Dan Banik and Indermit Gill discuss the causes of growing global poverty, debt and stagflation, and what the World Bank is doing to address some of these huge challenges.
The onset of the pandemic in 2020 marked a turning point in the 30-year pursuit of successful global poverty reduction. According to recent World Bank estimates, the incomes of the poorest 40 percent of the world’s population likely fell by 4 percent in 2020. And as a result, the number of people living in extreme poverty likely increased by 11 percent in 2020—i.e. it increased from 648 million to 719 million. The pandemic also increased global inequality. In terms of lost income, the world’s poor paid the highest price for the pandemic; Indeed, the percentage income losses of the poorest are estimated to have been double those of the richest. The rise in extreme poverty and decline of shared prosperity caused by inflation, currency depreciations, and broader overlapping crises facing development, pose numerous challenges for global development.
Indermit Gill is Chief Economist of the World Bank Group and Senior Vice President for Development Economics. Before starting this position on September 1, 2022, he served as the World Bank’s Vice President for Equitable Growth, Finance, and Institutions, where he played a key role in shaping the Bank’s response to the extraordinary series of shocks that have hit developing economies since 2020. Between 2016 and 2021, he was a professor of public policy at Duke University and non-resident senior fellow at the Brookings Institution’s Global Economy and Development program. Indermit has published extensively on policy issues facing developing countries, sovereign debt, green growth, labor markets, poverty and inequality, and managing natural resource wealth. His pioneering work includes introducing the concept of the “middle income trap” to describe how developing countries stagnate after reaching a certain level of income. Indermit also spearheaded the influential World Development Report 2009: Reshaping Economic Geography. Twitter: @IndermitGill
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Professor Dan Banik, University of Oslo, Twitter: @danbanik @GlobalDevPod
https://in-pursuit-of-development.simplecast.com/
Banik It's so great to see you Indermit. Welcome to Oslo and welcome to my basement.
Gill Thank you very much, it's lovely to be here. This is my third trip to Oslo and each one gets better.
Banik Let's start by talking a bit about how you understand the concept of development. This is a show called In Pursuit of Development, and over the years the understanding of development has ebbed and flowed, how do you see this animal that is called development?
Gill A very good question. We’ve been thinking about this more and more because we are suddenly in times that are quite turbulent, times that are quite uncertain and times that a lot of people think are not good for development. So, a really good way to start to actually think about development is what was a good time for development? It turns out that the 25 years between 1990 and 2015 or so were probably the golden age of development, the massive amount of progress, a lot of low-income countries became middle income countries, many middle-income countries became high income countries. You had a massive reduction in poverty back in 1990, more than half of the world was poor by even the most frugal of standards like $2.00 a day and that is now down to less than 7-8%. There was this huge drop in poverty and then if think about it and you say, what is it that led to this huge reduction, that there's great improvement in living standards and everything. I would trace it back to three things or four perhaps. The first one was that there was a mainstreaming of macroeconomic stability as an important thing, I'm speaking of governments, that they shouldn't spend more than what they can bring in. If they do want to borrow, they should borrow for investment, and then they should try to keep inflation low and not try to monetize any deficits, that's the first part, macro stability. The second one was governments recognise what really leads to improvements in livelihoods is the private sector, not the public sector. So, let the private sector lead and have the government facilitate things rather than having the government lead, which was something that was almost mainstream for about 50 years before, about 40 years before. That was the second part, just create a good environment for private investment. Those two things, macro stability and private investment actually led to a big supply response in poor countries, there was a flow of investment into these countries and there was an increase in their in their capacity to make goods and services. But because they were very poor countries, it wasn't always the case that they had the capacity to consume these goods and services so there was the third ingredient that was very important, which was international trade. As a result, what you could do is access large markets in North America and Western Europe and other places, Japan and as a result, you could actually start to move up the income ladder until the time that you actually had enough money to consume yourself. That combined with one fourth thing, which was a sense that these three things should have as a complement decent social protection, not too much of it, but not too little of it.
Banik I'm thinking about some of the debates over the years, there's always been this focus on GDP growth, you have to have economic growth, that's one aspect then you have to have some distribution of that growth and so that is the other inequality debate. A third strand, which is more common among us political scientists, is political regime, democracy versus development. In recent years Indermit I have noticed that there’s much more focus on climate change, sustainable development and degrowth. It's almost like the pendulum is coming back again and one is questioning some of the main tenets of economic development. How do you see that shift? Some of these new buzzwords like degrowth, are they making a dent in mainstream economic thinking on development?
Gill Not in developing countries, which is where it really matters, if you go and spend some time in India or go spend some time in China nobody's talking about degrowth there. If you look at China for example, it still has a per capita income that's about a fifth of the United States, they're not happy with that status quo. I think that Indians and Indonesians and others do care a lot about the climate, and they care a lot about pollution, they care a lot about these things, they also care about global warming and things like. But I think they see it as one priority among two or three other priorities and the other priority, of course, is to actually have higher incomes to have higher living standards, to have investment in the education and health of their children. So, I think that it may well be that in places like Western Europe or places where incomes are already very high, that one can talk about degrowth and things like that, but I don't think that is something that most developing countries even successful countries like China, India, Indonesia and others, I don't think these are things that people talk there.
Banik That means that the so-called twin goals that your organisation focuses on is still relatively unchanged, it's poverty reduction and prosperity, shared prosperity. Because we've discussed this before, you and I about this third pillar, where does sustainable development, climate change and concerns that our kids have, how do we factor that into this development thinking?
Gill A good analogy is thinking about poverty because you mentioned poverty. So, what is it that led to rapid poverty reduction? Basically, two and a half things, one was broadly based growth and the second one was investments in human capital like education and health. The third one, which was a supplement to this, was targeted social safety nets. Overtime, we found that once people actually got out of poverty, there was a danger of them falling back in and so over time, what we ended up doing was we said the third part should actually be bigger, it shouldn't just be a supplement. It should be a three-pronged strategy, not a two and half point strategy. We moved from just the two and a half points to three. I think in a sense, what I see is the same thing happening when it comes to climate change. We do want to end extreme poverty in all its forms and then the second one is that we do want shared prosperity, but our goals at the World Bank were always put as ending extreme poverty and promoting shared prosperity in a sustainable manner, we always had that third part. I think that was almost as a supplement to these things, it's no longer that because in a sense we've drained the planet of its resilience, and we need to sort of make sure that it becomes resilient again. In that sense, I think what you hear at the World Bank and in other places is an elevation of that to a goal equal to the other two.
Banik You've been at the World Bank for decades, Indermit, you've had all kinds of positions. Do you see a change in the way the bank sees development these days?
Gill First I do want to say that those of your listeners who are contemplating careers in development, I think the best places to do development are either in a developing country or at the World Bank, I can't think of a third place which is good. I've been at the World Bank since 1993 with a 5-year absence when I went and taught at Duke University. Has there been a change in the way that we think about development? In some ways things have changed I think that we have almost taken for granted that we would have an integrated global economy, we have almost taken for granted that everybody would understand that macro stability is the sine qua non of all progress and we had almost taken for granted that social protection or social transfers should not be the mainstay of the improvements of living standards, there should be a supplement to that. If you think about the last ten years or so, there has been a change in all three of those things. There is now a danger of the global economy being fragmented because of geopolitics, and that will be terrible for the countries that still have a way to go. I'm talking about countries in South Asia countries in sub-Saharan Africa especially, but also in other parts of the world. I think the macro stability part taking for granted things like the importance of fiscal prudence and the importance of low inflation that has come back to bite us. I think that economies around the world are learning that lesson very very quickly in the sense of trying to make sure that one doesn't overspend and so on. On the third part, I think the part about trying to make sure that it will still work, that the best poverty reduction program is still a job, it's not transfers from the treasury. But those are the sort of things that we had taken as almost as foundational for economic development that started to get questioned and I suspect some of it is coming back.
Banik I'm thinking about the role of the World Bank as a thought leader. Some of these very influential world development reports which among others you've also been heading, was it on economic geography?
Gill That's the one.
Banik I think some of the multilateral institutions have been at the forefront in terms of launching new ideas, and the bank has always been there, depending on some of your more perhaps activistic, presidents, etc. But to many observers the bank is an important player there is this feeling that maybe it's dominated by economists, but it has convening power, it is listened to, and sometimes it is criticised for offering advice that may lead to hardship for certain groups of people historically, I'm thinking about some of the PRSP strategies. This new situation that we find ourselves in we have had the pandemic we have an ongoing war and your organisations report say that between 75 and 95 million additional poor people are in the world now, because of these multiple crises. You mentioned earlier that global poverty was going down rapidly, thanks to mainly China and India, not all over the world, until 2019 we were making good progress and suddenly these crises hit us. I'm reminded of the late Martin Ravallion; it's a shame that he died so early just a few months ago. Martin, of course designed this idea of measuring poverty, which, among other things, the Bank became well known for this dollar a day poverty measure. I notice now that from 1.90 dollars a day, you increased it to 2.15, which is the new purchasing power parity criteria. Poverty is increasing. How robust are these measures that Martin and others like you have been working with? I'm just trying to get at this disagreement sometimes to use these measures, income and consumption measures. Is that something that we should stick to because they are measurable, the income measure? Should we be adopting other measures to identify vulnerable groups?
Gill I think that you posed the question very well and we already miss Martin because he was still very active in thinking about poverty measurement and also poverty policies. The best way to understand that $2.00 or $2.15 a day measure is that it's the poverty line of the poorest countries, the average of the national poverty line of the poorest countries. In a sense, we said if you want to adopt the minimal criteria for who should be considered poor consider the criteria that even poor countries consider very poor, so that's what we use. I think that eradicating poverty below $2.15 a day should be something that the whole world should want, because it's a very, very frugal standard. Unfortunately, as you just mentioned that even if poverty hasn't increase that much because it’s very hard to measure these things year to year, there is a clear sense that that poverty reduction has come to a halt. So, it's sort of levelled out at around 700 million for whatever reason and 700 million is a lot, that's twice the population of the United States, that's greater than the population of the European Union. That part, I think, should remain, you can disagree whether or not you want multidimensional poverty or money metric poverty, or you want to instead measure inequality or something like that, regardless of that, this is a very frugal standard. Using the poverty lines of lower middle-income countries takes you up a little bit to about $3.65 and when you start to look at that, you find countries like India actually have a large amount of poverty still. If you move to countries that are upper middle-income countries like China and so on, that poverty line is even higher, its closer to $6.50 or so. But even that measure, by the way, is fairly frugal. I actually did some work for the government in China, and they wanted to see what a good poverty reduction strategy in a push from upper middle income to high income is, as a country becomes an advanced economy. They were very interested in the experiences of the United States, of Japan and South Korea especially that of the United States. One of the things we told them after doing our work was that if you look at the period during which the United States was an upper middle-income economy between 1930 and 1960, the poverty rate at $21.70 a day not $2.00, $21.70 a day that came down from more than 70% down to less than 25% or so. If you have to think about the poverty reduction champion of the world ever, I would say it’s the United States between 1930 and 1960.
Banik We think of China, half a billion people in 20 years.
Gill But this is actually making people middle class. Now if you ask me what is it that I consider the biggest challenge for the World Bank right now? If you look at the number of countries in the world there are roughly 216 or so, so half are either low-income countries or high-income countries. So, the low-income countries by the World Bank standards are about 30 of them and then high-income countries about 70 something of them. Then you've got all the rest, 108 countries are actually middle-income countries. In many ways, the thing that we hear from the representatives of middle-income countries at the World Bank is that there's a big concern because if you see the potential growth rates for these countries dropping and they were dropping before the pandemic too, it’s not just the pandemic or the war or things like that, they were dropping already. This was despite the fact that many of these countries were actually improving the quality of their policies. That's going to be the topic, by the way, for the next World Development report. What should these countries do to actually address growth and growth and development issues? Because these countries tend to be different from low-income countries in the sense that it's not just accumulation that they have to do now, it's not just more labour and more capital, they have to start doing things differently. But then on the other hand, they also don't have the wherewithal of richer countries who borrow in their own currencies, so they have to fund these development efforts using the international financial architecture the way it is.
Banik This brings me to, among many things that you are well known for, we have a friend in common Homi Kharas and the concept of the middle-income trap. From what you said about the extreme poverty measures is that yes, they're frugal and we should actually have consensus that you can disagree with the threshold of where the poverty line should be. But let's at least do away with extreme forms of poverty, and then we can talk about high level needs. The thing that you and Homi worked on in 2005-2007 is this concept of the middle-income trap. If you've done away with extreme poverty, you've achieved middle income status, all kinds of other hurdles come that make it difficult for you as a country to transition to the next category. Tell us a bit about that and how you see that concept having evolved over the last two decades.
Gill Homi and I were doing a report called the East Asian Renaissance at the time, it was a successor report to the East Asian Miracle, but in this case, we were paying a lot more attention to China and we actually had a lot of good things in that report. The only thing that people remember from it now is this middle-income trap. We've been looking at this, I guess I would call it a pathology, why is it that countries find it so difficult to get to high income? By the way, it's not the case that no countries have become high income countries many have, but you can trace that to really good fortune. Essentially as the case of countries like Poland and Hungary and others who had the good fortune of being near the European Union and the European Union was a very inclusive association of nations.
Banik Geography matters.
Gill Geography matters a lot. The other part of geography is if you just have a lot of natural resources so the Saudi Arabians and the Kuwaitis and so on, they also got to high income but because they happened to have a whole lot of natural resources. The others that made it were very fierce they were not fortunate, they were very fierce, so they postponed gratification, high savings rates, very difficult land reforms early on and then essentially trying to make imports expensive, these are the East Asian countries. But if you look at the middle-income countries today life is much harder for them because you can't rely on the same drivers of trade perhaps as these middle-income countries did. The second one is you actually have a lot of expectations from the middle class. They don't want to actually postpone gratification the way some of these earlier countries could do it. The third thing is that there is a big demand to actually get them to forego fossil fuels, that's the third thing. So, they're growing in a sense, these middle-income economies are trying to grow but into spaces that are getting more and more constricted on the trade side, and I guess on the policy space side as well as on the climate change side. But these questions are what we are going to try to come up with decent answers in the next World Development Report and we have some good ideas on how to do it.
Banik When you think about some of the challenges that natural resource rich countries have faced over the years, not everybody has been as lucky as, say, Kuwait or Saudi Arabia. I'm thinking about the Nigerians or the Angolans, that curse, there's that feeling that natural resources are great, but you need good governance plus something and now there's so much focus on renewable energy, and it's a polarised discourse and natural gas on the African continent. I see that one of the reasons that we're not getting to an agreement on the way forward is that the world is divided in terms of how to use natural resources, particularly fossil fuels and natural gas is one of those controversial ones where the African countries, some of them like Senegal and Mozambique, they have trillions of tonnes of natural gas and they want to use it, as a transitional fuel, I have to mention not forever. But there's this feeling in some of the richer parts of the world that that is not the way to go. So natural resource governance, it turns out to be the controversial aspect and I'm not sure how we are going to resolve that because as you mentioned, energy security is really the crucial thing. If you think about the African continent where I do a lot of my work, it is just energy, energy, energy that is what they want, without energy, you can't have education, you can't have economic growth. To resolve that for me is the number one challenge, but I don't see enough traction, do you? Do you see hope in the in the near future?
Gill So there are two parts to this question. One part is what should countries that depend a lot on natural resources, what should they do and how should they do things? Even in the most ambitious scenarios, they still have time in the sense that countries will still need fossil fuels. Then the question is why did you not succeed in the past in actually translating all of this wealth under the ground into wealth in people and wealth above the ground. We did a really good report, which just hasn't got enough attention, and we ended up with three things. The first one was, we said these countries depend on one currency, they tend to have economies that are very volatile, so the government should not add to that volatility. Ideally it should offset it through fiscal stabilisation policy. The first part was stabilisation, fiscal stabilisation, the second part was these countries tend to sort of take that money and they're trying to spread that money out into the private sector, and they actually make things worse, they tend to favour some industries and not others. So, we basically said, look, you should just try to promote an even playing field, competition matters a lot. The first one, stabilisation and second competition and then the third one was many of them were trying to save this money for future generations. It would always end very badly because these funds would get raided. We said actually just invest in the future generations, don't try to save for them, give them education and other things now. So, the third part was what we called education. I think that if one just did those three things, you would end up having countries whose experiences would look much more like Norway's than like Nigeria's.
Banik I've had this discussion with several other guests on the show, is the Norwegian model the right way, to save for a rainy day? A lot of people say no because there is pressing need now, because Norway wasn't poor when we got the oil, we were an OK country, so saving for the rainy day is not always the best policy.
Gill I would say saving for stabilisation is OK, but trying to save for future generations, very few countries have managed to set in place strong enough arrangements that are not then raided. I would say keep it very much stabilisation focused, shorter term things you know not long term, don't try to transfer money to future generations.
Banik That is fascinating because of two things here, one has to do with the typical Western criticism of the natural resource curse thesis, that it's governance, it's corruption and illicit flows. It wasn't the natural resource per se, it is how they were governed so we should have better legislation, better control, etc. I hear that same argument in terms of natural gas, you didn't lift people out of poverty with oil what makes you think natural gas is going to do so? When I posed this to entrepreneurs like Mo Ibrahim from Sudan, the British Sudanese businessman who was also on the show earlier this season, he says, if you think that we are going to again misuse these resources, then there's really no way of discussing this any further, let's just all go home, don't give up, there's always that possibility. But I wanted to ask you about this future generation aspect because when you and I were chatting about this in DC in January of this year, you had some very interesting thoughts on sustainable development because we have this tendency to, in the sustainable development discourse, to think that we have current needs that need to be satisfied, but also not in a way that will compromise the needs of future generations. I noticed this particularly in India and in some other parts of the world where people say, when you talk about future generations, you're talking about fifth floor issues, we're stuck on the first floor, in the sense that there's pressing needs, there's contestation as to who will get how much when, etc. So, without resolving that, it is very difficult to think about future generations. But your point earlier, if I remember correctly, was slightly different. We may save now we may undertake certain measures to maybe curb our consumption, hoping that this will help future generations, but we can't really be sure, and we may actually end up making it worse. I don't know if I've paraphrased you correctly.
Gill So there is one thing about what essentially developing countries should be expected to do in terms of which kind of fuels should they be using, and the natural gas question comes up there. The second one that comes up has to do with, suppose you don't want them to do that, how does one finance their efforts? Because it may well be the case that there is no trade-off between climate action and growth in the long term, but there's a long way to the long term. I think that this is what I was trying to say back when we met is that if you're asking Indians today or Indonesians today to take up climate action and by the way they all want to, but I think the real thing about it is that they'll probably end up doing it in 20-30 years from now and we are asking them to bring that forward. If you're asking them to bring that forward, then you have to say, how does one do that? You can either do that through debt or through taxes because the private sector will follow on this one, it will not lead the way. If you say we think they should finance it themselves in that sense, what you're then implicitly assuming is that future generations of Indians and Indonesians are going to be poorer so you should do it for them. But that's very antithetical to the whole notion of economic development, that we want future generations to be richer when they are still quite poor today. Then the question is we should be finding ways to finance this by giving them 20–30-year money on reasonable terms, invest in these things and that's where the world is today, right now. It's not like Indonesians and Indians don't want to do this. In fact, we always tell them that they should want richer countries to undertake climate action because it's hurting everybody, not just the richer countries. Now, in terms of the natural gas question, back when I was chief economist for Europe and Central Asia, we did some work on green growth and things like that and we looked at energy issues and natural resource management issues. We said that a good strategy would have the first part as energy efficiency and the second one would be clean energy and the third one would be natural resource management. If I had to do a study like that today, I would add a fourth thing, energy security and that changes the dynamic, it changes the calculus for many of these countries. I think that countries in Europe and others would sympathise because energy security is a very important thing. Then the next question comes up, how do you ensure energy security? The most obvious way for a country like India or China is, we have a lot of coal, but you don't want them to use that coal, in that case, what should we substitute it by? Natural gas is the obvious alternative. I would have a debate with somebody like Homi Kharas who says no, no, no, they should not be thinking about natural gas they should be moving straight to renewables. But then when I look at how middle-income countries get energy and align it up based on really high carbon sources like coal and really low carbon sources like renewables, hydro and stuff like that. What distinguishes rich and middle-income countries is not the share of energy that they get from renewables, it's roughly the same, what distinguishes them is what I would call mid carbon fuels. Richer countries use a lot more natural gas, which has half the carbon intensity of coal, less than half, and poorer countries tend to use coal. So now you have to think about a thing, do you want middle income countries to leapfrog the mid carbon fuels and go straight to renewables. Or do you want higher income countries to move from mid carbon fuels like gas into cleaner fuels like solar first, because these technologies are still expensive to implement. That's the debate.
Banik The paradox is well illustrated in India if you see some of the investments in renewable energy, India is big on solar. I suppose it's not a paradox, but India is doing a bit of everything. India is dependent on coal because there's no option, but there's also enormous investments in hydrogen. It's this energy mix that, at least from the Indian perspective, it is almost like saying we are increasing the renewable energy component, but coal is still going to play an important role.
Gill I think as long as it plays a declining role, I think that we should not be too impatient because impatience has actually led to a lot of problems. Impatience with the energy transition is part of the problem here in Europe too, in the sense that if you have to go back to coal and to other things, that means that you were a little too impatient.
Banik Indermit, the impatience is largely because many of my students, my children, your children, they're all activists, they are impatient. It's the Greta Thunbergs saying there isn't that much time left, so we need to do something and it's this desire to go into renewable. Not to have this transition period of several decades.
Gill It should be the desire to cut emissions. You should be impatient about cutting emissions. That's the thing because that's the bad thing, are these emissions.
Banik So as long as there's a plan, you think, we shouldn't be preaching all the time, I’m thinking about the Global North telling the others.
Gill I find that we are at a very good stage where the Global North is doing something about this. If you look at carbon intensities, if you look at emissions per GDP this is all going down in many of these countries. But if you look more closely at the trajectories of GDP and emissions, even in middle income countries like India and China and so on, they are diverging in a good way, they're just not going down yet, but they're diverging. We should see that as an encouraging thing. But then I think the second thing is, one of the things that I've learned is that when you go and talk to citizens or to government officials and in countries like India as well as other countries, they smell hypocrisy, very quickly.
Banik And that that is the problem. I don't know if you know Vijaya Ramachandra, she's been on my show, and she's been making that point very clearly that it's the hypocrisy so it's fine if you preach, but make sure that your house is clean first.
Gill Or if it isn't, being more sympathetic or being more empathetic because you have to realise that energy security is the fourth pillar of a good energy transition.
Banik When I do some of the work that I do in many African countries, looking at, say, what India is doing in terms of IT or health, India is the pharmacy of the world. China is building infrastructure, it has infrastructure power, logistical capacity. South-South Cooperation is big now, which I think is a positive thing, we are not just thinking about ODA, Official Development Assistance from the Global North, there are so many alternatives out there which I think in my view is giving a lot of policymakers in the so-called Global South much more policy space. So, if China is willing to build a road that Norway isn't, great you have many alternatives. But in recent months, at least, following the pandemic, we see a huge decline in some of these infrastructure investments from China. There is less willingness to advance these big loans for the mega projects either in Latin America or in Africa. You've been concerned with stagflation, we've talked about all the other bad things that have happened post pandemic. How should we go about thinking about restarting global growth because there are concerns about debt and I know that you have written about this, that it isn't just China which is often seen to be the major cause of debt, at least on the African continent. I've also seen that it's the private sector, many Western countries actually own most of this debt it's not just China, but China has been doing quickly a lot of stuff which has perhaps accentuated that. But debt is always on the minds of people now, so it's almost like it's the elephant in the room and in a recent interview, I think in the Financial Times, you've argued that the kind of system that we have in place to restructure debt is just not fit for purpose. So, walk us through this situation where there are reduced investments, perhaps growth is slowing down, debt is a huge issue, how should we think about some of these big, big problems?
Gill If you take a look at any country, let's say, Zambia or Sri Lanka that declares debt default and let's follow that country through the steps that it goes through. The first thing that happens is that people try to take their money out of that country, you get a huge fall in the value of its currency, that's the first thing that happens. The second thing that happens is investment comes to halt so as a result, growth comes to halt, so there's no new investment, no growth. Then the third thing that happens is poverty goes up a lot and very quickly if there's another shock like high food grains prices you end up getting political instability. But these countries very quickly start to see that they go backwards. Zambia was a lower middle-income country less than two years ago now, it's a low-income country. Sri Lanka was an upper middle-income country two years ago, a year ago now it's a low middle income country and going the wrong way. Once a country has falling per capita income it's a very different country than a country with where incomes are growing.
Banik So, it's important to do this quickly.
Gill It's important to do it quickly. Then we say, OK, how does one do it quickly? We actually have been working quite a bit on this for the last year and a half, full tilt. We worked on these three pillars of good debt management. The first one we said was debt transparency because as soon as a country has a problem like this it comes under a microscope and then if at that time the country suddenly starts to reveal more debt or lousier debt. Then even a country that would otherwise seem to have a somewhat sustainable debt will actually go under very quickly. The first one is make sure if you have a public debt, make that debt public that's the first one. The second one is debt sustainability and I think the World Bank and the IMF and others share a blame here because I don't think that we have done a super job in flagging which countries are going to have debt sustainability problems.
Banik Was Zambia on your radar?
Gill They were always on the radar, but not early enough I think. The second part is we need to come up with a better assessment methodology for debt sustainability because these countries also now have access to markets. So, in very crudely speaking, our debt sustainability assessments look only at quantities and not at prices, we're not looking at spreads and things like that for low-income countries, we only do that for middle income countries. But these countries, for debt purposes started to look like market access countries. The third thing is the debt restructuring and the article that you mentioned that the debt restructuring frameworks that we have were for a completely different world.
Banik When the rich countries held most of the debt.
Gill Rich countries held most of the debt, when most of the debts that these countries had were all public, so they could be all negotiated in some room in Paris somewhere it was called the Paris Club. But that's not the case anymore and so what we've been trying to do is to try to feed ideas about how one should actually do this where you first recognise that more of the debt of these countries is private. The second one that more of the debt of these countries is not from the rich G7 countries.
Banik South-South cooperation comes in.
Gill Then the third one of course is that a lot more of their debt is domestic, we encourage these countries to borrow from their own citizens, their own banks. We have to come up with a measure that actually addresses all of this stuff. We've made some progress, but it's not quick enough.
Banik What are the obstacles? I mean, why did it take two years for Zambia to reach an agreement with the IMF?
Gill It's like I said, nobody wants to be the one to agree to a big debt reduction of their own and then leaving open the possibility that somebody else is much better.
Banik China was willing to be a part of this, which I don't think was the practice before from China so, some new things happened in terms of the Zambia situation. You've also been working on innovative social protection policies in Latin America. I noticed that the World Bank is thinking much more about impact evaluations, most of the RCTs done show that one intervention in social protection really seems to work and that is cash transfers. It's become this darling and everybody's talking about it. It's not always popular in some of the donor countries, why should you just give cash, this makes people lazy, etc. But unconditional or conditional cash transfers have a long history and given that you've worked in Latin America, of course you're familiar with how that arose. I wondered if we could end our conversation by thinking about what else is out there Indermit, that a country should be using more of? In terms of different types of social insurance, different types of social protection mechanisms other than cash, what is the of future global development? Where should we be really paying much more attention to?
Gill So the cash one, I think what our evaluations seem to indicate is that there were these two or three ways to do this. One was to have general subsidies for things that the poor consume more of, like food and we find that that's very difficult to actually carry out. Then the second one, we moved to community driven development. I think that all the serious evaluations that we see of these programmes are very harsh on this measure, they have not worked. Then you have the cash transfers, I believe that part of the reason why we have actually done much better with cash transfers and so on is that the technology has changed a lot, digital transfers, you can target people, you can move this thing very, very quickly. But again, you can always overdo these things, you can end up doing these things in a way like cash transfers for example is not that different from what happened in the United States during the pandemic as a result of which household wealth actually increased. A labour force participation in the United States is one percentage point below what it was earlier and that ends up becoming a big supply constraint. At the same time, you're trying to fight inflation and you are also carrying out policies in a way that reduces the work effort.
Banik So it's cash transfers plus something else.
Gill I guess in the case of India you had conditional cash transfers whether it was conditional on something like work which was MNREGA. But you would condition it on something the government can actually deliver, whether it's education or health or a job or whatever, you have to have the other part too. These instruments cannot be seen as substitutes for things that actually improve the productive power of a people. That lesson always keeps getting forgotten in all of this stuff and the poorer the country, the less one should be using purely social transfers and the more you should be emphasising the other two, broadly based growth and investments in human capital.
Banik Indermit it's been such a pleasure to have you in my basement. Thank you so much.
Gill Thank you very much. It's been an honour, thank you.