World Dev Report 1991 Pp 1 to 64

8/3/2019 World Dev Report 1991 Pp 1 to 64

1/64

< 0~~

--lr ~~~~

->x{AV{ /\~~l _6 ;I s '-


2/64

World DevelopmentReport 1991ne Challengeof Development

Published for the World BankOxford University Press


3/64

Oxford University PressOXFORD NEW YORK TORONTO DELHI

BOMBAY CALCUTTA MADRAS KARACHIPETALING IAYA SINGAPORE HONG KONG

TOKYO NAIROBI DARES SALAAMCAPE TOWN MELBOURNE AUCKLANDand associatedompaniesn

BERLIN IBADAN

( 1991The nternational ankforReconstructionnd DevelopmentTHE WORLDBANK1818H Street,N. W.,Washington,D.C. 20433U.S.A.

FirstprintingJune1991All rightsreserved. o partof this publication aybereproduced,tored n a retrieval ystem,or transmittedin any ormor by any means, lectronic, echanical,

photocopying, recording, or otherwise, without the priorpermission of Oxford University Press. Manufactured in the

United States of America.The denominations, the classifications, he boundaries,

and the colors used in maps in World Development Reportdo not imply on the part of The World Bank and its

affiliates any udgment on the legalor other status ofanyterritory, or any endorsement or acceptance f any boundary.

ISBN 0-19-520869-2clothboundISBN 0-19-520868-4paperback

ISSN 0163-5085

The Libraryof Congress has cataloged his serialpublicationas follows:World developmentreport. 1978-

[New York] Oxford University Press.v. 27cm. annual.

Published or The World Bank.1. Underdevelopedareas-Periodicals. 2. Economicdevelopment-

Periodicals. L. InternationalBank for Reconstruction and Development.HC59.7. W659 330.9'172'4 78-67086

This book s printed on paper hat adheres tothe American National Standardfor Permanenceof Paper

for Printed Library Materials, Z39.48-1984.


4/64

Foreword

World Development Report 1991, the fourteenth in institutions. Competition fosters innovation, thethis annual series, synthesizes and interprets the diffusion of technology, and the efficient use oflessons of more than forty years of development resources. Third, successful economic develop-experience. This Report, together with last year's ment requires the integration of countries with theon poverty and next year's on the environment, global economy. Openness to international flowsseeks to provide a comprehensive overview of the of goods, services, capital, labor, technology, anddevelopment agenda. ideas spurs economic growth. Fourth, a stableThe 1990s began with dramatic changes. Many macroeconomic foundation is essential to sus-countries in Eastern Europe and elsewhere initi- tained progress. Restoring the confidence of theated ambitious reforms of their economic and po- private sector is now a major challenge for severallitical systems. These reforms reflect both the accu- countries with a long history of macroeconomicmulated evidence on economic policies and instability.fundamental changes in the political environment. What are the prospects for rapid development inNot only in Eastern Europe, but also in Africa, the years ahead? The Report notes that a favorableAsia, Latin America, and the Middle East, people international climate is critical for future develop-are seeking escape from poverty and oppression to ment. The effects of the policies of industrial coun-gain control over their own destinies and find bet- tries on development grow, as more developingter lives for themselves and their families. Against countries turn outward and the world becomesthe backdrop of these transitions, this year's Re- more and more interdependent. But the Reportport links the historical debates that counseled stresses that, above all, the future of developingpolicymakers in their past decisions, the lessons of countries is in their own hands. Domestic policiesexperience, and the evolving thought on how best and institutions hold the key to successful devel-to proceed. opment. With strong and sustained reforms atOne of the most valuable lessons relates to the home, the Report concludes, the pace of develop-interaction between the state and the market in ment can be substantially increased-to lift mil-fostering development. Experience shows that lions of people out of poverty by the end of thesuccess in promoting economic growth and pov- decade.erty reduction is most likely when governments Like its predecessors, World Development Reportcomplement markets; dramatic failures result 1991 includes the World Development Indicators,when they conflict. The Report describes a market- which offer selected social and economic statisticsfriendly approach in which governments allow on 124 countries. The Report is a study by the staffmarkets to function well, and in which govern- of the World Bank, and the judgments madements concentrate their interventions on areas in herein do not necessarily reflect the views of thewhich markets prove inadequate. Board of Directors or the governments theyThe Report looks at four main aspects of the represent.relationship between governments and markets.First, investing in people requires an efficient pub-lic role. Markets alone generally do not ensure thatpeople, especially the poorest, receive adequate Barber B. Conableeducation, health care, nutrition, and access to Presidentfamily planning. Second, essential for enterprises Thesidentto flourish is an enabling climate-one that in- TheWorldBankcludes competition, adequate infrastructure, and May 31, 1991

iii


5/64

This Report has been prepared by a team led by Vinod Thomas and comprising Surjit S. Bhalla, RuiCoutinho, Shahrokh Fardoust, Ann E. Harrison, Daniel Kaufmann, Elizabeth M. King, Kenneth K.Meyers, Peter A. Petri, and N. Roberto Zagha. T. N. Srinivasan, Mark Rosenzweig, and FranciscoSagasti collaborated closely and provided extensive advice. The team was assisted by SushenjitBandyopadhyay, Fernando J. Batista, Marianne Fay, Jon Isham, Kali Kondury, Stefan Krieger, andYan Wang. Stanley Fischer played a principal role in the initial stages of the Report's preparation. Thework was carried out under the general direction of Lawrence H. Summers.Many others in and outside the Bank provided helpful comments and contributions (see thebibliographical note). The International Economics Department prepared the data and projectionspresented in Chapter 1 and the statistical appendix. It is also responsible for the World DevelopmentIndicators. The production staff of the Report included Kathryn Kline Dahl, Connie Eysenck, AlfredF. Imhoff, Hugh Nees, Kathy Rosen, Walton Rosenquist, and Brian J. Svikhart. Cartographic serviceswere provided by Jeffrey N. Lecksell, Gregory George Prakas, and Eric M. Saks. Library assistancewas provided by Iris Anderson and Jane Keneshea. The support staff was headed by Rhoda Blade-Charest and included Laitan Alli, Trinidad S. Angeles, and Lupita Mattheisen. Clive Crook was theprincipal editor.The advice and support of Professor Bela Balassa (1928-1991) are respectfully acknowledged. Hiscontributions to this and past World Development Reports were valuable in understanding develop-ment. The core team remembers fondly David A. Renelt (1964-1991), who contributed to the Report.

iv


6/64

ContentsAcronyms and initials ixDefinitions and data notes xOverview 1The world economy in transition 2Paths to development 4Elements of a market-friendly approach 6Rethinking the state 9Priorities for action 101 The world economy in transition 12

The long view 12The setting for development 14Prospects for world development 21Quantitative global scenarios for the 1990s 272 Paths to development 31

The evolution of approaches to development 31The determinants of the growth of income 42Components of overall development 47The way forward 493 Investing in people 52

Welfare and growth 53Challenges in human development 59Public policy 654 The climate for enterprise 70

Entrepreneurs unleashed 70Enterprise in agriculture 72Empowering the manufacturer 77Evidence on the productivity of investment projects 825 Integration with the global economy 88

Channels of technology transfer 88Labor flows and direct foreign investment 93Trade policy and economic growth 96Conditions for success in trade reform 101The global climate for trade 105

v


7/64

6 The macroeconomic foundation 109Policies to promote stability and growth 109Booms and busts 112From stabilization to growth 113The art of reform 115Investment and saving 118Global economic conditions 123

7 Rethinking the state 128The political economy of development 128Remedies: democracy and institutions? 132Equity and redistribution 137Reforming the public sector 139

8 Priorities for action 148Tasks for global action 149Specific actions that work 152A global challenge 157

Technical note 158Bibliographical note 165World Development Indicators 193

Boxes1.1 Innovations that changed the world 151.2 The Soviet economic crisis 201.3 The climate for development in the 1990s 221.4 How well did early World Development Reports foresee growth in the 1980s? 282.1 Scandinavian models of development 362.2 What's behind the Japanese miracle? 402.3 Totalfactor productivity in economic growth 422.4 Measurement informs policy-or does it? 442.5 The contribution of aid 482.6 Noneconomic components of development: liberties 503.1 Nutrition and life expectancy 533.2 Educating women: a key to development 553.3 Meiji Japan's penchant for education 583.4 Population, agriculture, and environment in Sub-Saharan Africa 613.5 AIDS in developing countries 633.6 The role of international aid in the social sectors 684.1 A different sort of enterprise: Gurdev Khush breeds super rice at the International Rice ResearchInstitute 744.2 Extension and the African agricultural services initiative 754.3 Parastatal marketing institutions and producer prices: impairing competition and incentivesto farmers 784.4 The payoffs from regulatory reform: India and Indonesia 794.5 Tax reform 814.6 Wrong incentives often make private projects go under 844.7 Participation enhances project efficiency and benefits the poor 855.1 Export takeoffs: two success stories 895.2 Protection in industrial countries: a historical perspective 975.3 Trade policy and growth: the evidence 995.4 Should states intervene in trade or shouldn't they? 1025.5 Commodity price movements 106

vi


8/64

6.1 What the assessments of adjustment programs say about income performance 1146.2 The speed of reform 1176.3 Determinants of household saving in Japan 1226.4 Capital flight 1246.5 The 1990 Mexican debt agreement 1277.1 Fighting corruption 1327.2 Populist experiments 1337.3 The contribution of institutional innovations to development 1357.4 Setting priorities for institutional development: easier said than done 1367.5 The politics of inclusion: Malaysia and Sri Lanka 1387.6 War and development 1417.7 From a centrally planned to a market economy 1458.1 For policymakers everywhere: seven lessons in reform 152

Text figures1 Per capita income: selected countries in 1988 compared with the United States, 1830-1988 22 Life expectancy at birth: selected countries in 1985 compared with Japan, 1900-85 33 Policy distortion, education, and growth in GDP, sixty developing economies, 1965-87 54 The interactions in a market-friendly strategy for development 65 Rates of return for projects financed by the World Bank and the IFC under different policies

and conditions 81.1 Periods during which output per person doubled, selected countries 121.2 Gains in life expectancy, selected countries and periods 131.3 Per capita output growth in the OECD and developing countries and significant world events,

1918-88 16-171.4 The share of exports in GDP, selected country groups, 1900-86 171.5 Estimates of the growth of GDP, 1965-89 192.1 The sectoral distribution of the labor force, low- and middle-income developing countries,1965 and 1980 322.2 Per capita income, selected countries, 1960 and 1988 37

2.3 Estimated annual growth in real exports, selected groups of countries, 1965-89 372.4 The average annual growth of per capita income and productivity, selected economies, 1960-87 462.5 Female educational attainment and decline in infant mortality, selected economies, 1960-87 493.1 Male life expectancy at birth, selected countries, 1855-1985 523.2 Adult literacy, selected countries, 1850-1985 563.3 Educational attainment of entrepreneurs in five developing countries 593.4 Population change by region, 1850-2025 603.5 Distribution of deaths by cause, about 1985 624.1 Rates of return for projects financed by the World Bank and the IFC under varying foreign exchangepremiums, 1968-89 834.2 Rates of return for projects financed by the World Bank and the IFC under varying degrees of trade

restrictiveness, 1968-89 834.3 The share of public investment in total investment and the rates of return of agricultural and industrialprojects financed by the World Bank and the IFC, 1968-89 865.1 Annual net flows of capital to developing economies, 1970-88 955.2 Openness and growth in productivity: partial correlations for developing countries, 1960-88 1005.3 The share of imports affected by all nontariff measures, 1966 and 1986 1045.4 Hard-core nontariff measures applied against industrial and developing countries, 1986 1056.1 The current account balance and the fiscal balance in Korea and Morocco, various years 1106.2 Inflation rates and the fiscal balance in Sri Lanka and Tanzania, various years 1116.3 The growth of GDP and private investment in Chile and Turkey, 1970-88 1136.4 Differing patterns of private and public investment in four countries, 1970-88 1206.5 Net resource flows and net transfers to developing economies, 1980-89 1267.1 Nation-states by type of government, 1850-1987 1297.2 Income inequality and the growth of GDP in selected economies, 1965-89 1378.1 The annual change in per capita GDP in OECD and developing countries, 1965-90 151

vii


9/64

Text tables1 Growth of GDP per capita, 1965-2000 31.1 Historical trends in GDP per capita 141.2 Global savings and investment 231.3 Aggregate long-term net resource flows to developing countries, 1980-95 241.4 The international economic climate in the 1990s: a comparison of recent and projected indicators 271.5 Real GDP and real GDP per capita growth rates for low- and middle-income economies,

1965-2000 302.1 The growth of agricultural productivity and the nonagricultural sectors, 1960-88 332.2 The growth of GDP, inputs, and TFP 432.3 Percentage share of output growth accounted for by factor input growth, sample of world economies,

1960-87 452.4 Interactirmn of policy with education and investment, 1965-87 473.1 The economic burden of adult illness, selected countries and years 543.2 The effect of an additional year of schooling on wages and farm output, selected countries

and years 573.3 Government expenditures for education and health as a percentage of GDP, 1975, 1980, and 1985 663.4 The government share in total education and health expenditures 674,1 Annual percentage growth rates of earnings, employment, and labor productivity in manufacturing,

selected economies and periods 804.2 Economic policies and average economic rates of return for projects financed by the World Bankand the IFC, 1968-89 824.3 Average economic rates of return for projects financed by the World Bank and the IFC under varyinginitial and final foreign exchange premiums, 1968-89 875.1 The relative performance of foreign firms in manufacturing, selected countries and years 945.2 Investment, growth, and net capital flows, 1970-89 965.3 Tariffs and nontariff barriers in developing countries, 1987 985.4 Intraunion trade as a percentage of total exports, 1960-87 1076.1 Investment and saving, 1965-89 1196.2 Indicators of external debt for developing economies, 1970-89 1257.1 Irregular executive transfers: average occurrence per country, 1948-82 1297.2 The success of economies with differing political systems in implementing an IMF adjustment

program 1347.3 The success of economies with differing political systems in controlling rapid inflation 1347.4 Percentage share of government expenditure in GNP or GDP, industrial countries, 1880-1985 1397.5 Percentage share of government expenditure and consumption in GNP or GDP, industrialand developing countries, 1972 and 1986 1397.6 Public expenditure on the military compared with that on the social sectors, 1986 1428.1 Changes in GDP growth rates relative to the central case, 1990-2000 157

Statistical appendix tablesA.1 Population (mid-year) and average annual growth 181A.2 GNP, population, GNP per capita, and growth of GNP per capita 182A.3 Composition of GDP 182A.4 Consumption, investment, and saving 184A.5 Investment, saving, and current account balance before official transfers 185A.6 GDP and growth rates 186A.7 Structure of production 186A.8 GDP by sector growth rates 187A.9 Growth of export volume 187A.10 Change in export prices and terms of trade 189A.11 Growth of long-term debt of low- and middle-income economies 190A.12 Composition of debt outstanding 191

viii


10/64

Acronyms and initialsDAC Development Assistance Committee of LIBOR London interbank offered ratethe Organisation for Economic Co-op- NGOs Nongovernmental organizationseration and Development NIEs Newly industrializing economiesEC The European Community (Belgium, ODA Official development assistanceDenmark, Germany, France, Greece, OECD Organisation for Economic Co-opera-Ireland, Italy, Luxembourg, Nether- tion and Development (Australia, Aus-lands, Portugal, Spain, and United tria, Belgium, Canada, Denmark, Fin-Kingdom) land, France, Germany, Greece,ERR Economic rate of return Iceland, Ireland, Italy, Japan, Lux-DFI Direct foreign investment embourg, Netherlands, New Zealand,GATT General Agreement on Tariffs and Norway, Portugal, Spain, Sweden,Trade Switzerland, Turkey, United Kingdom,GDP Gross domestic product and United States)GNP Gross national product PPP Purchasing power parityG-7 Group of Seven (Canada, France, Ger- TFP Total factor productivitymany, Italy, Japan, United Kingdom, UNDP United Nations Development

and United States) ProgrammeIBRD International Bank for Reconstruction Unesco United Nations Educational, Scientific,and Development and Cultural OrganizationIDA International Development Association UNICEF United Nations Children's FundIFC International Finance Corporation WHO World Health OrganizationIMF International Monetary Fund

ix


11/64

= Xg d

Definitions and data notesA note on data selection sification is fixed for any edition, all the historicaldata presented are based on the same countryThe data used in this World Development Reportcover a range of time periods and are from more grouping. The country groups used in this Reportthan 100 countries (both industrial and develop- are defmed as follows.ing). Data availability was the primary criterion for * Low-income conomiesare those with a GNP perusage; other criteria varied from chapter to chap- capita of $580 or less in 1989.ter. For details, see the technical note at the end of * Middle-incomeeconomiesare those with a GNPthe main text. per capita of more than $580 but less than $6,000 in1989. A further division, at GNP per capita ofCountry groups $2,335 in 1989, is made between lower-middle-in-For operational and analytical purposes the World come and upper-middle-income economies.Bank's main criterion for classifying economies is p High-income economiesare those with a GNPaccording to their gross national product (GNP) per capita of $6,000 or more in 1989.per capita. Every economy is classified as low-in- Low-income and middle-income economies arecome, middle-income (subdivided into lower-mid- sometimes referred to as developing economies.dle and upper-middle), or high-income. In addi- The use of the term is convenient; it is not in-tion to classification by income, other analytical tended to imply that all economies in the group aregroups are based on regions, exports, and levels of experiencing similar development or that otherexternal debt. economies have reached a preferred or final stageIn this edition of World Development Report and of development. Classification by income does notits statistical annex, the World Development Indi- necessarily reflect development status. (In thecators (WDI), minor changes to country classifica- World Development Indicators, high-income econ-tion have been introduced. The changes are: (a) omies classified by the United Nations or other-the "nonreporting nonmembers" group is now wise regarded by their authorities as developing"other economies" and includes only Albania are identified by the symbol t). The use of the termCuba, Democratic People's Republic of Korea, and "countries" to refer to economies implies no judg-the Union of Soviet Socialist Republics (USSR); (b) ment by the Bank about the legal or other status of"total reporting economies" is replaced by a territory."world." Note that the definition of "oil ex- * "Other economies"are Albania, Cuba, Demo-porters" has been changed (see the definition in cratic People's Republic of Korea, and the Union ofthe analytical groups below). As in previous edi- Soviet Socialist Republics (USSR). In the main ta-tions, this Report uses the latest GNP per capita bles of the World Development Indicators, onlyestimates to classify countries. The country com- aggregates are shown for this group, but Box A.2position of each income group may therefore in the technical notes to the WDI contains key indi-change from one edition to the next. Once the clas- cators reported for each of these countries.x


12/64


13/64

Data notes * The symbol .. in tables means not available.. Billion s 1,000 million. * The symbol in tables means not applicable.* Trillion s 1,000 billion. . The number 0 or 0.0 in tables and figuresTonsaremetrictons equalto ,000 kilograms, means zero or a quantity less than half the unitor 2'204.6 pounds. shown and not known more precisely.or 2,204.6 pounds.* Dollarsare current U.S. dollars unless other- The cutoff date for all data in the World Devel-wise specified. opment Indicators is April 30, 1991.* Growth ratesare based on constant price data Historical data in this Report may differ fromand, unless otherwise noted, have been computed those in previous editions because of continuouswith the use of the least-squares method. See the updating as better data become available, becausetechnical note to the World Development Indica- of a change to a new base year for constant pricetors for details of this method. data, and because of changes in country composi-* The symbol I in dates, as in "1988/89," means tion in income and analytical groups.that the period of time may be less than two years Economicand demographic erms are defined in thebut straddles two calendar years and refers to a technical note to the World Developmentcrop year, a survey year, or a fiscal year. Indicators.

xii


14/64

OverviewDevelopment is the most important challenge fac- The processes driving economic developmenting the human race. Despite the vast opportunities are by no means fully understood. But much cancreated by the technological revolutions of the be learned from experience. History shows, abovetwentieth century, more than 1 billion people, one- all, that economic policies and institutions are cru-fifth of the world's population, live on less than cial. This is encouraging, because it implies thatone dollar a day-a standard of living that Western the countries which have failed to prosper can doEurope and the United States attained two hun- better. But it is also challenging, because it obligesdred years ago. governments everywhere (not just in developingThe task is daunting, but by no means hopeless. countries) as well as the multilateral agencies toDuring the past forty years many developing take account of the factors that have promoted de-countries have achieved progress at an impressive velopment and put them to work.pace. Many have achieved striking gains in health A central issue in development, and the princi-and education. Some have seen their average in- pal theme of the Report, is the interaction betweencomes rise more than fivefold-a rate of progress governments and markets. This is not a questionthat is extraordinary by historical standards. So if of intervention versus laissez-faire-a popular di-nothing else were certain, we would know that chotomy, but a false one. Competitive markets arerapid and sustained development is no hopeless the best way yet found for efficiently organizingdream, but an achievable reality. the production and distribution of goods and ser-Nonetheless, many countries have done poorly, vices. Domestic and external competition providesand in some living standards have actually fallen the incentives that unleash entrepreneurship andduring the past thirty years. That is why poverty technological progress. But markets cannot oper-remains such a formidable problem and why sub- ate in a vacuum-they require a legal and regula-stantial economic progress has yet to touch mil- tory framework that only governments can pro-lions of people. The sharp contrast between suc- vide. And, at many other tasks, marketscess and failure is the starting point for World sometimes prove inadequate or fail altogether.DevelopmentReport 1991.Why have country experi- That is why governments must, for example, in-ences been so different? What must developing vest in infrastructure and provide essential ser-countries do if the productivity and well-being of vices to the poor. It is not a question of state ortheir people are to increase rapidly during the next market: each has a large and irreplaceable role.decade? What can the international community do A consensus is gradually forming in favor of ato spur development and alleviate poverty? These "market-friendly" approach to development. Thequestions are all the more pressing because nearly Report describes the various elements of this strat-95 percent of the increase in the world's labor force egy, and their implementation in a wide variety ofduring the next twenty-five years will occur in the country contexts. It goes further. It stresses thedeveloping world. complementary ways markets and governments

1


15/64

Kingdom sixty years to double its real income perFigure 1 Per capita income: selected countries person, starting in 1780. Many developing coun-in 1988 compared with the United States, tries matched the achievement within twenty1830-1988 years, after World War II.The real income gap between the industrialThousands of dollars countries and some developing countries, notably20 those in East Asia, has narrowed dramaticallysince World War II. But the gap between the indus-

trial countries and the developing countries of/ * Switzerland other regions has widened. The 1980swere a diffi-cult decade for most countries-though per capitaincome in China and India, the most populous

-*Japan countries, and Asia as a whole, grew substantially.-NFrance In the past quarter century, per capita income

Urnted tates | grew little in such countries as Argentina, Jamaica,10 Nigeria, and Peru; in Nicaragua, Uganda, Zaire,and Zambia, it declined. Many poor countrieshave per capita real incomes that are much lowerGreece than that of the United States at the beginning of

/ : * cuhga4$yhe nineteenth century (Figure 1). However, the0S-Brazl gaps between rich and poor in infant mortality and

life expectancy have narrowed more quickly-Lat Ha'>dneka thanks to the spread of medical technology, envi-

0 * ~ js> e ronmental sanitation, better nutrition, education,1830 1860 1890 1920 1950 198088 and the natural limits to achievement in such indi-cators (Figure 2).I- | Constant 1988dollars F3 1988 PPP dollars The crucial question for the future is whether

national and international policies will permit thepotential created by technological progress to beNote: Countrieswere selected on the basisof data availability poted. SustainblecdevlopmetrequireSources: or United States,WorldBank data and Maddison, exploited. Sustamable development requiresbackground paper; for other countries, Summers and Heston 1991. peace. War and its aftermath in the Middle Easthave cast a cloud of uncertainty over that region.Ethnic strife, civil wars, and international con-flicts, as well as natural disasters, continue to de-can pull together. If markets can work well, and stroy the fragile base of development in manyare allowed to, there can be a substantial economic parts of the world. By conservative estimates,gain. If markets fail, and governments intervene wars have been directly responsible for 20 millioncautiously and judiciously in response, there is a deaths since 1950. That includes more than 12 mil-further gain. But if the two are brought together, lion deaths from civil wars in the developingthe evidence suggests that the whole is greater world. Far and away, the most important cause ofthan the sum. When markets and governments famine in developing countries in recent years hashave worked in harness, the results have been been not inadequate agricultural output or pov-spectacular, but when they have worked in oppo- erty, but military conflict.sition, the results have been disastrous. Rapid development also requires that economicintegration expand for all. The boundaries that

The world economy in transition separate national markets for goods, capital, andlabor have continued to be eroded. WorldwideThe technological changes of this century have en- trade has expanded by more than 6 percent a yearabled countries to use their resources much more since 1950, which is more than 50 percent fasterproductively than ever before. Living conditions than the growth of output. Global integration inhave improved beyond recognition, not just in in- trade, investment, factor flows, technology, anddustrial countries but also in most developing communication has been tying economies to-countries. The pace of this improvement has gether. But it remains to be seen whether thisseemed to accelerate with time. It took the United trend will continue.

2


16/64

Increasing exposure to external influences un-doubtedly puts the developing countries at risk. Figure 2 Life expectancy at birth:High industrial-country fiscal deficits, potentially selected countries in 1985 compared withhigh international interest rates, weaknesses in the Japan, 1900-85financial institutions in the United States, deterio-ration of some aspects of the financial situation in YearsJapan, and protracted and inconclusive negotia- 80tions in the Uruguay Round of trade talks will all /Greecetake their toll. But globalintegration in the flow of 75 - France,goods, services, capital, and labor also brings United Statesenormous benefits. It promotes competition and 70 - Sri Lankaefficiency,and it gives poor countries access to ba- Japan * Chinasic knowledge in medicine, science, and / Thailandengineering. * BrazilSustained development depends on global con- / Algeriaditions and especially on country policies. Re- 60 Indonesiacently, countries in Eastern Europe embarked on hndiaambitious programs of economic reform. The So- 55 -viet Union grappled with difficulties of economic / Boliviaand political transformation. A number of devel- 50 -oping countries initiated policy improvements : Ugandasimilar to the earlier ones elsewhere. Democracy 45 Senegalswept through Eastern Europe as well as parts ofthe developing world. 40 ! IThe staff of the World Bank has made projec- 1900 1920 1940 1960 198085tions for the world economy in the 1990s. If there Note: Countries were selected on the basis of data availability.are no major adverse shocks and generally good Sources:WorldBank data; United Nations 1991.policies, average per capita real incomes in the in-dustrial countries might grow by about 2.5 percenta year (Table 1). This could be achieved with aninflation rate of 3-4 percent and a real interest rateof about 3 percent. If world trade expands more (for example, substantially lower growth rates inthan 5 percent a year and recent policy reforms industrial countries) are plausible, but not likely,continue and are consolidated, per capita real in- particularly during a period as long as a decade.comes in the developing countries might grow by Country studies which support these projec-roughly 3 percent a year. Better or worse external tions suggest that, under more vigorous and com-conditions could raise or lower this outcome by prehensive reforms, the developing countries'0.5-1.0 percentage point. More extreme scenarios long-term income growth could be improved byTable 1 Growth of real GDP per capita, 1965-2000(average annual percentage change, unless noted)

Population, Projection1989 forGroup (millions) 1965-73 1973-80 1980-89 1990saIndustrial countries 773 3.7 2.3 2.3 1.8-2.5Developing countries 4,053 3.9 2.5 1.6 2.2-2.9Sub-Saharan Africa 480 2.1 0.4 - 1.2 0.3-0.5East Asia 1,552 5.3 4.9 6.2 4.2-5.3South Asia 1,131 1.2 1.7 3.0 2.1-2.6Europe, Middle East, and North Africa 433 5.8 1.9 0.4 1.4-1.8Latin America and the Caribbean 421 3.8 2.5 - 0.4 1.3-2.0Developing countries weighted by populationb 4,053 3.0 2.4 2.9 2.7-3.2

a. Projected on the basis of the two main scenarios (baseline and downside) discussed in Chapter 1.b. Using population shares as weights when aggregating GDP growth across countries.Sources:World Bank data and World Bank 1991a.

3


17/64

1.5-2 percentage points-on average, about twice As the importance of openness and competitionthe improvement from better external conditions. has been realized, the conviction has grown thatWhat, in detail, those reforms might be is the sub- they are insufficient by themselves. Investing inject of the body of the Report. These projections people, if done right, provides the firmest founda-also contain a warning: if recent reforms are re- tion for lasting development. And the proper eco-versed, the outcome might easily be much worse. nomic role of government is larger than merelystanding in for markets if they fail to work well. InPaths to development defining and protecting property rights, providing

effective legal, judicial, and regulatory systems,The challenge of development, in the broadest improving the efficiency of the civil service, andsense, is to improve the quality of life. Especially protecting the environment, the state forms thein the world's poor countries, a better quality of very core of development. Political and civil liber-life generally calls for higher incomes-but it in- ties are not, contrary to a once-popular view, in-volves much more. It encompasses, as ends in consistent with economic growth.themselves, better education, higher standards of As a matter of arithmetic, the growth of output canhealth and nutrition, less poverty, a cleaner envi- be accounted for as the growth of capital and laborronment, more equality of opportunity, greater in- and changes in the productivity of those inputs. Pro-dividual freedom, and a richer cultural life. This ductivity has grown much more slowly in develop-Report is concerned primarily with economic de- ing countries than in industrial countries. In thevelopment, in itself a broad idea. Any notion of nearly seventy countries examined for the Report,strictly economic progress must, at a minimum, changes in the use of capital made a large contribu-look beyond growth in per capita incomes to the tion to changes in output. But the key to explainingreduction of poverty and greater equity, to prog- the differences in the growth of output from countryress in education, health, and nutrition, and to the to country is the growth of productivity.protection of the environment. Growing productivity is the engine of develop-Thinking on development has shifted repeat- ment. But what drives productivity? The answer isedly during the past forty years. Progress has not technological progress, which is in turn influencedmoved along a straight line from darkness to light. by history, culture, education, institutions, andInstead there have been successes and failures, policies for openness in developing and industrialand a gradual accumulation of knowledge and in- countries. Technology is diffused through invest-sight. On some matters, a fairly clear understand- ment in physical and human capital and throughing has emerged, but many questions still remain trade. Strong evidence links productivity to invest-contentious and unanswered. ments in human capital and the quality of the eco-Climate, culture, and natural resources were nomic environment-especially the extent toonce thought to be the keys to economic develop- which markets are distorted.ment. Rapid industrialization, using explicit and The Report looks at several indexes of marketimplicit taxes on agriculture to fund industrial in- distortion, such as the parallel-market premiumvestment, was for many years a much-favored on the exchange of foreign currency and restric-strategy. After the Great Depression and through tions on trade. Far more economies have had se-the 1960s, most policymakers favored import sub- verely distorted price systems than only mod-stitution combined with fostering infant indus- erately or slightly distorted ones. Most of thetries. In its day this view was endorsed, and the countries with severely distorted prices did poorlystrategy supported, by external aid and finance in output growth and productivity. At the oppo-agencies. site extreme, the few economies that had relativelyThese views have not stood the test of time. undistorted price systems did well. In the middleNow there is clearer evidence, from both develop- the results are more ambiguous: some economiesing and industrial countries, that it is better not to were successful, but others did much less well. Inask governments to manage development in de- general, a relatively undistorted price system,tail. Discriminatory taxes on agriculture have al- other things being equal, has a better chance ofmost always turned out to be taxes on growth. promoting growth than a heavily distorted one. AEconomic isolation behind trade barriers has range of evidence also suggests what can beproved costly. Retarding competition and interfer- gained by reducing interventions in the market.ing with prices, deliberately or accidentally, have For instance, various degrees of reforms in Chile,very often proved counterproductive. China, Ghana, India, Indonesia, the Republic of4


18/64

Korea, Mexico, Morocco, and Turkey during the1980s were generally followed by improvements in Figure 3 Policy distortion educationeconomic performance. and growth in GDP, sixty developingIs this view really consistent with the remark- economies, 1965-87able achievements of the East Asian economies, orwith the earlier achievements of Japan? Why, inthese economies, were interventions in the marketsuch as infant-industry protection and credit sub-sidies associated with success, not failure? First,these governments disciplined their interventions GDPwith international and domestic competition. This growthmeant that interventions had to be carried out (percent)competently, pragmatically, and flexibly; if one ALfailed, it was likely to be removed. Instead of re-sisting market competition, governments tried toanticipate it-and when they were proved wrong,they were quick to undo the harm. Second, thesegovernments, on the whole, were careful to en-sure that intervention did not end up distorting edu_ationrelative prices unduly: in trade, they successfullyneutralized the bias against exports that is usuallya by-product of protection. Third, their interven- Hgh 4 Low educationtion was more moderate than in most other devel- distortion distortionoping countries. In that respect, these economiesrefute the case for thoroughgoing dirigisme as con- Note:High distortion reflects a foreign exchange premium of morethan 30percent; low distortion, a premium of 30 percent or less.vincingly as they refute the case for laissez-faire. Education is measured by the average years of schooling, excludingIn several respects, government intervention is postsecondary schooling, of the population age fifteen to sixty-four.High education is defined here as more than 3.5 years; lowessential for development. What then are the con- education, 3.5 years or less. For the derivation of data, seeditions underhich govrnment intervention is TableA.4ditions under which government intervention is Sources:nternationalCurrencyAnalysis,nc., variousyears;likely to help, rather than hinder? Economic the- World Bank data.ory and practical experience suggest that interven-tions are likely to help provided they are market-friendly. That means:

* Intervene reluctantly. Let markets work unlessit is demonstrably better to step in. Certain actions cial discretion. Prefer, for example, tariffs to quan-involving public goods readily pass this test in titative controls.principle because the private sector does not usu- The complementarity of a sound policy climateally carry them out: spending on basic education, and market-friendly interventions is one of theinfrastructure, the relief of poverty, population most encouraging lessons of development experi-control, and environmental protection. Certain ence. Analysis suggests, for example, that thereother actions usually fail the test. For instance, it is may be an interaction between different forms ofusually a mistake for the state to carry out physical investment (human, physical, and infrastructure)production, or to protect the domestic production and the quality of policies (Figure 3). Among aof a good that can be imported more cheaply and sample of sixty developing economies during thewhose local production offers few spillover period 1965-87, those with distorted policies and abenefits. low level of education grew, on the average, by 3.1* Apply checks and balances. Put interventions percent a year. The economies that had eithercontinually to the discipline of the international higher levels of education or fewer policy distor-and domestic markets. The Republic of Korea tions did better, growing at 3.8 percent a year. Butwithdrew its support for the heavy chemicals in- the countries that had both-that is, a higher leveldustry when market performance showed that the of education and fewer distortions-grew at 5.5policy was failing. percent a year. There also seems to be such a com-

* Intervene openly. Make interventions simple, plementarity between increasing physical capitaltransparent, and subject to rules rather than offi- and economic policies. This research does not by5


19/64

Figure 4 The interactions in a market-friendly strategy for development

Gains from rade GloballinkagesAbility o attract oreign nvestment (Chapter5)

itself show causation, but it suggests that the re- Investing in peoplesults from moving forward on several fronts atonce can be exceptionally good. The economic returns from public and private in-vestments in people are often extremely high.Elements of a market-friendly approach Markets in developing countries cannot generallybe relied upon to provide people-especially theThe Report looks at the relation between govern- poorest-with adequate education (especially pri-ments and markets under four broad headings: mary education), health care, nutrition, and familyhuman development, the domestic economy, the planning services.international economy, and macroeconomic pol- Rapid population growth is a crucial concern inicy. These areas of activity are interrelated. A rela- some countries such as Bangladesh and in sometively undistorted domestic economy rewards parts of the world such as the Sahel. The growththose who build up their human capital more gen- of the population typically slows as people's edu-erously than does a distorted one; at the same cation and incomes grow and they move to cities.time, education makes the domestic economy Yet in many countries, investments in education,more productive by speeding the adoption of new health, and family planning have been necessary,technology. To take another example, a stable mac- in addition to income growth, to reduce fertilityroeconomy helps the domestic price system be- and slow the pace of population growth. Effectivecause it clears away the fog of inflation. But micro- family planning programs have informed peopleeconomic efficiency also makes it easier to keep of the private and social costs of high fertility, en-inflation low: with fewer unviable enterprises, couraged couples to reduce family size, andthere will be less need for subsidies to swell the helped to meet the demand for contraceptives.public sector deficit. All four sets of actions are Such programs have worked best in countries thatworth doing in their own right. But because of have also instituted policies to improve educationsuch linkages, the results will probably be dispro- for women and increase their opportunities forportionately strong if done together (see Figure 4). work in the modern sector.6


20/64

Many governments are investing far too little in price controls-all of which weaken the forces ofhuman development. In Brazil and Pakistan rapid competition-have held back technological changegrowth alone was insufficient to improve the social and the growth of productivity.indicators substantially. In Chile and Jamaica, Examples of such restrictions at various timeshowever, these indicators improved even in pe- include Argentina's policy of favoring incumbentriods of slow growth. Among low-income coun- firms for new industrial investment; barriers to en-tries, Guinea and Sri Lanka have the same per try or exit in many African countries, China, India,capita income, but average life expectancy is some and Eastern Europe; sheltered national marketstwo-thirds longer in Sri Lanka. Among middle- for parts of Europe's computer industry; extensiveincome countries, Brazil and Uruguay have similar price regulations in Brazil, the Arab Republic ofper capita incomes, but infant mortality is two- Egypt, and Indonesia; capacity licensing in Indiathirds lower in Uruguay. By some estimates and Pakistan; and state control of selected indus-Shanghai has a lower infant mortality rate and tries in almost all developing countries. When reg-longer life expectancy than New York City. ulatory reforms to correct the obstacles have beenIn addition to increasing the quantity of human undertaken-as in Ghana, India, Indonesia, andinvestment, governments must improve its qual- recently many other countries-they have paid off.ity. Too often, capital investments go forward with An efficient domestic economy also requiresinadequate provision for the recurrent expendi- public goods of correspondingly high quality.tures they entail, which results in wasteful under- These include, most fundamentally, a regulatoryutilization. And expenditures are frequently framework to ensure competition, and legal andpoorly targeted and involve a great deal of leak- property rights that are both clearly defined andages. There is a need to reduce heavy subsidies for conscientiously protected. It also requires invest-higher education and to spend much more on pri- ment in infrastructure, such as irrigation andmary education, from which the returns are rela- feeder roads, which have proven to provide hightively higher. The case for a similar switch in returns. The returns from research and develop-spending from expensive curative health care sys- ment in agriculture, for instance, can be extremelytems to primary systems is also strong. high: witness maize in Peru, rubber in Malaysia,More care is required to ensure that public pro- wheat in Chile and Pakistan, and cotton in Brazil.grams reach their intended beneficiaries. Exam- Domestic policy should confront entrepreneursples of well-designed and well-targeted social ex- with the information that is embodied in prices,penditures include a program to increase primary and it should then equip them (by means of invest-school enrollment in Peru; the provision of rural ments in infrastructure and institutions) tohealth facilities in the state of Kerala in India; ef- respond. A detailed study of the World Bank'sforts to reduce infant mortality in Malaysia; and investment projects in developing countries con-health programs to raise life expectancy in Chile, firms that market incentives work. The rate of re-China, and Costa Rica. There are useful oppor- tum to public and private sector projects imple-tunities for partnership with the private sector. In- mented under policies that do little to distortvolving the private sector permits services to be prices is consistently higher than under policiesdelivered more effectively, as in the cases of educa- that result in more distortions (Figure 5). A sub-tion in Kenya, the Philippines, and Zimbabwe; stantial improvement in policy is associated with aand of health care in Rwanda and Zambia. 5-10 percentage point increase in the rate of returnfor projects, or a 50-100 percent increase on aver-Theclimate or enterprise age. Also evident are the general positive effects ofinstitution-building and investing in infrastructureDomestic and external competition has very often on returns from projects. Again, this confirms thatspurred innovation, the diffusion of technology, good policies and investments (including externaland an efficient use of resources. Japan, the financing) are complementary.Republic of Korea, Singapore, the United States,and Europe's most successful economies have all Integrationwith the global economyestablished global competitive advantage throughthe rigors of competition. Conversely, systems of When international flows of goods, services, capi-industrial licensing, restrictions on entry and exit, tal, labor, and technology have expanded quickly,inappropriate legal codes concerning bankruptcy the pace of economic advance has been rapid.and employment, inadequate property rights, and Openness to trade, investment, and ideas has

7


21/64

to investment and to trade in goods and services.Figure 5 Rates of return for projects financed Nontariff barriers, which are especially distorting,by the World Bank and the IFC under need to be phased out, and tariffs reduced, oftendifferent policies and conditions substantially.Governments also need to play a more positiveEconomic rate of return (percent) role. To get the most out of technology transfer,20 appropriate education and on-the-job training willbe required. As in Japan and the Republic of Ko-

rea, government agencies and industry associa-_5 _ ^tions can collaborate to gather and disseminate in-formation on technology, and to help developquality control for exports.Governments in the industrial countnies have a10 o :. responsibility-if not to the developing world,then to their own people-to grant exporters in thedeveloping countries access to their markets.Without such access, reforms in the developingcountries may go to waste. For several decades,the industrial countries had been reducing theirtariffs; in the 1980s, however, nontariff barrierso l were steadily raised. Between 1966 and 1986, the

share of imports to countries that belong to theTrade Foreign Fiscal Organisation for Economic Co-operation and De-restrictions exchange deficit velopment (OECD) that were affected by nontariffpremium measures is estimated to have doubled. In 1986,0 High 0 Moderate U Low more than 20 percent of imports from the develop-ing countries were covered by "hard-core" mea-sures alone. Freeing trade within regions-as inNote:Calculated or1,200ublic and privateprojects.Ahigh the case of Europe's Project 1992, the Unitedforeign exchangepremniums morethan 200percent;moderate,StesCndFreTaeAemnto19,ad20-200ercent:ow, ess han20percent.Ahigh iscal eficitsStates-Canada Free Trade Agreement of 1989, andmorehan 8 percent of GNP;moderate,4-8 percent; ow, ess han 4 the proposed free trade agreement for Canada,percent. For explanation f trade restrictions, ee the technicalnoteforChapter at theendof themain ext. Mexico, and the Umted States-is benefical. But ItSource: World Bank data. remains to be seen whether regional blocs will

support or hinder the goal of a more open globaltrading system. At any rate, a renewed commit-ment to the General Agreement on Tariffs andbeen critical in encouraging domestic producers to Trade (GATT), together with a greater willingnesscut costs by introducing new technologies and to by all countries to undertake unilateral trade re-develop new and better products. A high level of form, is highly desirable.protection for domestic industry, conversely, hasheld development back by decades in many The macroeconomicoundationplaces. The effect of import competition on firmsin, for instance, Chile and Turkey, and the effect of A stable macroeconomic foundation is one of thegreater competition in export markets on firms in most important public goods that governmentsBrazil, Japan, and the Republic of Korea confirm can provide. Experience shows that when govern-the decisive contribution to efficiency that the ex- ment spending has expanded too far, the resultternal economy can make. has often been large deficits, excessive borrowingThe international flow of technology has taken or monetary expansion, and problems in the fi-many forms: foreign investment; foreign educa- nancial sector, which have been quickly followedtion; technical assistance; the licensing of patented by inflation, chronic overvaluation of the currency,processes; the transmission of knowledge through and loss of export competitiveness. Excessive bor-labor flows and exposure to foreign goods mar- rowing can also lead to domestic and external debtkets; and technology embodied in imports of capi- problems, and to the crowding out of private in-tal, equipment, and intermediate inputs. Policies vestment. Restoring the confidence of the privateto promote these flows include greater openness sector is now a basic aspect of efforts to spur re-8


22/64

newed growth and generate employment in sev- most promise, suggests a reappraisal of the respec-eral countries with a history of macroeconomic in- tive roles for the market and the state. Put simply,stability, including Argentina, Bolivia, C6te governments need to do less in those areas whered'Ivoire, and Ghana. markets work, or can be made to work, reasonablyFiscal and financial instability have sometimes well. In many countries, it would help to privatizebeen partly inflicted on governments by external many of the state-owned enterprises. Govern-events-or by internal shocks such as civil wars or ments need to let domestic and international com-natural disasters. But governments can choose petition flourish. At the same time, governmentshow to respond to such pressures. In such coun- need to do more in those areas where marketstries as C6te d'lvoire, Mexico, Kenya, and Nigeria, alone cannot be relied upon. Above all, this meansthe response to a temporary economic upswing investing in education, health, nutrition, familywas an unsustainable increase in public spending. planning, and poverty alleviation; building social,Countries such as Botswana, Chile, Colombia, In- physical, administrative, regulatory, and legal in-donesia, the Republic of Korea, Malaysia, frastructure of better quality; mobilizing the re-Mauritius, and Thailand have managed to keep sources to finance public expenditures; and pro-their macroeconomic policies on course, and their viding a stable macroeconomic foundation,broader economic performance has benefited ac- without which little can be achieved.cordingly. Government intervention to protect the envi-A government can maintain a prudent fiscal pol- ronment is necessary for sustainable develop-icy by looking carefully at the division of economic ment. Industrial countries as well as developingtasks between the government and the private sec- countries face serious problems of environmentaltor. That, as the Report argues, is desirable in any degradation. In addition to air and water pollu-case. In reappraising their spending priorities, im- tion, sustained development is threatened by theplementing tax reform, reforming the financial sec- depletion of forests, soil, village ponds, and pas-tor, privatizing state-owned enterprises, and using tures. Appropriate policies include proper pricingcharges to recover the cost of some state-provided of resources, clearer property rights and resourceservices, governments can meet the goals of micro- ownership, taxes and controls on pollution, andeconomic efficiency and macroeconomic stability investment in production alternatives. The experi-at the same time. ence of many countries suggests that market re-Developing countries are also affected by the forms can also help to protect the environment.macroeconomic policies of the industrial countries, But specific environmental actions are needed.especially when these policies reduce the supply Finding the least costly way to confront environ-of global savings relative to their demand and raise mental ills is a high priority.real interest rates. An adequate supply of external What might prevent a realignment of the roles ofcapital (concessional and nonconcessional) is es- state and market? Will the political and socialsential-which calls for strong efforts by the World structures permit it to be implemented? Is it moreBank and other multilateral agencies, as well as or less likely to go forward under governmentsbilateral sources. The decline in voluntary private that are accountable to their people and that de-lending to developing countries needs to be re- fend political and civil liberties? It has often beenversed. The debt crisis remains an obstacle to argued that a democratic polity makes economicgrowth. Overcoming it requires the implementa- development more difficult to achieve. Reform al-tion of comprehensive adjustment programs and most always comes at the expense of certainreturn to regular creditworthiness; expanding the vested interests, and macroeconomic stabilizationnumber of countries covered by commercial-debt usually means at least a temporary rise in unem-and debt-service reduction; more concessional re- ployment. The claim is that only authoritarian gov-scheduling for the poorest debtor countries; ex- ernments can make the hard choices.pansion of debt forgiveness and deepening the This is patently false. The evidence from largeconcessionality of other debt relief measures by samples of countries does not go so far as to showofficial bilateral lenders; and an increase in equity that individual freedoms by themselves spur eco-and quasi-equity investment. nomic growth, but it offers no support at all for theview that they hold growth back. Neither does itRethinking the state endorse the notion that authoritarian govern-ments, on average, show greater promise forThe approach to development that seems to have achieving rapid growth. And looking beyondworked most reliably, and which seems to offer growth to the other elements of economic develop-

9


23/64

ment, the lesson of experience is even less equivo- base of political support for difficult changes. Butcal: political freedoms, and civil liberties-such as caution is needed. Redistribution through distort-a free press and the free flow of information- ing prices (such as subsidized credit) can be dam-seem to be associated with progress in health and aging, and the benefits in any case often go to theeducation in large groups of countries. less needy. Many of the policies recommended inThe interactions between political systems and this Report would tilt the distribution of income ineconomic policies are complex. Clearly, economic favor of the poor. Reducing trade protection gener-policies are not chosen in a vacuum. All but the ally promotes exports and raises the incomes ofmost repressive governments need to retain a the poor by supporting labor-intensive activities,measure of popular support for their actions. Of- for instance, as does spending more on primaryten this support has been bought with an assort- education and preventive health care, improvingment of damaging policy interventions (such as the functioning of labor markets, and enhancinghigh tariffs, currency overvaluation, and industrial labor mobility. Some countries could improve eq-licensing) as well as corruption and wasteful pub- uity by reforming their highly regressive tax sys-lic spending. Military spending remains high in tems. Land reform can also be beneficial, as inmany industrial as well as developing countries. China, Japan, and the Republic of Korea, althoughAmong the latter, it is well in excess of the com- its feasibility in many other countries has beenbined public expenditures on education and health questioned. Subsidies, targeted to the poor, for thein many countries such as Angola, Chad, Iraq, the consumption of basic food, may be needed. Every-Democratic People's Republic of Korea, Uganda, where, well-designed safety nets are essential toor Zaire. Insecure authoritarian governments have protect the most vulnerable from the short-termbeen at least as prone as democratic ones to go costs of reform.down this path. At the end of it, all too often, lies The speed and sequencing of policy reform havean economic and political crisis that sets develop- often been decisive. Again, it is hazardous to gen-ment back years. eralize. Swift reforms may help to neutralize theMany countries have suffered a vicious circle of resistance of interest groups opposed to change; orharmnful nterventions that entrench special inter- more gradual reforms may allow time to addressests and lead to rent-seeking and the "capture" of their concerns. But countries such as Ghana, Indo-the state. Governments sometimes intervene in nesia, the Republic of Korea, Mexico, and Turkeythe market to address political instability and other seem to show that packages of comprehensive re-political constraints. But the result is that all too form, with at least some bold changes made at theoften, the combination of pervasive distortions start of the program, are more likely to succeed.and predatory states leads to development disas- Comprehensive reforms can make heavy demandsters. Reversing this process requires political will on the administrative capacity of governments.and a political commitment to development. Im- Some argue that moving too quickly can raise un-plementing the economic reforms considered in employment, skew the distribution of income, andthis Report is one way to confront the political promote the overrapid depletion of natural re-constraints on development. sources. But the social cost of failing to reform canReform must look at institutions. The establish- be very great, as Argentina, C6te d'lvoire, Peru,ment of a well-functioning legal system and judici- and Eastern Europe all found out in the 1980s.ary, and of secure property rights, is an essential Swift and comprehensive reforms, with measurescomplement to economic reforms. Reform of the to reduce poverty and protect the environment di-public sector is a priority in many countries. That rectly, will usually be the right way forward.includes civil service reform, rationalizing publicexpenditures, reforming state-owned enterprises, Priorities for actionand privatization. Related economic reforms in-clude better delivery of public goods, supervision The recent slowdown in many industrial countriesof banks, and legislation for financial develop- and renewed economic uncertainty have cast ament. Strengthening these institutions will in- cloud over the global prospects for development.crease the quality of governance and the capacity The task is formidable: for many of the world'sof the state to implement development policy and poorest countries, decades of rapid growth will beenable society to establish checks and balances. needed to make inroads on poverty. And prioritiesExperience also suggests that a relatively equita- and constraints vary widely across countries at dif-ble distribution of income and assets broadens the ferent stages of development. Yet the opportunity10


24/64

for rapid development is greater today than at any But the developing countries' prospects aretime in history. International links, in the form of principally in their own hands. Domestic reformstrade and flows of information, investment and ensure the benefits of better external conditions.technology, are stronger now than forty years ago. The developingcountriesneed toMedicine, science, and engineering have all madegetsrdes the benefits are available worldwide. * Invest in people. Governments must spendgreat stes;. more, and more efficiently, on primary education,And policymakers have a better understanding basic health care, nutrition, and family planning.than before of the options for development. 'To seize this opportunity, industrial countries That requires shifts in spending priorities; greaterdeveloping countries, and external aid and lend- efficiency and better targeting of expenditures,ing agencies need to act. The industrial counties and in some cases greater resource mobilization.ing agencieseed to act. The* Improve the climate for enterprise. Govern-ments need to intervene less in industrial and agri-* Roll back restrictions on trade. The Uruguay cultural pricing, to deregulate restrictions to entryRound of trade talks must not be allowed to fail. and exit, and to focus instead on ensuring ade-Nontariff barriers to trade need to be dismantled. quate infrastructure and institutions.Developing countries would benefit from being * Open economies to international trade and in-granted unrestricted access to industrial-country vestment. This calls for far fewer nontariff restric-markets-some $55 billion in additional export tions on trade and investments, substantially

earnings, or as much as they receive in aid. lower tariffs, and a decisive move away from dis-* Reform macroeconomic policy. Reduced fiscal cretionary forms of control.deficits, stable financial systems, stable currencies, * Get macroeconomic policy right. Macro-low and stable interest rates, and steady noneconomic policy needs to ensure that fiscal deficitsinflationary growth would transform the climate are low and inflation kept in check. Appropriate,for development in the rest of the world. market-based incentives for saving and invest-The industrial countries and multilateral agencies, ment are essential if domestic resources are to play

including the World Bank can strengthen develop- their essential part in financing development.ment prospects by enhancing the quantity and In each of these areas, the challenge to policy-quality of external financial assistance. They need makers is to exploit the complementarities be-to tween state and market. They can transform the* Increase financial support. More external fi- outlook for economic development by having thenancing, both concessional and nonconcessional, state intervene less where it may (for example, in

would greatly strengthen the development effort. production), and more where it must (for example,Many developing countries continue to struggle in environmental protection), by strengthening in-with heavy burdens of external debt. Further stitutions and capabilities, by finding nondistor-progress in extending debt relief to the middle- tionary ways to promote equity, and by fosteringand low-income countries is needed. checks and balances in governments.

* Support policy reform. Additional financingwill be far more effective when it supports sounddomestic policies. Experience shows that it pays Succeeding in development is indeed the mostlenders and borrowers alike to ensure that invest- pressing of all the challenges that now confrontments and market-friendly policies go together. the human race. Incomplete though our under-* Encourage sustainable growth. The global standing still is, enough has been learned in thecommunity has a great responsibility to take com- past forty years to point the way. Strategies inmon action to protect the earth's environment, which governments support rather than supplantand to support the control of environmental deg- competitive markets offer the best hope for meet-radation in developing countries. ing the challenge of development.

11


25/64

Theworld economy in transitionRadical change is under way in the global econ- for any country's economic development is itsomy. Recently more than a dozen countries have own approach to economic policies and institu-launched major economic reforms. Democracy has tions. But global economic conditions are impor-swept Eastern Europe and is making inroads in the tant. So whereas the rest of this Report is largelydeveloping world. The European Community has about what countries themselves can do to im-moved closer to political and economic union. If prove their performance, this chapter looks at thethese events are cause for optimism, others are global context in which those actions will be cast.not. War in the Middle East, increasing difficulties In some ways the international economy will bewith the Soviet Union's economic transition, and unfavorable to development in the coming decade.slowing world growth have been setbacks. Interest rates may remain high, and growth isThis Report will show that what matters most likely to remain slow worldwide. No early end tothe debt crisis is in sight-nor is any substantialresumption in North-South capital flows. Theneed to protect the environment poses an addi-tional challenge. Yet there are also favorable signs

person doubled, selected countries for development. Real reform is being carried outin Eastern Europe. Ghana, Indonesia, Mexico, andother countries are striving to sustain their earlierYears programs of reform; Peru, Tanzania, and Viet0 10 20 30 40 50 60 Nam, for example, have embarked on new ones. If

United Kingdom, I I I more countries do the same-and if their actions1780-1838 - I find support in greater openness in international

U 9nitedtates, trade and finance-rapid progress is indeedJapan, 1885-1919

Turkey, 1857-77 The long viewBrazil, 1961-79 Economic history shows that it is possible forRep. of Korea, countries to develop rapidly and indeed that for1966-77 many countries the pace of change has acceler-

China, 1977-87 ated. It shows at the same time that many coun-tries have developed very slowly, if at all. The keyto development, clearly, is to understand why theNote: For the rationale for the choice of periods, see the technical range of experience has been so wide.note at the end of the main text.Sources:For United Kingdom, Crafts 1981; for Japan, Maddison The time required for substantial changes in the1989; for others, World Bank data, quality of life has shrunk steadily over the centu-

ries (Figure 1.1). Beginning in 1780, the United12


26/64

Kingdom took fifty-eight years to double its outputper person. Starting in 1839, the United States Figure 1.2 Gains in life expectancy, selectedtook forty-seven years. Starting in the 1880s, Japan countries and periodsdid it in only thirty-four years. After World War II,many countries doubled their per capita output Average years gained per decadeeven faster than Japan: for example, Brazil in eigh- 8teen years, Indonesia in seventeen, the Republic of 1957-87Korea in eleven, and China in ten. This change in 1971 4pace indicates that the industrial revolution gained 1l8momentum over a long period, whereas catching C5up has been a more and more rapid process. 1956-78The pace of progress has hastened not only forincome and material consumption, but also for 41950_other aspects of welfare. Many developing coun-tries have approached the life expectancies of theindustrial world in a remarkably short time (Figure 21.2). These changes reflect better diet, housingconditions, and access to medical care. The latter,in turn, were possible thanks to increases in foodproduction and distribution, growth in family in- ocomes, medical advances, public investments in 23 41 32 43 38 50 44 52safe drinking water and sanitary waste disposal, India Sri Lanka Rep. of Korea Guatemalaand, more recently, the development of healthcare systems. Note: The numbers below each bar indicate life expectancy at birthTechnological progress, more than any other at the beginning of the period. For the rationale for the choice ofprogress,ore ~~~~~~~~periods,ee the technical note at the end of the main text.single factor, has fueled this economic advance. Sources:Data before 1978, Gwatkin 1978; ater data for all countriesInnovations have produced great strides in agri- except India, WHO 1989; for India, United Nations 1989.culture, industry, and services. Famines disap-peared from Western Europe in the mid-1800s,from Eastern Europe in the 1930s, and from Asia inthe 1970s. In Africa the challenge of eradicating ogy introduced by the industrial countries (seefamine remains. Over time, countries have tended Chapter 2). There is evidence that this has hap-to converge with respect to some aspects of perfor- pened in the industrial countries. With interrup-mance more than others. There has been a particu- tions caused by war, the variation in their per cap-larly strong tendency toward convergence in indi- ita incomes has declined steadily over the pastcators of basic health. Large falls in infant century. This convergence began with the indus-mortality have been achieved by many countries- trial revolution. In the nineteenth century, Austra-even those with very low incomes. The countries lia, Canada, Japan, the United States, and Westernnow classified as developing have better standards Europe began to industrialize and to grow at anof basic health than the industrial countries did accelerating rate. Some other nations followed inwhen they were at the corresponding level of in- the early twentieth century. But by 1945, most ofcome. The same holds for literacy, although less the world had failed to make much progress.so. Convergence in per capita income has been Asia, the world's most populous region, has re-much more disappointing. cently begun to catch up-in some cases, at a spec-Despite the dramatic progress in some coun- tacular rate. But Sub-Saharan Africa has seen itstries, the differences in per capita incomes are vast per capita incomes fall in real terms since 1973. Inacross countries and regions. Table 1.1 shows the 1950 he region's per capita income was 11 percentgreat strides that have been made in raising in- of the industrial-country average; now it is 5 per-comes around the world. But it also shows the cent. Latin America has also slipped, especiallygreat income differences and the lack of progress since 1980. There are disparities within groups ofin many parts of the world. countries, too. They are growing among the lessEconomic theory suggests that productivity and advanced economies as a whole, and especially inper capita incomes would converge across coun- East and South Asia.tries over time, assuming that the countries which Extraordinary progress is possible even whenare now developing get access to the new technol- countries seem doomed to fail. Forty-three years

13


27/64

Table 1.1 Historical trends in GDP per capita(1980 nternational ollars)Growth rate

Region or group 1830 1913 1950 1973 1989 1913-50 1950-89Asia 375 510 487 1215 2,812 -0.1 3.6(40) (23) (15) (16) (28)Latin America .. 1,092 1,729 2,969 3,164 1.2 1.2(49) (52) (40) (31)Sub-Saharan .. .. 348 558 513 .. 0.8Africa (11) (8) (5)Europe, Middle .. .. 940 2,017 2,576 .. 2.0East, and (29) (27) (26)NorthAfricaEastern 600 1,263 2,128 4,658 5,618 1.4 2.0Europe (64) (57) (65) (63) (56)Developing .. 701 839 1,599 2,796 .. 2.7

economies (32) (25) (22) (28)OECDmembers 935 2,220 3,298 7,396 10,104 1.1 2.3

Note:Data presented are simple averages of GDP per capita. Numbers in parentheses are regional GDP per capita as a percentage of GDP in theOECD economies. Regional groupings include only non-high-income countries. Hungary is included in Eastern Europe group, not in Europe,Middle East, and North Africa.Sources: or 1830-1965, Maddison, background paper. Data for 1950-65 for Africa and the Middle East are based on OECD; data after 1965 arebased on growth rates from the World Bank data base. Benchmark values are 1980 international dollar estimates from Maddison, backgroundpaper, if available; from Summers and Heston 1984, otherwise.

ago an influential government report in an impor- Using new technologies effectively has often re-tant developing country observed that labor today quired adaptation and innovation in economic in-shunned hard, productive jobs and sought easy, stitutions, and occasionally political and social in-merchant-like work. The report showed that stitutions, too. New means of transport extendedworkers' productivity had fallen, wages were too markets and thereby increased the division of la-high, and enterprises were inefficient and heavily bor, leading, as Adam Smith observed, to moresubsidized. The country had virtually priced itself specialization: goods and labor were traded forout of international markets and faced a severe money instead of bartered, and so on. Today, cre-competitive threat from newly industrializing ating and strengthening market institutions is theChina and India. It was overpopulated and becom- biggest task for the former socialist countries ofing more so. This would be the last opportunity, Europe and for many of the developing countries.concluded the prime minister in July 1947, to dis-cover whether his country would be able to stand Global ntegrationon its own two feet or become a permanent burdenfor the rest of the world. That country was Japan. Trade was crucial in the spread of technology.The central question of this Report is why coun- Countries have usually developed more quickly astries like Japan have succeeded so spectacularly part of the world economy than in isolation, al-while others have failed. though protection has stimulated growth in someinstances. Historically, trade wars have retardedThe setting for development global development.The Great Depression and its aftermath are per-The key to global development has been the diffu- haps the clearest example of this. The collapse ofsion of technological progress. New technology the post World War I trading system did not trig-has allowed resources to be used more produc- ger the Great Depression, but it did contribute totively, causing incomes to rise and the quality of its depth, spread, and duration. The stock marketlife to improve. Scientific and medical innovation crash of October 1929 caused demand and trade tohas proceeded at a breathtaking pace during the slump. After the failure to reach a cooperativepast two hundred years (Box 1.1). trade agreement in 1929, the United States raised14


28/64

Box 1.1 Innovations that changed the worldDuring the past two hundred years, a series of major duced. India doubled its average yield of wheat withinscientific and technological advances have dramatically a few years after the introduction of these improve-changed the course of development. ments in 1966-67. In China, where rural reforms pro-Health and medicine vided added flexibility in farming practices, new grainvarieties and farming techniques made it possible toIn the nineteenth century, improved nutrition played support 22 percent of the world's population on 7 per-the lead role in increasing people's life expectancy and cent of its arable land.in reducing infant mortality rates. In this century prog-communicationsress has come from the medical sciences. jenner's T esmallpox vaccine (1790) opened the way for the vac- The industrial revolution in Europe began with inven-cination of cholera, typhoid, and anthrax. Pasteur es- tions that augmented labor with machinery and new: tablished the relationship between microbes and im- sources of energy. After Savery's steam engine (1698)munity (1880). Half a century later came Fleming's and Newcomen's improved engine (1712), Watt's morediscovery of penicillin (1929), its clinical application efficient engines (1770 and 1796) brought steam into(1941), and the development of other antibiotics. As a wide use. The production and transport of coal grewresult, the morbidity rate of tuberculosis in the United quickly. Next came improvements in oil refining lStates, for example, declined from 79 per 100,000 in (1850s), then a method of drilling for oil. The internal1939 to 9 in 1988. Widespread immunization programs combustion engine (1876) and the technologies for elec-have contributed to dramatically reduced infant mor- tricity generation and transmission (1886) were part oftality rates, which are estimated to have declined in the same progression, transforming old industries andlow-income economies from 124 per 1,000 live births in launching new ones. Transportation was revolu-1965 to 72 in 1985. tionized along the way, with the steamship and theFood production locomotive (1830s), the automobile (1885), and the air-plane (1903). Harbors, highways, railways, and air-Steady increases in food production in the nineteenth ports brought trade to the remotest of places.century, followed by more dramatic increases in the The telegraph (1844), telephone (1876), radio (1895),twentieth, made possible some remarkable improve- and television (1925) changed the way people interact.ments in people's nutrition. The green revolution in With the electronic computer (1924), communicationthe 1960s and 1970s was possible because high-yielding satellites (1960), and fiber optics (1977), information ishybrid varieties of wheat and maize, dwarf varieties of now transmitted and processed at breathtaking speed,rice, and chemical fertilizers and pesticides were intro- yet at practical cost.

tariffs in the Smoot-Hawley Act of 1930. America's trade regime. Other countries followed. Expand-trading partners retaliated. World trade fell by ing agricultural markets lessened protectionisttwo-thirds-from $3 billion in October 1929 to $1 pressures, and the period from 1848 to 1873 be-billion in July 1932. Some of the contraction was came one of freer trade throughout Europe.the result of the Depression, but the hostility to- This process of international integration wasward trade caused damage that took decades to reinforced by integration within countries. In-repair. novations in transport were crucial. AcceleratingThe deterioration of the climate for trade in 1929 market integration, along with new manufactur-had followed a long period of peacetime market ing technologies, led to rapid increases inintegration. Britain had entered the nineteenth productivity.century with an unwieldy system of tariffs and Though this shift toward international integra-customs laws accumulated over five hundred tion undoubtedly spurred development, it also ex-years. The transition to liberal trade was not easy. posed countries to external economic shocks, andHigh duties on grain imports (the Corn Laws) as- hence to occasional setbacks. Dramatically lowersured landlords relative prosperity, while con- freight rates for shipping appear to have causedsumers paid high prices and export-oriented man- profits and wages to fall, but wages fell less so theufacturing was stifled. In 1845, when the potato cost of labor rose in real terms. Cheap grain fromcrop failed in Ireland, mass starvation followed. North America, Argentina, Australia, and theThis disaster paved the way for the repeal of the Ukraine was brought to Europe. Many countriesCorn Laws, and Britain moved to a more liberal raised their tariffs, on manufactures as well as

15


29/64

Figure 1.3 Per capita output growth in the OECD and developing countries and significantworld events, 1918-88Per capita output growth (percent; five-year moving average)8

2 ~~~~~~~~~~~OECD,...4 l.--._t _1920 1930 1940 1950 19

* 1918 * *1944World War I ends; 1929-39Great Depression Bretton Woods conferencerecovery begins 3 @- *19471924-26 1939-45 GATTestablishedReturn to fixed World War 11exchange ratesSources:For events, Pollard1990; or data, see the technicalnote at the end of he main text.

food. By 1913, the average tariff on manufactures Monetary and Financial Conference of the Unitedwas 20 percent in France, 18 percent in Italy, and and Associated Nations at Bretton Woods in July13 percent in Germany. Meanwhile, however, the 1944 set out to create "a world in which countriesfirst great global boom in trade had pulled many did not close their eyes to the repercussions ofdeveloping, primary-product exporters along. Ar- their actions on others" (Robinson 1975). The con-gentina had grown so fast that by the 1920s its per ference led to new rules and institutions for inter-capita income was 80 percent of Britain's. national monetary and exchange relations (underForeign trade was financed in the late nine- the International Monetary Fund), long-term capi-teenth century by a surge of foreign lending from tal flows for reconstruction and development (un-Europe, to the newly settled countries of the tem- der the World Bank), and international tradeperate zones and to czarist Russia. Technological (eventually embodied in the General Agreementbreakthroughs in chemicals, electrical products, on Tariffs and Trade, GATT). Even before theseand automobiles-sometimes called a second in- institutions were fully operational, the Marshalldustrial revolution-added new products sought Plan supported postwar reconstruction in Westernin import markets. British foreign lending in 1913 Europe; productivity missions from the Unitedreached half of national saving and 5 percent of States toured Europe and Japan, helping to de-national income. World War I cost continental Eu- velop trade relations and to spread information onrope much of its productive labor power and phys- technology.ical capital (Figure 1.3). Farm output had ex- The Soviet Union decided not to join the Brettonpanded significantly outside Europe during the Woods framework and formed a parallel interna-war. So the gradual recovery of European agricul- tional system. Eastern European nations nation-ture lowered prices after 1925. Prices collapsed af- alized their economies and adopted Soviet-styleter the October 1929 crash. The period from 1918 o central planning. The Council for Mutual Eco-1925 was one of great instability in exchange rates, nomic Assistance (CMEA) was set up to coordi-tariffs, trade agreements, and regulations. nate their economic activities.The Great Depression and World War II shat- The Marshall Plan sponsored the formation oftered the global economy and badly shook the con- the European Payments Union, creating the insti-fidence of the developing countries, especially in tutional basis for free trade within Western Eu-Latin America, in trade as an engine of growth. rope. The GATT spurred the move toward broaderThe need for international agreements on trade multilateral trade agreements. The formation ofand currencies was greater than ever before. The the European Economic Community (EEC) in16


30/64

86 __: ___: : : 1:_: __1 1

OECD Developing countries -

20 } 5 . -_

Developing countries excluding -Chunaand india

1953 1960 1970 1980 1988* 1957 p @ 1971 pEuropean Economic 1964-67 United States ends 1981-Community formed Kennedy Round gold convertibility International debt crisis* 1960 of GATT *1973 *1979Decolonization of First oil Second oil 1986-Africa accelerates price shock price shock Uruguay Roundof GAITT

1957, the formation of the OECD, and successive output is less than

World Dev Report 1991 Pp 1 to 64

Documents