Eighty years on from Second World War, can the West still eradicate global poverty?

A new book on the economics of poverty by Iraq's former finance minister Ali Allawi questions the effectiveness of the World Bank and the IMF

Iraq's Finance Minister Ali Allawi called for urgent reforms during his time in charge of Iraq's economy. AFP

When the World Bank and the International Monetary Fund were established towards the end of Second World War, there was hope that the world's poorest countries could be modernised and poverty eradicated.

Yet 80 years on, poverty levels are stagnating, and with the exclusion of China, about 60 per cent of populations live below the poverty line.

The failures and successes of the push to end global poverty are traced in a new book by Iraq’s former finance minister Ali Allawi Rich World, Poor World: The Struggle to Escape Poverty.

“If you look at economic history in the developing world, there's certain kinds of patterns and themes. Very few countries managed to escape from relative poverty,” he told The National.

The 688-page book gives a detailed diagnosis of the economics of poverty in the developing world, following the creation of the IMF and the World bank at the Bretton Woods conference of 1944.

Yet it is those countries that broke away from the Western economists' line of thinking, that appear to have succeeded.

Now living in London, Mr Allawi draws on decades of experience, including his early travels as an employee of the World Bank, where he saw first-hand Western development aid at work.

“I'm not prescribing anything,” Mr Allawi insists, over tea at an unassuming London cafe – his local favourite – where he also meets former diplomats and other associates from his long career.

The book opens with Mr Allawi's childhood memories of travelling to Europe in the 1950s, where scenes of wartime destruction made him feel like things were distinctly better in Iraq. But despite Baghdad's burgeoning theatres, restaurants and hotels, “something lurked in the background”.

That something was poverty, which was everywhere, and would come back to haunt rapidly modernising countries. Iraq's 1958 revolution, which overthrew the monarchy long associated with British colonial interests, drove Mr Allawi's and Baghdad's elite families into exile.

After the 2003 invasion of Iraq, Mr Allawi returned to the country for the first time, where he was appointed Minister of Trade in Iraq's interim government and Minister of Finance in the Iraqi Transitional Government of 2005.

The mishmash of policies adopted by the US-led occupation authorities, saw the dissolution of the old guard but with little reform to Iraq's institutions. Disillusioned, Mr Allawi spent two years in Singapore, studying the East Asian economic miracle which features prominently in his book.

He wrote of these experiences in his first book The Occupation of Iraq: Winning the War, Losing the Peace (2007).

In 2022, he resigned from his latest appointment as Iraq's Finance Minister, citing a political impasse which had delayed the formation of the then-caretaker government. “All these experiences reinforced my desire to understand the processes of economic development,” he writes.

The new book – Mr Allawi's fourth – offers a bleak picture of what is to come.

Migration continues to grow, and many of the world’s poorest countries rely on the money sent back home from their nationals who work overseas. The long-term costs of people leaving, and the debts countries incurred with their large-scale development projects, far surpasses the foreign aid that they get.

These inequalities will only be exacerbated by the push towards greener economies and the disastrous effects of climate change.

The Bretton Woods approach

European colonial powers started considering development policies for their colonies somewhat reluctantly in the 1920s.

By 1944, the US led the push towards inviting the Allied developing nations – including Iraq and Chile– to Bretton Woods. European powers with their crumbling empires preferred to focus inward at their own decimated economies.

While this set the stage for the development of the World Bank and the IMF – it also paved the way for economic development policies that were tainted by colonial attitudes towards the developing world.

British economist John Maynard Keynes – the IMF's co-founder – referred to the developing countries at the conference as the “most monstrous monkey house assembled for years”.

Developing countries began to adopt the policies of Western economists where rapid infrastructure building was coupled with tightening budgets and raised taxes.

Though many – like Pakistan or Indonesia – were able to modernise rapidly and saw rapid growth, the wealth was concentrated among the new industrial elites.

The US vision to modernise the developing world was inseparable from its political battles of the Cold War, including its bloody entanglement in Vietnam.

The East Asian model

The emergence of East Asian countries by the 1980s marked a change in the trend – but their successes were little acknowledged by the international development community.

According to Mr Allawi, South Korea, Taiwan, Japan and Singapore followed by China, often followed their own path rather than the “neoliberal Washington Consensus”, that was popularised by Western development agencies in the 1980s.

Mr Allawi notes that their policies were in fact “diametrically opposed” to Western prescriptions. “It took the World Bank 10 years to admit that the East Asian miracle had succeeded,” he said.

Their statist governments were aided by a “strong leadership focused on development”, and a political stability so that “policies are not overhauled” and institutions “didn’t change overnight”. Some, like South Korea, had developed under an American “security umbrella”, drawing their income from exports to the US.

Western aid institutions played a smaller role. “What the [countries] didn’t have is a long-term commitment to the various theses and policy principles coming out of the international agencies,” he said.

While the world was reeling from the collapse of the Soviet Union, China rose to become one of the world’s leading economies.

At the heart of this, Mr Allawi says, was a Chinese debate between the hardline reformers who pushed for an immediate “shock therapy” into the global marketplace, and those calling for a more gradual approach.

Their ultimate goal was to deregulate prices that had been set by the state for decades, and give more autonomy to state-owned industries.

Chinese Premier Deng Xiaoping – a proponent of shock therapy – nonetheless played a delicate balancing act, allowing for economic reforms while maintaining its one party state.

Though Chinese economists met Eastern European reform economists, they opted for their own approaches and advice – an approach which Mr Allawi suggests contributed to their success.

“Deng knew that you can't do it in China without the control of the Communist Party. That's why when Tiananmen Square (revolt) came, he didn't hesitate to use brute force. It was either this or that,” he said.

Fragile Democracies

Mr Allawi does not shy away from acknowledging the authoritarian nature of these East Asian regimes at the time of their rapid rise. This is somewhat surprising given his years in the Iraqi opposition calling for democracy in Iraq. “I am disappointed by democracy – or what passes for democracy in our context,” he said.

“The framework of democracy in Iraq – its’ a failure. It’s a success in the sense that people are less fearful. There’s more freedoms. But these freedoms are being constrained now in a peculiar form of political power, which is an authoritarian form.”

The strongman-ruled democracies of Turkey and India, are one example of autocracy masking as democracy – a rising trend identified in the book. “It is an autocratic system with democratic trappings,” he said. Though the countries hold elections and companies and the media are privately owned, favour is skewed towards friends of the leaders.

The two countries emerged as major economies in the last two decades, under the rule of President Recep Tayyip Erdogan and Prime Minister Narendra Modi. Yet the approach was ultimately fragile, the book argues. The economic booms of both countries, Mr Allawi argues, had more to do with groundwork that was laid before these leaders' ascent to power.

Western development aid

So what next for the Western financing institutions? Mr Allawi thinks that upstarts in the field, such as the BRIC’s New Development Bank, are unlikely to carry the same global weight as the Bretton Woods institutions in their pomp.

From his perspective, bilateral agreements, such as those China that has across Africa and Latin America, are emerging as a bigger competitor to Western development banks.

Yet there are fundamental structural reforms which Mr Allawi believes the World Bank and the IMF could follow.

The World Bank should re-centre its focus on the poorest countries – but it is constrained by its need to maintain a clean portfolio so that it continues to attract lenders. “The markets demand that you lend to China or India, which may not need (aid) any more, but don’t lend to Zambia. But this is where the money is most needed. There’s some kind of institutional deformity in the system,” he said.

The IMF struggled from offering advice that was “technically sound but politically unpalatable”, such as the devaluation of currencies. “Devaluations are generally extremely unpopular politically, and the short term consequence is inflation, but their medium and long term consequences are beneficial,” he said.

Voting powers within the boards of these institutions would need to be reviewed to give new emerging players a bigger voice – though there will be little political will to do this.

“The voting is skewed towards the Bretton Woods era which gives the Anglo-American alliance a huge share. How can that happen in the context of an emerging China or an emerging India? They’ve dealt with it by ignoring it,” he said.

Mr Allawi diagnoses the problem and sees the necessary changes. His recommendations are for an international system to adopt a more inclusive decision-making structure, where rising economic powers have a bigger say than in the days where the world was led by the West versus the rest.

Rich World Poor World: The Struggle to Escape Poverty is published by Yale University Press and is available in hardback or as an e-book.