Tapping Europe for solutions to poverty

What do you do, after decades of doling out development aid to third-world countries, and decades of debate about how they should best spend it, when you realize that more people are poverty stricken today than when you started?

Or when you note that 10 years after the collapse of the Berlin Wall, only two of the 25 countries that emerged from the Soviet empire are better off economically than they were under communism?

Or when you find that a sudden crisis on Asian financial markets can wipe out years of progress in feeding and schooling children and plunge tens of millions of people back into poverty?

You question conventional wisdom, the World Bank has decided. And at a conference of economists here this week, bank President James Wolfensohn came in search of European thinkers who he hoped could offer new ideas after 20 years of utter trust in free-market forces.

"Europe has a longer tradition of deeper concern for equity, and a different view of the role of the state," says Joseph Stiglitz, the bank's chief economist. "We need to replace ideological textbook economics and their simplistic explanations of what makes markets work with a broader understanding of institutional needs."

At the same time, after being "absent from the development debate for a long time," says leading French economist Franois Bourgignon, European economists "have discovered the virtues of free markets.... They are no longer talking nonsense ... and they are regaining credibility."

For most of the past 20 years, developing countries that turned to the World Bank and the International Monetary Fund (IMF) for help were told to liberalize their economies, privatize public enterprises, balance their budgets, stamp out inflation, and allow capital to flow freely in and out of their markets.

But when the Asian economies that had followed this advice most assiduously fell victim most heavily to the crisis in 1997 and 1998, economic analysts began to have their doubts. And when it transpired that the Eastern European countries that privatized fastest were doing less well than their more cautious neighbors, and that those who allowed higher inflation have begun growing faster, that led to "a lot of rethinking about what is going on," says Professor Stiglitz, former chairman of President Clinton's Council of Economic Advisers.

The result is a new emphasis on the social context in which governments act, as they try to develop their countries.

That means that the World Bank now wants to pay more attention in the countries where it lends money to fighting corruption, strengthening the courts, ensuring social safety nets, and building the institutions of civil society.

These are the sorts of jobs that states normally do. But for many years, third-world governments have been advised to cut the state out of public life as much as possible and to let market forces solve their problems.

As bank strategists reconsider the role of the state, Europe is a natural place to look for ideas. "European economists tend to be more concerned with income distribution and care more about questions of equality, while American economists tend to pay more attention to efficiency," says Richard Layard, a professor at the London School of Economics.

In holding this week's conference - the first World Bank meeting on development economics to be held in Europe - organizers went beyond the normal specialists in a field where Europe has long played second fiddle to the US.

"We are trying to bring people into this field not as development economists but as professionals," says Professor Bourgignon. It will be a long time, however, before European economists can match the influence of their American counterparts: 70 percent of papers published in the world's top academic journals are written by US economists, according to a recent survey by The European Economic Review.

"American economics has developed to a higher level of excellence as a system of research than European economics," says Professor Layard. In the international institutions such as the World Bank and the IMF, the overwhelming majority of economists are American or British.

But as the World Bank casts around for new ideas, European economists may get to share some of the limelight with their American colleagues. "Development is the hardest challenge the world has," observes Stiglitz. "Nobody has the right answer, so an open approach seems imperative. We should tap into all the strains of thought that exist."