find is that the global institutions we have are designed for an earlier era when these global spill-overs were not as important. Can they be redesigned?
Let us focus on one important institution-the World Bank-and tell the story of how it has been left behind in a rapidly changing world
The core financial instrument for GPGs has to be a grant instrument. This is recognised in a recent Centre for Global Development Report (CGDR) which proposes a new grant financing window for the World Bank alone of $10b annually. It raises the question then of whether similar windows should also be opened for the regional development banks.
The final issue for the World Bank as a purveyor of GPGs is its governance structure. This too reflects the financial and funding realities of 1944 and not the economic structures of today and the need for consensus building on how to address cross-border spill-overs.
For this, a major change in the voting structures of the World Bank will be needed, which is unlikely to happen with the veto power of the largest shareholder in the current structure.
The basic point is that the World Bank, a jewel in the crown of post-World War II global arrangements, cannot as it stands address the major issues of our time.
Its traditional role as supplier of country-specific investment is undermined by lack of capital increase, competition from replica regional development banks, and of course from private sector flows.
Its signature instrument (and that of the other multilateral development banks) is particularly unsuited to the multi-country nature of solutions to cross-border spill-overs.
And its governance structure reflects the terrain of 1944, not the realities three quarters of a century later.
The World Bank is symptomatic of institutional vacuums at the global level to address global issues. The last 75 years has seen enormous global progress in many dimensions.
Yet we live in an anxious age.
The reasons for this are various national and global challenges which threaten to swallow our steady march of progress.
(This is based on the presentation by Prof Ravi Kanbur recently at the Centre for Development Studies, Thiruvananthapuram, releasing the IPSP report. He is T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, Professor of Economics, Cornell University)
