Section 1. An Effective State Is Essential for Development... but Does It Have the Capacity?

The World Bank influences development through its loans or through the policies that it advocates. The Bank has remained _politically_ non-partisan in order to have maximum autonomy but advocates specific views on economic and social policy. Bank top management has sought to resist the pressures from its main shareholders, especially the United States, and has tried to be _politically_ neutral vis-à-vis its borrowers—it has worked equally well with right wing and left wing governments (from Allende to Pinochet; from Marcos to Aquino; from Somoza to the Sandinistas; and from Idi Amin to Museveni) and with dictatorships and democracies. However, in terms of economic _policy_ , it has not been neutral. By examining the historical record, we can obtain a general picture of the policy views it advocates and of how it influence its borrowers. In this paper, our focus is on the role of the state in development.

The World Bank does not make general pronouncements about the policies that it would like its borrowers to pursue; it operates on a loan-by-loan, case-by-case and country-by-country basis.<sup>2</sup> Its effectiveness is based not just on proposing investment projects and policy reforms to developing country governments but in actually assisting them to design and implement those projects and policies to achieve results.

In reviewing policy and project documents throughout the Bank’s history, we found that, while the Bank recognizes the importance of the state for development and has recently made efforts to improve country governance, its performance in improving the governance capacity of developing countries has been weak. This weakness has a high cost in terms of Bank effectiveness. We ask what explains this failure in helping countries improve their governance capacity.

The paper has three sections. In the remainder of this introduction, we provide some conceptual underpinnings for the view that an effective state is essential for development. We also ask whether development can be engineered, and state capacity increased, with massive flows of aid and good projects and programs. The central and main section of the paper sketches the historical evolution of the features which are characteristic of the World Bank: its role of institutional lending to developing economies and its role of advocacy of specific economic and social development ideas. We come to the conclusion that the Bank has not been able to bridge the gap between rhetoric and reality. While it has made a lot of progress in terms of the ideas it is propagating—recognizing that countries need to improve their governance and build the capacity of the public sector to make substantive progress on development and improvements in living standards—its successes in terms of results on the ground have been recognizably weak. In the final section of the paper we ask: Why is it the case? And what could the Bank do to enhance its performance in assisting governments to build state capacity and achieve better governance outcomes? We propose an interpretative thesis of why there has been low performance in building state capacity.

> 2  Even the World Development Reports that it has been publishing annually since 1978 do not provide systematic policy summaries but rather deal with specific (generally, sectoral) dimensions of development.

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