73355 A Vision for Development: Dialogues on the Work of Vinod Thomas Ray C. Rist, editor ©2011 The Independent Evaluation Group The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-458-4497 Internet: http://ieg.worldbankgroup.org E-mail: ieg@worldbank.org All rights reserved 1 2345 14 13 12 11 This volume, except for Part I and Part II, is a product of the staff of the Independent Evaluation Group (lEG) of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. This volume does not support any general inferences beyond the scope of the evaluation, including any inferences about the World Bank Group's past, current, or prospective overall performance. lEG does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group or lEG concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. lEG encourages dissemination of its work and permits this document to be copied or otherwise transmitted, with appropriate credit given to lEG as the authoring body. How to cite this report: Rist, Ray c., ed. 2011. A Vision for Development: Dialogues on the Work of Vinod Thomas. Washing- ton, DC: Independent Evaluation Group. ISBN-13 978-1-60244-184-2 ISBN-lO: 1-60244-184-7 Printed on Recycled Paper Independent Evaluation Group Strategy, Communication, and Learning (lEGCS) E-mail: ieg@worldbank.org Telephone: 202-458-4497 Facsimile: 202-522-3125 Contents Foreword .................................................. v James D. Wolfensohn Introduction ................................................ ix Ray C. Rist Part I-An Emergent Vision for Development ..................... 1 Recent Lessons of Development ................................ 3 Lawrence H. Summers and Vinod Thomas Policies for Economic Development ............................ 21 Stanley Fischer and Vinod Thomas Paths to Development ....................................... 33 Vinod Thomas and others The Lessons of East Asia: An Overview of Country Experience ........ 83 Danny M. Leipziger and Vinod Thomas Assessi ng the Experience of Trade Pol icy Reform .................. 121 Vinod Thomas and John Nash, with Sebastian Edwards, Thomas Hutcheson, Donald Keesing, Kazi Matin, Garry Pursell, and Alexander]. Yeats Improving the Distribution of Opportunities ..................... 139 Vinod Thomas, Mansoor Dailami, Ashok Dhareshwar, Daniel Kaufmann, Nalin Kishor, Ramon Lopez, and Yan Wang Brazil's Agenda ........................................... 185 Vinod Thomas Part II-Reflections from Outside: Contributions to Shaping the Thinking on Development. ............................... 199 From Inside Brazil: Vinod Thomas's Vision ....................... 201 Joseph E. Stiglitz iii iv I A Vision for Development Brazil- Vision of a Developed Country and the Economy of Knowledge ..................................... 207 joao Paulo dos Reis Velloso VinodThomas and the Colombian Economy .................... 213 Roberto junguito Urbanization and Globalization in the 21 st Century: Emerging Challenges ....................................... 215 Rakesh Mohan Shaping the Development Debate: The Contributions of Vi nod Thomas ............................ 231 George S. Tolley Bracing for a Tumultuous Future .............................. 247 Kristalina Georgieva Central Asia's Trade-Rising to the Challenge .................... 257 Kazi M. Matin Part III-Reflections from Inside: The Transformation of the Independent Evaluation Group ............................ 271 New Directions in Development Evaluation ..................... 273 Daniela Gressani and Patrick Grasso On Strategy and Independent Evaluation ....................... 285 Hans-Martin Boehmer Evaluation for Results ....................................... 293 jira Tominaga Part IV-The Last Word • ..••••.••••.•.......•.••.••.••••..•• 307 Reflections on My World Bank Group Career .................... 309 Vinod Thomas Aboutthe Authors ......................................... 325 Foreword During my tenure as President of the World Bank Group, my Bank colleagues and I worked to make an increasing share of the attention and the resources of the institution available for the goal of reducing poverty and debt in devel- oping countries. In the mid-1990s, after a decade of structural adjustment policies, it was clear that a new, more engaging development agenda was needed-one that promoted growth and social change in poor countries as the way to reduce poverty. To this end, financial aid and loans were not enough; the Bank also had to become a partner of client countries. For countries to achieve sustainable growth, four things would seem to be needed: government capacity, a legal system that protects property rights, an honest financial system, and vigilance against corruption. The World Bank Group is a unique institution, with enormous knowledge and experience in development and relationships with governments and institutions around the world. It is a knowledge organization-a premiere resource, singular in its ability to help countries build capacity, solve problems, and enable growth- whose reach is extended through innovative use of technology for information systems and communication. The institution's role as a knowledge bank falls heavily on the work of the World Bank Institute. When I started at the Bank in 1995, Vinod Thomas was already the head of the Institute. Between 1994 and 2001 he sharpened the program's focus and quality and expanded its mandate and impact. Vinod led the Institute through much change and achievement, from its previous incarnation as the Economic Development Institute, which I endorsed, to its transformation in 1999 into the World Bank Institute, with its well-defined core courses, policy services, and knowledge networks. Iv vi A Vision for Development In recognition of the Institute's expanded role and greater audience reach, it was made a vice presidential unit in 2000 and Vinod Thomas its first Vice President, with responsibility for managing a $70 million program offering training, outreach, and scholarships. The World Bank Institute launched distance learning and, as a result, expanded its reach and connectivity several-fold. It has functioned as the Bank's principal vehicle for delivering timely knowledge in countries through seminars; conferences; and a variety of print, broadcast, and multimedia products. During this transition, the World Bank Institute's program was realigned more closely with World Bank and country priorities, shifting from stand-alone and sectoral courses to cross-sectoral and thematic programs that were more directly related to actual circumstances. The Institute began working jointly with the Bank's regions and networks to deliver cross-cutting, team-based thematic programs. I am thankful to Vinod for his leadership and transformative work at the Institute during seven years there before he moved on to become the Bank's Country Director for Brazil in 200 I. Vinod continued to move the Bank's development agenda forward while in his new position. In Brazil, between 2001 and 2005, he worked intensely with and oversaw developments in that country during a very difficult time, including a major public debt and currency crisis in 2002. As Country Director, he managed the Bank's large lending and nonlend- ing portfolio in Brazil and helped shape the dialogue with the govern- ment and the Brazil Country Assistance Strategy, anchoring the program not only on economic growth but also on human development as well as environmental sustainability. Vinod's directorship in Brazil ended at about the same time my presidency at the World Bank concluded. He subsequently returned to Washington to take up the position of Director-General of the Indepen- dent Evaluation Group, where he again succeeded in reorganizing and expanding the impact and effectiveness of an entire vice presidential unit, this time one that cuts across the World Bank Group, including the International Finance Corporation, the Multilateral Investment Guaran- tee Agency, and the International Bank for Reconstruction and Develop- ment/International Development Association. I commend his continued Foreword I vii service to the institution and his work on behalf of the world's poor and their social and natural environments. Through his work, Vinod has made a very real investment in people and achieved subsequent results in improving the quality and effectiveness of development programs. He is someone who has made an enduring contribution to the reputation and effectiveness of this great institution. James D. Wolfensohn President of the World Bank, 1995-2005 Introduction by Ray C. Rist, Editor The field of development is unsettled, contentious, and fractured. The cen- ter does not hold, and paradigms are constantly accepted and then rejected. Indeed, for example, the notion of micro-enterprises as a means to lift the poor out of poverty has been widely admired and advocated in develop- ment-until now, when we hear calls for a re-examination of these basic assumptions. This book examines the 35-year odyssey of Vinod Thomas through the debates and disputes of development. Vinod has spent these past 35 years within the World Bank Group in different positions and in different regions. He has grappled with topics as diverse as the "Asian Miracle" (and decline and resurgence), environmental challenges, poverty reduction, how to improve the quality of growth in poor countries, and, most recently, how to bring the lessons of evaluation into the policy arena. The breadth and scope of his work is impressive. He does not shy away from being strong in his convictions. This book not only illuminates the distinguished career of Vinod Thomas, it also provides an important overview of the many intellectual streams that have flown into the developmental delta over these past 35 years. Whether the discussion is on economic policy making, developing better trade practices, alleviating poverty, or making institutions such as the World Bank Group more nimble and responsive to global currents, the papers here provide a coherent sense of how assumptions have changed, how firm convictions of causality seem to be on shifting sand, and how illusive it is to talk of strategies for poverty reduction. This book gives a clear message of how difficult it is to positively affect development. This book is organized in four parts. First, there is a collection of seven articles that he has either authored or coauthored that reflect the diversity of ix x I A Vision for Development his thinking on key topics of development. These articles span decades, and the works he has coauthored give an indication of the wide-rang- ing intellectual collaboration he has maintained throughout his career. This point is worth emphasizing: Vinod is not a solitary intellectual. He builds his intellectual contributions both in and out of networks, and in and out of the Bank. He finds colleagues who share frameworks and understandings and together they build their analyses from such shared platforms. Well over half his published work is coauthored. Second, there are a number of contributions from persons acquainted with his work-or who have personally worked with him. These papers come from those inside and outside the World Bank Group. They reflect both on his substantive contributions and on their relations with Vinod as a friend and colleague. These papers add an important dimension to this book, as they place Vinod and his work in the context of develop- ment. Whether it is Joseph Stiglitz reflecting on the analysis Vinod offers on the future of Brazil, or George Tolley on the breadth of Vi nod's work, or Rakesh Mohan on how Vinod approaches the challenges of urbaniza- tion and globalization, these contributors all give us a clear sense of the importance of Vinod's thinking and the importance of his writings. Third, there are three papers from colleagues who have worked with Vinod in his most recent position as Director-General and Senior Vice President of the Independent Evaluation Group (lEG). This last six-year stint at the Bank has been notable for the changes that Vinod has brought about inside lEG (including the name change, from three separate unit names corresponding to the units in the World Bank Group-the World Bank, the International Finance Corporation, and the Multilateral Investment Guarantee Agency-which is of no small import). Even more important is how he has linked evaluation findings to the deliberations and strategy of the Executive Board of the Bank, to whom he directly reports. Independence has been a core value of lEG, and this theme comes across in all these papers. Vinod has given no ground on sustaining both the intellectual and the organizational inde- pendence of this group. The last section of the book is a personal reflection by Vinod on his 35 years in the World Bank Group. He has worked under seven World Introduction I xi Bank presidents. He has watched as the Bank has expanded its portfolio, increased its lending by hundreds of millions of dollars, and become the intellectual epicenter of international discourse on poverty alleviation and economic growth across the globe. Vinod is not going off into the sunset. He continues to blend his eco- nomics background with the emergent field of evaluation as he moves to the Asian Development Bank. His creativity and innovation do not cease. As he leaves the World Bank Group, those who know him, who have worked with him, and who have shared his intellectual journey all wish him well. n Emer ent ision eve 0 m nt Recent Lessons of Development by Lawrence H. Summers and Vinod Thomas Development is the most pressing challenge facing the human race. Despite the enormous opportunities created by the advances in technology, more than 1 billion people, one-fifth of the world's population, live on less than US$l a day, a standard of living that the United States and Europe attained two centuries ago. In the past the development effort may have mattered primarily to the citizens of poor countries. But now demographic, political, and technologi- cal trends make development an urgent priority for rich countries as well. Ninety-five percent of the growth in the world's labor force will take place in the developing world over the next quarter of a century. With the end of the cold war, economic and environmental issues will occupy the center of the diplomatiC stage, and these issues will increasingly involve developing nations. As improvements in transportation and communication shrink the world, the rich and poor countries will inevitably impinge more and more on each other. International television's impact on the less-advanced nations and the sharp increase in refugee flows worldwide are harbingers of things to come. A remarkable transformation in prevailing views about how governments can best promote economic development has occurred in recent years. Where it was once thought that government needed to occupy an economy's com- manding heights by allocating credit, rationing foreign exchange, ensuring against dependence, and operating key industries, today it is widely accepted that government's responsibility for directing the production and distribution Originally published in the World Bank Research Observer 8(2): 241-54, 1993. Reproduced with pennission. 4 I A Vision for Development of goods and services should be much reduced and the private sector's role much enhanced. It is in those tasks for which markets prove inad- equate or fail altogether-for example, investing in education, health, or physical infrastructure-that government has a central role. For some time now, the advice of the Bretton Woods institutions (the World Bank and the International Monetary Fund) has reflected the view that economic progress is impeded by governments that seek to supplant, rather than support, markets. That view has recently been taken on board by policymakers in many parts of the world. Most publicized has been the collapse of communism in what was once the Soviet bloc. China, where one-fourth of the people in the develop- ing world live, calls itself socialist, but the past decade has witnessed spectacular growth of the nonstate sector and very substantial price liberalization. India, where one-fifth of the population of the develop- ing world lives, is now undertaking a program of structural adjust- ment and liberalization that is mild by Eastern European standards but would have been unthinkable even two years ago. Chile and Mexico have demonstrated to other Latin American nations the benefits that liberalization can bring. And change is coming, albeit slowly, in Africa, as agricultural marketing boards are dismantled and investment licens- ing schemes are scaled back. For fifteen years, the World Bank's World Development Reports have been distilling the lessons of the record in various aspects of economic development. In a syntheSiS of what has been learned to date, the 1991 report (World Bank 1991) described the emerging consensus in favor of what was labeled the "market-friendly" strategy, one in which gov- ernments sustain rather than supersede markets. That report coincided with a growing literature on thinking about development (for example, Krugman 1993; Srinivasan 1991; Ranis and Schultz 1988) and on the lessons of growth and development (for example, Journal of Economic Perspectives 1990; Barro 1989; Stem 1989; Chenery and Srinivasan 1988; WIDER various years). This article summarizes what we consider to be the main policy conclusions from the development experience of the past thirty years and then considers a number of unresolved issues and challenges for the future. Recent Lessons of Development I 5 The Development Record In thinking about development strategy, it is a mistake to lose sight of the enormous progress that has been made and continues to be made in the developing world. Average incomes in developing countries have doubled over the past three decades-faster, that is, than in the United Kingdom during the Industrial Revolution, in the United States during its spurt to industrial maturity in the nineteenth century, or in japan during its prewar growth spurt. Economic progress in some developing countries has been dramatic: Turkey doubled its average income in twenty years (1957-77), Brazil in eighteen years (1961-79), the Republic of Korea in eleven years (1966-77), and China in ten years (1977-87). Tremendous social progress has also been achieved in the developing world. Infant mortality rates have been cut in half, total fertility rates have been lowered by 40 percent, and life expectancy has increased by nearly a decade, equivalent to twice the gain from eliminating both cancer and heart disease in the United States. A child born in Shanghai today has a smaller chance of dying in the first year of life, a longer life expectancy beyond one year, and a greater chance of learning to read than a child born in New York City. Social advance has been most strik- ing in East Asia. It is estimated that the incidence of absolute poverty (that is, the percentage of the population that subsists below the poverty line) in that region has fallen dramatically in the past three decades, from a third of the population in 1970 to a tenth in 1990 Qohansen 1992). Many people think of the 1980s as a "lost decade" for development. Indeed the economies of Latin America, the Middle East and North Africa, and Sub-Saharan Africa, where average incomes declined in real terms during the decade, did have a difficult time during the 1980s. But growth of income per capita weighted by population was slightly above the historic average during the decade. In other words, the income of the average person worldwide grew more in the 1980s than in the 1970s. This reflects the acceleration of growth in India and China, where more than 2 billion people live: average incomes in China expanded at roughly 8 percent a year in the 1980s, while those in India increased by more than 3 percent a year. 6 I A Vision for Development Of course, this relatively favorable record conceals enormous varia- tions in growth rates and poverty reduction across countries. Per capita incomes in some economies have doubled twice over since 1960 and are well on the way to a third doubling. But thIrty-six nations with a com- bined population of nearly 500 million people have seen low or declin- ing average incomes over the past twenty-five years. Poverty remains a formidable problem, and substantial economic progress has yet to touch millions of people. Before turning to the more detailed implications of this record of divergence for national policy., three broad facts of experi- ence are worth emphasizing. First, peace is prerequisite to successful development. Most of the economically successful countries have been able to enjoy sociopoliti- cal stability. By contrast, most of the thirty-·six countries that have lost ground over the past twenty-five years were involved in a substantial military conflict (Sivard 1989). In Africa, where development perfor- mance has been most disappointing, 7 million lives have been lost in wars in the past thirty years. Second, nations shape their own destinies. Poor domestic policies, more than an unfavorable external environment, are usually to blame for development failures. By any measure more foreign assistance goes to Africa, where performance has been poor, than to parts of Asia, where it has been better. Net capital inflows over the past quarter of a century to the most successful area of the developing world, East Asia, were less than one percent of the region's gross domestic product (GDP). More- over, East Asia has not had the benefit of natural resources to export. And countries such as Korea and Indonesia, despite debt burdens similar to those of some of the highly indebted countries, have not experienced debt crises because they used the proceeds of borrowing to make invest- ments yielding high returns. The recognition that countries make their own histories has begun to be reflected in models of economic growth, which increasingly factor in aspects of a country's policy environment that affect performance (Easterly and others 1991; Romer 1990; Lucas 1988). Third, the proper blend of state and market in the economy is a deci- sive factor. A review of the record identifies some important characteris- Recent Lessons of Development I 7 tics of successful government intervention. Most of these follow from the general principle of supporting, rather than supplanting, markets and the related idea that, as Keynes (1926) put it, "the important thing for government is not to do the things which individuals are doing already and to do them a little better or a little worse; but to do those things which at present are not done at all." Market development itself requires government action. The socialist economies in transition, from Eastern Europe to East Asia, are finding out that the establishment of the rules of the game by the government is crucial to the success of market reforms. The need for government action goes further, its rationale resting on various notions of market failure. Investment in human capital and physical infrastructure by the gov- ernment are usually justified because of externalities or spillover effects in the consumption or production of both of these categories and the inadequate incentives for markets to take them into account. In the case of primary education, for example, there are consumption-related spill- overs. The benefits to literacy go well beyond the gains to the individuals becoming literate. In the case of physical infrastructure such as roads, there are production-related externalities based on the need to make lumpy investments or to integrate the service in large networks. Nega- tive spillovers, too, justify government intervention: environmental pol- lution and congestion are inadequately accounted for by the market. The central issue, then, is one of the state and the market, but it is not a question of intervention versus laissez faire-a popular dichotomy but a false one. As discussed below, it is rather a question of the proper division of responsibilities between the two and of efficiency in their respective functions. learning from Experience The relation between government and market can be seen under three broad headings: human and physical infrastructure, competitive climate for enterprise, and macroeconomic management. A fourth area, insti- tutional development, cuts across all three. The areas, of course, are 8 I A Vision for Development interrelated. A relatively undistorted and competitive domestic econ- omy rewards the buildup of human capitai more generously than one that is highly regulated and protected. At the same time, investments in education make the domestic economy more productive by speed- ing the adoption of new technology. To take another example, a stable macroeconomic framework allows the domestic price system to work effectively because it helps to avoid inflation. But microeconomic effi- ciency also makes it easier to keep inflation low: with fewer unviable enterprises, there will be less need for subsidies that swell the public sector deficit. And, reforms in all these areas work better if a country's institutional framework, embracing both market and government insti- tutions, is improved. Uuman Perhaps the most important investments governments need to make are in people. The economic returns from public and private invest- ments in education and health are often extremely high (Psacharopoulos and Woodhall 1985; Easterlin 1981). Improving peoples' health and education strengthens the demand for smaller families, which, together with better provision of family planning services, helps to tackle the population problem in many parts of the world. Markets in developing countries often cannot be relied upon to provide people-especially the poor-with adequate education (particularly primary education), health care, nutrition, and family planning services. The returns to government development of various forms of physical infrastructure are also usu- ally very high Gimenez 1995). The incentives for the private sector to develop adequate infrastructure, such as rural roads, are often lacking. A child born in Africa today is more likely to be malnourished than to go to school at all, and is more likely to die before the age of five than to go to secondary school. And yet because basic health care services are labor intensive, they can be effectively produced in developing coun- tries. By one recent calculation for Pakistan, providing 1,000 girls with one extra year of schooling would raise their market productivity by between 10 and 15 percent and would avert nearly seven hundred births and close to fifty infant deaths. (Summers 1992). Recent Lessons of Development I 9 Many governments are investing far too little in human development (World Bank 1991; United Nations Development Programme 1990). In Brazil and Pakistan rapid economic growth alone was insufficient to improve social indicators substantially. In Chile and Jamaica, how- ever, these indicators improved even in periods of slow growth. Among low-income countries, Guinea and Sri Lanka have the same per capita income, but average life expectancy is some two-thirds longer in Sri Lanka. Brazil and Uruguay have similar per capita incomes, but infant mortality is two-thirds lower in Uruguay. Governments must also make necessary tangible investments in infra- structure. However appropriate the incentive framework, firms cannot function if the water runs brown and nothing happens when a coin is put in the phone. Too often, as in the case of electricity and water sup- ply, failed government efforts to provide or maintain infrastructure lead to very expensive attempts at private sector substitution. For example, in India power plants operate with a capacity utilization of less than 50 percent, yet firms are forced to install their own generators because the risk of interruptions is so great. Ensuring that governments make the necessary investments in both tangible and intangible infrastructure is partially a matter of making sure they have adequate resources. But in addition to increasing the quan- tity of human investment, governments must improve its quality. Too often, capital investments go forward without adequate provision for the recurrent expenditures they entail, which results in wasteful underuti- lization. Too often water is provided at little or no cost to industry and then is wasted, while clean water is unavailable where it is desperately needed to improve health. Targeting expenditures appropriately is cru- cial. Expenditures are frequently poorly targeted and involve a great deal of leakage. The need to shift priorities in spending is wide-ranging. It will pay to reduce heavy subsidies for higher education and to spend much more on primary education, from which the returns are relatively higher. The case for a similar switch in spending on the margin, from expensive curative health care systems to primary systems, is also strong. In too many developing countries half the national health budget goes to a 10 I A Vision for Development few hospitals that do open heart surgery in or near the nation's capital, whereas immunizations cannot be afforded in rural areas. The question of priorities goes beyond the area of human resources. In many coun- tries there is scope for substantially reducing spending on the military in favor of increased spending on human and physical infrastructure. Growth led by the private sector needs a permissive, rather than a pro- hibitive, environment. Almost no one disagrees that communism is the longest route from capitalism to capitalism. For all their faults, com- petitive markets are the most effective way yet found to get goods and services produced and distributed efficiently. External and domestic competition provides the incentives that unleash entrepreneurship and technological progress (Balassa 1977; Bhagwati 1978; Krueger 1978; Porter 1990). Openness to trade, investment, and ideas encourages domestic pro- ducers to cut costs and improve productivity by introducing new tech- nologies and to develop new and better products (Chenery, Robinson, and Syrquin 1986). A high level of protection for domestic industry, conversely, has held development back by decades in many places. The effect of import protection on firms in Chile and Turkey, for instance, and the effect of greater competition in export markets on firms in Bra- zil,Japan, and Korea confirm the decisive contribution to efficiency that the external economy can make. Many developing countries are taking to heart the lessons from world- wide experience in trade liberalization. As a result of the various liberal- ization episodes of the 1970s and 1980s, the developing world is more open today than at any time in recent history. But the threat of increasing protectionism is ever present, not least from the industrial countries. In fact, as the developing countries liberalized, the industrial countries on average raised trade restrictions in the 19805: development prospects can be substantially improved if all countries roll back trade barriers. A permissive domestic environment is one where government seeks to reduce, rather than increase, the cost of doing business. That means Recent Lessons of Development I 11 doing away with licensing requirements for investment, avoiding debil- itating restrictions that limit firms' ability to downsize, and reducing tariffs and quotas on capital goods whose cost is found to affect growth performance significantly (De Long and Summers 1992). One study found that the price of traded capital goods was 50 percent higher in Africa than in other parts of the developing world (World Bank 1989). Creating a competitive climate for the private sector also entails avoid- ing government monopsonies or punitive regulations. The success of the Nigerian government's action in abolishing agricultural marketing boards and moving toward a realistic exchange rate illustrates what deregulation can accomplish. Cocoa output has risen 50 percent since 1986, both rubber and cotton production has more than quadrupled, and soybean production and processing of soybean products have increased even more. A permissive environment is also one where mar- ket forces are able to set prices without price controls or large subsidies. The former Soviet Union, where the price of oil at any realistic exchange rate has been less than $1 a barrel for many years, is an extreme example of distortions caused by subsidies, but large subsidies to energy and energy-using products are ubiquitous in developing countries. Governments have a history of failure in attempting to manage directly the production of private goods and services. Around the world the record of public enterprise management is one of disaster. It may be true in theory that a properly managed public enterprise can often be as productive and efficient as a private one, but the reality is that politics usually intrudes and efficiency is sacrificed (Nellis 1986; Jones 1982). Public enterprise managers are rarely permitted to shed labor in order to produce at minimum cost. And procurement is often treated as a way of enriching contractor and procurement officers rather than producing efficiently. Nigeria provides an example of what can go wrong when government tries to operate what should be private industry. Between 1973 and 1990 the Nigerian government invested $115 billion in its public sector, or about $1, 000 for every citizen. This investment, depending on what exchange rate is used, represented as much as four years' worth of gross national product. Yet there is little growth to show for it. Public sector assets are operating 12 I A Vision for Development at a capacity utilization rate of less than 40 percent. And a $3 billion steel complex sits empty, awaiting the $1 billion of investment necessary to complete it. Mexico, by contrast, provides an example of what privatiza- tion can accomplish. Large-scale privatization has attracted substantial for- eign investment and has already considerably improved effiCiency. Indeed, several countries have found that the expectation that enterprises will be privatized creates an impetus for increased efficiency. Macrueconomic Sound macroeconomic policies with sustainable fiscal deficits and real- istic exchange rates are a prerequisite to progress (Fischer 1986). Large government budget deficits absorb domestic saving and foreign funds that could otherwise be channeled to the private sector. Crowding out productive investments by farmers, entrepreneurs, and large businesses, government deficits place the financial system under great strain. Often they induce rapid inflation, which in tum exacerbates the deficit, cre- ating a vicious cycle. Deficits also lead to overvalued exchange rates, which stifle exports, damage domestic producers, and create pressures for protectionism. Evidence is accumulating from country experience of widespread ill-effects of large fiscal deficits (Corden 1989; World Bank 1988; Tanzi and Blejer 1986, for example). A distinguishing feature of the East Asian experience is that the public sector exercised discipline in its spending; such discipline is essential to ensure that rents from government interventions are kept to a minimum. Fiscal diSCipline was practiced in different ways. In Taiwan before 1987, a law limited the value of outstanding government bonds to no more than 40 percent of the central government's annual budget. Thailand limits its budget deficit to 20 percent of expenditures. In Indonesia the openness of the capital account has served as a check on irresponsible fiscal behavior that could precipitate currency speculation and crisis. MalaYSia, however, ran a large deficit (a high of 19 percent of GDP in 1982) but cut it sharply (5 percent in 1990) when performance was threatened. To be sure, fiscal and financial instability have sometimes been partly inflicted on governments by external events-or by internal shocks such as civil wars or natural disasters. But governments can choose how to Recent Lessons of Development I 13 respond to such pressures. In such countries as Cote d'Ivoire, Kenya, Mexico, and Nigeria, the response to a temporary economic upswing was an unsustainable increase in public spending. Countries such as Botswana, Chile, Colombia, Indonesia, Korea, Malaysia, Mauritius, and Thailand managed to keep their macroeconomic policies on course, and their broader economic performance has benefited accordingly. If a persistent government budget deficit is the surest route to economic failure, an artificially overvalued exchange rate must be the runner-up. Underlying such overvaluation are expansionary fiscal and monetary policies, excessive borrowing, and inadequate trade and exchange rate policies. Overvaluation leads to the rationing of foreign exchange, which is invariably associated with its discretionary allocation and appropria- tion by government officials and their friends. Overvaluation also cre- ates pressures for layer after layer of controls on imports, capital flows, and even travel. And it destroys emerging export industries, perhaps the most important foundation for growth that any developing country enjoys. The extent of exchange rate misalignment and its deleterious effects on performance are now well documented (see, for example, Edwards 1989; Williamson 1987). The better a country's institutional capabilities are, the more effective such actions will be. Similar policy reforms have produced different results across countries (Thomas and others 1991), and one of the explanations is the variation in the capacity of institutions to implement the reforms. Institutional development refers to market as well as to government institutions. In many countries market development requires less government intervention. Market institutions are often stifled by a series of harm- ful interventions. Governments sometimes intervene in the market to address political instability and other political constraints. But, all too often, the resulting combination of pervasive distortions and predatory states leads to development disasters. Reversing this process is a crucial part of institutional development. It requires political will and a political commitment to market reform and market development. 14 I A Vision for Development But it is a myth that "government is the problem, not the solution." When governments do the things they should not do, they are stretched too thin to do the things they must do. Governments need to assist in the efficient development of markets. Only governments can provide the institutional framework for exchanges. This means rules govern- ing property rights, and it means enforcement based on pre-established principles of contracts. The establishment of a well-functioning legal system and judiciary and of secure property rights is an essential com- plement to economic reforms. Reform of the public sector is a priority in many countries. In addi- tion to market liberalization and privatization, it includes reforming the civil service, rationalizing public expenditures, and reforming some state-owned enterprises. Related economic reforms include better deliv- ery of public goods, supervision of banks, and legislation to encourage financial development. Adopting these reforms will increase the quality of governance and the capacity of the state to implement development policy and enable society to establish checks and balances. What Are the Uncertainties? Across a wide spectrum of opinion there is agreement on the basic prin- Ciples we have just described. Governments have done too much of the things they cannot do well-regulating markets and producing ordinary goods-and too little of the things they must do well-maintaining mac- roeconomic stability and making necessary public investments. Govern- ments, in ways that will differ from country to country, need to do less of certain things and to do them better. But the agreement on these points leaves a great deal unresolved. There are questions about implementa- tion and concerns about external constraints of various kinds. First, the East Asian success stories remain open to differing interpre- tations (Wade 1990;james, Naya, and Meier 1989). Government, at key stages in each of these countries' development, did seek to affect the allo- cation of resources across sectors through industrial, trade, and credit allocation policies. The World Development Report 1991 noted some key conditions under which East Asian interventions were far more effec- Recent Lessons of Development I 15 tive than similar actions in other parts of the world. Government inter- ventions were disCiplined by international competition. And they were flexible enough to be changed on the basis of the evidence about their effectiveness. As the success of Japan, Korea, and Taiwan continues, the position taken by some economists that they succeeded despite government efforts at channeling market forces is increasingly implausible. But there is still room for disagreement, and so for research on two questions: how important in explaining East Asian growth is the contribution of sectoral interventions relative to the contribution of overall macroeconomic sta- bility, outward orientation, and investments in capital and people, and what is unique about these countries that enabled interventionist poli- cies to succeed there when they have been so unsuccessful in the rest of the world? Answering the latter question is essential if the East Asian experience is to provide guidance to other countries. Second, what is the best sequence and pace of reform? If the role of government that we have just described is agreed to be appropriate, there remains the question of how poliCies should be reformed. On the sequenc- ing question, experience suggests that it is wrong to think of reform as a series of obstacles, each of which must be surmounted. Policy changes typi- cally occur simultaneously or nearly simultaneously on many fronts. But as a general proposition it appears that macroeconomic stabilization is essen- tial to reform and needs to come early, and that it is usually best to delay financial liberalization until macroeconomic stability has been put in place and the viability of enterprises has been restored (Fischer and Gelb 1991). On the question of the pace of reform there is also room for disagreement. Where hyperinflation is rampant or looming, the case for urgent action is clear. But where the threat is not imminent, as in much of Africa, China, or India, the case for "big bang"-style reform is much weaker. Particularly where reform will involve large displacements of workers who will not be quickly reemployed, there are legitimate grounds for favoring gradual tran- sitions. The difficulty, of course, is that gradual transitions are often favored by those whose first choice would be no transition at all. Third, what is the relationship between political and economic reform? An earlier view that democracy was antithetical to development 16 I A Vision for Development and that the strong-arm state with a strong leader at the helm was essen- tial has now been discredited. A number of studies, some summarized in the World Development Report (World Bank 1991), have found no systematic relationship between liberties and rates of economic growth and evidence of a positive relationship between liberties and social per- formance. These findings are reassuring to friends of both economic and political freedom, but doubts remain. Most of the major develop- ment success stories-for example, Chile, China, Korea, or Singapore- had governments that were or are authoritarian in many respects. It is possible that democracy can foster growth by making it impossible for hopelessly incompetent and corrupt governments to remain in power, but one also has to wonder whether democracy can be inconsistent with outstanding performance. A related issue involves the sequencing of political and economic reform-the ordering of glasnost and per- estroika. It is easier to identify examples of successful economic reform that preceded political reform than that immediately followed it. Fourth, can adjustment to the "market-friendly" approach work in very low-income countries, espeCially in Africa? It is hard to answer this question in the absence of a clearly speCified alternative strategy. One of the hard lessons of the adjustment efforts of the past decade is that adjustment and reform take time to yield results (World Bank 1989). Government credibility, once lost, is restored only very slowly. And would-be investors, whether foreign or domestic, can always delay investment, waiting to see how things turn out before deciding whether to invest. Most of the success stories-Japan and Germany after World War II and Chile, Korea, and Mexico more recently-took time, and things often got worse before they got better. The process appears even more protracted in very low-income countries. It is no accident that programs put in place with the cooperation of the Bretton Woods insti- tutions involve a higher ratio of adjustment to austerity than would have been the case a few years ago. Fifth, will the external global economic conditions make export-led growth possible on a large scale over the next twenty-five years? Export- led strategies have not invariably been the most effective. Looking at the record of the period between the two world wars and of the immediate Recent Lessons of Development I 17 postwar period, it is not difficult to understand the appeal of import substitution notions. Brazil, with relatively closed markets, was about the fastest -growing country in the world from 1965 to 1980. The liberal advice that most developing countries receive must be based on one of two premises. One is that it will be widely ignored, so the adding-up problem-that is, the problem that increased exports from all will deny benefits to individual countries-will not arise, and those few countries that increase their export capacity will benefit. The other is that many countries will be able to increase exports greatly without depressing their terms of trade, either because industrial markets for domestic products will grow without protectionist policies being imposed, or because trade among developing countries will become more important in the future than it has been in the past (World Bank 1992a). These premises are not self-evident as reform sweeps the developing world, industrial country growth slows, and the Uruguay Round flounders. Although it has been true in the past that the external climate has been a less important bar- rier to development than misgUided domestic policies, this may change as domestic policies improve and protectionism in the industrial world mounts. Sixth, will natural environmental constraints hold back development or force a new paradigm based on notions of sustainability? Environ- mental concerns are very important and have been too little reflected for too long in policymaking in both developing and industrial coun- tries. To a large extent, environmental problems are a consequence of policies that are misguided on narrow economic grounds-subsidies to energy, failure to give farmers title to their land and adequate credit, public ownership of major industries, inefficient charging for water, and so forth. And where they are not, the difficulty is to do the right cost- benefit analysis and implement the most cost-effective policies for sus- tainable development (World Bank 1992b). Of particular importance are steps to eradicate the severe forms of environmental degradation, such as poor sanitation and water and air pollution, that threaten human lives and well-being. The agenda for environmental reform is a large one. Accepting the challenge to accelerate development in an environ- mentally responsible manner will involve substantial shifts in policies 18 I A Vision for Development and priorities and will require substantial investments. Failing to accept it will be far more costly. Seventh, and finally, there is the ever present danger that some new problem will surface. The only real constant of experience is the unpre- dictability of the future. Note When this article was written, Lawrence H. Summers was the Chief Economist and Vice President of Development Economics at the World Bank. At that time, Vinod Thomas was the Chief Economist in the East Asia and Pacific Region at the World Bank. References The word "processed" describes informally reproduced works that may not be commonly available through library systems. Balassa, Bela. 1977. Policy Reform in Developing Countries. New York: Oxford University Press. Barro, Robert. 1989. "A Cross-Country Study of Growth, Saving, and Government." 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Quarterly Journal of Economics 106 (May): 445-502. Dornbusch, Rudiger, and Sebastian Edwards. 1989. 'The Macroeconomics of Populism in Latin America," WPs 316. World Bank, Country Economics Department, Wash- ington, DC. Processed. Easterlin, Richard. 1981. "Why Isn't the Whole World Developed 7" Journal of Economic History 44 (l, March) 1-17. Recent Lessons of Development I 19 Easterly, William, Robert G. King, Ross Levine, and Sergio Rebelo. 1991. "How Do National Policies Affect Long-Run Growth? A Research Agenda." World Bank, Coun- try Economics Department, Washington, DC: Processed. Edwards, Sebastian. 1989. "Real Exchange Rates in the Developing Countries: Con- cepts and Measurement." NBER Working Paper 2950. National Bureau of Economic Research, Cambridge, Mass. Processed. Fischer, Stanley. 1986. "Issues in Medium-Term Macroeconomic Adjustment." The World Bank Research Observer 1 (2, july): 163-82. Fischer, Stanley, and Alan Gelb. 1991. 'The Process of Socialist Economic Transforma- tion." Journal of Economic Perspectives 5 (4): 91-106. james, William E., Seiji Naya, and Gerald M. Meier. 1989. Asian Development. Madison: University of Wisconsin Press. jimenez, Emmanuel. 1995. "Human and Physical Infrastructure: Public Investment and Pricing Policies in Developing Countries." In jere Behrman and T. N. Srinivasan, eds., Handbook of Development Economics. Vol. 3. Amsterdam: North Holland. johansen, Frida. 1992. "Poverty in East Asia." World Bank, East Asia and Pacific Region, Washington, DC: Processed. jones, Leroy P. 1982. Public Enterprise in Less-Developed Countries. Cambridge, U.K.: Cambridge University Press. Journal of Economic Perspectives. 1990. Various articles. 4 (3). Keynes, john Maynard. 1926. 'The End of Laissez-Faire." In The Collected Writings of John Maynard Keynes. (1972). New York: St. Martin's Press. Krueger, Anne. 1978. Liberalization Attempts and Consequences. Cambridge, Mass.: Ballinger. Krugman, Paul. 1993. "Toward a Counter-Counterrevolution in Development Theory." In Proceedings of the World Bank Annual Conference on Development Economics 1992. Washington, DC: World Bank. Lucas, Robert E. 1988. "On the Mechanics of Economic Development." Journal of Mon- etary Economics 22: 2-42. Nellis,1ohn R. 1986. "Public Enterprises in Sub-Saharan Africa." World Bank Discussion Paper 1. Washington, DC: Porter, Michael E. 1990. The Competitive Advantage of Nations. New York: Free Press. Psacharopoulos, George, and Maureen Woodhall. 1985. Education for Development: An Analysis of Investment Choices. New York: Oxford University Press. Ranis, Gustav, and T. Paul Schultz. 1988. The State of Development Economics. New York: Blackwell. Romer, Paul M. 1990. "Endogenous Technological Changes." Journal of Political Econom- ics 98 (5, Pt. 2) 71-102. Sivard, Ruth Leger. 1989. World Military and Social Expenditures 1989. 13th ed. Wash- ington, DC: World Priorities. Srinivasan, T. N. 1991. "Development Thought, Strategy and Policy: Then and Now." Background paper for World Development Report 1991. World Bank, Washington, DC: Processed. Stem, Nicholas. 1989. "The Economics of Development: A Survey." Economic Journal 99: 597-685. Summers, Lawrence H. 1992. "Investing in All the People." World Bank, Office of the Vice President, Development Economics, Washington, DC: Processed. Tanzi, Vito, and M. 1. Blejer. 1986. "Public Debt and Fiscal Policy in Developing Coun- tries." IMF Working Paper WP/86/5. Washington, DC: Processed. 20 I A Vision for Development Thomas, Vinod, Ajay Chhibber, Mansoor Dailami, and jaime de Melo. 1991. Restructur- ing Economies in Distress. New York: Oxford University Press. United Nations Development Programme. 1990. Human Development Report. New York: Oxford University Press. Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, N.j.: Princeton University Press. Williamson, john. 1987. "Exchange Rate Policy for Developing Countries." Journal of Foreign Exchange and International Finance 1 (l, january): 39-46. World Bank. 1988. World Development Report 1988. New York: Oxford University Press. - - - . 1989. Sub-Saharan Africa: From Crisis to Sustainable Growth. Washington, DC. - - . 1991. World Development Report 1991: The Challenge of Development. New York: Oxford University Press. - - - . 1992a. Global Economic Prospects and the Developing Countries 1992. Washington, DC. - - - . 1992b. World Development Report 1992: Development and the Environment. New York: Oxford University Press. World Institute for Development Economics Research (WIDER). Various years. Research for Action. Helsinki. Policies for Economic Development by Stanley Fischer and Vinod Thomas At the end of a decade in which many developing countries have seen economic regress rather than progress and in which the formerly socialist economies for the most part turned away from central planning toward a market-oriented approach, there appears to be more agreement on the policies needed to pro- duce growth and economic development than at any time in the post-World War II period. It remains to be seen whether the moment is more than fleet- ing. But it is certainty a good time to attempt to set out a mainstream, prag- matic view of what those policies are and of the uncertainties that surround the basic market- and outward-oriented approach to development. In this paper we summarize the consensus views of the major economic policies needed to generate economic growth and development, consider issues that cut across these policy areas, and then provide brief concluding comments. Consensus Views in Major Policy Areas Policies conducive to economic development in three broad areas are an appro- priate macroeconomic framework, the right set of sectoral policies and invest- ments, and integration of the domestic economy into the world economy. the Macroeconomk framework Right Economic development is unlikely to occur unless policies produce a stable macroeconomic environment in which inflation remains reasonably low, the Fischer, Stanley, and Vinod Thomas, "Policies for Economic Development," Ameri- canJoumal of Agricultural Economics 1990, 72(3): 809-14, by permission of Oxford University Press and the Agriculture and Applied Economics Association. 22 I A Vision for Development real exchange rate is competitive and stable, and foreign exchange and debt crises are avoided. Fiscal policy. Tax rate and expenditure policies of government, including the composition of government spending, are the government's major microeconomic tools for affecting the allocation of resources. Beyond these micro economic effects, fiscal policy is increasingly seen as the key to successful macroeconomic policy because, in its macro impacts, it has direct effects on the current allocation of resources, and because all methods of financing budget deficits have potentially adverse macroeco- nomic consequences when used to excess. Given private saving, fiscal deficits displace private domestic investment or cause current account deficits. Thus, unless private saving responds fully to public sector deficits-and there is little reason to think it does- reduction of the fiscal deficit is likely to improve the current account and, perhaps after a period of adjustment, increase investment. Fiscal deficits can be financed by printing money, by running down foreign exchange reserves, and by borrowing, at home or abroad. Each of these methods of financing can be used on a small scale (and in the case of running down foreign exchange reserves, on a transitory basis), but each is likely to have seriously adverse consequences if used on a major scale. Printing (high-powered) money is inflationary; running down foreign exchange reserves leads to a foreign exchange crisis; domestic borrowing can lead to higher real interest rates and an unstable domestic fiscal situa- tion; and excessive foreign borrowing can lead to an external debt crisis. While the conclusion is that fiscal moderation is the key to macro- economic stability, this does not mean a zero deficit is optimal: a coun- try that is growing fast can afford to run a larger deficit than one that is growing slowly; a country with a higher saving rate can run a given deficit for longer than a country with a lower saving rate. Fiscal mod- eration must be judged by the projected path of the debt (the sum of internal and external debt) to gross national product ratio, and of the inflation rate and external balance. On the whole, inadequate fiscal poli- cies remain a central factor behind the macroeconomic instability and poor performance of many developing countries. Policies for Economic Development I 23 The exchange rate. The second key to a sound macro framework is the exchange rate; it plays two roles in economic policy. First, the level of the real exchange rate is crucial to the development of the domestic econ- omy: it establishes market incentives to export and the level of protec- tion for domestic industries. Second, stability of the nominal exchange rate is one potential monetary anchor and a powerful anti-inflationary factor. When an economy operates with a fixed nominal exchange rate, the quantity of money becomes endogenous. This simplifies the job of the monetary authority; but, as experience shows, it frequently leads to a host of foreign exchange controls. The two roles of the exchange rate sometimes clash: governments afraid of inflation hold the nominal exchange rate constant or devalue it too slowly, with the result that the domestic currency appreciates, and-with a lag-the current account goes into crisis. When the mon- etary anchor and trade incentive roles of the exchange rate conflict, the monetary anchor should be pulled up first and attention turned to the underlying source of inflationary pressure, typically the budget. Inter- mediate steps, such as a crawling peg, in conjunction with appropriate fiscal policy can provide some monetary stability without tending to produce an overvalued currency. Investment, saving, and growth. Investment and saving ratios in rap- idly growing economies are typically higher than those in stagnating economies. It is further clear that sustained growth will not resume in Sub-Saharan Africa and Latin America until investment ratios there rise significantly. The rise in the real interest rate in the 1980s reduces the possibilities of finanCing investment from abroad; economic growth in the 1990s will have to be largely domestically financed. The surest way to increase domestic saving is to increase government saving, i.e., to reduce the government budget deficit. The emphasis in the 1980s was on the importance of positive real interest rates for development. The emphasis is appropriate when the real interest rate is significantly nega- tive, as it frequently is in high inflation economies: negative real interest rates appear to reduce saving and impair the efficiency of the financial system by reducing the share of saving that is intermediated through 24 I A Vision for Development financial institutions. But once the real interest rate is positive, or nearly so, there is little empirical or theoretical reason to believe that further increases will increase saving. Responding to shocks. Emphasis on the stability of the macroeconomic framework should not obscure the importance of the ability of the gov- ernment to adjust macroeconomic policy quickly to external and inter- nal shocks. Fiscal and monetary policy, and the exchange rate, may have to change rapidly when external conditions change; the more successful governments recognize change and respond to it. The need for flexibil- ity is especially great for economies whose external earnings fluctuate a great deal, typically because they are dependent on earnings from one or a few primary commodities. Se('torai Policies: Projects and Beyond Macroeconomic poliCies for stability and growth usually need to be underpinned by appropriate sectoral pohcies to obtain a satisfactory supply response. Sectoral poliCies include investment decisions, pricing and regulatory policies, and institutional development. Investments in agriculture, industry, infrastructure, and human resources have long formed the core of development efforts. The tra- ditional approach was to pursue development projects in these sectors with the aid of project analysis of benefits and costs. The effectiveness of the investments, however, depends on the policy environment affecting the sector and the degree of institutional development. Sectoral priorities and investments. Although there is no universal prescrip- tion for sectoral priorities for development, development usually requires increases in agricultural productivity permitting an increasing share of the labor force to contribute to industrial production. Accordingly, develop- ment is usually accompanied by an increasing share of industry in output. Human resource development is both an independent goal of develop- ment and an essential instrument of economic progress. Unprecedented rates of population growth in the post-World War II period have contributed to low or negative per capita income growth in Policies for Economic Development I 25 much of Africa, Asia, and for some time in China and India. Despite signif- icant political opposition within the United States, international agencies have sought to assist governments to reduce population growth. Success to date has been limited, but there have recently been encouraging signs from some African countries, where population growth rates appear to be turning down as a result of government educational programs and the provision of contraceptives. Reducing the rate of population growth remains a priority of development policy in many developing countries. Sectoral policies and strategy. The emphasis on the centrality of sectoral and macroeconomic policies to the success of projects has strengthened in recent years, along with the recognition that policies are of indepen- dent importance to sectoral performance. Measures to bring domestic relative prices closer to international levels and to establish a relatively neutral macro-economic framework are often essential to enhancing sectoral performance. In agriculture, for example, incentives were his- torically suppressed by agricultural taxes. Perhaps more important, macroeconomic poliCies resulting in overvalued exchange rates have translated into heavy (often unintended) taxation of that sector. Adjust- ment programs in the 1980s have therefore focused on both macroeco- nomic poliCies (exchange rate, import protection) and sectoral pricing poliCies (eliminating price controls on agricultural output, for example). Concurrently, many programs have also attempted to reduce the rather ineffective input subsidies in agriculture while improving the delivery of inputs and services. The consensus is converging to the view that macroeconomic and sectoral pricing and regulatory policies should be relatively neutral, that governments should move away from interventions designed to favor particular industries, regions, or factors of production. However, moving toward neutrality may require active transitional government policies, for instance in restructuring public enterprises or the financial system (see also the next section). It also remains true that an active gov- ernment investment program in the sectors, especially physical infra- structure and human resource development and technology, is essential to development. 26 I A Vision for Development The most successful performers of recent decades have been the newly industrializing economies, characterized by their relative openness and links with the world economy. To malntain these links, they have had to remain competitive in a rapidly changing world environment. Common to successful competition strategies is the reduction or elim- ination of discrimination against tradables-permitting exports and efficient import substitutes to be produced on a similar footing with nontradables. However, such neutrality in the trade regime has been approached through different routes. Some successful reformers have substantially liberalized their trade restrictions (Chile, Mexico), others have inter- vened to offset existing biases against exports (Korea, Taiwan), and still others have done both (Indonesia, Turkey). Government controls have been especially prevalent in the area of capital flows in many countries. Interventions to encourage new technologies and to industrialize have also paid off on occasion. Commercial policy reform. Developing countries are more open, and their trade regimes are more efficient than a decade ago. They have substan- tially reformed their exchange rate and export poliCies. They also have increased the effiCiency of their import regimes by switching from quan- titative restrictions to tariffs. But reductions in the levels of nominal and effective protection have been more limited than is generally believed. Most countries that have implemented trade policy reforms have won long-term economic gains. The policy changes and additional financing under adjustment programs have both been associated with moderate improvements in output and export growth. However, supply response to changes in relative prices associated with the trade reforms has been limited in many countries. The main constraints on the supply response have been restrictive domestic regulations and inefficient public enter- prise poliCies; growing protectionism in industrial countries; doubts about the permanence of the reforms; and inadequate institutions, Policies for Economic Development I 27 infrastructure, entrepreneurial, and managerial capacity in the reform- ing country. Issues Spanning Policy Areas There are several issues that span policy areas. These include sustainable development, both country-specific and global environmental sustain- ability, and social, political, and economic sustain ability of adjustment programs. Other issues include poverty alleviation, the balance between both public and private sectors, the World Bank's role, and adjustment lending. Two issues fall under this heading. The first is environmental sustain- ability, which has both a country-specific and global aspects. One fear is that in many countries development is taking place by exploiting and destroying much of the resource base, and that such development is accordingly not sustainable. The presumption is that two-way links exist between growth and the environment: certain growth policies are con- sistent with environmental protection, and environmental care in turn contributes to sustained growth. But knowledge of the tradeoffs between measured growth and environmental protection must increase. At the same time, simple steps to prevent environmental damage, such as envi- ronmental assessments for all projects, are already being implemented. Global environmental issues pose more difficult problems. If global warming is taking place, it is largely the result of current and past eco- nomic activities of the now-industrialized countries. If measures are put in place to reduce global environmental damage, the issue of burden sharing between developing and industrialized countries-as well as among all countries-will pose major political difficulties. A second sustainability issue is whether the adjustment programs of many countries are socially, politically, and economically sustainable. Adjustment is more likely to be SOCially sustainable if the poor are protected during the process of adjustment. Political sustainability may depend on how adjustment affects the segment of population with political clout. In 28 I A Vision for Development general, adjustment is more likely to be sustainable the sooner it shows economic results. One reason to provide external financing during the adjustment process is temporarily to reduce the extent of cuts in expendi- tures and in imports that would otherwise have been necessary. Poverty Alleviation Although the purpose of economic development is to reduce poverty, poverty alleviation is a separate goal of policy in developing as well as industrialized economies. Specific policies, such as targeted food sub- sidy and health programs, can be used to protect the poor and reduce poverty, even during adjustment. Bolivia's experiment with the Emer- gency Social Fund and Ghana's Program of Actions to Mitigate the Social Cost of Adjustment are examples. These are temporary measures (three years in Bolivia and two in Ghana). More fundamentally, education and other social programs can be designed to reduce poverty, even though in many countries social spending helps mainly the middle and up- per classes. More effective and better targeted public expenditures are needed. Sometimes it would help to correct mistargeting of existing public social expenditures, for example, by reducing public funding of education and curative health care expenditures. The Public and Private Sectors The new consensus on development policy places greater stress than before on the central role of markets and on the private sector (in some countries, the informal private sector) as the engine of growth. The role of the public sector is seen as the creation of a favorable enabling envi- ronment for economic activity. The enabling environment consists of the legal, institutional, and policy framework within which economic agents operate. A government that creates a favorable enabling environment has a large role to play, for instance in ensuring the provision of infrastruc- ture, including social services, such as poverty alleviation, basic educa- tion, and access to health care; public security; a stable macroeconomic framework; and an efficient fiscal and regulatory system. Policies for Economic Development I 29 The most difficult question about the role of the government is whether it should take an active part in promoting particular industries, that is, whether it should pursue an industrial policy. Some successful elements of an active policy are clear: export development and assistance in marketing, informa- tion, technology, and know-how. Expanding manufactured exports requires sustained efforts on both macroeconomic and microeconomic levels. Japan, Korea, and Taiwan have paid attention to the many nonprice requirements of export development. For a period of time, they also pursued export devel- opment while maintaining a certain degree of import protection. World Since the start of its operations in 1946, the World Bank has moved from assisting in the reconstruction of post-World War II Europe to the develop- ment of basic physical infrastructure in the developing world, to financing developmental projects, and to the support of structural reform through adjustment lending. This evolution largely reflects a shift in the econom- ics of development. A professional view that focused on "critical mass" and the role of the economic planner has shifted, under the weight of four decades of experience, to a view that centers on establishing an enabling policy environment, the efficient decentralization of information, operation of incentives, and integration with the world economy. This view also has become more realistic with respect to the goals and operations of governments. It has moved away from the simple notion of government as an altruistic entity and at the same time has accepted that significant changes cannot be instituted if they are not owned by the policymakers and administrators. For the three decades from 1950 to 1980, the World Bank's almost exclu- sive role was to proVide financing and technical assistance in the develop- ment of investments. Even since the advent of adjustment lending in 1980, about 75 percent of World Bank lending has continued to be for projects. The shift of World Bank operations toward adjustment lending in the 1980s has been associated with the debt crisis and its associated external 30 I A Vision for Development shocks, the decline in general balance-of-payments lending to develop- ing countries by the commercial banks. As the debt crisis developed, it became clear that the adjustments many of the indebted countries would have to make to the sharp reduction in external financing could be smoothed by the provision of rapidly disbursing loans by the World Bank. But to ensure that such loans were used to make economic adjust- ments to changed circumstances, the loan conditionality was tied to policy changes in the borrowing country. Adjustment lending, as it has taken place in the 1980s, can be char- acterized as rapidly disbursing and policy based. However, these charac- teristics are separable, and slowly disbursing policy lending is possible. Analytically, the shift to adjustment lending coincided with the rec- ognition that the overall quality of economic policy management is key to economic development, and with the realization that a good eco- nomic environment is essential to project development. While early structural adjustment loans focused on general macroeconomic reforms, the adjustment experience of the last decade has led to greater empha- sis on sector-oriented programs, and thus to sectoral adjustment loans. These adjustment loans typically support significant policy changes in a particular sector or sectors, with disbursement depending on both the sectoral policy measures and the maintenance of an appropriate macro- economic framework. The design of policy lending programs has been a subject of controversy for borrowing members, international organiza- tions, and World Bank staff and management alike. Borrowers under the pressure of debt service requirements and domestic resistance protested at the hardships coincident with undertaking such programs. Some observers in donor countries also objected to the social burdens associ- ated with the implementation on program conditionality, while others argued that adjustment loans enabled borrowers to avoid implementing reqUired policy changes. This controversy has tended to die down as some countries have shown success in pursuing adjustment pohcies, as nonadjusting coun- tries have descended into economic disorder, and as the lack of alterna- tives to adjustment has become clearer. Policies for Economic Development I 31 Outstanding Issues General agreement on the policies needed to produce growth and economic development will remain only if the currently agreed upon policies produce growth and development. Seen in that light, the chal- lenges, particularly from Africa and Latin America, and most recently from the reforming socialist economies, are formidable. In many cases, the problems are analytic, for instance, how to sequence the adjust- ment of a heavily distorted economy with macroeconomic and external imbalances to the market-oriented structure that its policymakers seek. In other cases, the problems are political: countries with infrastructure and analytic capacity lack the political ability to implement changes that are generally recognized to be desirable. This is not a problem only for developing countries. In other countries, inadequate human capital and institutional framework constrain development. It is essential to recog- nize that the problems of development differ from country to country, and that each country's policies have to fit its own structure while still recognizing the realities of the world economy in which it operates. There are also deep questions about the role of external funding and the international development agencies. It is often argued that countries would have done better if left to their own devices and forced to con- front their budget constraints earlier and harder. One can agree with this judgment for some countries, but not for most. Nonetheless, it is essen- tial to recognize that an important goal of development is for countries to reach the stage at which they manage their own affairs. Paths to Development by Vinod Thomas and others l Introduction Economic development is defined in this report as a sustainable increase in living standards that encompass material consumption, education, health, and environmental protection. Development in a broader sense is understood to include other important and related attributes as well, notably more equal- ity of opportunity, and political freedom and civil liberties. The overall goal of development is therefore to increase the economic, political, and civil rights of all people across gender, ethnic groups, religions, races, regions, and coun- tries. This goal has not changed substantially since the early 1950s, when most of the developing world emerged from colonialism. Thinking on development has undergone a sea change during the past forty years. The change is by no means total, nor is there universal agreement on what it takes for a country to develop. But the early faith in the ability of the state to direct development has given way to a greater reliance on markets. Inward-oriented strategies are more and more being replaced by outward- oriented ones. Discriminatory taxes on agriculture to fund industry are no longer the norm. In recent years many countries have implemented market-oriented reforms. With these changes has come a growing recognition that develop- ment is a multidimensional process, within which price reforms, investment, and institution-building are complementary. Success depends on getting many things right. Several countries have achieved rapid development in the postwar period. For the most part, they have two features in common: they First appeared as Chapter 2 in World Development Report 1991: The Challenge of Development. Washington, DC: World Bank, 1991. Reproduced with permission. 34 I A Vision for Development invested in the education of men and women and in physical capital; and they achieved high productivity from these investments by giving markets, competition, and trade leading roles. New ideas, progress in technology, and pressures to achieve efficiency thus were nourished by their economies. The extent and efficiency of the state's involvement in the economy has been critical. One lesson is that it is better for the state to focus on areas where it complements and supports the private sector (by pro- viding, for example, information, infrastructure, health, research, and education) than on areas where it supplants the private sector (by, for example, producing cement and steel, or running airlines and hotels). A second lesson is that the quality of government matters as much as the quantity. Many economic, sociopolitical, and historical factors play a role in government. History shows that civil and political liberties- goals in themselves-need not impede economic development. And in achieving several developmental goals, civil and political liberties appear to help. The Evolution of Approaches to Development Economists have traditionally considered an increase in per capita income to be a good proxy for other attributes of development. But the weakness of income growth as an indicator is that it may mask the real changes in welfare for large parts of the poor population. Improvements in meeting the basic needs for food, education, health care, equality of opportunity, civil liberties, and environmental protection are not cap- tured by statistics on income growth. Policymakers in most developing countries have long recognized that development encompasses more than rapid income growth. They have often differed, however, about priorities. India's economic plans, for example, assumed that income growth by itself would fail to reach many of the poor. Much stress was placed on measures to tackle poverty directly. A different emphasis is seen in Malaysia's policy documents: "For operational purposes, therefore, rapid economic growth of the country is a necessary condition for the success of the New Economic Paths to Development I 35 Policy. It is only through such growth that the objectives of the NEP can be achieved without any particular group in Malaysian society experi- encing any loss or feeling any sense of deprivation" (Malaysia 1973). Although different cultures place different values on the various ele- ments of development, broadly defined, most seek improvement in every dimension. Many of the indicators used to measure progress (infant mortality, school enrollment, gender equality in education, indexes of political freedom, and so on) are correlated with income per capita. But the correlation is imperfect. All these factors need to be assessed inde- pendently of economic growth. Development has almost always involved a shift in the sectoral compo- sition of output. Agriculture's share in production and employment- which is typically high in the early stages-begins to decline, and that of manufacturing industry to increase. The share of the industrial sector in gross domestic product in low-income countries increased from 27 percent in 1965 to 34 percent in 1988, whereas that of agriculture fell from 42 to 31 percent. There are similar shifts in the sectoral shares of employment (Figure 1), although agriculture remains the biggest employer in many developing countries. The next stage in this sectoral evolution is usually a shift toward services. As in industrial countries, population growth in the countries now classified as developing was fueled first by rapidly falling mortality rates which were the result of better living conditions. Although rising incomes and falling mortality provide incentives for lowering fertility and slower population growth, this demographic transition does not always happen in an orderly way. The population of the developing world grows about 2 percent a year, which is more than twice the growth rate in industrial countries. This rate has declined somewhat in the 1980s from the previ- ous two decades, but with important regional differences: East Asia has experienced a sharp decline; Sub-Saharan Africa, an increase. Rapid agricultural growth has generally been associated with suc- cessful industrialization and sustained gains in overall output and 36 I A Vision for Development Figure 1 The Sectoral Distribution of the labor Force, low- and Middle-Income Developing Countries, 1965 and 1980 100 Agriculture Industry Services .. ili 1.1 80 .. ..... 0 .0 0 ~ 60 ili .... ..c: ..... 0 ili OIl 40 .... <1l s::: .. ili 1.1 ili Q.. 20 0 1965 1980 1965 1980 1965 1980 • Low-income countries • Middle-income countries Source: World Bank data. productivity. Growth in output and productivity are usually lower where agricultural growth is low. Of sixty-eight developing countries for which the World Bank has reliable data, thirty experienced agri- cultural growth rates of more than 3 percent a year during the past twenty-five years. All thirty had a GDP growth rate of at least 2.5 percent, and two-thirds of the countries whose agricultural sector grew fast also experienced very rapid economic growth (exceeding 5 percent). Growth in agricultural yields has usually been essential for growth in agricultural output. Hence higher yields are also positively associ- ated with growth in overall output (Table 1). Technological progress is one of the factors that have raised the productivity of land and labor, Paths to Development I 37 China Hungary Cameroon Nicaragua Egypt, Arab Philippines Rep. of Yugoslavia Korea. Rep. of 1-2.5 Brazil Indonesia Bangladesh Malawi Zambia percent Cote Thailand EI Salvador Mauri d'ivoire Greece Morocco Congo India Sri Lanka Mali Togo Less than Rwanda Peru Central Tanzani 1 percent Sudan African Uganda Senegal Rep. Zaire Zimbabwe Ghana Source: World Bank data. Note: The nonagricultural growth rate is calculated as the weighted average of the growth rates of industry and sesrvices, with the weights being the share of each in GOP. Calculations are from national accounts data for all countries for which data are available and for which the initial share of agriculture in GOP in the 1960s was more than 10 percent. enabling a smaller agricultural labor force to meet the domestic and external demand for farm products. In order to speed the development process, some countries have implicitly or explicitly taxed agriculture as a means to promote industry. This has generally not worked well. Instead, policies consistent with rising agricultural productivity have proved a firmer foundation for industrialization. Falling costs in various industries have enabled countries to diversify their production structures, enter new production lines, and compete successfully in world markets. Rapidly growing urban centers are usu- ally part of this pattern. In the industrial countries, nearly 80 percent of people live in urban areas. In the developing countries, the urban share of the population has doubled in the past 30 years to more than 38 I A Vision for Development 40 percent. Government strategies have directly or indirectly affected this transition. Excessive industrial protection; import-substitution; and a pro-urban bias in pricing, taxes, and subsidies have often encouraged an inefficient pattern of production and urbanization. In many coun- tries, pressures on urban infrastructure have increased without any cor- responding economic gain. When many developing countries achieved independence, their leaders were concerned with both political and economic development. Their political goal was national unity and identity. Their primary economic goal was the rapid structural transformation of backward agrarian econ- omies into modem industrial ones. The dominant paradigm of that time recognized four main issues in development, and recommended policies to address them: • Physical capital. It was a goal of policy to increase saving and invest- ment and thus the rapid accumulation of capital. • Agriculture. The farm sector was seen as a source of resources for industrial investment. Policies to protect industry turned the terms of trade against agriculture. • Trade. Policymakers felt that import substitution was necessary for development. It was also feared that integration with the global economy might destabilize development. The response usually was import protection. • Market failure. It was assumed that in the early stages of development markets could not be relied upon, and that the state would be able to direct the development process. The major development institutions (the United Nations and its agen- cies, including the World Bank, and several bilateral aid agencies that form part of Official Development Assistance) supported these views with varying degrees of enthusiasm. By the early 1980s the dominant paradigm had shifted. Paths to Development I 39 Capital Formation A lack of physical capital, especially infrastructure, was initially thought to be the critical constraint on development (Mandelbaum 1945; Rosen- stein-Rodan 1943; Nurske 1952; Lewis 1954, 1955). Domestic capital formation was a primary concern. As a leading development economist put it, the "central problem in the theory of economic development is to understand the process by which a community which was previously saving 4 or 5 percent of its income or less converts itself into an economy where voluntary saving is about 12 to 15 percent of national income or more" (Lewis 1954). One influential model also stressed a foreign exchange constraint- that is, the difficulty of financing import needs by means of exports (Chenery and Bruno 1962; Little 1982; Bacha 1984). This so-called two- gap model of the domestic saving and foreign exchange constraints to growth gUided external aid and lending agencies in judging the extra resources that developing countries would need to finance imports and investment. Later the contribution that human capital makes to development came to be emphasized. The role of human capital was especially clear in the experience of the East Asian economies. They invested heavily in education and skills. Research on the productivity of education has elucidated the link between human capital and development (Schultz 1961; Becker 1964). Accumulation of human capital emerges from all this work as one of the most powerful engines of development. Incentives for Agriculture and Industry Often, promoting industry meant neglecting agriculture-or worse. Two assumptions appeared to justify transferring resources, through implicit or explicit taxes, from the farm sector to industry. One was that the supply of unemployed or underemployed agricultural workers was abundant. The other was that farmers were unresponsive to changes in price. Together these implied that the loss of agricultural output caused by taxing the sector would be small. "If these surplus workers were withdrawn from agriculture and absorbed into other occupations, farm 40 I A Vision for Development output would not suffer, while the whole new output would be a net addition to the community's income. The economic case for the indus- trialization of densely populated backward countries rests upon this mass phenomenon of disguised rural unemployment" (Mandelbaum 1945). But with time, the damaging effects of policies discriminating against agriculture have come to be widely recognized. Foreign Trade For years the conventional wisdom was that trade had only a small and pOSSibly detrimental role in development. The declining growth in trade volumes-3.5 percent a year from 1850 to 1913, which fell to 0.5 percent a year during the period 1913-48-and the worsening terms of trade for primary commodities seemed to mean that trade could not be relied on as a source of growth (Prebisch 1959; Singer 1949). An approach based on import-substitution would allow domestic industry to grow, conserve scarce foreign capital, decrease external dependency, and strengthen nationhood. Although domestic enterprises would fail if exposed to international mar- kets, protection would give them a guaranteed domestic market in which to grow; later they would be able to compete. The costs of this protection of infant industry in misallocated resources were perceived to be minimal; once the infants grew to adulthood, rapid learning-by-doing was expected to emerge and guide the economy to profitable growth. In many countries the bias against exports was reinforced by the desire to achieve self-sufficiency in food, which was often a top prior- ity. Rather few economists recognized the role of trade liberalization for development early on (see Haberler 1959), but with the accumulation of case study evidence this recognition spread (Balassa and Associates 1971; Krueger 1978). The Role of the State The success of state planning in achieving rapid industrialization in the Soviet Union (for so it was perceived) greatly influenced policymakers in the 1950s. Its avowedly egalitarian character was also appealing. The staggering human costs of this transition became apparent only much later. Moreover, Paths to Development I 41 policymakers viewed the economic collapse of the Great Depression of the 1930s as evidence of widespread market failures. The subsequent recov- ery was attributed to government intervention (a view supported by the Keynesian revolution in macroeconomics). Government allocation of scarce resources and the rationing of essential consumer goods during World War II seemed to confirm the effectiveness of state intervention Domestic conditions at home in most developing countries also encouraged a major role for the state. Illiteracy was widespread, and many policymakers believed that development would have to be directed by "the best and the brightest." The idea that the state should occupy the "commanding heights" of the economy also began to take hold. Soon, along with redistributing assets and income, alleviating poverty, and meeting basic needs, the state became directly involved in produCing goods for investment and consumption. Even in the 1950s, some questioned whether the state was competent to do all this. 'The adequate performance of these functions exceeds the resources of governments of all under-developed countries .... We are faced with the paradoxical situation that governments engage in ambi- tious tasks when they are unable to fulfill even the elementary and nec- essary functions of government" (Bauer 1958). The balanced growth approach "requires huge amounts of precisely those abilities which we have identified as likely to be very limited in supply in underdeveloped countries" (Hirschman 1958). But even the skeptiCS supported gov- ernment involvement in production. The state was expected to initiate growth by creating incentives and pressures for further action, and then to stand ready "to react to, and to alleviate, these pressures in a variety of areas" (Hirschman 1958). Others went further: "Apparently, nobody in the advanced countries sees any other way out of the difficulties, which are mounting in the under-developed countries, than the socialistic one, however differently one's attitude may be towards the economic prob- lems at home" (MyrdaI1956). Growth Theories Classical economic analysis envisaged that per capita output would be stationary as the rate of profit declined with diminishing improvements 42 I A Vision for Development in productivity. The neoclassical tradition also incorporated the idea of falling marginal product of inputs, so that sustained growth was possible only through exogenous technological change (Solow 1957). If coun- tries have access to the same technology, therefore, growth rates would be expected to converge across countries. The recent record of industrial countries offers support for convergence. The growth rates of developing countries, however, have diverged. At first look, this seems to be at odds with the expectation of conver- gence. But in practice, technological change has not been equal, nor has it been exogenously transmitted in most developing countries, because of import and other restrictions. Furthermore, even if all economies have access to the same technology, national growth rates can differ if human capital and the incentives to adopt new technology differ across countries. The "new" growth theories note that technological change is endogenous, and that education and knowledge produce positive exter- nalities or increasing returns (Romer 1986; Lucas 1988). Accordingly, a big push in an economy open to foreign technol- ogy can yield large gains-an idea generally put forward early on. The Cambridge model of the 1940s and 19503 assumed that output would grow in proportion to reproducible inputs, or capital. Rosenstein-Rodan (1943) postulated the big push by which an economy propels itself into self-sustaining industrialization and rapid growth. Rostow (1960) envis- aged a takeoff from a stationary state to per capita growth. Thus investment policies that encourage externality-generating activities (improvements in education) or introduce increasing returns (improvements in physical infrastructure) can be good for growth. Also important are complementary policies that facilitate the spread of knowledge and that permit free entry and exit of firms-and free mobil- ity of people, capital, and technology. Education, technology, and openness have complex relations to devel- opment. They enable economies to respond not only to price signals but also to new ideas. This link between knowledge and growth has Paths to Development I 43 been important in East Asia for the past forty years and in Scandinavia, especially between 1860 and 1950 (Box 1). It was recognized in the lit- erature early on. "It is not enough that knowledge should grow; it should also be diffused, and applied in practice. The rate at which knowledge is taken up depends partly on the receptiveness of the people to new ideas, and partly on the extent to which institutions make it profitable to acquire and apply new ideas ... New ideas will be accepted most rapidly in those societies where people are accustomed to a variety of opinion, or to change ... A country which is isolated, homogeneous, proud, and authoritarian is by contrast unlikely to absorb new ideas qUickly when it meets them" (Lewis 1955). Box 1 Scandinavian Models of Development Denmark, Finland, Iceland, Norway, and Sweden have successfully combined private ownership and market competition with government actions-to ensure an egalitarian income distribution, provide insurance against loss of income caused by disabilities, and address market failures. These activities of government, which were of limited importance before World War II, expanded rapidly thereafter. The high spending of the wel- fare state required the high incomes of the postwar era. The Early Period: Mid-1800s to World War II The Scandinavian countries started industrialization in the mid-1800s and late 1800s. Security for property rights and trade reforms were important conditions for growth. Governments generally did not restrict the workings of the market, and financial institutions and ownership structures were allowed to develop with little state interference. Literacy was already very high when industrialization began in the last century. Substantial attention was given to primary and general education, including women's education, as well as to technical and mercantile education in trade schools and universities. The government focused on building the infrastructure for development, which included legal and administrative frameworks and transport. The Later Period: After World War II Scandinavia is rightly acclaimed for having reached an advanced phase of welfare. But some characteristics of the welfare state have had costs (Box continues on the following page.) 44 I A Vision for Development Box 1 Scandinavian Models of Development (continued) that could have been avoided with difficult policies. First, in an attempt to keep down the cost of capital, financial markets were heavily regu- lated after the war. This, however, limited the access of smaller firms and entrepreneurs to capital. It has also discouraged the adaptation to the financial innovations abroad. (These markets were deregulated dur- ing the 1980s.) Second, policies guaranteeing low unemployment and the public sec- tor's larger and larger share in employment have in the long term seri- ously weakened the discipline of the market on union wage demands. This has resulted in high labor costs and lower profits and investment. Privatizing certain public services-now under consideration-may strengthen discipline in the labor market. Third, the high marginal tax rates for most of the labor force are a bur- den on growth. In response, Sweden is embarking on a program of tax reform to alleviate the distortions in the choice between work and lei- sure and to shrink parallel, underground labor markets. Scandinavia's pragmatic willingness to avoid conflict and to seek con- sensus in political and economic life has certainly shaped development there in important ways. Although it is impossible to say if the search for consensus has contributed much to grovvth, it has molded Scandina- via's special combination of private and public activity. The green revolution in agriculture, which above all included the spread of new, high-yielding varieties of wheat and rice, is an example of the interaction between new technology and education. The new varieties were developed by scientists in Mexico and the Philippines with assistance from the Rockefeller Foundation. To gain access to these technologies, domestic economies needed to be receptive. In order for them to be absorbed, adapted, improved, and disseminated, domes- tic research and local technologies had to be strengthened. Countries in South Asia did these tasks reasonably well, and farm yields there doubled and tripled. Wealth and the ability to bear risk were important, but the most critical factor in adopting the technology was the ability of farmers to make use of new information. Paths to Development I 45 Openness encourages the flow of technologies from industrial countries to developing countries; education encourages the adoption, adaptation, and diffusion of technology. Differences in the rate of technology adoption and economic growth among countries are in large part the result of differ- ences in education. ''The worldwide spread of modern economic growth has depended chiefly on the diffusion of a body of knowledge concerning new production techniques ... the more schooling of appropriate content that a nation's population had, the easier it is to master the new technologi- cal knowledge becoming available" (Easterlin 1981). Equally essential is the freedom of individuals and firms to borrow foreign technology, learn from foreign ideas, and buy foreign goods. The more open the economy, the greater the returns to education and to physical investments. Another important link connects macroeconomic stability to the suc- cess of microeconomic poliCies. Countries with low inflation and sus- tainable external balances have been far more successful in achieving lasting growth. Finally, human development and poverty alleviation, on the one hand, and economic growth, on the other, seem to reinforce each other. Human development and poverty alleviation have always been devel- opment goals in the eyes of policymakers and planners. Their methods, however, have varied, and have ranged from government interventions to market solutions. Elements of both are needed: market-oriented poli- cies to support growth, together with well-targeted social programs. Outnnnl'!o> in Incomes and welfare have improved substantially in the postwar era. In low- and middle-income countries, output has grown at an aver- age annual rate of nearly 5 percent since 1965, with output per capita growing at 2.5 percent. Social progress has also been strong. Secondary school enrollment has nearly doubled since 1965, to about 40 percent. Infant mortality seems to have fallen substantially, from an estimated 124 deaths per thousand births in 1965 to 72 in 1988. Not all countries have achieved the same successes. The rate of GDP growth has varied substantially from region to region. Incomes improved 46 I A Vision for Development consistently in East Asia; performance also improved in South Asia, but more slowly and patchily. In other regions, income growth deteriorated. Since 1960, per capita real incomes have surged in Japan, the Republic of Korea, and Singapore; stagnated in Argentina, Jamaica, and Peru; and dropped in Ghana, Nigeria, and Zambia (Figure 2). The rates of saving and investment rose in many countries. India consistently saved more than 20 percent of its income in the 1970s and 1980s. In 1988, Brazil saved 28 percent of its income; China, 37 per- cent; Cote d'Ivoire, 22 percent; and Kenya, 22 percent. Investment as a share of income averaged 26 percent for developing countries in 1988. But again, country differences were substantial. Investment shares were about 4 percent in Bolivia, Sudan, and Zaire and about 30 percent in the Republic of Korea, Portugal, and Venezuela. The growth of trade in low- and middle-income countries was strong as a whole; exports expanded by almost 5.3 percent during the period 1965-89. Brazil, China, Korea, and Turkey were among the strongest performers. But many countries fared poorly, particularly in Sub-Saha- ran Africa, where real exports plummeted in the 1980s (Figure 3). In all developing countries, the share of exports in output increased from about 13 to 23 percent in this period-a trend dominated by East Asia, where the share increased from 8 to 30 percent. Government involvement in the economy also varied greatly. The share of public employment in the formal nonagricultural sector in 1980 was estimated to be more than 70 percent in Benin, Ghana, India, Tan- zania, and Zambia, and less than 25 percent in Argentina, Guatemala, and Korea (Heller and Tait 1984). In some countries, public consump- tion has averaged more than 15 percent of output, which implies that the wages of public employees may have absorbed more than a third of nonagricultural output. Much can be learned about the effectiveness of different development strategies from the experiences of individual economies. The following paragraphs highlight the recent stories of development in China, India, Nigeria, Brazil, Argentina, Malaysia, Sri Lanka, Korea, other East Asian Paths to Development I 47 Figure 2 Per Capita Income, Selected Countries, 1960 and 1988 (1985 PPP dollars) 1 1,000 20,000 United States Uruguay Venezuela Argentina Chile Mexico Japan Spain Singaporea Costa Rica Peru Mauritius Greece Colombia Jamaica Malaysia Algeria Turkey' Brazil Sri lanka Philippines Zambia Ni~eria G ana Cote d'ivoire Thailand Zimbabwe Rep. of Korea Morocco Pakistan Indonesia b Cameroon Kenya Bangladesh India E~yPt Maawi Tanzania • 1960 Source: Summers and Heston 1991. D 1988 Note: A logarithmic scale is used to facilitate comparison of countries with high and low per capita income. Countries were selected, based on data availability, to provide a balanced sample in terms of population size and regional distribution. a. Data are for 1960 and 1985. b. Data are for 1962 and 1988. 48 I A Vision for Development Figure 3 Estimated Annual Growth in Real Exports, Selected Groups of Countries, 1965-89 (percent) -2 0 2 4 6 8 10 12 Sub-Saharan Africa East Asia South Asia Europe, Middle East, and North Africa a Latin America and the Caribbean Industrial countries 01965-73 1973-80 .. 1980-89 Source: World Bank data. a. Excluding Iran and Iraq. newly industrializing economies, and the OECD economies. The subject of regional variations in income within economies is also raised. • China. From 1950 to 1978 the Chinese economy was centrally planned in most respects. The defects of such a highly centralized administra- tive system became clear, despite the progress in infrastructure and resource mobilization, "it makes productive enterprises subordinate to administrative organs ... [and] involves excessive command plan- ning from above and is too rigid" (Hsu 1982). So structural reforms were introduced in 1978. The most striking were rural reforms that introduced price and ownership incentives to farmers. Real farm prices have increased by 50 percent, and the agricultural growth rate rose from 2.5 percent in 1965-78 to 7.2 percent in 1978-88. Paths to Development I 49 • India. The government has been actively involved in the production process, regulating "the scale, technology, and location of any invest- ment project other than relatively small ones ... a chaotic incentive structure and the unleashing of rapacious rent-seeking were the inevitable outcomes" (Srinivasan 1990). This extensive govern- ment involvement was accompanied by macroeconomic stability in the 1960s and 1970s, but growth was slow nonetheless. During the period 1960-79, the growth of per capita income averaged 1 percent a year. Absolute poverty declined from about 55 percent in the early 1960s to only 45 percent in the mid-1980s. Since the late 1970s, some industries have been deregulated. The exchange rate, whose real value relative to the dollar was the same in 1955 and 1980, has depreciated in real terms. These partial reforms contributed to an acceleration in the per capita growth rate to about 3 percent in the 1980s. • Nigeria. A telling statistic about this oil exporter is that its per capita growth rate, which averaged 1.1 percent a year in the period 1960- 73, declined 2.8 percent a year after the oil price increase of 1973. Public spending was largely responsible for the decline. Between 1973 and 1981, public employment tripled from 0.5 to 1.5 million. Government expenditure rose fivefold between 1972 and 1974 and accounted for almost 80 percent of total oil revenue. Public invest- ment increased from 5 percent of GDP in 1974 to 17 percent in 1977, and accounted for more than half of total investment in that year. The budget turned from surplus to a deficit averaging 24 percent of retained revenue in 1975-78 (Bevan, Collier, and Gunning 1999). • Brazil. This country is often cited as an example of the success of good import substitution policies. For almost three decades (between 1960 and 1987) its average growth rate was an impressive 6.6 percent a year. What is revealing about the miracle years of 1967 to 1979, however, is that rapid growth was preceded and accompanied by economic reform. Before 1967, classic stabilization measures (tight credit and budget controls) were applied to bring down inflation. In 1967, a new tariff law reduced protection to domestic manufactur- ing from 58 to 30 percent. In 1968, a crawling peg exchange rate 50 I A Vision for Development replaced the multiple exchange rate system. These policies produced a surge in export volume of more than 10 percent a year between 1964 and 1980, and an annual rate of growth of 9.4 percent (Mad- dison and Associates, 1992). • Argentina. At the turn of this century, Argentina's per capita income was comparable to those of Australia and Canada. But since the 1940s the country has suffered chronic macroeconomic instability and slow growth. Inflation and repeated failures to stabilize the financial envi- ronment have discouraged domestic savings and investment. Without macroeconomic stabilization, Argentina has had difficulty adjusting to shocks to its terms of trade, a problem compounded by high levels of protection. These continuous macroeconomic failures largely explain the decline in Argentina's growth rate, which has fallen from an average of 4 percent a year in the period 1960-73 to 0.8 percent in 1973-87. • Malaysia and Sri Lanka. In 1960, these two countries had similar per capita incomes, education levels, infant mortality rates, ethnic diver- sity, and economic structures. Since then they have followed different development strategies. Even after the reforms of 1978, Sri Lanka remained less open than Malaysia. Agricultural taxation has been lower in Malaysia too: taxation of rubber exports has averaged less than 30 percent, compared with more than 60 percent in Sri Lanka. During the period 1960-78, Malaysia grew at 7.0 percent and Sri Lanka at 4.4 percent. Productivity growth has averaged 1.5 percent in Malaysia and 0 percent in Sri Lanka. Between 1960 and 1988, infant mortality rates dropped from an estimated 70 per thousand in both countries, to about 15 in Malaysia and about 30 in Sri Lanka. The share of the poor in Malaysia's population is estimated to have been reduced from about 37 percent in 1973 to 15 percent in 1987; in Sri Lanka it fell from 37 to 27 percent between 1963 and 1981. • Republic of Korea. Undoubtedly, this economy is an example of spec- tacularly rapid development. But analysts differ as to the causes. The growth rate during the period 1960-87 in Korea was 9.0 percent. Social indicators have also improved rapidly. Korea continued its import substitution approach in the 1960s. A strong export drive was also launched in the 1960s. After experiencing economic difficulties Paths to Development I 51 in the late 1970s, Korea pursued a more and more liberal approach in the 1980s. During the period 1960-87, the annual growth of total fac- tor productivity (TFP) was an estimated 1.7 percent in Korea. Income distribution compares very favorably with that of other developing economies, though it is estimated to have worsened. • Other East Asian Economies. The economies of Hong Kong and Sin- gapore have also achieved enviable success. So has Taiwan, China, which during the period 1960-87 grew 9.5 percent. This economy opened up early, initiating new policies in 1958-59 that "reversed the import-substitution strategy [and] reoriented the economy to the world market" (Myers 1990). Income distribution compares favor- ably with that in other economies, and it has improved. The government of Singapore has been considerably more inter- ventionist than the government of Hong Kong. During the period 1960-87, growth rates were 8.8 percent in Singapore and 8.6 percent in Hong Kong, whereas productivity grew by 1.7 percent in Singa- pore and by 3.1 percent in Hong Kong. These East Asian economies have performed exceedingly well for long periods of time. Although they differ in many important respects, they all share several features: high and rising levels of education, and an outward orientation. But these economies raise important ques- tions about the proper roles of state and market. Hong Kong followed a relatively free-market approach. The other economies were relatively more interventionist. Japan and Korea followed policies of protection for infant industries and of credit subsidies. Why, in these cases, did interventionist policies succeed when they so often failed elsewhere? Some economists argue that intervention worked because markets were still freer than in other economies. Some go so far as to argue that intervention set the East Asian economies back, that they would have done even better without it. Other economists say that the secret is to intervene competently. But this begs the key question: what is the dif- ference between competent and incompetent intervention? The issue remains controversial, but three propositions now command quite wide support. First, government intervention in these economies was subjected to international competition and 52 I A Vision for Development market-related checks and balances. These governments did not avoid the discipline of market forces. When protection failed, it was promptly removed-difficult to do, and most unusual. Second, governments were careful to offset the: bias against exports that is usually a feature of trade protection. Their trade regimes, in other words, remained highly outward-oriented. Third, intervention in the market in these East Asian economies was, in an overall sense, more moderate than in most other developing economies. These and other institutional features seem to distinguish the East Asian economies, including Japan (see Box 2). • OECD Countries. During the past three decades, the OECD countries have experienced solid growth, averaging about 3 percent a year, and with less country-by-country variation than among the developing countries (Harberger 1984). The fastest growing advanced economy has been Japan; its output increased by 6.5 percent a year between 1965 and 1980 . Two features of this experience stand out: first, rapid technological progress, supported by a strong outward orientation; second, a rise in saving rates, supported by moderate fiscal policies. Often the government's budget was in surplus. This stimulated sav- ing and investment and created opportunities to cut taxes. Germa- ny's postwar growth (3.5 percent during the period 1965-80) was export-oriented, with low inflation and a realistic exchange rate that ensured international competitiveness. By and large, organized labor supported the government's growth-oriented policies. Economies of scale, learning by dOing, and the restructuring of industry led to rapid advances in productivity. In Britain, economic growth in the 1960s and 1970s was slower because of high inflation, troubled labor rela- tions, an overvalued exchange rate, frequent balance of payments problems, low corporate profits, and too little investment. Growth improved during the 1980s. • Regional Differences in Income within Countries. Data on average incomes for countries conceal regional variations in incomes, espe- cially in large countries. Variations in nominal income, or output, per capita originating from region to region are substantial in several large countries, including Brazil, China, India, Indonesia, and Nigeria (see Paths to Development I 53 the maps of Brazil, Indonesia, and Nigeria for examples). Differences in expenditures, as well as differences in real terms-that is, after correcting for regional price differences-are expected to be less (see below). Within China, the per capita nominal income in the eastern region (which contains 29 percent of the population) was estimated to be 50 percent higher than in the southern region (43 percent of the population) in 1987. The average per capita income in the western region of India (14 percent of the population) was about 60 percent higher than in the eastern region (22 percent of the population) in 1986-87. In Indonesia, the per capita output in Sumatra (20 percent of the population) was estimated to be 36 percent more than in Java (60 percent of the population) in 1988. According to available data, this difference is virtually eliminated if income from oil is excluded, or if expenditures are compared. Within Nigeria, the eastern region was estimated to have a 70 percent higher per capita income (also including oil income) than the northern region in 1981. Variations in nominal income, however, are biased upward because costs of living are typically higher in the wealthier regions. But data for cost of living adjustments are scarce. Where the adjustments were possible, in the case of Brazil, differences do diminish (in real terms). In 1980 the southeastern region of Brazil (with about 40 percent of the people) had an estimated per capita nominal income more than three times that of the northeastern region (30 percent of the people). According to an estimate for 1975, when measured in real terms, the southeastern region's income was twice, rather than three times, that of the northeastern region. The evidence from industrial countries shows smaller regional dif- ferences in nominal terms. In the United States, the Middle Atlan- tic region (15 percent of the population) had a 16 percent higher nominal per capita income in 1988 than the South Atlantic region (17 percent of the population). The differences were estimated to have narrowed in the past three decades. Adequate comparisons of trends in regional inequalities in the developing countries, however, are constrained by lack of data; the available data do not show any clear reduction in regional inequalities. 54 I A Vision for Development Nominal average income of regions: o I 500 I 1000 I variations from national Kilometers average • 40 percent above or more • 20-40 percent above Within 20 percent (above or below) [] More than 20 percent below INDONESIA Sources: Indonesia income data from Biro Pusat Statistik 1989. Note: Regional estimates include income from oil production, especially important in Indonesia. See map of Brazil for key. Paths to Development I 55 Sources: Nigeria data from World Bank; United States data from u.s. Depart- ment of Commerce, Bureau of the Census 1990. Note: Regional estimates include income from oil production, especially important in Nigeria. The various economy experiences, though highly suggestive, need to be analyzed more carefully if they are to yield systematic evidence. A larger number of countries must be compared with one another in an econometric framework that ensures consistency of treatment. Then it may be possible to infer the factors that fuel development. The Determinants of the Growth of Income Comparative studies were pioneered by the International Labour Organisa- tion in the early 1970s (Meier and Seers 1984), in the trade studies of Little, Scitovsky, and Scott (1970), and by studies done under the sponsorship of the National Bureau of Economic Research (Bhagwati 1978; Krueger 1978). Since then, further studies have accumulated rapidly. They include recent work at the World Bank (where five large multicountry studies have cov- ered approximately sixty countries), other agencies of the United Nations, and the World Institute for Development Economics Research. Two of the main conclusions of this body of research are as follows. First, sustained development in many countries, notably the Scandinavian countries after 1870 and the East Asian economies after World War II, can be largely explained by education (and the associated quality of institu- tions) and by policies promoting outward orientation and competition. Outward orientation boosts growth and productivity. Import substitution policies have generally had disappointing results. Protected infant indus- 56 I A Vision for Development Box 2 What's Behind the Japanese Miracle? Exceptional investments in people, physical assets, and technology are generally considered the main reasons for japan's success, as elaborated on elsewhere in this report. The institutional and policy factors that created the climate for these large investments and their productivity are still debated. The Bureaucrats? Some see the japanese miracle as the result of bureaucrats in the Ministry of International Trade and Industry (MITI) guiding firms' pro- duction and investment decisions. Since the 1930s at least, japanese bureaucrats have influenced manufacturers' decisions. They have eased their access to capital and to foreign technology. They have granted subsidies, trade barriers, and tax breaks. They have formu- lated plans to allocate production. And they have sanctioned cartels. As industrial consultants who can persuade their clients to follow their advice, MITl's officials have a close relationship with manufac- turers. The Size of Interventions? By any measure-the size of government expenditures or taxes, gov- ernment-induced macroeconomic disturbances, controls on prices, the role of state-owned enterprises in manufacturing, or restric- tions on private sector activities-the role of government in japan's economy is small. Moreover, of the nearly half million japanese man- ufacturing firms in the 1950s, most were small and medium-size- accounting for half the value added in manufacturing (60 percent in the late 1970s). Institutions? Traditional japanese views on rights and appropriate behavior have affected the resolution of conflicts-and the relations between work- ers and managers, between large firms and subcontractors, and between government agencies, producers, and producers' associa- tions. For example, norms of behavior toward authority, which encourage a free flow of information between workers and supervi- sors, and a consensus building approach in conflict resolution have allowed better quality control in mass assembly. (Box continues on the following page.) Paths to Development I 57 Box 2 What's Behind the Japanese Miracle? (continued) All Three Each explanation probably captures an aspect of reality. But it is diffi- cult to draw lessons for other countries from an institutional explanation of Japan's success----except to note that bureaucrats did not try to fight market trends. Instead, they tried to anticipate those trends, and they retreated when they were wrong. The market was a disciplining factor. tries have rarely grown up, while the anti-export bias from protection has impeded the growth of exports. Further, these policies have lowered agri- cultural incentives. Second, severe and prolonged macroeconomic imbal- ances hurt investment and growth. Private investment is hampered because public borrowing and debt crowd it out and investors are uncertain about the future of the economy. Another method of analyzing the growth process is to estimate the contribution that capital and labor make to growth. Patterns of experi- ence across countries can be examined through a comparative study of large groups of countries and of econometric analyses of the data derived from them. One result applies to both industrial and developing countries. The sum of the contributions of the factors of production fails to account for overall growth. The so-called residual in the estimated production function, or total factor productivity, accounts for the rest. It captures the efficiency with which inputs are used (Box 3). The empirical literature on the determinants of economic growth in industrial countries is voluminous (Denison 1962; Jorgensen and Grili- ches 1967; Maddison 1981). Similar work for developing countries has been less comparable, however, because of data problems. Data on inputs are generally unavailable. Estimates of human and capital stock are vital for this sort of analysis. For this report, a consistent set of data for output, capital stock, labor force, arable land, and years of education of the working population has been constructed. For GDP growth, national accounts data have been used. Their limitations need to be borne in mind (Box 4). Estimates of 58 I A Vision for Development Box 3 Total Factor Productivity in Economic Growth An important advance in economics of the past fifty years has been to identify and measure total factor productivity, which measures changes in output per unit of all inputs combined. Before, most analysis of pro- ductivity focused on the growth of labor productivity, and to a lesser degree, on the growth of the average productivity of capital. Observe the following differences. The total output of the United States in the first part of the twentieth century grew at about 3 percent a year. Its capital stock also grew at about 3 percent, whereas the labor input (measured in worker-hours) grew at only about 1 percent a year. In the capital-labor mix, capital accounted for about one-third, and labor, two-thirds. So inputs were rising about 1.7 percent a year: two-thirds times 1 percent plus one-third times 3 percent. Total factor productiv- ity, or the residual, thus accounted for 1.3 percent in output growth: 3 percent (the rate of growth of output) minus 1.7 percent (the growth rate of inputs). The early calculations of total factor productivity for different countries led to the conclusion-surprising at the lime-that about half of growth in output was due to the residual, which was quickly baptized as tech- nical change. What makes up the residual? Technological innovations have no doubt generated some improvements in total factor produc- tivity. But the main additional element is in the quality of labor. If the additions to the labor force are more productive than the existing force, they will add more to output than they would under the formula based on labor's share. And the extra contribution from upgrading the quality of labor ends up in the residual. Adjusting for labor quality makes it easy to identify the residual with technical change--defined very broadly. Technical change includes such obvious innovations as the mechanical cotton picker, the pneu- matic tire, the hand-held calculator, the personal computer, the fork-lift truck, and the containerized shipping system. But technical change also includes numerous ways of reducing real costs. These costs may fall as more discipline is instilled in the work force by a more demanding manager-Dr as the work force becomes more productive because a too-demanding manager has been fired. An assembly line might be made more productive simply by straighten- ing it out-Dr a farm by introducing a different fertilizer. Productivity (Box continues on the following page.) Paths to Development I 59 Box 3 Total Factor Productivity in Economic Growth (continued) may also be increased by, for example, installing a facsimile machine, clos- ing down unprofitable branches, or buying longer-lasting tires for trucks. The way to understand more about what makes up the residual is to study the growth of total factor productivity in detail-product by prod- uct, industry by industry, sector by sector. Even with close study not every source of cost reduction can be identified, but the most important ones surely can. This identification alone reveals the kaleidoscopic sources of growth encompassed in the residual. physical and human capital were prepared for sixtyeight countries. The group includes some of what are now high-income countries 0apan, Greece, Spain, and Portugal), but none of the results is sensitive to their inclusion. Of the other countries, twenty-seven are in Africa; fifteen in Latin America; nine in East Asia; eight in Europe, the Middle East, and North Africa; and four in South Asia. For the sample of developing countries used, the estimated elasticity of output to capital for the 1960-87 period is about 0.4; for every 1 percent capital increases, output increases by about 0.4 percent. Under assumptions of perfect competition in product and factor markets, this elasticity reflects the share of capital in the economy. For industrial countries, this share has indeed been estimated at between 0.25 and 0.4 percent. The estimated elas- ticity of output to labor is about 0.45 percent. This elasticity is somewhat lower than that of industrial countries; estimates for the United States put the figure between 0.6 and 0.75 percent. The much lower levels of educa- tion in developing countries probably account for much of this difference. Many studies document the high returns on investment in education. In past studies of growth, education has been roughly proxied by literacy 60 I A Vision for Development Box 4 Measurement Informs Policy-Or Does It? The demand for economic data in policy analysis has intensified since Simon Kuznets pioneered national income accounting in the 1920s. With Keynes's macroeconomic models and Leontief's input-output models, the data, analytical tools, and computing capabilities have mushroomed. But serious problems of data and measurement still plague quantitative economic analysis. Dubious Quality In many countries, estimates of agricultural production are not based on reliable estimates of crop area and yields. Estimates of industrial production are based on partial coverage of enterprises, ignoring for the most part small-scale production units. Measures such as national savings, investment, and consumption are indirectly estimated, derived as the difference between two other magnitudes, which are themselves subject to error. There are serious gaps in the data on literacy, school enrollment, pov- erty levels, and nutritional levels. Reliable estimates of life expectancy at birth-based on recent censuses-and measures of births and deaths are only available for thirty countries for the years after 1980 (see table). Only twenty-seven countries have series for more than one period. Thus, most of the available estimates are based on assumptions about mortality. Poor Comparability GDP measures pose important problems in comparability across countries and over time. Among the major hurdles are price changes accompanying quality changes, changes in relative prices, the choice of base periods, and the extent of coverage of economic activity. The conventional use of official exchange rates introduces biases during periods of volatile exchange rates. Purchasing power parities (PPPs) generally yield a more accurate measure of output by comparing the value of a specified basket of goods and services in the domestic mar- ket, expressed in national currency, with the value of the same basket in foreign currency. Own-account consumption and subsistence production are often inad- equately measured, if at all. Even with imputations, the pricing of such volumes is less than satisfactory. Multiple exchange rates, enforced Latin Amer- Ci; ica,27 24 5 3 16 26 3 22 26 2 4 20 ~ n Asia and 0 14 Oceana, 40 " 'S· 47 r::: ([) Total, 117 '" 0 Source: United Nations 1990. O)l " 'g. ([) g.. V> 0' 8" g: o §. (1) ~ C1Q ""Q 0- u '" C1Q 't> 3 (1) ~ '" ..... 62 I A Vision for Development Box 4 Measurement Informs Policy-Or Does It? (continuecl) through rationing or other means, distort GOP measures because the prices used do not reflect true values. Parallel or underground market activities lead to incentives for evading taxes; these activities are not captured fully in GOP. If the share of such activities in measured GOP changes over time, estimated growth rates based on measured GOP will be off the mark. Externalities associated with resource overuse and environmental degradation present another difficult issue for proper accounting. If an economy overuses its environmental resources and if market prices do not fully reflect this use, conventional GDP measures overstate the capability of the economy to sustain the flow of goods and services. Tenuous Policy Inferences Can we infer, from an observed positive association between policies and performance, that performance responds to policy? Econometric tests of causality often cannot be applied with the available data-not to mention the complex problems of interpreting the results of such tests or of drawing statistical inferences from them. Policy conclusions based on analyses of meager data sets can be seriously biased. Ultimately, it is a matter of judgment whether an observed association between policy and performance is causal or simply the result of both being driven by a third set of unobserved (or latent) variables. Implications for Analysis These cautionary remarks should not lead us to abandon quantitative analysis. Nor do they relieve us of the responsibility of deriving policy lessons from such analysis. We have no serious alternative to empiri- cally based analysis for policymaking. Judgments will have to be made. And insights from analytical descriptions of economic history will have to be combined imaginatively with purely econometric analysis. This Report reflects the results of such an effort. Although there can be no finality about its conclusions, it does represent a careful assessment of the available evidence. rates, or by primary school enrollment ratios. Research for this Report suggests that increasing the average amount of education of the labor force by one year raises GDP by 9 percent. This holds for the first three years of education; that is, three years of education as compared with Paths to Development I 63 none raises GDP by 27 percent. The return to an additional year of school- ing then diminishes to about 4 percent a year-or a total of 12 percent for the next three years. These results are consistent with earlier studies. Almost everywhere, growth rates fell after 1973 (Table 2). Two pos- sible causes were examined: slower growth of inputs, particularly capi- tal, and slower growth in the effiCiency with which the inputs were used. SlOwing growth of the capital stock is not, it seems, to blame. It grew on average by slightly more than 7 percent a year before and after 1973. Even in Africa, the rate of capital formation was 6.3 percent a year in both periods. With certain technical caveats, if input growth was broadly unchanged in the second period and output growth declined, then growth in the productivity of input use must have fallen. The data support this view- strikingly so (Table 3). Variations in productivity growth reflect changes in resource allocation, technologies, and dynamic comparative advan- tage. Slower TFP growth points to diminishing advances in technology, fewer improvements in the efficiency of input use, or both. Since 1960, growth in productivity has accounted for a relatively small proportion of output growth for most developing countries. The exception is East Asia, where the share is more than 25 percent. For the industrial economies, productivity growth has been much more impor- tant. A recent study of the United States suggests that technical progress alone accounts for more than 50 percent of output growth since 1945 and labor force growth for 27 percent (Boskin and Lau 1990). Another draws this conclusion: "A major difference between [developing and developed countries] seems to be that growth in the former is largely accounted for by the accumulation of inputs rather than the growing efficiency in their deployment" (Chenery and Srinivasan 1988). The small role that productivity growth plays on average in devel- oping countries is unlikely to be explained by lower rates of techno- logical change. In East Asia, productivity increased at 2.6 percent a year for the period 1960-73, about the same as in the industrial coun- tries. The importance of productivity growth, despite its small share, is indicated by the fact that differences in it account for more than half a- "" » I ~•• ~n.. p"~'"' ~Hlil lakr prOllk!divtty :::; Region, I 1~ 1 1973- t 1966-- V> group, or 1966-- 1973- 19~ 1969- 1973- 1~ 1973- 1966-- o· . 87 a 81a 01" 1969-73 ::J 73 87" 87" 13 $7' 87" §" Developing economies 0 ([) < Africa 4.0 2.6 3.3 6.3 6.3 6.3 2.1 2.3 2.2 0.7 -0.7 0.0 ([) 0- East Asia 7.5 6.5 6.8 9.8 10.7 10.2 2.8 2.6 2.6 2.6 1.3 1.9 " 3 ([) EuroJl e, ~ Mid Ie East, and North Africa 5.8 4.2 5.0 7.7 7.5 7.6 1.4 1.9 1.7 2.2 0.6 1.4 I I I I I Latin America 5.1 2.3 3.6 7.4 5.6 6.3 2.5 2.8 2.6 1.3 I -1.1 I 0.0 South Asia 3.8 5.0 4.4 8.0 7.2 7.7 1.8 2.3 2.1 0.0 I 1.2 I 0.6 Sixty-ei&ht ") c economies 5.1 J.J I 4.2 "7 I.'-t A I "71 / . I I 7.2 I 2.2 I 2.4 I .23 1.3 i -0.2 I 0.6 Industrial France 1.7 Germanyb 1.4 United Kingdom 3.3 1.3 2.4 3.6 2.6 3.1 0.1 -0.5 -0.2 1.7 0.6 1.2 United States 3.7 2.2 3.0 3.8 2.8 3.4 1.8 1.9 1.8 1.0 -0.1 0.5 Sources: World Bank data; Boskin and Lau 1990. Note: Estimates for developing countries are based on a sample of sixty-eight economies. a. Until 1985 for industrial economies. b. The Federal Republic of Germany before reunification with the former German Democratic Republic. Paths to Development I 65 59 22 17 50 16 35 51 10 38 25 56 18 26 92 37 -27 62 17 20 68 19 14 94 51 -48 55 19 24 76 28 -6 58 14 28 67 30 o 14 27 -5 78 23 -10 87 36 5 59 -5 78 United States 23 27 50 Sources: For developing countries, World Bank data. For industrial economies, Bosking and Lau 1990. a. The Federal Republic of Germany before reunification with the former German Democratic Republic. 66 I A Vision for Development of the variation in growth rates across countries. Economic policy, as this report will explain, goes a long way to explain these differences. The association between productivity growth and aggregate growth is strong and positive (Figure 4). It holds across regions and in different peri- ods. In the period 1973-87, the average decline in growth rates (about 1.5 percent) is exactly matched by the decline in TFP growth (Table 2). Histori- cal data for Japan also support this strong association between economic growth and productivity growth (Ohkawa and Rosovski 1973). During periods of rapid growth, such as 1912-18 or 1931-38, TFP grew as well (at 2.1 percent a year in the period 1912-18 and at 3.8 percent a year in 1931- 38). During periods of slow growth, productlvity stagnated or declined (it fell by 0.2 percent during the period 1918-31). In the period 1960-73, output grew at 9.2 percent and productivity at 3.4 percent. In the period 1973-87, output grew at 3.7 percent and productivity at 0.8 percent. Domcstk Policies can affect both the quantity of inputs and their productivity. A policy of import substitution, for example, may increase investment but decrease efficiency and technological progress, and hence produc- tivity. It can be argued that an import tariff has only a once and for all effect on efficiency and does not affect the rate of technical progress. Alternatively, it has been claimed that tariffs make it harder to adopt new technology and therefore slow the growth of productivity. Theory, therefore, is ambiguous. Evidence from country studies brings out the aspects of policy that affect productivity. Three suggestive overall find- ings are mentioned here. First, the contribution of additional education in raising total output and productivity has already been noted. In addition to this effect, the level of education (as opposed to changes in the kind of education) of the population also seems important. A three-year-higher initial level of edu- cation is associated with an increase of 0.4 percent in the annual growth rate (or 11 percent extra output during a twenty-seven-year period). Second, openness and competition are associated with growth in pro- ductivity. This holds for the various measures of openness used in this Paths to Development I 67 Figure 4 The Average Annual Growth of Per Capita Income and Productivity, Selected Economies, 1960-87 (percent) 8 6 • ••• • .... ...t: • 3: 4 ... 0 OJ) Q) E 0 2 u t::: .... I'tl '0.. I'tl ... U Q) 0 • Q.. -2 -4 -4 -2 0 2 4 6 8 TFP growth a Source: World Bank data. a. The unexplained residual of GDP growth after controlling for growth in con- ventional inputs (labor, capital, land) report, including the two used in this chapter: movements in the domes- tic prices of traded goods toward international prices, and changes in trade shares. Other studies have found similar results. Third, macroeconomic instability diminishes the return on invest- ment and the growth of output, as country studies have suggested. This is only weakly supported by one proxy used in the cross-country esti- mation, the foreign exchange premium. Finally, the data suggest that an increase in the share of government consumption in GDP results in 68 I A Vision for Development a decline in productivity growth later on. This is consistent with the results of other studies (Barro 1991). The evidence suggests that good policies-assumed to be reflected by alternative measures-and investments, both physical and human, are complementary. Both better policies and more education contribute to growth. Furthermore, they seem to interact. Thus, the effect on growth of better policy and more education together is greater than that of each separately (Table 4). Similar results are obtained for changes in educa- tion and for investment. These results appear fairly robust for alternative groupings of coun- tries and measures of policy. The variables under consideration may not be independent sources of good performance; causality has not been established, and variables omitted from the analysis may be affecting the results. But the evidence still suggests that simultaneous efforts to improve policy and to augment human and physical capital can have exceptionally high returns. The The terms of trade faCing developing countries, growth in the OECD countries, international interest rates, and capital flows are just some of the external factors that can affect development. The importance of these factors for the aggregate prospects for development is discussed through- out this report (see Dell and Lawrence 1980). But can they account for differences in performance among individual countries? A study of 33 developing countries did not find a statistical association between dif- ferences in growth rates and the magnitude of external shocks (Mitra and Associates 1991). Capital flows are another external factor that affects development. Concessional aid is an important source of finanCing for low-income countries, and its volume makes a difference to these countries. At the same time, the efficiency with which aid is used matters, and improve- ments in both the quality and quantity of aid are needed. EffiCiency, in turn, depends on the policies of lenders and borrowers alike (Box 5). Overall assessments of aid effectiveness are inconclusive, but country studies yield four important lessons that can strengthen the effectiveness Paths to Development I 69 low distortion and high education level 5.5 1.40 63.7 53.9 low distortion and low edu- cation level 3.8 0.25 52.0 49.9* High distortion and high education level 3.8 0.00 35.7 38.1 High distortion and low education level 3.1 20.40 42.0 46.0* low distortion and high rate of increase in education 5.3 1.30 57.0 54.3 low distortion and low rate of increase in education 4.0 0.40 55.1 48.8* High distortion and high rate of increase in education 3.5 20.16 35.0 39.7 Hi~h distortion and low rate of Increase in education 3.4 20.19 39.2 44.7' and investmenF low distortion and high investment 5.2 0.91 73.6 56.5 low distortion and low investment 3.5 0.75 35.6 46.4* High distortion and high investment 4.6 0.07 53.8 44.9 High distortion and low investment 2.6 20.36 26.7 41.2* Sources: For foreign exchange premium, International Currency Analysis, Inc., various years. For all other variables, World Bank data. Note: All results are significant at the 5% level unless marked with an *, in which case they are not significant. a. High distortion here is reflected by a foreign exchange premium of more than 30%; low distortion, a premium of 30% or less. b. Education is measured by the average years of schooling, excluding postsecondary schooling, of the population age 15-64. High education is defined here as more than 3.5 years; low education, 3.5 years or less. c. Five-year increase (above or below the median). d. Investment rate as a share of GOP (above or below the median). 70 I A Vision for Development of aid. First, aid often serves multiple objectives. When it is determined primarily by political considerations, special care is needed to ensure that its economic effects are satisfactory. Second, foreign assistance can reinforce good domestic policies as well as bad ones, and in the final analysis, efforts to support good poliCies are crucial. Third, a country's capacity to absorb aid depends on its human, financial, and adminis- trative capabilities. Strengthening these capabilities must be a priority. Fourth, stability in the volume of funding and transparency of condi- tions on the aid help its recipients put it to better use. Components of Overall Development Meeting basic needs is an important part of economic development. The governments of many developing countries have made it a priority. India's first prime minister, while introducing the country's third five- year plan in 1960, stated: "It is said that the national income over the First and Second Plans has gone up by 42 percent and the per capita income by 20 percent. A legitimate query is where has this gone ... I can see that people are better-fed and better clothed, they build brick houses ... But some people probably have hardly benefited" (India 1964). Meet- ing basic needs requires both economic growth and a range of well- targeted social programs. Several studies using household data show that social spending can Significantly improve the welfare of households. Yet only a few studies have examined the effects of social spending using aggregate data It would be especially helpful to know whether social spending or over- all growth in incomes was the more effective way to improve social welfare. Several indicators are typically used to measure welfare: life expectancy, infant mortality, and school enrollment, none of which is devoid of drawbacks. Data for public expenditures, income growth, and the educational status of adult females were examined for their effects on infant mor- tality and secondary school enrollment. The results from these cross- country analyses are mixed. Evidence in this Report and in other studies stresses the importance of well-designed social spending for develop- Paths to Development I 71 Box 5 The Contribution of Aid When Aid Can Be Ineffective Sometimes aid can permit countries to postpone improving macro- economic management and mobilizing domestic resources. External agencies continued to provide aid to Tanzania while the country experimented with disastrous rural policies and institutions. The ready availability of foreign assistance to Pakistan-largely for politi- cal reasons---enabled it to postpone fiscal reform. Sometimes aid can strengthen lobbies that have a strong vested interest in a distorted policy framework and so make policy reform more difficult. Aid at times can replace domestic saving and flows of trade, direct for- eign investment, and commercial capital as the main sources for invest- ment and technology development. Several countries have allowed food aid to depress agricultural prices. They have also postponed criti- cal investments in rural infrastructure and ignored the need to build agricultural institutions. Aid is sometimes turned on and off in response to the political and strategic agenda of bilateral funding agencies, making resource flows unpredictable. This resource instability can result in interruptions in development programs, as in Egypt, India, and Pakistan. Uncoordinated and competing bilateral agencies can transfer incom- patible technologies and deliver conflicting projects and advice. These problems of bilateral aid arise partly from the widespread practice of tying aid to the purchase of equipment, shipping, and technical advice from agency sources, which substantially reduces net resource trans- fers. In Pakistan, for example, the cost of using agency shipping lines to transport aid-funded procurements (often a substantial proportion of total project costs) was 50-115 percent higher than the cheapest alternative. Swings in policy advice from funding agencies can add to the cost of aid for developing countries. Many recipients, advised to dis- mantle industrial protection and marketing boards. complain that agencies had encouraged these strategies in the 1960s and 1970s, when import substitution and regulation were in vogue. Agencies can often adjust rapidly to the changing thinking on development, but recipients of aid need more time to adjust because of their weak administrative structures. (Box continues on the following page.) 72 I A Vision for Development Box 5 The Contribution of Aid (continued) When Aid Is Effective Aid improves the credibility of economic reform by providing assistance in the design of reform packages and by holding down the cost. Structural adjustment lending has triggered and helped sustain reforms in many coun- tries that have been committed to reform, including Chile, Mexico, and Tur- key. In the Republic of Korea, the infrastructure and education projects of the 1950s helped the economic takeoff that followed the reforms of the early 1960s. Humanitarian relief is another unassailable reason for aid. Aid provides external resources for investment and finances projects that could not be undertaken with commercial capital because of debt overhang or a long project gestation period. Aid discussions also inform industrial countries about reforms in developing countries. This knowl- edge improves the developing countries' access to capital and direct foreign investment and, as in the cases of Korea, Malaysia, and Thai- land, helps them become commercial borrowers. Project assistance helps expand much-needed infrastructure-roads, railways, ports, and power generating facilities. It also builds technical expertise in project evaluation, monitoring, and implementation. Aid also contributes to personnel training and institution building (for example, in Korea, Pakistan, Thailand, Colombia, and Mexico). In addition, informa- tion on best practices-such as Bangladesh's Grameen Bank, Bolivia's Emergency Social Fund, and Jamaica's Food Stamp Scheme-helps recipients tailor practices to their circumstances and avoid mistakes. Domestic policies, institutions, and administrative capacity also vitally affect the success of project aid. An excellent example of their contribu- tion to the effectiveness of project aid is the green revolution in South Asia in the 1960s. It was successful both because of technology trans- fers, research, and infrastructure financed by aid and because of the responsiveness of domestic institutions. Aid can support better economic and social policies. External aid and finance agencies are more and more sensitive to a project's effects on the environment and on social conditions. The emphasis on policies has also resulted in successful programs to reduce poverty, for example, in Bolivia, Cote d'ivoire, and Malaysia. In Pakistan, concern with low achievements in education and health is prompting more lending for human resources to complement efforts to alleviate poverty. Paths to Development I 73 ment. Greater efficiency in the delivery of services and more accurate targeting are recurring themes (Sen and Dreze 1990). The results are quite clear about the importance of educating women. The educational status of adult women is by far the most important variable explaining changes in infant mortality and secondary school enrollments (see Figure 5). An extra year of education for women is associated with a drop of 2 percentage points in the rate of infant mor- tality. Household-level studies have reported even larger reductions of 5-10 percentage points. As noted at the outset, overall development includes more than eco- nomic variables: it includes noneconomic features which enrich the quality of life. Some noneconomic variables are associated with eco- nomic development, although lines of causation are generally difficult to establish. For example, some of the economic and social indicators dis- cussed above are positively associated with noneconomic components of development, such as civil and political liberties (Box 6). Equity is a separate concern in its own right. It has two aspects: income distribution and the incidence of poverty. There is no clear link, in either direction, between growth and changes in income distribution. But economic growth is strongly associated ~ith a reduction in the inci- dence of poverty. A review of twenty developing countries found that growth was associated with an improvement in absolute poverty in all but one country (and the exception had negative per capita growth dur- ing the period considered). Lal and Myint (1998) find the same effect in their detailed country studies. World Development Report 1990 also found strong evidence that growth reduces absolute poverty. The Way Forward Perhaps the clearest lesson from work on development during the past thirty years is that there is a premium on pragmatism and an open mind. Ideas that were once the conventional wisdom, and which guided gov- ernments and multilateral institutions in forming their approaches to development, have now been largely set aside. New ideas stress prices as Signals; trade and competition as links to technological progress; and 74 I A Vision for Development Figure 5 Female Educational Attainment and Decline in Infant Mortality, Selected Economies, 1960-87 Average annual decline in infant mortality (percent) 01234567 Burkina Faso ; : Low female Ethiopia -, Mali ~ education Burundi Sudan Central African Rep. Senegal Cote d'ivoire I;;;:::;:::::JI Pakistan ~ Benin =::::;:::J Nigeria ~~=::j Tanzania =::::;J Uganda ====1 Morocco ~~~~ Togo ~ Rwanda Bangladesh §S Zaire Cameroon ~~~:JI Haiti~ India Kenya Ghana ~~~:JI Bagon ~ Algeria ~~~:::=::::J Gu~~:~:: ~I Malawi ~ I Congo Madagascar Egypt Syria Turkey Indonesia Bolivia ~ I Zimbabwe ~~==~=~=:::=~ China ~ I Nicaragua Brazil Hong Kong Colombia Venezuela, RB I EI Salvador Mexico I Israel Portugal Peru ~ I I Singapore Rep. of Korea Thailand Mauritania Greece Malaysia Philippines Costa Rica Argentina Chile I Spain Yugoslavia Sri Lanka I Hungary High female Jamaica Japan education Source: World Bank data. Note: Economies are listed in ascending order by level of female education, defined as the average years of schooling, excluding postsecondary schooling, of females age fifteen to sixty-four. Paths to Development I 75 Box 6 Noneconomic Components of Development: Liberties What connection, if any, is there between economic development and liberties, one of the noneconomic components of overall devel- opment? One possibility is that a free press and open public debate might expose actions by the government or the private sector that might otherwise hold development back. A free press and expanding flow of information often spur social and economic progress. India's free press can plausibly be credited with preventing famines, because it forced the government to act promptly. But it can also be said that freedoms in general make it harder for government to take tough but necessary decisions. The latter view is often advanced to explain the success of countries such as the Republic of Korea (with its "good" authoritarian rule) in contrast to countries such as India (where liberties and policy weaknesses may have gone together). To examine this further, data on political and civil liberties were taken from Freedom in the World (Gastil 1989). This survey has been under- taken every year but one since 1973. It ranks countries according to thirty specific tests under two criteria: political rights, defined as "rights to participate meaningfully in the political process"; and civilliber- ties, or the "rights to free expression, to organize or demonstrate, as well as rights to a degree of autonomy such as is provided by freedom of religion, education, travel, and other personal rights." The result- ing index is highly correlated with another constructed by Humana (UNDP 1991). All such measures are crude. They cannot support firm conclusions. However, the results are interesting. There is a strong relation between income growth, education levels, and declines in infant mortality; between female education levels, and changes therein, with infant mortality decline; and between political and civil liberties and achievements in male and female education and infant mortality decline (Box table). The results of regression analysis do not go as far as to suggest that liberties contribute positively to income growth, but they imply that they do not hold growth back. Some studies find that the relationship between free- dom and growth is ambiguous (Grier and Tullock 1989). Dasgupta (1990) reports a clearer effect for 1970-80, finding that "political and civil rights are positively and significantly correlated with real national income per head and its growth." Scully (1988) also reports a positive effect. (Box continues on the following page.) 76 I A Vision for Development Box 6 Noneconomic Components of Development: Liberties (continued) 1. Growth 1.00 0.30 0.12* 0.23 0.31 0.42 0.37 0.19* 2. Decline in infant mortalitya 1.00 0.27 0.41 0.29 0.67 0.71 0.59 3. Change in educa- tion 1.00 0.92 20.18* 0.30 0.25 0.32* 4. Chan~e in fema e education 1.00 0.22 0.52 0.48 0.28 5. Chan~e in fema e- male education gap 1.00 0.55 0.56 0.39 6. Educa- tion level 1.00 0.98 0.57 7. Female education level 1.00 0.63 8. Politi- cal and civil liberties 1.00 Sources: For political and civil liberties, Gastil 1989. For others, World Bank data. Note: Numbers are period averages; data are for a sample of 68 economies. All correlation coefficients are statistically significant at least at the 10% level, except for those marked with an *. a. Because of low data quality, these data cover only the period 1973-84. Finally, after controlling for income growth and regional effects, liber- ties appear to be strongly and positively associated with measures of welfare improvements such as women's education, overall education, and infant mortality declines (Box figure). These results do not show the lines of causation, but they suggest that these important components of overall development go together. Paths to Development I 77 Box 6 Noneconomic Components of Development: Liberties (continued) Box Figure The Association Between Political and Civil Liberties and Women's Education, Selected Economies, 1973-86 ~ 1.2 OJ ~ E !: .~ t1:I 1.0 - • •• - .... "iii ~ !: o 0.8 - • \J :::l -c - • ••• ,. • ~ ~ 0.6 - "iii E 0.4 -I. .... -. • • ~ T. • ~ 0.2 - o +-- less liberty More liberty ~ Sources: For data on political and civil liberties, Gastil1987; for data on educa- tion, World Bank. Note: Data are period averages for a sample of sixty-seven economies; data for 1974 were unavailable. Educational attainment is defined as the average years of schooling, excluding postsecondary schooling, of the population age fifteen to sixty-four. effective government as a scarce resource, to be employed sparingly and only where most needed. In development, generalizations can be as rash as unbending com- mitments to theories. Quantitative evidence of the sort reviewed in this chapter is suggestive, but no more. There is no magic cure for eco- nomic backwardness. There is more than one way to succeed-if only 78 I A Vision for Development because there are many different sorts of success. And success needs to be evaluated according to the various dimensions of development, not just income growth. The fastest growing economies of the sixty-eight analyzed are the four newly industrialiZing economies of East Asia. The best performer in terms of progress on infant mortality is Chile, along with japan. jamaica and japan score highest on education (although Costa Rica and Venezuela are better with regard to gender equality). Costa Rica, along with japan, ranks highest in political and civil liberties. Some of the poorest performers in the economic sphere also fared badly in some of the non-economic aspects. The statistical research therefore shows that the various measures of development are linked, more closely in some cases than in others. But there are always exceptions. If indicators are ranked, then Algeria, Brazil, and Gabon are in the top one-third ranked by income, but half- way down the rankings for infant mortality and education. Pakistan also scores well on income growth, but conSiderably less well on gender equality in education. In a spirit of pragmatism and open-mindedness, it is right to conclude that income growth has been overemphasized as a measure of welfare, but also that income growth usually does not militate against success in the other dimensions. The challenge for governments is to translate the broad lessons of development experience into policies that work. To help in this task, the next four chapters of this report examine different areas of policy- human capital, domestic markets, foreign trade, and macroeconomic policy-in detail. In each case the report asks: What have governments done, and what appears to have worked best? Note 1. This report was prepared by a team led by Vinod Thomas and comprising Surjit S. Bhalla, Rui Coutinho, Shahrokh Fardoust, Ann E. Harrison, Daniel Kaufmann, Elizabeth M. King, Kenneth K. Meyers, Peter A. Petri, and N. Ro- berto Zagha. T. N. Srinivasan, Mark Rosenzweig, and Francisco Sagasti col- laborated closely and provided extensive advice. The team was assisted by Sushenjit Bandyopadhyay, Fernando]. Batista, Marianne Fay, Jon Isham, Kali Paths to Development I 79 Kondury, Stefan Krieger, and Yan Wang. Stanley Fischer played a principal role in the initial stages of the report's preparation. Bibliography Bacha, Edmar L. 1984. "Growth with Limited Supplies of Foreign Exchange: A Reap- praisal of the Two-Gap Model." In Moshe Syrquin, L. Taylor, and Larry Westphal, eds., Economic Structure and Performance. New York: Academic Press. Balassa, Belaand Associates. 1971. The Structure of Protection in Developing Countries. Bal- timore, Md.: Johns Hopkins University Press. Barro, Robert. 1991. "Economic Growth in a Cross Section of Countries." Quarterly joumal of Economics 106 (2): 407-43. Bauer, P. T. 1958. Some Economic Aspects and Problems of Under-Developed Coun- tries. Bombay: Forum of Free Enterprise. Becker, Gary. 1964. Human Capital. New York: Columbia University Press. Bevan, David, Paul Collier, and Jan Gunning. 1999. 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United Nations. 1990. World Population Trends and Policies: 1989 Monitoring Report. New York. The Lessons of East Asia: An Overview of Country Experience by Danny M. Leipziger and Vinod Thomas The success of development in East Asia is legendary. No other group of developing countries has done as well in fostering growth, reducing poverty, integrating with world markets, or raising standards of living. Over the past twenty-five years, per capita incomes in the region almost quadrupled. Abso- lute poverty fell by about two-thirds on average, population growth rates declined rapidly, and health and education improved markedly. The first set of success stories, that of the "Asian tigers," has led to a second generation of rapidly industrializing, fast -growing economies. And now China has started a new engine of regional growth. Although often spoken of as a Single group, the East Asian economies are, in fact, remarkably diverse. The region includes some of the richest and the poor- est of the world's developing countries, some of the most populous and some of the least, some with a store of natural resources and some with virtually none. Moreover, despite its steady growth, East Asia is still grappling with serious challenges, including environmental degradation, infrastructural bottlenecks, and poverty. But if there is a Single firm lesson to be drawn from the region in the past few decades, it is that difficult challenges have a history of being met. The Search for Country Lessons Why have the different economies of East Asia been so successful? To shed light on this question, the World Bank studied several countries in the region, First appeared in The Lessons of East Asia, Washington, DC: World Bank, 1993. Reproduced with permission. 84 I A Vision for Development complementing other approaches and cross-country analyses.! The analy- ses were conducted by teams that included local experts as well as World Bank economists. The task was daunting, but it has added to knowledge and provided glimpses of why East Asia has been so successful. The country studies show the diversity of the East Asian phenom- enon, with variation among countries and over time. No one formula or standard prescription has been decisive. Several compelling factors do, however, emerge as major contributors. It is important to note that the policy approaches adopted by East Asian economies were not uniform. Of the first generation of newly industrialized economies (NIEs), the Republic of Korea, Singapore, and Taiwan, China, chose a good deal of state intervention, as did Japan earlier on. Hong Kong was an exception for the most part. Among the second generation of successful East Asian economies, Indonesia and Malaysia had little success with their early interventions, and as they became less interventionist over the past dozen years their economic performances improved markedly. Other recent NIEs, like Thailand and coastal China,2 are avoiding interventionist industrial policies in most respects. These differences notwithstanding, it could not be pure coincidence that the fastest growing economies in recent decades are concentrated in East Asia. Indeed, the country studies found that behind the substantial country variations are Significant common features that policymakers elsewhere might take to heart. A country's development prospects are influenced by three sets of factors: endowments, policies, and institutions, as set out in the Develop- ment Checklist. The checklist is illustrative and must be interpreted with caution, since the categories are at times subjective and are subject to the time period considered. Nevertheless, it is useful in drawing the patterns emerging from East Asian economies. It dispels the notion that all East Asian economies share identical features; quite to the contrary, it highlights considerable diversity. The checklist also draws a strong contrast between many characteristics common to the first -generation NIEs and those of the second. The Lessons of East Asia: An Overview of Country Experience I 85 Investment in human resources Yes Yes Yes Yes Some Yes Some Import Some Yes Yes Yes Some Yes Some Selective indus- trial policies Yes Some Some No No Some Some Yes Some No No Some Some Yes No Some Yes Some Central eco- nomic ministry Yes Yes Yes No Some Some Some Yes Yes Yes Yes Yes Some Some Yes Yes Yes Yes Some Yes Yes Yes Yes Yes No No Yes Some world) Growth in the Aver- 1960s age Growth in the 1970s Better Growth in the 1980s High High 86 I A Vision for Development The traditional focus of economists has been on policies, which prove to be crucial to the East Asian experience. Regional success has been analyzed by other social scientists, who have emphasized the quality of policymaking, leadership, nationhood, cohesion, and the role of the state. 3 The review of these more intangible features is motivated by the observation that similar policies undertaken elsewhere have proved less productive than in East Asia. Similarly, government interventions in many cases have not had the dire consequences that many would have predicted. Clearly one must distinguish between policy interventions and policy distortions, between distortions affecting particular markets and those affecting the economy as a whole, and between pervasive and non pervasive distortions. The country studies found that none of the initial four NIEs-Korea, Singapore, Hong Kong, or Taiwan, China-was generously endowed with natural resources. (The later NIEs--Indonesia, Malaysia, and Thailand-were richer in natural endowments.) For the initial NIEs, the only resource was people, In the form of a relatively well-educated labor force. For these first-generation NIEs, economic development was a matter of survival and therefore of national urgency. They met the challenge by forcefully committing themselves to becoming exporters in global markets. Common to East Asia's success were policies for macroeconomic stability, human resource investments, and outward orientation- quite different from what happened in most other developing regions. Because these economies to a large extent took international prices as an ultimate guide to domestic resource allocation, macroeconomic stability was seen as central to maintenance of competition. In addition, a num- ber of regimes had a strong aversion to inflation, which strengthened the hands of technocrats. In the area of human resources, strong public policies were often augmented with high household investments in edu- cation. And in many areas, including export promotion, it was not just the design and selection of poliCies; it was also efficient implementation. By any standard, implementation of policies was East Asia's forte. At the core of development success in East Asia has been pragmatic policymaking-meaning, most importantly, the relative absence of ide- The Lessons of East Asia: An Overview of Country Experience I 87 ology and the willingness to repudiate failed policies. Policies have been reversed swiftly if experience showed them to be ineffective. Examples include the abandonment in the early 1980s of Malaysia's experiment with selective industrial policies, Korea's curtailment of the heavy and chemical industry drive in 1979-80, and Singapore's abandonment of a high-wage policy in 1985. Indonesia's strong policy response to mac- roeconomic instability and Thailand's exchange rate management in the mid-1980s are other cases of timely and effective policy actions. Bureaucracies can facilitate reform, or they can prevent it. In many successful East Asian industrializers, bureaucracies were agents of devel- opment. Put differently, East Asia's technocrats have generally been part of the political mandate for reform. In Singapore bureaucrats and party officials worked hand in glove for the national agenda. In Indonesia and Malaysia the political leadership allowed technocrats substantial free- dom to manage the economy. In Thailand the bureaucracy provided continuity when political processes faltered; and in both Korea and Tai- wan, China, core economic ministries were key to government efforts to develop the economy. The means differed, but the institutions were influential in hastening economic development. Korea, Singapore, and Taiwan, China, the fastest industralizers after World War II, are credited with "visionary" leadership and efficient bureaucracies. They also achieved national consensus on development goals and had a centralized political apparatus to implement their fairly interventionist strategies. Many observers tend to view each of these features as major, if not decisive, causes of success. Indeed, East Asia's achievements have cast a glow over the region that often transforms every initial policy and institutional condition into a positive contribu- tor to success. That conclusion would be too simplistic and misleading. After all, in many other countries centralized power has been accompanied by poor policies, and there are numerous examples of visionary leadership, a strong bureaucracy, and concerted government interventions being associated with poor results. Conversely, during successful episodes, some of these features were absent in other country settings. It would seem that each of these factors, taken separately, may not be necessary- 88 I A Vision for Development and certainly not sufficient-for success, and some may have been costly even if overall success was achieved. But with hindsight, these NIEs seem to have benefited from a combination of sociopolitical features that accompanied their superior economic policies. It should be emphasized that there were some big policy mistakes in East Asia-in industrial policy, financial policy, and the absence of sufficiently forward-looking environmental policies. As a result, the region now faces serious challenges in sustaining rapid development. Yet the questions are why did past mistakes not cause the kind of dam- age that is so apparent in other countries} How were these mistakes recognized and corrected? It is these issues that offer the most valuable lessons for new market entrants like Vietnam or perennial aspirants like the Philippines. What is it about the quality of decisionmaking, and the ability to turn decisions into action, that has led to East Asia's outstanding record? One strong conclusion is that macroeconomic diSCipline, outward orientation, and human resource investments-along with political stability-paid off in all successful East Asian economies. Success in the first-generation NIEs, however, involved more intervention than in the second generation, an important finding in light of the greater relevance of the latter experience in the current international environment. East Asia, therefore, makes a case neither for a laissez-faire approach to eco- nomic policymaking nor for a heavy hand on the tiller. The crucial factor was the way that governments supported markets in helping to unleash entrepreneurship. The second strong conclusion is that, contrary to currently fashion- able views, one of the key ingredients in East Asia's success was active government. But it was not more government that had a positive effect, it was better government. East Asia thus offers a contrast to widespread episodes of policy failure. Development economics lacks an adequate theory of why good government policy, combining economics, politi- cal organization, and technocratic decisionmaking, is pursued by some countries and not others. 4 Although the region offers no universal para- digm in this respect, it does provide some useful lessons in successful policymaking. The Lessons of East Asia: An Overview of Country Experience I 89 Making the Most of Initial Conditions If asked in the early 1950s to name the success stories in the next thirty years, only a seer would have chosen Hong Kong, Korea, Singapore, or Taiwan, China. All were lacking in natural resources and all had ratios of arable land to population that were so low that meeting basic consump- tion needs was questionable. The two largest economies, Korea and Tai- wan, China, were heavily dependent on food aid from the United States. The story of early East Asian success is much less one of favorable initial conditions than of countries turning adverSity into opportunities. Only one resource was common to all four: an adaptable and disci- plined labor force. From around 1960, the principal distinction between these four NIEs and most low-income countries lay in human resource development. In secondary education, for example, the East Asian econ- omies (except Indonesia and Thailand, but including the Philippines) exceeded the average of other developing countries by many multiples. They combined this high level of education with imported technology and the return of expatriates to produce rapid productivity growth. 5 Korea, Singapore, and Taiwan, China, produced spectacular gains in tertiary education in one generation. 6 A second initial factor was that national vulnerability created the neces- sity of economic success. Korea was a divided country competing in a cold-war environment with a more industrialized neighbor; Taiwan, China, also felt compelled to assert its economic independence; Singapore was a city-state thrust into a competitive environment and attempting to reach nationhood; and Hong Kong was a market outpost for China. This political imperative, combined with the work discipline of societies in Korea, Singapore, and Taiwan, China, seems to have turned weak initial conditions into advantages to an extent seldom seen elsewhere. A third initial condition was the relative equality of income in the first- generation NIEs. This factor was more of a change brought about by pol- icy than an inheritance. Most other low- and middle-income countries were not able to achieve similar equality of income or assets. Large land reform schemes in both Korea and Taiwan, China, did away with the landholding classes and made wage income the main source of advance- 90 I A Vision for Development ment. Public housing investments in Singapore and Hong Kong were early priorities of governments bent on maintaining a national consen- sus on development policies. Fourth, governments embraced export development. This was not dic- tated by ideology but by realism. Small size and low incomes dictated that external markets would provide the major source of revenue for these economies. Singapore's leaders are fond of noting that their econ- omy was too small to change international markets, so they decided to change their own economy. Finally, export drives required domestic entrepreneurship. In Singapore publicly owned corporations, behaving commercially, took the lead. In Korea the government had to foster the creation of firms, encourag- ing their growth and laying the foundation for the modem day chaebol, or conglomerate. Using the Japanese model of zaibatsu and the general trading company, the Korean government was able to compensate for the apparent lack of entrepreneurship. East Asian economies have done exceedingly well in monitoring each other's success and, when neces- sary, in borrowing one another's institutions. External Circumstances The original "East Asian miracle" was post-World War II Japan, which shared some similar conditions with the early NIEs, Korea and Taiwan, China. With little in the way of physical assets, all three began with the desire to accumulate capital in their first decade of development. Korea and Taiwan, China, were critically dependent on large quantities of foreign aid early on; it accounted for as much as 50 percent of fixed investment in some of the early years. For Korea over a period of three decades (1946-76), the United States alone provided more than $500 (in current U.S. dollars) per capita in economic and military assistance. For Taiwan, China, aid was $425 per capita. Once the growth engine was sparked, however, high domestic savings rates took over and main- tained the process of accumulation. Export development in the early NIEs was helped by the expanding U.S. market of the 1960s and 1970s, and the model was Japan. This was The Lessons of East Asia: An Overview of Country Experience I 91 particularly true of Korea, which was most inclined to compete directly in large industries such as steel, shipbuilding, and automobiles. Taiwan, China, relied more on a range of smaller firms in most sectors,7 while Hong Kong and Singapore were entrepot exporters. Within two decades the "tigers" were firmly established, to the envy of other economies. The outstanding performance of East Asia was not the result of favorable external conditions. Most other regions faced similar exter- nal conditions. But the East Asians committed themselves, almost from the outset, to become players on the global scene. With rather similar endowments, Korea and Taiwan, China, followed the Japanese lead, attempting to acquire state-of-the-art technology and inputs. Much of Korea's imitative strategy was a reaction to Japanese dominance and a desire for economic independence. Its work ethic, as seen in its 55-hour average work week, was motivated by a national drive to succeed. The success of the second-generation NIEs in the 1980s cannot be attributed primarily to favorable external conditions, either. Indonesia, MalaYSia, and Thailand were resource rich, but they did not excel until manufactured exports were developed. It is important to note that these second-generation NIEs laid the foundation for their surge with stable macroeconomic policies and political stability. These factors, plus low labor costs, appealed to foreign investors-those facing higher costs at home, such as Japan in the first instance, but later including Korea and Taiwan, China. Japanese-led foreign investment followed American and regional Chinese capital in the southern tier, providing the transfer of technology that the first -generation NIEs struggled to acquire. This allowed the Asian "cubs" to penetrate the u.s. market, especially during the 1980s. Coupled with aggressive exchange rate poliCies following the Plaza Accord in 1985, they acquired a strong position as exporters. Malaysia and Thailand emerged among the fastest growing economies in the world in the second half of the 1980s. There are exceptions to this growth. The Philippines failed to respond to the challenge, despite its rich endowment of human capital and its access to foreign aid and credit. Commentators point to the deeply rooted structure of oligopoly and the sizable inequalities in income and wealth in the Philippines as causes for the relatively poor performance. 92 I A Vision for Development These factors, combined with a relatively weak bureaucracy, it is argued, allowed the elite to engage in rent-seeking activities at the expense of development objectives. The Philippines stands out as a country that did not achieve an export vision. Mongolia, Myanmar, Vietnam, the Demo- cratic People's Republic of Korea, and Lao People's Democratic Republic for various reasons did not do well. Elsewhere, however, there was an outbreak of "regional contagion," a factor that was undoubtedly important for the region's success. Foreign direct investment (FDl) inspired the transfer of financing and know- how in the later NIEs. In 1991 Malaysia, Thailand, Indonesia, and the Republic of Korea were the third, fifth, seventh, and eighth largest reCip- ients respectively of FDI among developing countries, after Mexico and China. Together, they accounted for almost a quarter of total flows to developing countries; adding China raises the proportion to more than a third. In Malaysia FDI accounts for 20 percent of gross domestic invest- ment The figure is not much lower in the southern Chinese provinces, where the world's fastest growth is being recorded in the 1990s. Macroeconomic Policies Perhaps the factor most consistently present in the successful East Asian economies was a sound macroeconomic policy framework. This was characterized by fiscal discipline, adequate incentives for saving and investment, and an outward-oriented trade policy. Originally imposed by bilateral donors as a condition for continued assistance of the early NIEs, these policies were qUickly internalized and became tenets of development policy. fiscal Discipline One of the striking lessons from East Asia 1S the consistent presence of macroeconomic stability.8 East Asia's governments exercised macroeco- nomic diSCipline, ensuring that fiscal and external deficits were generally kept in control. Prudent foreign borrowing helped East Asians avoid debt crises, which had set back progress elsewhere in the developing world in the 1980s. Macroeconomic stability gave predictable and cred- The Lessons of East Asia: An Overview of Country Experience I 93 ible signals to savers and investors about prices and returns, which in turn encouraged risk taking, investments, and growth. Over the past quarter century the fiscal deficit and the current account deficit in developing East Asia were less than half the average for other developing countries, and high-income East Asia had surpluses. Exchange rates for East Asian developing economies were seldom over- valued in contrast to the situation in other developing countries. Interest rates were generally positive in real terms, while in the rest of the devel- oping world they tended to be negative. By and large, East Asia managed to keep inflation in single digits. From time to time macroeconomic difficulties did occur, but they were swiftly contained to ensure that deficits never got seriously out of control. For example, Korea's inflation rate hovered around 20 percent in the late 1970s as a result of the Central Bank's financing of heavy and chemical industries and the government's purchase of food grains. But stability was restored as civil service salaries were contained, rice pur- chase prices restrained, and state spending eventually frozen (in 1983). Indonesia's public sector deficit exceeded 4 percent of gross domestic product (GDP) in 1986 as oil prices declined and terms of trade dete- riorated. But the government made sharp budget cuts in 1987-88, and by 1989 the deficit was down to 1.3 percent of GDP. Malaysia's fiscal deficit approached 20 percent of GDP during 1981-82 as expenditures outstripped revenues, which were hurt by terms of trade shocks. The government quickly squeezed spending, bringing the deficit down to about 10 percent of GDP in 1984 and 5 percent in 1987, while at the same time using domestic, noninflationary sources of financing. The contribution of macroeconomic stability to growth came not only from low and stable deficits, but also from the composition and quality of public finances. Public investment as a proportion of GDP in East Asia was similar to that in other developing countries, although it was higher in MalaYSia, Singapore, and Taiwan, China. But public consumption was lower than average. The share of wages and salaries in government expenditure has varied considerably, ranging from 15 percent in Korea over the past two decades to 30 percent in Malaysia. During periods of general restraint the East Asian economies managed to protect crucial 94 I A Vision for Development investments, as shown, for example, by the continuous reviews of public expenditure in Indonesia and Korea. Macroeconomic stability has been supported at times by law, which serves also to underscore the governments' commitment to providing a secure and predictable commercial environment. Indonesia and Thai- land have balanced-budget laws. In Taiwan, China, before 1987, a law limited the value of outstanding government bonds to no more than 40 percent of the central government's annual budget. Stability in Indone- sia has been aided by an open capital account, which, combined with the desire to avoid inflation, served as a check on monetary expansion. Finally, the personal distaste for high inflation on the part of political leaders-for example, in Korea, Malaysia, and Singapore-kept macro- economic stability high on the policy agenda. Underlying this macroeconomic record has been a high degree of pragmatism and flexibility, in the sense that governments had few ideo- logical objections to needed policy corrections. Indonesia and Thailand engineered major depreciations of their exchange rates in the mid-1980s. Korea and MalaYSia reversed their costly targeting of heavy industries when they proved to be a fiscal drain and threatened growth. Investments: More and Better Investment (as a share of GDP) in East Asia has risen sharply over the past quarter of a century, increasing from figures somewhat higher than in other developing regions to some 50 percent higher. The share of private invest- ment in GDP rose to be two-thirds higher in the successful East Asian econ- omy than in other developing regions. Private investment was encouraged by a generally supportive macroeconomic environment and by forward- looking public sector infrastructure investments. The lack of high tariffs on imported capital goods was also helpful in raising private investment. Public investment shares, on average, have been similar in East Asia to those in other regions. Although cross-country comparisons may well underestimate total "public" investment in those NIEs where public or quaSi-public entities played dominant roles, it is more the effiCiency of public investment than its size that distinguishes its performance from The Lessons of East Asia: An Overview of Country Experience I 95 that in other developing countries. East Asia's total factor productivity growth (TFPG) was three to six times (depending on the measure) greater than the developing country average. This efficiency would seem to be largely a result of the region's policy and institutional frameworks. The rate of return on World Bank projects was higher in East Asia than else- where. In the period 1974-92, the average rate ofreturn was 18 percent in East Asia, but about 16 percent in the rest of the developing world. Analysis of national rates of return on investment does show that those who have industrialized rapidly are more efficient users of capitaI.9 The question is whether this is the result of better project selection, swifter implementation, or better capture of externalities. Evidence tends to indicate that all three factors were at work. NIEs are, of course, often caught in a virtuous cycle with respect to project selection, particularly as far as scale is concerned. Rapid growth tends to validate after the fact somewhat risky initial investments. Cases in point are the Seoul-Pusan highway in Korea and the scale of production of China Steel in Taiwan, China. Implementation records can be inferred from the experience of World Bank projects: East Asia's success in implementation has been superior. Most interesting is the conclusion that the use of five-year plans and of coordination mechanisms to convey information between the government and the private sector has enhanced the level and qual- ity of private investments, particularly in the early NIEs. 10 Much of the gain associated with capital accumulation depends on the productivity of labor. To begin with, the educational status of the population was, in general, higher in East Asia in the 1960s than in other developing regions. Educational investments thereafter were also higher, leading to universal primary education and widely available secondary education. As fertility rates fell in the 1970s, education expenditures per child increased. Various indicators suggest that the quality of education is also high in the region compared with elsewhere. An indication of the desire to increase human capital is the high proportion of investments in education made by private households; in Korea an equal share of GDP was spent by the private and public sectors. High-quality labor, as seen in Korea and Singapore, for example, has aided industrial flexibility, increased economic efficiency, and produced greater equity. 96 I A Vision for Development East Asia's investment performance has been aided by rapidly increas- ing savings (as a share of GDP) as well as by external capital flows. Domestic resource mobilization is a regional strength, fostered by high private savings, as well as fiscal prudence that generated increasing pub- lic savings. Savings shares are now more than SO percent higher on aver- age than in other developing countries. Although savings propensities may be dominated by income gains, demographies, and the like, East Asian experience points to low inflation and generally higher real inter- est rates than elsewhere. This alone does not explain the region's pro- digious savings, however. There seems to be a natural drive to save, as seen in curb-market savings and cooperative savings clubs, which were prominent in the first-generation NIEs. Governments helped transform these informal savings into formal savings by fostering savings institu- tions such as postal savings accounts and generally excluding savings from taxation. Mandatory savings schemes were also favored by some. Given the high rates of return on invested capital, encouraging savings in East Asia has not been a problem and has led to a virtuous savings- income cycle. Outward Orientation and an Export Push East Asia's success in international trade and investment is well docu- mented. 1l The region's developing economies expanded their exports more than twice as fast as the average for other developing countries, tripling the share of exports in GDP over the past quarter of a century. Their share of foreign direct investment in developing countries rose from about 16 percent in 1970 to more than 33 percent in 1990. The flow of trade and investments was crucial to the transfer of technol- ogy and the gains in efficiency and productivity. Thus, exports fueled growth to an extraordinary degree. 12 That much may be beyond dispute; the nature of the underlying poli- cies is not. The question remains, how much free trade and how much intervention took place in East Asia? This raises the important distinc- tion between free trade and neutrality of incentives. Depending on its nature, an intervention can have different effects on incentives; some- times it is market distorting, sometimes not. The Lessons of East Asia: An Overview of Country Experience I 97 Recent evidence on the relative prices for exports, imports, and domestic goods suggest a remarkable degree of neutrality in East Asia. In other words, local prices of traded goods, on average, departed much less from world prices than in other developing regions, even though there were substantial variations for some individual items and for some countries in East Asia. Prices of traded goods for the East Asian econo- mies were generally closer to world prices than elsewhere. 13 Nevertheless, outward orientation should not be equated with import openness. Especially in the 1960s and 1970s, several economies exhib- ited moderate import protection. While such protection in East Asia was usually offset by export incentives, as late as the mid-1980s the effec- tive protection rate for manufacturing was nearly 30 percent in Korea, 50 percent in Thailand, and 70 percent in Indonesia. By the end of the decade, however, these rates had declined substantially, to the benefit of exports and the economy. One key difference in the earlier (1960-80) period was that in East Asia economic policies ensured that import protection did not pro- duce the anti-export bias that it did elsewhere. This distinction can be traced to the region's general unwillingness to allow the exchange rate to become overvalued and to the fact that exporters were given access to offsetting incentives (for instance, duty exemption, free access to for- eign exchange, and free trade zones) which favored exports. There was also effective institutional support for exports (espeCially in Korea, Sin- gapore, and Taiwan, China) as well as considerable labor market flex- ibility. The effects of successful government support are typified by the assistance that led Malaysia to start growing palm oil-it became the world's largest producer, with half the acreage under public control- and the Pohang Steel Complex in Korea, which became a global leader, again in public hands. A favorable domestic climate for FDI was another key difference. For- eign capital was welcomed, whether in the form of wholly owned subsid- iaries of multinationals, joint ventures, or licensers. Malaysia and Thailand achieved dramatic shifts in favor of FDI in the 1980s; today China is doing the same, with similarly impressive results. Malaysia again illustrates the point about government support: many multinationals in electronics 98 I A Vision for Development invested in the country in response to active government encouragement. Today Malaysia is the developing world's largest exporter of semiconduc- tors, and the third-largest producer after Japan and the United States. Selective Industrial Policy The term industrial policy has many meanings. In the East Asian con- text, it has been used synonymously with deliberate attempts the change a country's industrial structure, usually to encourage the growth of capital-intensive industries. The debate about industrial policy is rich. Initially neoclassical economists were pitted against a small group of interventionists. With the success of East Asian economies, however, industrial policy is no longer a dirty phrase to most economists. Indeed, numerous elegant reasons have been advanced in support of market intervention, ranging from classic externalities to information gaps14 and strategic trade advantages.]5 The debate has turned to the role of government in guiding markets J6 or deliberately underpricing capital to achieve rapid industrialization. 17 These discussions cannot be divorced from the more general role of government in coordinating investment decisions and supporting infant industries with the ultimate aim of pen- etrating world markets. The most forceful examples of selective indus- trial policy are Japan and Korea. These examples are very important, but they tell only a partial story of East Asia's success. A great deal more can be learned from individual country assessments. IS The Korea Story Korea pursued an industrial policy-that is, the comprehensive use of public instruments to industrialize-at least from the start of the Third Republic under President Park Clung Hee. However, during the 1961- 71 period this policy was sectorally neutral. Manufactured exports were promoted through a familiar range of poliCIes, but the government was satisfied to capitalize on Korea's comparative advantage in labor-inten- sive manufactures. Beginning in 1971, however, the government began a coordinated campaign, known as the Heavy and Chemical Industry (HC!) drive, to build up six deSignated industries. It increased protec- The Lessons of East Asia: An Overview of Country Experience I 99 tion and provided many incentives to certain firms whose actions were carefully controlled. 19 The most important measure was heavily subsidized credit. What dis- tinguished this industrial intervention was not only its thoroughness but also its premise that firms in steel, shipbuilding, machinery, electronics, petrochemicals, and metals would achieve internationally competitive levels within a decade. In this respect, Korean intervention differed from the policy pronouncements in Brazil or India and many other import- substituting countries. Success was measured by export performance, and eventually all subsidies were expected to be withdrawn. The nature of the policy is clear, although it has at various times been judged both a failure and a success. For our purposes, it is enough to say that Korea did alter its industrial structure dramatically, and in most of the targeted industries it succeeded in penetrating international markets. The issue, however, is not whether technical efficiency was achieved, but whether it was achieved profitably. The country study concludes that the pol- icy was, on balance, successful but that its long-term costs are usually understated. Specifically, the socialized nature of risk bearing and the tight controls on the financial system in Korea led to many publicly managed bailouts of industry. Today the financial sector is still not free of the shackles of directed credits or their costs, as borne by commercial banks, government banks, and the central bank itself20 Faced with considerable macroeconomic difficulty in the period 1979-80, largely as a result of the second oil shock, Korea abandoned the HCI drive. Over the next decade the government stopped trying to pick winners; it liberalized trade; and it loosened its grip on the financial sector. Some Korean economists argue that Taiwan, China, outperformed Korea without undertaking the costly HCI driveY Oth- ers say that the interventions were largely successful in accelerating the process of dynamic comparative advantage and that were it not for the oil shock, the period would have been an unqualified success. This evidence is reviewed in the Korean case study. No other rapid industrializer intervened quite so heavily, although the new literature on Taiwan, China, shows an effort to direct the industrial efforts of entrepreneurs. 22 100 I A Vision for Development The Singapore Story The government of Singapore had few qualms about intervening to supplement market forces and bring about desired industrial change. Clearly the size and malleability of the economy made control easier, but Singapore also developed institutions that made it possible. Singapore has been aptly described as a corporate state because the distinction between government and business-indeed between the political lead- ership and the bureaucracy-is murky. The first key to Singapore's industrial strategy was an accurate assess- ment of the country's national resources, followed by clear industrial goals and an understanding of the relationships and ingredients needed to achieve them. Without capital, technology, or entrepreneurs, Singa- pore put its industrialization squarely on the shoulders of multinational corporations (MNCs) and foreign direct investment. To attract FDl, it invested heavily in education and technical skills and in the infrastruc- ture that MNCs value. Where necessary, it used government-linked companies (GLCs) to push its development agenda, although these GLCS were run on a commercial basis. Recognizing that their city-state, with its limited physical resources, would have to depend on re-exports, Singapore's first generation of lead- ers built their industrial strategy around labor policy. Singapore's First Five Year Plan stressed technical education, school building, and fam- ily planning. The political agenda included the 1967 Employment Act, which established national employment regulations and clearly delineated worker benefits to attract foreign investors, and the 1968 Industrial Rela- tions Act, which pioneered three-year collective bargaining agreements. The National Wage Council was a tripartite forum (business-government- labor) established in 1972 to make wage recommendations on the basis of productivity gains and the cost of living. As in Korea, wages were a policy tool used to ensure competitiveness. Balancing these labor market interventions were social poliCies (such as hOUSing) to improve living standards and a major public role in education and training. In addition to encouraging foreign investors, the government decided in the late I970s to promote higher technology and higher-value-added The Lessons of East Asia: An Overview of Country Experience I 101 industries. It instituted a high-wage policy in an attempt to move qUickly out of traditional labor-intensive manufactures. Although this policy did stimulate investment in electronics, machinery, pharmaceuticals, and precision products, by 1985 Singapore experienced its first severe recession. Rather than nominally devalue the currency, the government opted to decrease labor costs through a large reduction in employer contributions to the Central Provident Fund. The implicit 12 percent wage cut was possible because the union movement was allied with the government and the political leadership. In effect, the government tried to position its labor force to be attractive to multinationals, adjusting its price, augmenting its skills, and tinkering with financial incentives to change its trade pattern and stay ahead of its competitors in East Asia. The Indonesia Story In much the same way that Korea pursued its capital-intensive HCI drive in the 1970s, Indonesia tried to create its own dynamic comparative advantage in the early 1980s. Under a blueprint known as the Investment Policy List, industrial entry was directly controlled, capacity limits were set, local content requirements were enforced, and foreign investment was discouraged. Behind high trade barriers, local industry, mostly in the form of state-owned companies, attempted to move into "upstream activities," to produce more "value added," and to protect itself against the terms of trade losses it suffered in the post-oil-boom years. This foray into steel, plastics, and petrochemicals, helped by subsidized credits and trade protection, was a failure. The Indonesian experience suggests that capital-intensive industrial transformation cannot easily be imposed. Indeed, it is not even neces- sary for late industrializers. Between 1985 and 1988 the government changed course. It reduced its share in the industrial sector from 43 to 23 percent (1989). Industrial concentration (measured as the share of output from the four largest producers) fell from 54 percent, on average, to 32 percent. Trade was dramatically liberalized and foreign investment actively encouraged. The results were remarkable: despite a cumulative terms of trade drop of more than 40 percent between 1986 and 1988, the productivity ofland, labor, and capital grew strongly in 1988-91, 102 I A Vision for Development GDP grew at an average 7.1 a year, and non-oil exports boomed. Indo- nesia, impoverished in the 1960s, an oil economy in the 1970s, and an inefficient spender in the early 1980s, has now become another East Asian dynamo. It has done so through traditional outward-oriented policies and an abandonment of selective industrial policies. The Malaysia Story Over the term of its Fourth Five Year Plan (1981-85), Malaysia pursued import substitution with renewed vigor. Its models were Japan and Korea (hence the "Look East Policy," a tern coined in 1981) and the decision to bring in Korean advisors to help pick and produce industrial winners. The government created a holding company, the Heavy Industries Corporation of Malaysia (HICOM), which was charged with creating a nucleus of criti- cal industries, including basic metals, machinery and equipment, automo- biles, building materials, pulp and paper, and petrochemicals. The public sector's investment in HI CO M from 1981 to 1986 was intended to reach 6 billion to 8 billion ringgits, equal to the national development budget. The symbol of this selective industrial policy was the Proton Saga, a car whose production was heavily subsidized by both the Malaysian govern- ment and its Japanese partner, Mitsubishi. Unlike Korea's HCl push, which was aimed at achieving international competitiveness, HlCOM industries, although monitored by the government, were under no such compulsion. They lost money, suffered from poor management and excess capacity, and required government bailout. Between 1981 and 1985 the number of non- financial public enterprises rose from 498 to 702, while the percentage that was profitable fell from 62 to 55 percent. Faced with mounting deficits, the government changed policy and began a major program of privatization. The lessons can be summarized as follows. First, industrial policy was aimed at internal industrial objectives, such as changes in ownership and employment patterns, rather than at the achievement of international levels of effiCiency or export targets. For this reason, in part, the system of rewards and penalties could not be ruthlessly applied. Second, clear overall goals were not established whereby infant industries would be judged. Third, insuffi- cient domestic competition was fostered to create incentives to perform, and systems for monitoring state-owned enterprises were inadequate. Fourth, the The Lessons of East Asia: An Overview of Country Experience 1103 selection of industries was based too heavily on traditional import-substitu- tion criteria and insufficiently on global marketing concerns. The Taiwan, China, Story A glance at the history of Taiwan, China, could suggest that the coun- try's initial conditions-the econometric infrastructure from Japanese colonialism, entrepreneurial talent from mainland China, and u.s. aid-were unique. But its rapid industrialization owed much more to domestic policies. 23 In addition to the early success of land reform in bringing about remarkable equity of income and wealth, policies for macroeconomic stability, domestic investments, and industrial develop- ment were highly effective. After the import substitution phase of 1953-57, the government pro- moted exports during the period 1958-72. It gradually reduced import protection and offset anti-export bias by providing free trade status and other incentives for exporters. It also set export targets and sup- ported the development oflabor-intensive industries. Economic growth between 1963 and 1972 averaged nearly 12 percent a year. For various economic and political reasons, the 1970s saw the emer- gence of a more self-reliant strategy with large investments in infra- structure, industrial upgrading, and further import substitution. Public enterprises were used as a means of industrial policy, especially for a big push in heavy and chemical industries. Some of these state enterprises- for example, China Steel Corporation-performed remarkably well by any standard, but many were outright failures. Economic performance, although robust overall, revealed strains, especially in competitiveness. In the 1980s, the policy switched to place a greater emphasis on liberal- ization and export development. The results were striking. The economy generated massive payment surpluses and the means to invest elsewhere in the region on a scale rivaling that ofjapan. The Thailand Story Thailand has had fairly consistent and rapid growth since 1955. It has emphasized private sector development, outward orientation, and macro- 104 I A Vision for Development economic stability. In the 1960s and the 1970s the government made var- ious efforts to protect and promote domestic industry, but compared with the efforts of Korea or Taiwan, China, they were not highly coordinated. The general thrust of policy since then has been to allow free markets rather than to intervene in them. A half-hearted attempt at capital-inten- sive industrial promotion was pursued in the Eastern Seaboard project, but in the end its more costly and inefficient elements were abandoned. Within this overall picture, import-substitution poliCies in. the 1970s favored capital-intensive industries. Industry's share of GDP rose sub- stantially in the 1970s, while its share of the labor force showed little increase. Balance of payments problems and concern with the pattern of industrialization prompted a shift in the early 1980s to export develop- ment and import liberalization. Effective protection for manufacturing was reduced by the mid-1980s, although it was much higher than in Korea and Malaysia. Any anti-export bias, however, was vigorously offset by exchange rate policy, export incentives, and the promotion of FDI by the Board of Investments. On balance, sectoral interventions had only mild effects on overall performance. The government's interventions were poorly coordinated, the private sector was robust, and Japanese investment was heavy. As a result, Thailand avoided costly industrial adventures, while maintaining basic macroeconomic stability. It could of course be argued that more effective intervention could have raised growth rates further, but that presumes a state apparatus which Thailand did not possess. The Hong Kong Story Hong Kong embarked on its export drive in the early I950s, a decade before the other early NIEs. It has always been different from the other three, particularly in the small and noninterventionist role of its govern- ment. For most of the past forty years, Hong Kong's economic growth and productivity growth were the highest in the region. Industrialization was initiated by migrant industrialists, largely from Shanghai, but was fostered by local merchant entrepreneurs. Small enterprises flourished, supported by a government dedicated to stability and "positive non- intervention. " The Lessons of East Asia: An Overview of Country Experience I 105 Hong Kong's continued prosperity in the past dozen years has been built on the links with southern mainland China-and vice versa. Dur- ing this period China doubled its average income faster than any other country on record. The growth of Guangdong province, which is adja- cent to Hong Kong and where millions of migrant workers from other provinces come to work, has been phenomenal. Today the province aspires to be the fifth "tiger," and it has achieved this through free mar- ket policies rather than state intervention. The Diversity in Industrial Policy East Asia's industrial policies showed great diversity. Not all govern- ments intervened heavily, and not all interventions were successful. In the first-generation NIEs, the record points to the potential rewards of socializing risk under an industrial policy. But the risks of such an approach are equally important, as illustrated by the failures of such a policy approach in Malaysia and Indonesia. The success of Thailand, Hong Kong, and recently the coastal provinces of China show the mer- its of avoiding unbridled industrial activism. Countries entertaining an activist industrial policy need to weigh both the risks and the potential gains of this gamble. Where there were successes, they were based on export development. Governments did not merely provide protection for a local industry (as was the case in many countries outside the region), but proVided sup- port of many kinds to help industry achieve export competitiveness. Crucial elements were that (a) government guided, but did not override the decisions of firms; (b) international price signals were used to gauge efficiency and success; and (c) firms were offered support in exchange for specific performance requirements. More generally, the conditions needed for selective industrial policy to work are not usually present. In addition to the capacity to select potential winners linked to exports, a successful policy depends, first, on the ability of society to place efficiency and public interest above rent seeking and, second, on pragmatic and flexible policymaking, including the ability to reverse failed policies. 106 I A Vision for Development If these preconditions can be found, it can be argued that they offer the potential for effective government action short of concerted industrial intervention. Some of the earlier intervention policies are in any event probably not replicable today, given a less receptive trading environment for export subsidies, more open capital markets, and freer labor markets. Instead, the augmented view of public policy that we advocate emphasizes government's role in supporting invest- ments, particularly in infrastructure and labor skills, international marketing, and technology acquisition. What has separated success- ful industrializers from unsuccessful ones has been whether or not international efficiency was achieved. This yardstick can be either imposed by government as a qUid pro quo for time-bound public support or implicitly supplied by foreign investors. Evidence of the 1980s from China, Indonesia, Malaysia, and Thailand tends to show that the second-generation NIEs have relied on foreign investment to provide this discipline. Policymaking Common to successful government interventions was the pragma- tism and flexibility to change course as needed. What characteristic of policymaking can be associated with such a pattern? In East Asia it seems that governments are repeatedly able to distance themselves from past policies that have failed or are no longer useful. This flexibil- ity should not be mistaken for good luck. More often it was associated with problems or crises that led to change, as indicated by the follow- ing examples. In Korea the end of the heavy-handed HCI interventions, under which the bulk of industrial credit was absorbed by large capital-intensive indus- tries, was prompted by the second oil shock. 24 When, in 1980, the economy went into recession, the government opted for macroeconomic stabiliza- tion, and the fiscal drain ofHCI was no longer affordable. Trade liberaliza- tion was begun in earnest. Credit allocation once more favored exporters, commercial banks were privatized, and troubled HCI industries were put under new management. In the following years, incentives to encourage The Lessons of East Asia: An Overview of Country Experience I 107 R&D and technological upgrading were put in place, and interventions concentrated on strategic bailouts rather than on picking winners 25 In 1967 Indonesia was not only poor (with a per capita income of $50 and with 60 percent of its population living in absolute poverty), it was also indistinguishable from many other inward-oriented develop- ing countries that were awash with licensing restrictions and protection. Hyperinflation produced the 1967 Balanced Budget Amendment and a new dedication to controlling inflation. But despite significant macro- economic reforms during the 1967-73 period, after the first oil boom the country's inward orientation was encouraged by heavy-handed selective intervention. By 1985 about 28 percent of import categories required licenses, there was a large current account deficit, and the debt service ratio was 40 percent. Faced with a deteriorating macroeconomic situation, the government changed course, with a major devaluation and sharp macroeconomic adjustments. It gradually liberalized trade so that the effective rate of protection on capital goods industries fell by 50 percent between 1987 and 1990. Countries with oil resources, such as Indonesia and Malaysia, at first reacted to their surpluses predictably, by spending more. However, within five years of the second oil shock both had cut their fiscal deficits and adjusted their exchange rates in order to compete in the region's increasingly tough manufacturing arena. Macroeconomnic policies, far from flawless, were subject to scrutiny and revision. And industrial poli- cies, if they conflicted with prudent macroeconomic policy, were also adjusted or abandoned. A striking example of policy change is the increasing role of market economics in the southern provinces of China. These "experiments" have been largely successful-in fact, the volume of trade between Guangdong and Hong Kong is now almost the size of the Hong Kong's GDP. The suc- cess of China's SpeCial Economic Zones (SEZs) in Guangdong and Fujian is attributable to the ease with which capital and technology are admitted, the flexibility of wages, the freedom to import materials and remit foreign exchange, and the shift in the state's role toward emphaSiS on the provi- sion of infrastructure in the SEZs to attract foreign investment. 26 108 I A Vision for Development Bureaucracy In most East Asian countries, selection for the bureaucracy is an honor, and government has been able to pick its officials from prestigious uni- versities. In Korea graduates of Seoul National University fed the bureau- cracy, with the best of them going to the core economic ministries. A Confucian level of status ordinarily reserved for scholars also placed bureaucrats in a preferred position27 Overseas training often furthered the career prospects of government officials, and ministers frequently vied for the best-trained technocrats. Central banks also managed to attract highly skilled staff, as did research institutes, which (particu- larly in Korea) were strongly affiliated with government. Fellows of the prestigious Korea Development Institute were more highly paid than ministers, and generous financial incentives were offered to returning foreign-trained experts by the research ann of the Ministry of Science and Technology. Indeed the "reverse brain-drain" was a major factor in upgrading the skills of the Korean bureaucracy. One of the roles of research institutes has been to digest experience from foreign sources. Copying the successful actions of others is con- sidered part of prudent policy. This search for policy lessons and advice extends to international organizations, such as the World Bank, whose advice is sought, if not always followed. Although both the Bank and Korean authorities enjoy noting that the Bank opposed expansion of the automobile industry in the mid-1970s, it is more telling that the Bank's work on trade liberalization and energy pricing actively supported gov- ernment reforms. East Asia's bureaucracies emphasized managerial organization and functional responsibilities. Governments centered their efforts on core economic ministries, which formulated and coordinated economic pol- icy. A pioneer was Korea's Economic Planning Board, but similar core ministries exist throughout Asia. How did these technocrats in East Asia succeed where other well-trained bureaucrats failed? Country experi- ences provide some important clues. Organizationally, economic teams in Indonesia and Korea were coordinated and led by a single, clearly identified "economic czar"-a The Lessons of East Asia: An Overview of Country Experience I 109 coordinating minister for economic, industrial, and financial affairs in Indonesia, and the deputy prime minister and minister of the Economic Planning Board (EPB) in Korea. In Korea the EPB has traditionally con- tained both the planning apparatus responsible for successive five-year plans and the budget function that finances those plans. Coordination of economic policy was equally strong, if not quite so ministerially prom- inent, in Malaysia. There the Economic Planning Unit (EPU) reports directly to the prime minister, which is also the case with Singapore's Economic Development Board (EDB). Thailand's National Economic and Social Development Board (NESDB) performed a similar coordi- nating task in forging a consensus on development goals. Nevertheless, there is variation in the roles of economic ministries. Malaysia's EPU is unusual for both its small size and its clear mandate to serve the prime minister, and Thailand's NESDB is distinguished by the unique way it achieves consensus. In both countries one may argue that the central bank's role was critical, and that the strong voice of finance ministries on macroeconomic management usually dominated economic policymaking. In Thailand the action of the technocrats in devaluing the baht in 1984 is seen by many as the critical action that restored the cred- ibility of macroeconomic management and laid the basis for Thailand's financial and industrial surge later in the decade. In Malaysia the voices of prudence in the Ministry of Finance and Bank Negara kept inflation low for decades, despite variation in industrial policies. Among planning ministries, those in Korea and Singapore stand out, in part for their ability to implement decisions. The quality of imple- mentation depends on a clear identification by government officials with the goals being pursued. In Korea monitoring of key economic variables (notably exports) was an obsession, and it permeated the bureaucracy. The extra export effort of the "final 100 days" of each year was legendary. Plan targets, although in some sense indicative in market economies, were usually exceeded, and public officials were held accountable for their achievement. Performance evaluation and monitoring systems have become models for the management of public enterprises as well. 28 Singapore's economic policy apparatus has been different but no less effective. The EDB, established in 1961, was able to coordinate policy, 110 I A Vision for Development offer incentives to foreign investors, acquire land, create industrial estates to attract multinational corporations, and take equity stakes in corpo- rations. Beginning with the First Five Year Plan, the EDB was charged with ending bottlenecks, creating new programs, and spearheading Sin- gapore's development drive. In the process, it created the Jurong indus- trial estate, began a joint-venture shipyard project with Japan, offered incentives to investors under the 1961 Pioneer Industries Ordinance (which deferred 90 percent of the corporate profits tax for a period of fifteen years for export industries), and promoted exports via the Economic Incentives Bill of 1967. As its economic objectives matured, Singapore played a prominent role in establishing aJoint Industry Train- ing Scheme with the participation of foreign companies and in attracting foreign investors to Singapore. The role of technocrats in Indonesia is not dissimilar to that in Korea and Singapore. Indonesia's leadership delegated economic policy to a group of senior officials. This alliance has served both parties well, as it combined pragmatic leadership with capable implementation. In Korea President Park qUickly formed an alliance with the technocrats he needed to implement his vision of Korean development, relying on engineers to design his industrialization strategy and on economists to secure financing. In Singapore the distinction between political affilia- tion and technocratic position has often been blurred; the goals of the People's Action Party and the national economic goals were the same. Leadership The East Asian state has a record of maintaining political and economic stability and of pursuing long-term development goals. The first-gener- ation NIEs qUickly developed enough consensus on development goals and a suffiCiently broad distribution of benefits to push the economic agenda forward. How was this accomplished? While we do not have the analytic tools to answer this question definitively, country experiences provide useful inSights. In Korea and Taiwan, China, land was a scarce asset, and both regimes were prescient in redistributing land to small farmers. These rural constit- The Lessons of East Asia: An Overview of Country Experience I 111 uencies are still conservative and pro-government today. By contrast, land reform has eluded countries such as the Philippines, and the uneven distri- bution of income has perpetuated poverty and alienation. Korea managed, over the 1965-85 period, to maintain reasonable equality between urban and rural incomes. SpeCial rural development programs (such as the Sae- maul movement), agricultural price supports, and a relatively large rural investment program were prominent features of Korean development. In Singapore early support and trust were built on the hOUSing policies led by the Housing and Development Board. Through its efforts begun during the First Five Year Plan, public hOUSing construction was one of the plan's top priorities. As a result, owner-occupied housing rose from less than 10 percent of the population in 1970 to 80 percent in 1980. In these first-generation NIEs, the notion of shared sacrifice can be seen in anticonsumption campaigns, long hours for workers and man- agers, and the virtual absence of capital flight. The corollary of shared return is also seen in the dramatic increases in wages and in the unprec- edented gains in social indicators, to the point where absolute poverty has been virtually eliminated. The role of the state in the second-generation NIEs-Indonesia, Malaysia, and Thailand-is far less uniform. The clarity of equity objec- tives was perhaps most visible in Malaysia's New Economic Policy, a two-decade plan (1970-90) to reorder the distribution of income and wealth in favor of the Bumiptera (Malay) majority. This goal of raising the incomes of the Malay majority served to unite the Muslim popula- tion and may have been responsible for keeping interracial peace. The government's other emphasis, on education and agricultural advance, did yield high returns and can be credited with bringing the percentage of people in absolute poverty down to single digits. In Thailand there was initially no strong equitable-growth strategy in place. Indeed, there was no consensus for any particular set of development objectives. The country's success came later, largely as a result of prudent macroeconomic poliCies, the beneficent role of foreign investment, and the contagion factor. Observers credit the relatively conservative bureaucracy with steering a steady course amid political vacillation and upheavals and the monarchy with keeping social stability and a sense of nationhood. 29 112 I A Vision for Development Observers have also attributed some of East Asia's economic success to the concentration of political power in many of the countries in ques- tion. In Indonesia, Korea, Singapore, and Taiwan, China, to varying degrees, the state held enormous power, dissent was largely absent, and bureaucrats had a relatively free hand in pursuing reforms. The greater equality of income in these economies may also have aided reforms by limiting the differences among winners and losers, but the absence of outright opposition to poliCies decided at the top is said to have expe- dited economic reforms. In fact, Singapore's former President Lee Kwan Yew has questioned the compatibility of purely democratic models with rapid development. 30 Clearly, however, the equating of political control and economic success is far too simplistic and misleading. Authoritarianism has not been in short supply in the developing world; yet in most authoritarian regimes economic poliCies have been poor and results disastrous. The East Asian experience shows superior performance under a variety of dif- ferent political situations. Both authoritarian and participatory institu- tional mechanisms in East Asia managed to achieve features favorable to rapid growth-reducing uncertainty, improving economic incentives, limiting economic controls, providing adequate support services, and, often, providing a strategic vision. All this shows the merit not of political control but, rather, of the ability to use political and institutional fea- tures to achieve development objectives. The pragmatism of government meant-with the benefit of hindSight-that when it intervened to speed development, the probability of failure was much lower than elsewhere. Conclusions The evidence from East Asia contradicts forcefully the notion of any Single, decisive cause of economic success. Instead, it points to a combi- nation of tangible factors conSistently associated with progress. None of the East Asian economies succeeded unless it had three attributes: out- ward orientation, macroeconomic stability, and investment in people. These economies were not always blessed with this triad. They devel- oped institutions and policies that delivered it. The Lessons of East Asia: An Overview of Country Experience I 113 It is our view that any country which achieves successful perfor- mance in these policy inputs will be amply rewarded in income gains. But would that be enough to reproduce the remarkable growth of East Asia? The notion persists that similar actions on these three fronts will not produce similarly large payoffs in other country circumstances. Getting Higher Payoffs First, there is something to be learned from East Asia's style of poli- cymaking that translates policies on paper into practice. Many of the features associated with such effectiveness-consensus building, policy flexibility, and pragmatism-are replicable. Most clearly, countries need to develop a mandate for development and also to continually reassess their strategies. Mechanisms of formulating development plans in East Asia served to inform and coordinate the activities of economic agents; annual management plans served to monitor performance of the public and private sectors and to signal the need for policy revisions. East Asia managed to develop business-government relations that allowed such revisions to take place in a mutually beneficial manner. Second, East Asia is getting a greater payoff for its actions because of regional contagion. The proximity to other successful countries pro- vides a special advantage. In particular, Japan has played a strong lead- ership role in transferring technology and ideas around the region. At first glance, this advantage may not seem replicable, but that conclusion may well be wrong. With the revolution in communications, geographic proximity is less relevant, and other growth centers are likely to emerge. Increasingly, outward orientation and sound domestic poliCies enable a country to share technologies and ideas from around the world. Another advantage of regional contagion is that there are proximate comparators for economic performance, which is useful if public poliCies are openly scrutinized. Third, does a state need to go further than adopting the fundamentals of strong economic management? The country studies leave no doubt that government intervention in picking winners was prominent in some East Asian countries. The evidence also suggests that some others in the region did equally well without government direction, or because such 114 I A Vision for Development directions failed and were abandoned. In other regions where govern- ments have tried to pick winners, the failure rate has been even higher. 31 In the worldwide context, the issue boils down to probabilities: picking winners leads to high rewards in a small percentage of cases where the experiment is successful and to disastrous results in a large percentage of failures. Early versus Later NIEs As seen in the Development Checklist, political stability, efficient bureau- cracies, macroeconomic stability, export drive, and investment in human resources were common features across most successful East Asian econo- mies. But with the exception of Hong Kong, the first -generation NIEs had some systematic differences from the second-generation NIEs. In the first-generation NIEs the state generally had a more forceful role in industrialization. Starting with visionary leadership and sup- ported by strong economic ministries, governments "went for broke," acquired technology feverishly and invested heavily in upgrading labor skills. A few used directed credit as part of their strategy, relying on state enterprises when private firms were lacking. What lowered the risks of these policies was strong macroeconomic diScipline and the use of inter- national price signals as a gUide to performance. Macroeconomic disci- pline meant that countries abandoned imprudent policies when stability was at risk. The use of international prices helped them to measure the performance of infant industries. The second-generation NIEs differed considerably from the first in terms of initial conditions and, to some extent, political institutions. The availability of resources in Indonesia, Malaysia, and Thailand allowed a more relaxed pace of development. More reliant on foreign investment than on aid, the second-generation NIEs did not have to follow such an aggressive policy of acquiring technology. Where selective industrial policies were attempted, these policies largely failed. Yet regional con- tagion, low wages, and strong fundamentals fostered export industries. Liberalization and reforms removed the public sector from inefficient activities in Malaysia and Indonesia, and even in Thailand state enter- The Lessons of East Asia: An Overview of Country Experience I 115 prise reform is now a priority. Open capital accounts contrasted with the financial controls used in Japan and Korea in earlier decades. The Question of Replicability Much intellectual energy has been devoted to deciding the right degree of government involvement in industrial policy. This may not be the central question, however. What is clear from the combined experience of East Asia over the past three decades is that certain common fea- tures dominate, and that they involve some fundamental public policies. Countries may choose "supplemental policies" in an effort to achieve a "growth overdrive,"32 but these idiosyncratic policies are difficult (if not impossible) to replicate. More importantly, there are few cases, if any, where countries that pursued the "core policies" have not succeeded. Put differently, govern- ments that have adopted the essential policies-stable economic man- agement, investment in human capital, and export drive-have been able to entertain the option of a larger role for government in industrial- ization policy. Whether such interventions would succeed has depended primarily on the policy objective itself and, secondarily, on the institu- tional capacity to execute it. Unless these policies are continuously reas- sessed (and, if necessary, reversed), they stand little chance of success. Moreover, as the evidence of the second-generation NIEs demonstrates, they are neither essential to, nor sufficient for, rapid growth. The big question for policymakers is why such diversity of experience in East Asia has produced uniformly good results. The first answer is that success has not been universal. The Philippines, for example, was not able to combine enough positive factors from among macroeconomic stability, strong technocratic bureaucracy, export competitiveness, political stability, and policy consistency. Equally puzzling is why other countries, such. as India, even during periods featuring macroeconomic and political stability and perhaps a talented bureaucracy, have not done equally well. In some, bureaucracies were impediments to private entre- preneurship rather than instruments of change. In others, policy was ideologically determined and was not critically reassessed for its effec- 116 I A Vision for Development tiveness. And in yet others, no social consensus existed under which a national development strategy could be forged and implemented. The diversity of experience within East Asia suggests that universal and sweeping prescriptions are not possible and that country-specific circumstances will dominate. Yet the body of East Asian evidence points to the dominant contribution of stable and competitive economic poli- cies to the unleashing of private entrepreneurship. More often than not, the key to the policymaking process was the positive role of government in charting a development course, creating a longer-term vision shared among key participants, and fashioning an institutional framework for nonideological and effective policy implementation. Notes 1. The Country Lessons project includes case studIes of Hong Kong, Indonesia, ICorca, Malaysia, Singapore, and Thailand, as well as two cross-country papers. Individual studies have been disseminated by the World Bank in the Lessons of East Asia series. See also World Bank 1993, The East Asian Miracle, the major institutional product on this subject, and World Development Report 1991. 2. China clearly pursued very interventionist policies until the late 1970s. Since then the country has been adopting market reforms gradually with spectacular results. In view of its special circumstances, China is not a central part of this discussion. 3. See for example Haggard 1990;]ohnson 1987; Vogel 1991. 4. See Fishlow 1991. 5. Set Bhattacharya and Page 1992. 6. See Birdsall and Sabot 1993; Barro and Lee 1993. 7. See Dahlman and Sananikone 1993. 8. See Corden 1993. 9. Set World Bank 1993, The East Asian Miracle. 10. See Campos 1993. 11. See Krueger 1985; Westphal 1990. 12. See Balassa 1988; Pack and Page 1993. 13. See Thomas and Wang 1990; Bhalla 1993; Dollar 1992. 14. See Stiglitz 1989. 15. See Krugman 1990. 16. See Wade 1990. 17. See Amsden 1989. 18. See individual country studies in the Lessons of East Asia series. Hong Kong: Chau 1993. Indonesia: Bhattacharya and Pangestu 1993. Korea: Kim and Leipziger 1993. Malaysia: Meyanathan and Salleh 1993. Singapore: Soon and Tan 1993. Thailand: Christensen and others 1993. 19. See World Bank 1987. The Lessons of East Asia: An Overview of Country Experience I 117 20. See Leipziger and Petri 1993;]. H. Kim 1990; Nam 1990,1991. 21. See Yoo 1990. 22. See Wade 1990. 23. See Dahlman and Sananikone 1993. 24. See World Bank 1987; Sakong 1993. 25. See Leipziger 1988. 26. See Brown 1993. 27. See Song 1990. 28. See Shirley and Nellis 1991. 29. See Christensen, Dollar, Siamwalla, and Vichyanond 1993. 30. Point made by the Hon. Lee Kwan Yew in "The Proven Path to Economic Growth," a speech in Manila, November 19, 1992. 31. See World Bank, World Development Report 1991. 32. See Petri 1993. References Amsden, Alice. 1989. Asia's Next Giant: South Korea and Late Industrialization. New York: Oxford University Press. Balassa, Bela. 1988. "The Lessons of East Asian Development: An Overview." Economic Development and Cultural Change 36(April): 5273-90. Barro, Robert]., and]. W. Lee. 1993. "International Comparisons of Educational Attain- ment." Paper presented at conference, How Do National Policies Affect Long-Run Growth? World Bank, February, Washington, DC: Bhalla, S. S. 1993. "Free Societies, Free Markets and Social Welfare." July 15, 1993. Washington, DC: Bhattacharya, Arnarendra, and John Page, Jr. 1992. "Adjustment, Investment and Growth in High Performing Asian Economies." Washington, DC. Bhattacharya, Amarendra, and Mari Pangestu. 1993. "Indonesia: Development Transfor- mation and Public Policy." Lessons of East Asia. Washington, DC: World Bank. Birdsall, Nancy, and Richard H. Sabot, eds. 1993. "Virtuous Circles: Human Capital Growth and EqUity in East Asia." Background paper for The East Asian Miracle. Wash- ington, DC: World Bank. Brown,]. 1993. "Economic Development in Southern China: The Role of the State and the Market." Washington, DC: World Bank. Campos, E. 1993. "Institutions and Public Policy." Issues paper for The East Asian Mir- acle. Washington, DC: World Bank. Chau, Leung Chuen. 1993. "Hong Kong: A Unique Case of Development." Lessons of East Asia. Washington, DC: World Bank. Christensen, Scott, David Dollar, Ammar Siamwalla, and Pakorn Vichyanond. 1993. "Thailand: The Institutional and Political Underpinnings of Growth." Lessons of East Asia. Washington, DC: World Bank. Corden, W. Max. 1993. "Seven Asian Miracle Economies: Overview of Macroeconomic Policies." Background paper for The East Asian Miracle. Washington, DC: World Bank. 118 I A Vision for Development Dahlman, Carl]., and Ousa Sananikone. 1993. "Taiwan, China: Policies and Distribu- tion for Rapid Growth." World Bank, East Asian Department, Washington, DC. Dollar, David. 1992. "Outward-Oriented Developing Economics Really Do Grow More Rapidly: Evidence From 95 LDCS, 1976-85." Economic Development and Cultural Change 40 (April) 523-44. Fishlow, Albert. 1991. "Review of Handbook of Developmnent Economics." Journal of Economic Literature 2 9 (December): 1 728-37. Haggard, Stephen. 1990. Pathways from the Periphery: The Politics of Growth in the Newly IndustrialiZing Countries. Ithaca, NY: Cornell University Press. Johnson, Chalmers A. 1987. MITI and the Japanese !v1.irade: The Growth of Industrial Pol- icy, 1925-1975. Stanford, Calif.: Stanford University Press. Kim, j. H. 1990. "Korea's Recent Experiences with Industrial Restructuring in Response to Trade Friction." Korea Development Institute, Seoul. Kim, Kihwan, and Danny M. Leipziger. 1993. "Korea: A Case of Government-Led Devel- opment." Lessons of East Asia. Washington, DC: World Bank. Krueger, Anne 0., ed. 1985. Export-oriented Development Strategies: The Success of Five Newly IndustrialiZing Countries. Boulder, Colo.: Westview Press. Krugman, Paul, ed. 1990. Rethinking International Trade. Cambridge, Mass.: Massachu- setts Institute of Technology Press. Leipziger, Danny M. 1988. "Industrial Restructuring in Korea." World Development 16 (1)121-36 Leipziger, Danny M., and Peter A. Petri. 1993. "Korean Industrial Policy: Legacy of the Past and Directions for the Future." Washington, DC: World Bank. Meyanahan, Saha D., and Ismail M. Salleh. 1993. "Malaysia: Growth, Equity and Struc- tural Transformation." Lessons of East Asia. Washington, DC: World Bank. Nam, S. W. 1990. "Institutional Reform of the Korean Financial System." Korea Devel- opment Institute, Seoul. - - - . 1991. "Korea's Financial Policy and Its Consequences." Korea Development Institute, Seoul. Pack, Howard, and John Page. 1993. "Accumulation, Exports and Growth in the High Performing Asian Economies." Paper presented at Carnegie-Rochester Conference on Public Policy, April. Petri, Peter A. 1993. "Common Foundations of East Asian Success." Lessons of East Asia. Washington, DC: World Bank. SaKong, II. 1993. Korea in the World Economy. Washington, DC: Institute for Interna- tional Economics. Shirley, Mary, and John Nellis. 1991. Public Enterprise Reform: The Lessons of Experience. ED! Development Studies. Washington, DC: World Bank. Song, Byung-Nak. 1990. The Rise of Korean Economy. New York: Oxford University Press. Soon, Teck-Wong, and C. Suan Tan. 1993. "Singapore: Public Policy and Economic Development." Lessons of East Asia. Washington, DC: World Bank. Stiglitz,Joseph. 1989. "Markets, Market Failures and Development." American Economic Review, Papers and Proceedings 79 (May): 197-203. Thomas, Vinod, and Yan Wang. 1993. "Government Policy and Productivity Growth: Is East Asia an Exception?" Lessons of East Asia. Washington, DC: World Bank. The Lessons of East Asia: An Overview of Country Experience I 119 Vogel, Ezra P. 1991. The Four Little Dragons. The Spread of Itndustrialization in East Asia. Cambridge, Mass.: Harvard University Press. Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, NJ: Princeton University Press. Westphal, Larry E. 1990. "Industrial Policy in an Export-Propelled Economy: Les- sons from South Korea's Experience." Journal of Economic Perspectives 4 (Sum- mer):41-59. World Bank. 1987. Korea: Managing the Industrial Transition. Washington, DC. - - - . 1991. World Development Report 1991. New York: Oxford University Press. - - - . 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. Yoo,]. H. 1990. "The Industrial Policy of the 1970s and the Evolution of the Manufac- turing Sector in Korea." Working Paper 9017. Korea Development Institute, Seoul. Assessing the Experience of Trade Policy Reform by Vinod Thomas and John Nash, with Sebastian Edwards, Thomas Hutcheson, Donald Keesing, Kazi Matin, Garry Pursell, and Alexander Yeats Reform of trade policy is essential to link the economies of developing coun- tries to worldwide technological advances and enable them to compete in an increasingly integrated world. In consequence, trade policy has been high on the agenda of reforms in these countries in the past decade, although it has been unclear what has actually been done and what the results have been. The evidence in this book suggests that reforms in trade policy have, by and large, contributed to improved economic performance in developing countries. The book shows that countries that reformed are more open and their trade regimes more efficient than a decade ago. But the commitment to implement reform has been weaker than expected, and results have often been disappoint- ing. Stronger and more comprehensive improvements in policy and institutions are needed to enhance the effectiveness of the reforms, among them measures to reduce the protection of domestic industry in competition with imports. It is noteworthy that the supply response to reforms has been stronger in countries where institutions and infrastructure have supported changes in pol- icy and where the linkage between trade and other policies has been recognized. This argues that more attention should be paid to actions that complement trade policy reforms in order to derive the greatest possible benefit from them. Trade Policy Reforms and Their Effects Most trade policy reforms of the 1980s in the developing countries were sup- ported by the World Bank's adjustment lending, in conjunction with assistance First appeared in Best Practices in Trade Policy Reform, Washington, DC: World Bank 1991, 202-16. Reproduced with permission 1121 122 I A Vision for Development from the IMF.l (A few countries, notably Bolivia, reformed their trade policies without explicit World Bank support.) The most common reform proposals concerned the exchange rate, export promotion, import restric- tions, and studies of protection. Proposals regarding policy on exports and quantitative restrictions on imports were generally stronger than those concerned with the level and dispersion of tariffs. The Extent of Policy Change Many countries corrected misaligned exchange rates and reduced impediments to exports, including restrictions on imports needed for export production. Several countries substituted tariffs for quantita- tive restrictions on imports. Fewer countries significantly reduced both quantitative restrictions and tariff levels, but several have made good progress, including Bolivia, Costa Rica, Chile, Ghana, Korea, Mexico, and, until recently, Turkey. In nearly all these countries the bias against trade, especially exportables, declined in part as a result of a reduction in import protection. 2 But progress in lowering import protection levels across countries has been slower than expected. 3 Also, implementation of reform has varied con- siderably among recipients of trade loans. Some countries achieved substan- tial reform (Chile, Mexico, and Turkey), while others made little progress or reversed their reforms (Guyana, Yugoslavia, Zambia, and Zimbabwe). Four sets of domestic factors constrain stronger and more sustained reforms: • The opposition of vested interests and inadequate conviction about the benefits of the reforms have weakened the commitment to reform (in Kenya, Peru, Yugoslavia, and Zimbabwe, for example). • Administrative and institutional insufficiencies have contributed to setbacks in implementing reform (in Bangladesh, Cote d'Ivoire, and Malawi, for example) and reforms to strengthen institutions in the public sector have received inadequate attention. • Weak macroeconomic performance and conflicts between policy reform and stabilization goals have sometimes slowed trade liberal- Assessing the Experience ofTrade Policy Reform 1123 ization (as in Morocco and the Philippines) or even reversed it (as in Argentina and Zambia). • Lags in the supply response to policy reform, by reducing its appar- ent benefits, have dampened enthusiasm, especially in low-income Africa. The Effect on Performance Assessing the impact of reforms on economic performance is made dif- ficult by the incomplete nature of the reforms and the simultaneous presence of other contributing factors. Nonetheless, the evidence sug- gests that policy reforms have contributed positively to growth in out- put and exports. Both the additional financing from adjustment lending and the policy reforms themselves have contributed to a mild, relative improvement in GDP, exports, and other variables in the loan recipient countries-especially among the early and intensive recipients (those that received three or more adjustment loans).4 The results are much stronger and are statistically more significant when the comparison is between trade policy reformers and nonreformers rather than simply between trade loan recipients and nonrecipients. 5 The response of output to policy change has varied considerably. Studies of a number of countries identify several factors that constrain the supply response. • The institutional and infrastructural needs of exporters are often insufficiently addressed because of weak systems for providing duty free and restriction-free access to imported inputs; inadequate port, transport, and telecommunications facilities; and poor information and market services for exporters. • Domestic regulatory policies are allowed to interfere with the change in incentives in response to reform (price controls) and to reduce the mobility of factors of production through labor market interventions, market entry and exit regulations, and foreign investment controls. • Growing protectionism in international markets in the 1980s has depressed world prices and blocked access to markets, thereby reduc- 124 I A Vision for Development ing the response of exports, especially in agriculture. Lower tariffs for manufactured exports make the markets of industrial countries more promising, although the nontariff barriers they impose in some important product categories (such as textiles, clothing, and steel) have hurt the growth of exports in developing countries. • The credibility of the reforms, which affects their sustainability, depends on a country's track record in policy reform, the forceful- ness of its initial reform steps, its macroeconomic stability, and the consistency of its trade policy reforms with its reforms in other areas such as the financial sector or agricultural pricing. • Underdeveloped entrepreneurial and managerial capacity inevitably slows the supply response. Shortages of trained labor and poorly developed input supply lines have also been serious problems. The Sequencing and Timing of Trade Policy Reforms Tariff reform may cause revenue losses, devaluation may increase infla- tion, and liberalization may aggravate balance of payments problems. Does this mean that trade liberalization is inconsistent with stabiliza- tion efforts? Indeed, there is little doubt that macroeconomic instability makes trade policy (and some other) reforms more difficult to imple- ment successfully. For this reason some analysts have argued that the fiscal deficit and inflation should be reduced before trade policy reforms are introduced. Stabilization and Trade Policy Reforms In practice, the strong practitioners of trade policy reform in the sample have generally also managed to reduce their inflation and fiscal and bal- ance of payments deficits more than have the weaker reformers. One reason is that some reforms increase revenue and thus reduce the fis- cal deficit. Furthermore, in cases in which the fiscal deficit has been reduced sufficiently and the real exchange rate depreciated, the current account deficit has also declined despite the liberalization of imports. In these circumstances, import liberalization can reduce inflation and contribute to stabilization by providing much needed competition in Assessing the Experience ofTrade Policy Reform I 125 domestic markets. Although devaluation raises the domestic prices of tradables and can fuel inflation, inflation can be lowered even with a devaluation if the fiscal deficit is lowered sufficiently. But trade policy reforms are unlikely to be productive under con- ditions of severe and continuing macroeconomic instability. When inflation is very high and variable, leads and lags in the movement of individual prices mean that the resulting pattern of relative prices is a poor guide for economic decisions. Also, if the authorities use the exchange rate (instead of adequate macroeconomic policies) as a brake on inflation, the real exchange rate is likely to appreciate and thus reduce the effectiveness of the reform. Under these conditions the trade policy reform in question should be delayed until the very high rates of infla- tion are brought down. Fiscal Reforms and Trade Policy Reforms Eliminating nontariff barriers (especially by converting them to tariffs), eliminating tariff exemptions, and raising the lowest rates to make the structure more uniform are revenue-enhancing measures (which were used in Jamaica, Kenya, and Mauritius, for example). In a sample of countries that reformed primarily non tariff barriers, tariff revenue increased from 2.7 percent of GDP to 3.4 percent of GDP. Revenues can also be kept constant or raised in domestic currency if lowered rates are accompanied by a sufficiently depreciated exchange rate. And reducing very high tariff rates can increase trade tax revenue if tariff evasion rates fall as a result or if import demand is price elastic. But an increase in tariff revenue cannot always be relied on. In a sample of countries that reduced tariffs as well as implemented other reforms-among them Mexico, Morocco, the Philippines, and Thai- land-revenue fell on average from 2.8 percent of GDP to 2.3 percent of GDP. The fiscal effects of a evaluation also vary depending in general on whether the government is a net buyer of foreign exchange (Ghana, Sierra Leone, Somalia, Uganda, and Zaire, for example) or a net seller (Nigeria, for example). When import liberalization is likely to worsen an already large fiscal deficit, measures to reduce expenditure or increase revenue from other sources will need to be implemented along with the 126 I A Vision for Development tariff reforms. Mexico generated additional revenue through tax reform when its trade taxes fell, whereas Morocco took no compensatory mea- sures when tariff revenue fell (and did not reduce nontariff barriers to increase revenue while reducing tariffs), and in consequence experi- enced a partial reversal of reform. Domestic Policy Reforms In general, the benefits of trade policy reforms are greater when accom- panied by domestic economic reforms. Hence, trade policy and domes- tic reforms are best carried out simultaneously. But in practice not all actions can be taken at the same time and so the issue of sequenc- ing becomes relevant. Initiating trade policy reforms often exposes the need for domestic reforms and investments (as was the case in Madagascar, Mexico, Tanzania, and Zaire). It also exposes unforeseen infrastructural needs of industries that are based almost entirely on foreign demand (such as fresh fruit and salmon in Chile, cut flowers in Colombia, and cutlery and television sets in Korea). And sometimes domestic reforms should be deferred until the business and financial communities clearly understand that the protection of imports will be reduced. Otherwise, when investment or price controls are removed in highly protected sectors, increased investment and production might be encouraged in the wrong sectors. At other times, trade policy reform may need to wait until a domestic control is relaxed. For example, a processed product (such as textiles) may see its effective protection vanish or become negative if its tariffs are reduced while the price of its basic input (cotton), which is set by a monopolistic parastatal, remains high. If all reforms cannot be carried out simultaneously, priority should be placed on removing or counteracting the most important and binding constraints to better performance. If a country has a substantially over- valued exchange rate, the first step should be to achieve and maintain a real devaluation and to unify any multiple exchange rates. Because a real devaluation can make quantitative import restrictions redundant Assessing the Experience ofTrade Policy Reform I 127 and facilitate their removal, large devaluations have often preceded or accompanied the rapid removal of these restrictions (as in Bolivia, Chile, Ghana, Laos, Mexico, Nigeria, Sri Lanka, and Zaire). Such a shift from commercial policy protection to "exchange rate protection" constitutes a major step toward establishing neutral incentives between and among exportables and import substitutes. Introducing some export policy reforms shortly before, or at least at the same time as, import reforms stimulates a more rapid export supply response and can insulate exporters from any adverse effects of tariff unification by exempting them from paying higher rates on imported inputs. Import policy reform often starts by replacing nontariff barri- ers with tariffs that provide roughly the same protection. This step not only eliminates tariff exemptions but also improves resource allocation, increases transparency, reduces rent-seeking, and improves the fiscal situation. Reducing the dispersion of tariff rates ought to follow, in order to move toward a uniform incentive structure. It should usually be accompanied or followed by a reduction in the average tariff rates so as to reduce protection levels. At the same time, any potentially harmful effects on the fiscal deficit should be offset. If revenue is not a serious concern, nontariff barriers could be phased out without introducing eqUivalent tariffs. Expeditious reform avoids a drawn-out process that gives opponents time to organize and lobby for a reversal. It also avoids difficulties in importing intermediate and capital goods that would interfere with the restructuring that liberalization is expected to set in motion. Also, the sooner the benefits of reform begin, the better the prospects for sustain- ability. Some successful reforms have been comprehensive, intensive, and fast, as in Bolivia. Mexico quickly reduced the coverage of quantita- tive restrictions and reduced tariffs in about two years. Chile's phasing out of quantitative restrictions was rapid, but tariff reductions took place over five years. Korea carried out its comprehensive reforms over twenty years, with substantial import liberalization occurring only after 1980. When implementation of tariff reform is spread over several years to give affected activities time to adjust, it is desirable to announce the trade policy reforms in advance, as Chile did. 128 I A Vision for Development Experience suggests that substantial and comprehensive liberaliza- tion can be completed in less than five to seven years from the start of the adjustment program, although the decision on the pace of reform ulti- mately depends on the specific circumstances of the country involved. This should allow time for quantitative restrictions to be phased out and for tariffs to be reduced to, say, 15 to 25 percent. Later stages of reform might reduce the tariffs further. But even when reforms are drawn out over this period, major and decisive actions in the first years are impor- tant to Signal commitment and give the reform credibility. Trade Policy Measures A real devaluation improves the incentives for producing exports and efficient import substitutes. 6 Devaluation needs to be accompanied by macroeconomic policies to restrain inflation and maintain the real exchange rate. In addition to sound exchange rate and macroeconomic poliCies, there are some cost-effective means to support export develop- ment. More fundamentally, export development is assisted indirectly by policies to reduce import protections that contribute to a more appro- priate real exchange rate and to a smaller antiexport bias. Export Development East Asia's economic success has rested on macroeconomic stability- low fiscal deficits and inflation rates, and stable and adequate exchange rates. Relatively low protection of import substitutes helps to sustain a more depreciated real exchange rate than would otherwise be the case. Low protection rates also make it easier to administer schemes that exempt exporters from restrictions and tariffs on their imported inputs. Although Korea and Taiwan were successful in using protective import poliCies by avoiding exchange rate overvaluation and offsetting the anti- export bias of import protection, their approach would be difficult to replicate in today's world economy. Korea's approach during the 1960s and 1970s included export subsidies, which other countries would countervail today, and on vigorous government intervention to suppress rent -seeking activities viewed as incompatible with export growth. Assessing the Experience ofTrade Policy Reform I 129 Giving direct and indirect exporters restriction-free access to inputs at duty- and tax-free international prices is particularly effective in developing manufactured exports. 7 One method is to have no tariffs or restrictions on imports (as in Hong Kong and Singapore). Where import protection remains, however, the bias against exports needs to be reduced through schemes that reduce import costs. One approach that can be used for large export-oriented firms that import inputs is to provide duty waivers (and exemptions from other import restrictions) or temporary admissions of imported inputs (as in India, Indonesia, Mexico, Morocco, and Turkey). For small or occasional exporters, for which waivers or temporary admission schemes are impractical, a quick, reliable method is to use drawbacks or rebates of duties and indirect taxes actually paid (as in Korea, Taiwan, and Thailand). But collecting and refunding duties is less efficient than waiving duties, and drawbacks do not offset nontariff barriers. Other duty-free schemes allow in-bond or duty-exempt export manufacturing plants to locate almost anywhere (as in Mauritius and Mexico) or establish physically separate export pro- cessing zones (as in more than thirty developing countries). But many export processing zones have proved to be poor investments as a result of unwise location, high investment costs, mediocre management, or uncooperative customs officials. Duty-free schemes for exporters do, however, involve costs. For example, they may temporarily increase a fiscal deficit,S penalize domestic suppliers of importable inputs, and cre- ate new opportunities for rent -seeking. Manufactured exports must meet special requirements of quality and timeliness if they are to be competitive. Exporters require efficient infrastructure and telecommunications, readily available export credit, and support in technology development, quality control, production planning, and trade logistics. The East Asian experience suggests the value of relaxing regulations on layoffs, fringe benefits, minimum wages, and collective action in order to reduce labor costs and increase the fleXibility of the enterprises 9 Policies regarding industrial loca- tion and regional development may also need to be changed, because exports on a large scale cannot be expected from undeveloped areas with poor infrastructure. Helping exporters secure technical assistance 130 I A Vision for Development services from consultants and information suppliers of their choice may also be useful. Foreign firms can be a valuable source of technol- ogy and capital and can provide a link to world markets. Foreign inves- tors are attracted to countries with macroeconomic stability, strong protection of property rights (including intellectual property rights), a stable and transparent regulatory environment, and liberal access to foreign exchange for profit remittances and imported inputs and services. This kind of good climate for investment is likely to produce better results than special incentives, such as tax holidays, which may attract footloose industries that leave when the holiday is over. Import Policy Nontariff barriers make the system less transparent and less predict- able and encourage lobbying, rent-seeking, and corruption. Even with little or no decrease in protection levels, therefore, a reduction of non- tariff barriers can have major salutary effects. One simple reform is to switch from a list of permitted imports to a list of forbidden imports and allow unlicensed import of all items that are not listed-the first step in Korea's liberalization in 1967. Auction systems can sometimes be substituted for administrative rationing, with good results. Quotas can be auctioned, with the quota amount increased until its protective value falls to zero, at which point it can be abolished. Alternatively, tariffs providing approximately equivalent protection can be imposed on product categories as nontariff controls are eliminated. This change reestablishes the link between domestic and international prices and ensures that they move in the same direction and diverge by no more than the amount of the tariff. Because tariffs are usually higher on finished products than on inter- mediates and raw materials, and tariff exemptions are common, effec- tive protection varies greatly across industries. To achieve effiCiency in production, effective protection must be reduced and protection levels among imports must be made more uniform, while the protective effect of the domestic tax system is taken into account. Coordinating tariff reform with domestic tax reform permits deeper reductions in tariffs than would otherwise be fiscally acceptable. Reductions should eventu- Assessing the Experience ofTrade Policy Reform I 131 ally result in a low, equal rate of tax of imports and domestic production for each product. Raising low tariff rates (usually on inputs) also raises revenue, allOwing high rates to be reduced further, and makes effective protection more uniform between inputs and finished goods. On efficiency and political economy grounds, a relatively low and relatively uniform tariff structure is the best option. Uniformity mini- mizes distortions in production incentives for a given level of overall protection, subject to the qualification that exporters should be insu- lated from paying prices above world levels for their protected imported inputs. In general, such a tariff structure has the further advantage of being less likely to encourage lobbying. Bolivia, Chile, and Mexico have converged their tariff structures toward 15 percent, in addition to nearly eliminating quantitative restrictions, and other countries have reduced tariffs to below 30 percent. An industry-by-industry approach to tariff reform is difficult to imple- ment because changes in one industry have repercussions in others. What seems to work better is the concertina approach, whereby at each stage all the top rates are collapsed to the next highest level. Even better is a radial reduction, in which all rates at each step are cut to an equal fraction of their previous level, thereby consistently reduCing protec- tion at each stage. Although radial tariff reduction promises faster gains in production effiCiency than does the concertina approach, it is more likely to reduce revenue in its first stages. lO A combined approach-col- lapsing the very high rates and radially reducing all others subject to the revenue constraint-should be the best alternative because it combines the advantages of each of the other schemes. Policies toward Trading Partners Should developing countries reduce barriers unilaterally or delay reforms in hopes of gaining concessions in multilateral negotiations? The issue could be resolved if all parties in multilateral negotiations were to declare unambiguously that credit would be granted for unilateral reductions of barriers. An alternative is for developing countries to bind tariffs at a level higher than the actual level and to offer to reduce the bound level at negotiations. This approach requires a credible threat to 132 I A Vision for Development raise tariffs to the bound level if negotiations fail, as well as a credible commitment not to raise the tariffs if negotiations succeed. For most countries the costs imposed by their own trade policies are likely to be higher than the costs imposed by other countries' barriers. This situation argues for unilateral reforms. Industrial countries have reduced tariffs from an average of approxi- mately 40 percent in the late 1940s to less than 5.5 percent today. The markets of industrial countries remain attractive for a wide range of manufactured exports from developing countries. But nontariff barriers have increased, and the proportion of imports of developed countries affected by nontariff barriers nearly doubled between 1966 and 1986. More than 90 percent of OECD imports of foodstuffs are now affected by some type of nontariff barrier. This change, coupled with the surpluses resulting from high OECD agricultural support prices, has distorted and destabilized agricultural markets. The nontariffbarriers and agricultural poliCies of industrial countries reduce the potential benefits of reform in developing countries, reduce consumer welfare in industrial countries, and threaten the world trading system. It is in the interest of all countries that industrial countries reform their trade policies. Some countries have formed regional trade groups, expecting to real- ize gains from increased trade, to take advantage of economies of scale by prodUCing for a larger regional market, and to gain initial exporting experience under protection. But intraregional trade has grown little or has even declined. Industries established in response to integration usually had high production costs, and the experience firms gained in marketing to neighbors proved irrelevant for exporting to wider mar- kets. Most regional groups also raised barriers against extra regional trade, thereby discouraging integration into the world economy, where the gains from trade are likely to be greater. The costs of this diversion of trade from efficient world markets to high-cost regional producers were also great. Success in integration has been greater among countries with gener- ally outward-oriented economies (such as the Southeast Asian countries or the European countries). Two lessons from the experience with inte- gration efforts are noteworthy. First, integration schemes should focus Assessing the Experience ofTrade Policy Reform I 133 more on improving infrastructure and factor mobility than on direct trade policy measures. Increased trade would follow naturally. Second, trade policy measures ought to focus on reducing barriers to all trade, not just trade among members. The Central American Common Market, for example, has explicitly recognized the need to avoid impeding the progress of its member countries in overall trade reform. Policies Complementary to Trade Policy Reform Fiscal policy can complement trade policy reform in several ways. Domes- tic taxes can be used to equalize the price of domestically produced final goods and the tariff-inclusive price of imports, thereby reducing protec- tion, raising revenue, and allowing tariff rates to be lowered more than they otherwise could be (as Malawi, Nigeria, and Togo are beginning to do). Fiscal policy can also be used to direct public investment in ways that support the trade policy reforms. Efficient investments in infrastruc- ture and expenditures for research and extension services are important to take full advantage of increased trade incentives. Cuts in expenditure designed to achieve fiscal policy goals have, however, caused public investment budgets to fall in many countries (such as Cote d'lvoire, Mexico, Morocco, and the Philippines). Some successful reformers have raised the share of public investment (Chile, Korea, and Turkey, for example); in other countries, the share has declined. In either case, the key is to ensure that the investments are efficient and appropriate to support the adjustment to policy reforms. Public sector reform is an important complement to trade policy reform. Protection of state-owned manufacturing enterprises has sometimes inter- fered with trade liberalization (as in Argentina, Bangladesh, Chile, and Peru). Even when governments have privatized unprofitable firms (Togo's steel mill, for example), buyers have insisted on guarantees of high protection. Liquidation would probably be preferable to privatization in these cases. In socialist countries trade liberalization needs to be accompanied by a phaSing out of the central planning and allocation mechanisms, so that the new mar- ket Signals can be effective at the firm or farm level (in Poland, for example). Domination of crop output markets by state enterprises might mean that the effects of devaluation on producer prices are realized very slowly while input 134 I A Vision for Development prices rise qUickly. Or a state monopoly in input markets (seeds and agro- chemicals, for example) may mean that farmers lack high-quality inputs to use in responding to the liberalization of output markets. Meaningful trade liberalization in such cases may require abolition of the state enterprise (as in Nigeria) or elimination of its legal monopoly in the import market (as in Mexico). A corrupt or inefficient customs service can also reduce the sup- ply response to reform; hence, as greater rehance is placed on tariffs, the customs service might need to be upgraded. Reform of regulatory policies is another area that supports trade policy reform. If exit from or entry to the market is difficult, inefficient firms may hang on and new firms may never start up. Regulations that make it costly for firms to restructure or shut down have been a factor in failed liberalization attempts in Poland, Turkey (in the early 1970s), and Yugo- slavia. In Mexico until 1988, regulations governing entry of new firms and expansion of established firms apparently slowed the pace of adjust- ment. The absence of such inhibiting controls was important for the suc- cess of Chile's trade policy reforms in 1974-79, which were carried out concurrently with the reduction or elimination of many regulations. Price or wage controls are incompatible with trade policy reforms whose pur- pose is to alter relative prices. Financial sector regulations that encour- age or enable banks to continue to lend to bankrupt enterprises (which must close down if the economy is to reap the efficiency gains from trade policy reform) may reduce the supply of new credit available for firms that should be expanding in the wake of the reforms. Regulatory reform, combined with support for restructuring in the financial and industrial sectors, could magnify the benefits of trade policy reforms. Credibility and Sustainability If the private sector is to invest in new sectors, it must believe that the new pattern of incentives will be sustained. If not, firms in previously protected sectors may invest in lobbying efforts and go deeply into debt trying to ride out the storm until their protection is restored. To be credible, the first steps of reform should be clear and decisive: reforms begun with tentative steps have often been reversed. A strong, well-publiCized announcement Assessing the Experience ofTrade Policy Reform 1135 of the program that demonstrates the head of state's commitment to the reforms can also be important in establishing credibility. In addition, a general interest agency (the central bank or finance ministry) is usually more reliable in executing a reform program than is an agency with specific interests to protect (such as the ministries of trade or industry). Credible announcement of a timetable-although it carries the risk of giving the opposition time to mobilize against the reform-can usually strengthen the reform process. Reforms are generally easier to introduce after a crisis that discredits old poliCies. Since the crisis is often related to the balance of payments, a strong devaluation and macroeconomic adjustment are probably necessary and may be useful in sending a sig- nal to producers, whose supply response will help to justify the pro- gram. Sustainability may also be enhanced by an external commitment to maintain reforms-such as joining the GATT-that raises the costs of reversal. l l In some cases reforms may be politically more acceptable, credible, and sustainable if they are carried out under regional auspices, as was the case when the European Communities began to lower exter- nal trade barriers in the 1950s. This approach has yet to be tried in the developing world, however. Successful trade policy reform can also have short-term transitional costs because some groups are made worse off as a result of shifts in resources. Taking steps to partially compensate losers may increase the odds that the reforms will be sustained and may have other benefits as well. Some compensatory measures, such as retraining workers, can improve factor mobility and thereby speed up the intersectoral adjust- ment process. Other measures, such as antidumping procedures (set up in Chile and Mexico, for example), may reduce resistance to the reduction of more costly forms of protection. Devaluation can also be viewed as a measure to partially compensate for the loss of protection and thereby reduce political resistance. Other steps, such as targeted food assistance programs and employ- ment programs, may offset any transitional effects of adjustment mea- sures on real wages or employment. Often, however, workers displaced from protected industries are not among the poorest groups in the soci- ety. Moreover, new programs run the risk of creating new distortions 136 I A Vision for Development and worsening the fiscal deficit. But the compensation issue needs to be addressed, and pragmatic and effective means must be found to target the programs well. 12 Implications for Trade Policy Reform This book strongly supports further reform of trade policies. It recom- mends that future programs seek to improve the design and implemen- tation of reforms. In addition to ensuring an appropriate exchange rate and removing export restrictions, well-designed trade policy reform will reflect the following considerations: • The main initial priority will be to reduce quantitative restrictions. • Strong action needs to be taken to reduce import protection through tariff reductions and reforms. • Relatively low and relatively uniform tariffs are preferable for reasons of effiCiency and political economy, even though uniformity of import tariffs cannot be demonstrated in theory to be optimal in many cir- cumstances. • Studies of the economic costs of existing policies and evaluations of the expected benefits of reform are useful in improving the accept- ability of trade policy reform. The lack of adequate data on indicators and measures of nominal and effective protection is a defiCiency that needs to be remedied. • A strong commitment to monitor and evaluate results is essential. The capacity of reforming countries to assess their own policies needs to be strengthened. • Although the main focus in this book has, by intent, been developing countries, the urgency of the need for industrial countries to reform their trade policies is recognized. Lessons have emerged from the experience with trade policy reform that should help address concerns regarding the interaction between such reform and other priorities. Assessing the Experience ofTrade Policy Reform I 137 • If all reforms cannot be carried out simultaneously, careful sequenc- ing of the reforms can usually avoid conflicts among them. With respect to macroeconomic stability, it is necessary to consider the likely consequences of trade liberalization for the fiscal deficit and ways to offset adverse effects, if they are judged likely to be serious. When the inflation rate is very high and variable, stabilization efforts can precede other reforms. • Greater emphasis on complementary policies, investments, and insti- tutional reform will improve the payoff to trade policy reform. Where domestic market problems are severe, deregulation, infrastructural improvements, and institutional reforms are essential for the success of trade policy reforms. Thus, although many governments have already taken the initial steps, much remains to be done to prepare for and implement trade policy reforms. It is hoped that the lessons discussed in this book will help these countries, and others that have not yet begun reforms, to design and implement programs to liberalize their trade regimes signifi- cantly. The eventual outcome of widespread reforms would be a more open global trading system and an enhanced standard of living in all countries. Notes 1. As of June 1989, a total of ninety-eight loans to forty-four countries contained sig- nificant trade policy components. 2. Usually the estimates of bias compare the real effective exchange rates (taking into account import tariffs and export subsidies) for exportables with those for importa- bles, in addition to comparing domestic relative prices. 3. Implementation data were available for twenty-four of the forty trade loan recipi- ents. Detailed findings on implementation refer to the twenty-four recipients. Aggre- gate data were also considered for the forty recipients, as well as for forty-seven nonrecipients. 4. Accordingly, the results measured for all recipients are likely to understate the bene- fits because they include the early stages of what is a continuing, cumulative process in some cases. 5. Real exchange rate adjustment and export-related reform had the greatest beneficial effect in some of the cases examined (Pakistan and Thailand, for instance). Most examples of import liberalization during the 1980s also involved a real exchange 138 I A Vision for Development rate depreciation, and this combination was beneficial (in Chile, Jamaica, and Mex- ico, for example). 6. A devaluation, of course, should not be carried out simply as an export promo- tion measure. Competitive devaluations designed to undercut competitors on world markets should be avoided. Rather, devaluation should be considered a means to restore equilibrium in internal and external markets and to encourage long-run growth. 7. This approach avoids the wide variations in effective incentives that arise when different exports use inputs subject to different import controls and tariffs. It is not subject to the countervailing measures that importing countries are increasingly applying to direct or indirect export subsidies. 8. Short-run negative revenue effects may occur when protection of inputs is provided principally by tariffs. Tariff revenue should increase, however, as expanding exports increase the supply of foreign exchange for imports. 9. Another ambitious but effective strategy used by Korea and Taiwan is to establish a full range of industries, characterized by highly efficient technology, location, scale, and production operations, that provide intermediate inputs at low prices. 10. In contrast, the concertina approach concentrates initial reductions on very high rates, some of which may be so high that reducing them will increase import volume and tariff revenues. 11. However, the value of this commitment is decreased by the easy access developing countries have to GATT provisions that allow them to impose barriers for purposes of correcting balance of payments disequilibria or protecting infant industries. 12. A UNDP-World Bank program for trade expansion is providing technical assistance to a number of countries in this and other key areas of implementation of trade policy reform. Improving the Distribution of Opportunities by Vinod Thomas, Mansoor Dailami, Ashoh Dhareshwar, Daniel Kaufmann, Nalin Kishor, Ram6n L6pez, and Yan Wang Wealth to us is not mere material, but an opportunity for achievement. -Thucydides, 460-400 R.C. The main asset of most poor people is their human capital. Investing in the human capital of the poor is a powerful way to augment their assets, redress asset inequality, and reduce associating the distribution of education with growth and poverty reduction. It then asks how to make education at all levels more productive. To be sure, access to good quality education is impor- tant in that it enhances people's capabilities to generate income. This is not enough, however. To be more productive, they need to be able to combine their human capital with other productive assets, such as land and equity capital, and with job opportunities in an open market. This chapter focuses on assets that the poor possess, primarily human capital, and those on which they rely most heavily, such as land. For growth to have an impact on poverty, the assets of the poor, especially their human capital, need to be augmented and distributed more equitably 1 Yet inequality in education and health outcomes is staggeringly high, reflecting market failures and underinvest- ment in the human capital of the poor. Asset distribution represents the distri- bution of opportunities and is a precondition for individual productivity and income. While redistributing existing assets and incomes is politically difficult, building new assets such as human capital is widely accepted. First published as Chapter 3 in The Quality of Growth, Oxford University Press, 2000. 1139 140 I A Vision for Development To be sustained, development must be equitable and inclusive. Ensur- ing adequate public spending in education and health care is important, but does not by itself guarantee progress. A multidimensional strategy to empower people is needed. Actions to highlight include the following: • Augment assets of the poor by ensuring access to high-quality educa- tion and health services • Increase attention to the distributive effect of public investment and reduce subsidies to the types of education and health care that benefit the rich • Facilitate full use of human capital by empowering the poor with land, credit, training, and job opportunities • Complement all human capital investments with economic reforms and market openness, which increase the productivity of education. Potential Benefits of Education Education and good health improve people's ability to shape their lives-strengthening their functioning in society and contributing to their welfare directly. Educating women, for example, not only increases their income-earning capacity, but also improves their reproductive health, lowers infant and child mortality, and benefits both current and future generations. Investing in human capital is therefore crucial for economic growth, poverty reduction, and environmental protection. The benefits of investing in human capital are well known, but some of the linkages with other dimensions of development-security, social justice, and sustainability-are better understood today than they were 10 years ago. 2 Investing in people can protect workers and improve security-an important aspect of quality of life. Education and good health increase the poor's ability to cope with changes in their environment. They allow them to switch jobs and provide some protection against economic downturns and financial crises. Social exclusion reduces an individual's incentive to attend school and to work (Bourguignon 1999; Loury 1999). Investment in human capital, Improving the Distribution of Opportunities I 141 if well distributed and targeted to the poor, can facilitate social inclu- sion. Better education and health services to vulnerable, often excluded groups, such as those who are illiterate, disabled, elderly, chronically ill, or separated by language barriers, can help them overcome social obstacles and increase their productivity. Investing in people may also help protect the environment. Better- educated women have healthier and, in many cases, fewer children, thereby reducing demographic pressure on natural resources and the environment. With more education, people can assimilate more infor- mation and employ instruments to protect the environment and better manage resources. Investing in people improves human rights and social justice, which provides direct satisfaction. Basic education enables the poor to learn about their civil and political rights; to exercise those rights by voting and running for office; and to voice their concerns, seek legal redress, and exercise public oversight. That helps in building institutions, improving governance, and fighting corruption. These benefits are far from automatic. Many studies show that addi- tional years of education per person increase real output or growth rates. However, a few researchers suggest that human capital accumulation has an insignificant or negative impact on economic and productiv- ity growth (Benhabib and Spiegel 1994; Griliches 1997; Islam 1995; Pritchett 1996). More government spending on education, if misallo- cated, might contribute little to poverty reduction and instead increase inequality and rent seeking. As Murphy, Shleifer, and Vishny (1991, p. 503) point out: "A country's most talented people typically organize production by others ... When they start new firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth." Quantity Is Not Enough-Quality Matters Since 1980, developing countries have invested substantial amounts of public resources in education services. In the 1990s, more than three- quarters of school-age children in developing countries were enrolled 142 I A Vision for Development in schools, up from less than half in the 1960s. Illiteracy rates dropped from 39 to 30 percent between 1985 and 1995 (World Bank 1999a). Progress has been uneven across regions. Enrollment rates fell in Sub- Saharan Africa: the proportion of 6-11 year olds enrolled in schools dropped from 59 percent in 1980 to 51 percent in 1992 (World Bank 1999a). Lack of access to basic education remains a major challenge in many countries. Increasing public spending is desirable, but not suf- ficient for the following reasons. Spending Is Only Weakly Related to Outcomes Cross-country analyses reveal a weak relationship between the generos- ity of education spending and education outcomes. Using cross-country data, Filmer and Pritchett (1999b) examined the correlation between government education spending per student and the percentage of people aged 15 through 19 who had completed grade five. The correla- tion appeared positive and significant at first, but after controlling for per capita income, the correlation was found to be fairly weak (figure 1). A similarly weak correlation was found between government health spending and mortality rates for children under five years old (Filmer and Pritchett 1999c). Why is public spending only weakly related to outcomes? What makes the difference is the quality and distribution of education ser- vices and the productivity of human capital. For developing countries that already allocate a substantial share of public resources to social services, further spending may not improve education outcomes for the poor. Reallocating public spending and improving its efficacy often can improve outcomes, especially when public resources are subsidizing education for the wealthy. Economywide strategies and poliCies also mater: subsidies to attract foreign capital may, under certain circum- stances, bias the rate of return against human capital. 3 Labor market distortions create disincentives for investing in education. In addition, to be productive, people must have access to other productive assets, including land, credit, equity, and job opportunities in open and com- petitive markets. Improving the Distribution of Opportunities I 143 Figure 1 Relationship between Public Spending Per Capita and Educational Attainment, Various Years ~Lf') "9 ~ 100 80 •• . , .. • • .. ... Ie Ie ... Il) on :;-- "0 60 •• • ~• • O'l Il) ,] ..... c.. Lf') E 40 • ..... 0 o on> 1.1 Il) Il) 20 • ~ Ie c:..c: Il)o 0-+----,-------,--------, ~..c: ~ ~ o 100 200 300 Public spending on education per person (U.s. dollars) 40 30 • •• 20 10 o • • -10 -20 •• • -30-·~---,,----.-----.----- -200 -100 o 100 200 Public spending on education per person controlling for GNP per capita (U.S. dollars) Sources: Education outcome data are updated from Filmer and Pritchett (1999b) combined with expenditure data from the United Nations Educational, Social, and Cultural Organization (UNESCO) database. Note: Expenditures refer to public spending on preprimary, primary, and sec- ondary education only. Thirty-five developing countries were included in the study. 144 I A Vision for Development Variability in School Quality Despite progress on access to education, the quality of schooling var- ies considerably across countries and regions. An extensive literature explored how best to define and measure the quality of schooling: whether inputs, processes, or student achievements should be used in assessments (see, for example, Behnnan and Birdsall 1983; Card and Krueger 1992; Greaney and Kellaghan 1996; Lockheed and Verspoor 1991). We measured quality as a combination of indicators that reflect inputs, defined by expenditure per student and the number and qual- ity of teachers; processes, that is, the length of school terms and the curriculum content and outputs, measured by cognitive achievements, attitudes, test scores, and dropout rates. In high-income countries where these mdicators are well developed, student achievement varies widely, even in countries with universal basic education. Functional literacy rates for young adults, 16-25 years old, in some industrial countries vary from 45 percent in the United States to 80 percent in Sweden, while the secondary net enrollment rates in these countries are all above 85 percent (World Bank 1999a). In developing countries, where achievement indicators are scarce, less accurate indicators, such as repetition and dropout rates, have been used to assess education outcomes. Data generated by these imperfect measurements showed considerable variation in the quality of schools (table 1). Repetition and dropout rates for primary school are much lower and test scores higher in East Asia than in Latin American coun- tries, where incomes are higher. While public education spending rose in some Latin American countries in the 1990s, average primary drop- out rates also increased. 4 Other studies, based on the limited available data on internationally comparable test scores, also show that generous public spending did not guarantee high-quality education. What explains the large variations in quality? Education outcomes depend on both demand and supply factors, and thus on poliCies and incentive structures that affect the whole economy. Macroeconomic sta- bility, represented by international terms of trade and GDP volatility, for example, is found to be the most Significant determinant of educational Improving the Distribution of Opportunities I 145 20 18 78 6 23 17 9 43 8 11 15 34 30 30 10 11 41 32 52 4.30 5.09 4.56 15 38 36 3.62 5 Malaysia Philippines 2 25 Thailand 8 57 23 13 3.35 3.58 3.88 Average, East Asia 7 6 21 15 14 2.96 3.32 3.21 Sources: World Bank data; UNESCO for expenditure data. - Not available. attainment in Latin America. Using data from 18 household surveys, Behrman, Duryea, and Szekely (1999) found that the debt crisis of the 1980s contributed to the slowdown in the accumulation of schooling in Latin American countries. Kaufmann and Wang (1995) found that macroeconomic policies affect social sector investment projects. As a country opens to international trade and investment, the rate of return to education rises. People demand higher quality education and are will- ing to pay more for it. Stronger demand, higher private investments, 146 I A Vision for Development better-paid teachers, and more motivated students produce higher edu- cational achievements, with differing time lags. The higher the demand for education, the higher its quality, and vice versa. If a country devotes public resources to subsidize physical capital instead of basic education, it can bias the rates of return against unskilled labor and hurt the poor. At the micro level, many studies have examined the links between schooling quality and student performance. Behrman and Knowles (1999) found a strong positive association between the quality of teach- ing staff, the quality of current inputs, and children's success at school. Hanushek and Kim (1995) found that conventional measures of school resources, that is, pupil-teacher ratios and educational spending, did not affect student test performance. In cross-country regressions, test scores were positively related to growth rates·of real per capita GDP, indicating a potential feedback from growth to strong demand and good student performance. Lee and Barro (1997) found that family background, strong communities, school inputs, and length of school terms are positively related to student performance; however, they cannot fully explain why East Asian countries experienced better education outcomes than did other developing countries. That suggests that other factors may be at play, including those associated with a more open and export-oriented economic environment. Consequences of Poor Quality Low-quality schooling disproportionately hurts the poor and limits their future earning opportunities. For example, Vietnamese students from high-income households enjoy greater access to high-quality education (Behrman and Knowles 1999). In Latin America, most students from low-income families attend public schools, which offer half the hours of instruction and cover only half the curriculum compared with the private schools. The higher the family'S income, the greater the aversion to public schools (lDB 1998). Estimates based on household surveys from Latin America show that students from lower-income deciles received an inferior primary education. Quality, measured by students' labor market performance, was 35 percent lower for low-income students than for those at the next, higher income Improving the Distribution of Opportunities I 147 decile (lDB 1998, p. 54). Figure 2 shows the enormous gaps in secondary school completion rates for the rich and poor. Because private education is feasible only for the wealthy, the poor quality of public schooling severely reduces the income-generating potential of children from poor families. Quality and Quantity: A Tradeoff? Improvements in quality complement the expansion of access to educa- tion. If poor children can go only to low-quality schools, they have few Figure 2 Secondary School Completion Rates for 20-2S-Year-Olds by Household Income Level, Selected Latin American Countries and Years - Bolivia, urban 1995 40 -III Honduras, 1996 48 - Peru, 1996 54 ~ Uruguay, urban 1995 56 ";: ..... !:: Venezuela, RB, 1995 59 ::::l o t.J Ecuador, 1995 59 !:: III Costa Rica, :i...... 1995 60 t.J - ";: Q) E -< Chile, 1994 EI Salvador, 1995 - - ...... 61 60 !:: Paraguay, 1995 62 "Z III ...J Mexico, 1994 --- -- 66 Brazil,1995 Panama, 1995 Argentina, 1996 -- 71 73 79 I o 20 40 60 80 100 Percent • Poorest 10 percent Ea Richest 10 percent Source: IDB (1998, p. 27). Note: Numbers next to bars are gaps in completion rates (percent). The surveys for Argentina include only Greater Buenos Aires. 148 I A Vision for Development opportunities to obtain high-paying jobs and parents are disinclined to send them to school. When education coverage is not universal, the best strategy is to focus on policy interventions that raise demand for both the quantity and the quality of education. For example, programs to reduce child labor and keep children in school-such as school lunches and cash stipends-would go well with teacher training to improve quality. However, with growing populations and tight budgets, the synergies of quantity and quality can tum into tradeoffs, especially if the quality mea- sures selected are not closely linked with student learning. What quality measure should be used for intervention( Should it be student incen- tives, or length of school terms, or the quality of teaching staff? Evidence shows that reduction of pupil-teacher ratios, which is expensive, has little impact on student learning (Mingat and Tan 1998).5 Despite the relatively high pupil-teacher ratio in the 1980s and 1990s, Korean students' average scores on intrnational science and mathematics tests were among the high- est. Spending more to hire more teachers might imply a tradeoff against wider coverage and broader distribution of education, which would be inefficient and inequitable, particularly where many children still have no access to basic education (Mingat and Tan 1998). Achieving Equitable Education and Social Inclusion Equal access to education and health services is among the basic human rights to which everyone is entitled. As with land and physical capi- tal, an equitable distribution of human capital is important for broad- based growth and poverty reduction. Moreover, equitable distribution of opportunities is preferable to the redistribution of existing assets, because investing in people creates new assets and improves social wel- fare 6 Ensuring access by the poor by distributing education services more equally is a win-win policy that is gaining support in both indus- trial and developing countries. Why the focus on the distribution of education( This is because ensuring access to basic education by the poor is closely related to a bet- ter distribution of education. Given limited public resources for educa- Improving the Distribution of Opportunities I 149 tion, concentrating public investment on education for the poor usually implies a reallocation of public spending away from subsidies to the types of education services that benefit the rich. Such policies are politi- cally unpopular, and many countries have been unable to implement them. However, as shown in this section, there are compelling reasons why a government should pursue such policies. Measuring Dispersions in Education Outcomes Since the days of Adam Smith, education has been linked to equitable social and economic progress. There is a small but growing literature on schooling inequality or the distribution of education (see, for example, Lam and Levinson 1991; Londono 1990; Maas and Criel 1982; Ram 1990). As data became available for measuring the distribution of edu- cation, the disparities became more apparent. Using standard deviation of schooling attainment, Birdsall and Londono (1997) investigated the impact of initial asset distributions on growth and poverty reduction and found a Significant correlation between initial educational inequal- ity and reduced income growth. Later, researchers constructed education Gini coefficients, which are similar to the Gini coefficients widely used to measure .distributions of income, wealth, and land. The Gini coefficient ranges from 0, which represents perfect equality, to 1, which represents perfect inequality. Education Gini coefficients can be calculated using enrollment, financ- ing, or attainment data, recognizing that different cohorts in a popula- tion were educated at different times. L6pez, Thomas, and Wang (1998) estimated Gini coefficients of educational attainment for 20 countries and found Significant differences in the distribution of schooling. Korea had the fastest expansion in education coverage and the fastest decline in the education Gini coefficient; it dropped from 0.51 to 0.22 in 20 years. India's education Gini coefficient declined moderately, from 0.80 in 1970 to 0.69 in 1990. Education Gini coefficients for Colombia, Costa Rica, Peru, and Venezuela have been increasing slowly since the 1980s, showing that inequality is on the rise (figure 3). An examination of education Lorenz curves for India and Korea in 1990 shows a great range among developing countries (figure 4). Despite 150 I A Vision for Development Figure 3 Gini Coefficients of Education, Selected Countries, 1960-90 1.0 - Less - - - - - - - - - - - Mali equal 0.8 - ............... ~ .............. . I: It • • • • • • • • India \3 0.6 - : ...................•• I: 0 .... . .. .. ...... ~~ ••••••••• •••. Venezue IRB a, ~ .. .. Ch- Ie U 0.4 - ........... Ina :::::l ... ... "'C ... L.U 0.2 - .. Korea, Republic of More equal o _L-,---,---,----,---,---,----,- 1960 1965 1970 1975 1980 1985 1990 Source: L6pez, Thomas, and Wang (1998). progress in expanding primary and secondary enrollment in India, more than half of the population (age IS and older) did not receive any educa- tion, while 10 percent of the population received nearly 40 percent of total cumulated years of schooling. Providing universal access to basic education remains a huge challenge for the country. Korea expanded its basic education program more rapidly, with a far more equitable distribution in educational attainment, as indicated by a flatter Lorenz curve and a smaller Gini coefficient. Even in 1960, when Korea's per capita income was similar to that of India, Korea's education Gini coefficient was 0.55, much lower than that of India in 1990. Note that the distribution of education in Korea was more equitable than that of income, but the distribution of education in India was much more skewed than that of income between 1970 and 1990. 7 A distribution of education as skewed as that of India implies a huge social loss from the underutilization of potential human capital. Assum- ing that ability or talent is normally distributed across population groups, production increases to its optimum when the dispersion of education matches the distribution of human ability. When the distribution of education is too skewed to match the distribution of ability, there is a Improving the Distribution of Opportunities I 151 I Figure 4 Education Lorenz Curves for India and Korea, 1990 '0 ? 100 -,----------H:1t:1:9 'O:g1 00 -,------------'~,. c: c: Mean = 2.95 years .91 c: Q) Mean = 10.04 years .2 ~ 80 Education Gini = 0.6<1 •• 83. .g ~ 80- Education Gini = ~}2" t:: Q) ...c.. oc.. o~ c.. ~ 60 o .~ g- ~ ... ... 60- ... ~ c..o ~ -= 40 Q) ~ 40- .::: ob .::: ob ~.= 20 E :§ 20- ~o ~o E 0 0 E,g 0 ~ ~ U ~ --,r--.--.-~--.-~ U~ ~ --,~~~~-.--,--.-~ o 20 40 60 80 100 40 60 80 100 Cumulative proportion of Cumulative proportion of population population (15 and over) (percent) (15 and over) (percent) Source: Thomas, Wang, and Fan (2000). deadweight loss to the society of underdeveloped and underutilized tal- ent. In this case, societies would be better off to massively expand basic education, especially by improving access to education by the poor. Examining the cross-country pattern of the distribution of education, we found that education Gini coefficients decline as the average educa- tion and income levels increase, although there clearly are other possi- bilities. Does the education Gini have to get worse before it gets better? As suggested by Londono (1990) and Ram (1990), there is a "Kuznetsian tale" with distribution of education. That is, as a country moves from the zero to maximum level of education, the variance first increases and then declines. However, country analysis suggests that this may not be the case if Gini coefficients are used to measure inequality. In addition to the industrial countries, Argentina, Chile, and Ireland had relatively low education Gini coefficients from the 1960s to the 1990s. The Gini coefficient for education in Korea and some other countries declined dramatically. Only a few countries-Colombia, Costa Rica, Peru, and Venezuela-have seen a Significant worsening of the education Gini coefficient. So worsening distribution of education is not inevitable (fig- ure 5). Among 85 countries for which education Gini coefficients were 152 I A Vision for Development Figure 5 Education Gini Coefficients for 85 Countries, 1990 1.0 - ..... c: IlJ '0 ::E ~ 0.6 - u c: .... '., .. . . \3 c: 0.4 - o • ••••. ..... • Hong Kong, China :;::; ••• <':l U • • • • Korea .g w 0.2 - Sri Lanka • Poland • • • •• United States o _'1-----;1----,--1-'1----;-1--,-1-'1,------,-1-----;1----,--1-'1----;-1--'-1--'1 o 1 2 3 4 5 6 7 8 9 10 11 12 13 Average years of education Source: Thomas, Wang, and Fan (2000) calculated, Afghanistan and Mali had the least equitable distributions in the 1990s at approximately 0.90, while most industrial countries were at the lower end, with the United States and Poland having the most equitable distribution (Thomas, Wang, and Fan 2000). Similar to the large variations in the distribution of education, other studies found large variations in health outcomes across income groups (box 1). Causes of Inc«(uaHty in Education Disparities in education is one of many aspects of poverty, but they are also associated with misallocation of public investment, war, wealth gaps, gender gaps, social exclusion, and economic crises. Numerous studies found that parents' education and household income, as well as wealth, affect children's education attainments. Wealth Gaps. Using data from the National Family Health Survey col- lected in Indian states in 1992 and 1993, Filmer and Pritchett (l999a) Improving the Distribution of Opportunities I 153 Box 1 Health Gaps between the Rich and the Poor Are Also Large Health gaps between the rich and the poor are as large as education gaps, which reflects the difficulties of reaching the poorest people outside the mainstream of economic life. Many studies find that the poorest of the poor are in the worst health (Behrman and Deolalikar 1988), and they are often hit hardest by wars, external shocks, and social and political upheavals. Child mortality rates among the poorest of the poor are often much higher than those among people who have higher incomes. The figure shows that in Brazil, child mortality rates were high among the poorest 10 percent of the population, and fell as wealth rose. It indicates that the poorest of the poor are in worse health than others. They suffer from infectious diseases much more than richer people do. Therefore, they are more dependent on good public policies than the rich (Bonilla-Chacin and Hammer 1999). Box Figure Mortality of Children Two Years Old and Younger by Wealth, Brazil, 1998 12 10 o o o 8 ...... ... ~ 6 '" 4 £ t1l QJ Cl 2 o Poorest 2 3 4 5 6 7 8 9 Richest Source: Bonilla-Chacin and Hammer (1999). found that the wealth gap, defined as the difference between the top 20 percent of an asset index and the bottom 40 percent, accounted for a large proportion of differences in enrollment rates. Enrollment rates varied from 4.6 percent in Kerala to 42.6 percent in Bihar. 154 I A Vision for Development In some countries, the differences in educational outcomes between the rich and the poor are staggering. A study of youths aged 15-19 in 20 countries showed that the poorest 40 percent of the population in five countries had a median of zero years of completed schooling; more than half of this group completed less than one year of school (figure 6). The education difference between the richest and poorest groups reached as high as 10 grades in India. Similar disparities in education attainment are found in Latin America (figure 7). Figure 6 Median Grade Attainment for 1S-19-Year-Olds from Rich and Poor Households, Selected Countries and Years ~- Tanzania, 1996 2 ~- Zambia, 1996-97 2 Zimbabwe, 1994 2 Uganda, 1995 3 Indonesia, 1994 ~- 3 Egypt, 1995-96 3 ~- >- Mali,1995-96 ~Cen. African Rep., 1994-95 .-- 4 4 5 Malawi, 1992 4 U Haiti,1994-95 4 Brazil, 1996 4 Cameroon, 1991 4 Colombia, 1995 4 Peru, 1996 4 Dominican Republic, 1996 4 Bangladesh, 1996-97 5 Cote d'ivoire, 1994 6 Guatemala, 1995 6 Morocco, 1992 8 Pakistan, 1990-91 9 India, 1992-93 10 I I I I o 1 2 3 4 5 6 7 8 9 10 11 Grade • Poorest 40 percent o Richest 40 percent Source: Filmer and Pritchett (l999b). Note: Numbers next to bars are the gaps (in grades) between rich and poor. Improving the Distribution of Opportunities I 155 Figure 7 Years of Schooling for 25-Year-Olds from Rich and Poor Households in Latin America Uruguay, urban 1995 6.2 Venezuela, RB, 1995 Argentina, 1996 ---- ...... 6.3 6. 5 Chile, 1994 6.6 Peru, 1996 6.9 - Bolivia, urban 1995 7.2 ... >- .... U !:: ::s o Paraguay, 1995 Costa Rica, 1996 -... 7.3 7.4 Honduras, 1996 Ecuador, 1995 -...... -. ilL 7.5 8.4 Brazil, 1995 8.5 -~ EI Salvador, 1995 8.6 -~ Panama, 1995 9.2 Mexico, 19941- 10 I I I I I o 4 8 12 16 Years of schooling • Poorest 1 0 percent [J Richest 10 percent Source: IDB (1998, p.27). Note: Numbers next to bars are the gaps (in years of schooling) between rich and poor. The surveys for Argentina include only Greater Buenos Aires. One implication of this large wealth gap is that demand for education is not independent of other endowments. Providing access to education inequalities influencing demand, such as gender gaps and the distribu- tion of other productive assets such as land (discussed later), is impor- tant as well. Social Exclusion. People who are excluded from mainstream society are less likely to be educated. Loury (1999) showed how social exclusion 156 I A Vision for Development changes human behavior and reduces the demand for schooling in inner cities of the United States. One reason that students drop out of school is because their peers have dropped out. In Bolivia, the inability of parents to speak Spanish is associated with higher mortality rates for children under two years old. In India, members of scheduled castes have higher mortality rates than other groups (Bonilla-Chacin and Hammer 1999). Gender Gaps. In some countries gender gaps are an important cause of education inequality. Among many studies addressing gender gaps in education, Schultz (1998) found that some 65 percent of world inequality is between countries, 30 percent is between households in a country, and 5 percent is between gender inequality. Bouis and others (1998) found a significant difference in human capital investments, such as in nutrition, health care, and educational attainment, between boys and girls in the rural Philippines. In Bangladesh, which has the largest gender gap out of the countries reviewed, women's attitudes toward their daughters' education have been slow to change (Amin and Pebley 1994). However, recent efforts have resulted in encourag- ing progress (box 2). Knight and Shi (1991) found that educational opportunities were still unevenly distributed in China despite consid- erable progress. The pattern of educational attainment is affected by gender as well as by other factors, such as income of the provinces, rural-urban differences in income, and family background. Though on the decline, gender discrimination persists in China's rural areas (see Dubey and King 1996; King and Hill 1993; and World Bank 2000b for cross-country experiences). The correlation is strong between inequality in education and gender gaps in literacy. Using a sample of 85 countries for which education Gini coefficients are available, Thomas, Wang, and Fan (2000) found that correlation coefficients between gender differences in illiteracy and edu- cation Gini coefficients increased Significantly from 0.53 in the 1970s to 0.69 in the 1990s. While educational inequality declined, gender inequality accounted for much of the remaining disparities in educa- tional attainment (figure 8). Reducing gender gaps in education is cru- cial to addreSSing the inequality in education. Improving the Distribution of Opportunities 1157 Figure 8 Gender Gaps and the Inequality of Education, 1970 and 1990 , 1.0 1.0 0 I'-. 0.8 o g; 0.8 • • • .... 0"> .... :S~ 0.6 'i::~ 0.6 G l.J I:: 0 0.4 I:: o 0.4 • ~ ~ III U :::l 0.2 • • r 1970 = 0.53 ~ :::l 0.2 r 1990 = 0.69 "0 "0 IoU 0 IoU 0 I -40 -20 20 40 60 -40 -20 o 20 40 60 Difference in illiteracy rate Difference in illiteracy rate (female-male, percent) (female-male, percent) Sources: Education Gini coefficients from Thomas, Wang, and Fan (2000); gender gap in illiteracy from World Bank (l999d) Note: The figures indicate data for 85 countries. Consequences of Large Dispersions in Education Outcomes A society cares about the unequal distribution of education because it directly affects human welfare. Unequal distribution of education is both a source and a consequence of poverty and social exclusion. Poor children who drop out of school eventually form a core of disadvantaged citizens who will be left out of mainstream economic and social life. Unless such people can obtain training later in life to find a meaningful job, poverty reduction and social inclusion will remain out of reach. A highly skewed distribution of education tends to be associated with reduced per capita income growth, even after controlling for labor and physical capital (Lopez, Thomas, and Wang 1998). Unlike land and physical capital, which are tradable across firms and individuals, edu- cation and skills are not perfectly tradable. As a consequence, both the distribution and level of education enter the production function and affect the level and growth of output. Using panel data from 20 devel- oping countries, Lopez, Thomas, and Wang (1998) demonstrated the 158 I A Vision for Development Box 2 Supporting Girls' Education in Bangladesh A revolution is taking place in schools across Bangladesh. Enrollment trends are changing and now more girls than boys can often be seen in schools. The educational attainment of women in Bangladesh is among the low- est in the world, and the gender gap is among the largest. In 1997, the female-male illiteracy gap was as high as 23 percentage points. Accord- ing to 1991 census data, only 20 percent of women could read and write, and only one in three students in secondary schools were girls. In 1994, the government launched a program to increase support for female secondary education, to raise the female literacy rate from 16 to 25 percent, and to create employment opportunities for women. With support from the World Bank and other development partners, the pro- gram is being implemented successfully and has made Bangladesh a South Asia pioneer in this area. The incentive program for girls, including fee exemptions and cash sti- pends, has generated tremendous enthusiasm for female education and has boosted the enrollment of girls in secondary schools. Girls' enroll- ment in the project districts is above expectations: enrollments rose every year and for every class. A total of 554,077 girls were awarded stipends in 1996, and the number was greater in 1997. In the Fulbaria Mohammad Ali High School in Savar, near Dhaka, girls out number boys four to one, a situation that was unthinkable a few years ago. Source. Robboy (1999). negative association between skewed distribution of education and eco- nomic growth. When a large part of the population is not educated, the low productivity of the labor force discourages investment in physical capital, and economic growth suffers. The distribution of education also holds strong implications for the poverty-reducing impact of growth. Ravallion and Datt (1999), using data from 15 Indian states between 1960 and 1994, found that the poverty redUCing association of growth varied according to initial conditions: growth contributed less to poverty reduction in states with Improving the Distribution of Opportunities I 159 initially lower literacy rates, farm productivity, and rural standard of living relative to urban areas. In Kerala, where basic education is well distributed and literacy rates are the highest, for males and females, a percentage point increase in the growth rate was more strongly associ- ated with poverty reduction. In Assam and Bihar, which had similar nonfarm growth rates to that of Kerala, but low literacy rates and higher inequality in basic education, growth contributed little to poverty reduction (figure 9). For example, Bihar, with the lowest female literacy rate among the states studied, 29 percent, showed a 32 percent gender gap in literacy rates, and 6 million children ages 6-10 were not enrolled in school between 1992 and 1993. Figure 9 Trend Rates of Poverty Reduction and Nonfarm Output Economic Growth in India, 1960-94 3 Kerala. Punjab & Haryana • Andhra Pradesh. West Bengal. Gujarat. • Tamil Nadu Orissa. Rajasthan. Karnataka. • • Jammu & Uttar Pradesh. Maharashtra Kashmir • Madhya Pradesh Bihar. Assam. -1 1 2 3 4 5 Trend growth in nonfarm output per person (percent per year) Source: Ravallion and Datt (1999). Note: Trend rates of growth estimated by ordinary least squares regressions of the logarithms on time. 160 I A Vision for Development Other states, such as Maharashtra and Madhya Pradesh, had higher growth rates but lower poverty reduction rates than that of Kerala. More than fast growth, pro-poor growth is needed for poverty reduction. If all Indian states had an elasticity of poverty reduction like Kerala, poverty, as measured by the headcount index, would have fallen at a rate of 3.5 percent, instead of 1.3 percent, a year since 1960. Improving the Efficacy of Public Spending Markets alone cannot provide equitable access to basic education by the poor. As partly a public good, education provides positive spillovers that are not fully captured by individuals and firms. However, the market fails mainly at the lower end of the income distribution: without public investment in the education of the poor, society's investment in education would be suboptimal. Yet, as we have seen, public spending is only weakly associated with education outcomes, partly because of a bias toward the better-off. Increasing public spending is desirable, but not enough to deal with the inadequate human development outcome, therefore, we now tum to improving the allocation and efficacy of spending. Allocate More Public Spending to the Education of the Poor The composition of government expenditures on education and health influences human development outcomes. Public spending needs to con- centrate on areas where market failure is pervasive and where positive spillover is largest: in primary and secondary schooling, especially for the poor. Given limited public resources, the balance needs to shift more toward investments in primary and secondary education. Additionally, the private sector and public-private partnerships should be encouraged to provide higher education where market failure is minimal. Korea showed how a strong emphasis on primary and secondary education could eliminate illiteracy and reduce educational inequality. Korea allocated two-thirds of its public education spending to primary schooling in the 1960s and early 1970s (table 2). Public spending on secondary education rose from 22 percent in 1965 to 33 percent in 1990. Yet, public expenditures on higher education rarely exceeded Improving the Distribution of Opportunities I 161 Table 2 Public Spending by Level of Education, Korea, Selected _Eml_ _ _ _ _ _ Years (percentage of total expenditures on education) Primary 64.7 67.4 52.2 47.9 44.5 43.2 Secondary 21.8 20.9 37.1 33.8 37.7 33.1 Higher education 13.3 8.2 10.7 11.4 11.5 9.6 Source: UNESCO database. 12 percent of the total public spending between 1965 and 1990. Ter- tiary education was mainly financed by private investments.' Before the 1990s, India spent a larger share on higher education than did Korea and a smaller, but increasing, share on primary education. In the mid- 1990s, India increased its spending on elementary schools and adult literacy programs from 20 to 31 percent of its total public spending on education, which was still far below that of Korea. To provide broader access to education and reduce the inequality, more remains to be done to improve the allocation of public investment in India Measured by public spending per student, public subsidies to higher education have been falling in many countries, but not fast enough to enable reallocation of public funds to basic education (table 3). Resource allocation is still biased against primary and secondary education in most countries. In the United States, the allocation of public spending has been balanced for more than 30 years, with subsidies to primary schooling at more than 20 percent of gross national product (GNP) per capita, the highest in the world. In Korea, due to the large number of students in primary schools, government support per student did not sufficiently emphasize primary education in the 1960s, even though more than 60 percent of total spending was allocated to primary educa- tion. This pattern was reversed in the 1980s, when public spending per primary school student exceeded that per college student. Associated with a strong emphasis on basic education, Korea was able to reduce education inequality rapidly. The United States has maintained the low- est education Gini coefficient in the world since 1965. 162 I A Vision for Development 0.27 Chile 0.31 Korea, Republic of 0.34 0.22 Mexico 0.50 0.38 United States 0.15 Venezu- ela, RB Tertiary 121.76 100.00 65.74 37.38 0.39 0.42 Sources: Public expenditure data are from the UNESCO database; education Gini coefficients are from Thomas, Wang, and Fan (2000). - Not available. Venezuela, in contrast, has favored higher education over basic educa- tion for more than four decades. While total public spending on educa- tion has increased from 4.3 percent of GNP in the 1970s to 5.1 percent in the 1980s and 4.6 percent in the 1990s, its allocation has worsened. In fact, the subsidies to primary and secondary education were reduced in the 1990s. This misallocation of public resources might partially explain the worsening of the education Gini coefficient in the 1990s. Improving the Distribution of Opportunities I 163 Korea, Republic of Terti 545 757 622 India Primary 8 10 20 23 29 39 39 Secondary 35 35 34 38 43 189 227 299 260 12.0 17.4 9.9 11.9 5.8 5 11.8 9.9 Secondary 24.9 15.8 14.8 13.9 11.0 Tertiary 81.8 85.0 90.3 66.4 Sources: Calculated from UNESCO and World Bank data. Note: Dollar amounts are not comparable accross countries as they are not in PPP dol- lars, but are comparable over time. - Not available. The Interaction between Demographics and Education Public spending per primary-school-age student in Korea rose more than tenfold between 1970 and 1995 as population growth rates slowed and the economy expanded (table 4). Public spending per secondary student also rose. Rapid economic growth, together with a stabilizing and even declining student base, meant that far more resources were being devoted to fewer children, allOwing dramatic improvements in the quality of primary education. In India, rapid population growth and constraints on public funding meant that a quantity-quality tradeoff was likely to occur. In 1995, India spent US$39 (in 1995 constant dollars) per pupil in primary schools, or 10 percent of its GOP per capita; Korea spent 17 percent (table 4). In Tamil Nadu, India, enrollment in primary and middle schools expanded 164 I A Vision for Development 35 percent between 1977 and 1992, a major achievement, but the pupil- teacher ratio rose from 36 to 47 and school conditions worsened. Stu- dent achievement suffered as a result (Duraisamy and others 1998). These relationships point to a need to consider the interaction between demographics and education policy and a need for policies focusing on education of girls and women, education to improve reproductive health, and voluntary family planning as pan of an overall development strategy centered on people (see also box 3). Box 3 Population and Development The link between population growth and economic development is a subject of contentious debate. The 1960s and 1970s were dominated by pessimistic, and sometimes alarmist, predications that rapid popula- tion growth would lead to famines, resource exhaustion, deficiencies in saving, irreversible environmental damage, and ecological collapse (Ehrlich 1968). The population optimists believed that rapid popula- tion growth would allow countries to capture economics of scale and promote technological and institutional innovation (Simon 1976). In the 1980s, the alarmist views were replaced by moderated, time- and country-specific assessments of the net negative impacts of rapid popu- lation growth, which were considered to be small. Only weak or incon- clusive links were found between demographic changes and economic growth (Bloom and Freeman 1988; Kelley 1988). More recent investigations revealed fairly large, negative effects of rapid population growth and related demographic components on per capita economic growth. Kelley and Schmidt (1999) found that rapid population growth exerted a fairly strong, adverse impact on the pace of economic growth in 89 countries between 1960 and 1995. The posi- tive impacts of density, size of population, and labor force entry were dominated by the costs of rearing children and maintaining an enlarged youth dependency age structure. Declining mortality and fertility each contributed approximately 22 percent to changes in output growth between 1960 and 1992, a figure that corresponds to approximately 21 percent of the average growth of per capita output, wh ich was mea- sured at 1 .5 percent. (Box continues on the following page.) Improving the Distribution of Opportunities I 165 Box 3 Population and Development (continued) Various components of demographic change have been successfully introduced into growth models. Bloom and Williamson (1998) showed that rapid demographic transition in East Asia led to fast growth in the working-age population between 1965 and 1990, expanded the per capita productive capacity, and contributed to the East Asia economic miracle. Other economic policies also facilitated the East Asians to real- ize the growth potential of the demographic transition. Less evidence was available on the link between demographic change and poverty until recently. However, if rapid population growth has a negative effect on economic and wage growth, it would negatively affect poverty as well. Eastwood and Lipton (1999) found that higher fertility increases poverty both by retarding growth and by skewing the distribution against the poor. In addition, evidence shows that public sector programs targeted at the poor, such as basic education and health care programs, have contributed to reduced poverty. Rapid population growth will dilute the intensity of public investment, and as a consequence make quality of service improvements more difficult to achieve. Source: Bloom and Williamson (1998); Eastwood and Lipton (1999); Kelley (1998); Kelley and Schmidt (1999) Improve the Mix of Public and Private Spending Korea also achieved a good mix of public and private financing in edu- cation. Since the mid 1960s, private colleges and universities have accounted for more than 70 percent of enrollments, private secondary institutions for more than 40 percent. Households assume a large share of educational costs, between 30 and 50 percent, depending on student education level. Tuition and related fees account for 40 percent of in- school expenditures for middle school, but rise sharply to 72 percent and more for high school and college students. The most effective public-private mix depends on the extent of mar- ket failures and a variety of other factors. Higher education is crucial for technological progress and productivity growth, but it can be con- sidered a private good, because most of the returns can be internalized 166 I A Vision for Development by individuals and firms. Whereas primary and secondary education have large spillover effects that are not fully captured by individuals and firms. Thus while government has a direct role in primary and second- ary education, it needs to encourage private investments and public-pri- vate partnerships in higher education. The United States, for example, provides valuable experiences in this regard. The policy environment, which can be defined by the degree of open- ness to trade and investment, for example, affects the demand for skilled workers and as a consequence people's willingness to pay for educa- tion. The quality of service provision for education, which is related to institutional capacities, also affects the willingness to pay. Similarly, the public-private mix in health care also depends on the nature of services and the degree of market failures in particular subsectors (Filmer, Ham- mer, and Pritchett 1999). One successful intervention is the Quetta Girls Fellowsbip Program in Pakistan. Launched in 1995, the pilot project aimed at determining whether establishing private schools in poor neighborhoods was a cost -effective way of expanding primary education for girls. The program encouraged private schools controlled by communities, ensuring them government support for three years. An evaluation analysis indicates that the program increased girls' enrollments by 33 percentage points, and boys' enrollment rose as well. Such programs offer promise for increasing enrollment rates in poor urban areas (Kim, Alderman, and Orazem 1999). Decent.ralize Dedsionmaking and Encourage Panicipation How decisions are made also affects the efficacy of public services. Where institutional capacity is low, public spending on centrally planned and organized interventions is likely to be ineffective. Many countries are moving to decentralized decisionmaking to better match expenditures to local needs. Empirical evidence on the benefits of decentralized school management was rare until recently. A recent evaluation ofEl Salvador's EDUCO program (Community-Managed Schools Program) shows that enhanced community and parental involvement in EDUCO schools has improved students' language skills and diminished student absences, which may have long-term effects on achievement Gimenez and Sawada Improving the Distribution of Opportunities I 167 1999). Other studies have also shown that community-managed schools achieved better results in Indonesia and the Philippines Games, King, and Suryadi 1996; Jimenez and Paqueo 1996). Several counties have been experimenting with voucher programs, which transfer resources to parents to help pay private school tuition. Colombia used a national voucher program from 1991 to 1997 to decen- tralize management and expand enrollment. The program was meant to address the deficiencies in the public education system, especially the low transition rate from primary to secondary schools by the poor. Only the poor were qualified for vouchers, which avoided subsidizing the wealthy as in previous voucher programs. Participation was a problem, however; only 25 percent of Colombia's municipalities joined the pro- gram, limiting the benefits. A careful evaluation of the program found that demand for secondary education and availability of space in private schools were key determinants of municipal participation (King, Ora- zem, and Wohlgemuth 1999). Such voucher programs are potentially beneficial to the poor. In countries with corrupt and predatory governments, however, decentralizing decisionmaking may not be the answer. Corrupt officials are likely to reallocate public resources from the poor to elite interest groups, subsidizing the types of social services that benefit the rich. Empowering people to influence policy through democratization and a greater role for civil society and encouraging greater participation of the community and families are steps in the right. Making Education More Productive Improving the productivity of education for the poor takes more than invest- ments in their education. To be more productive, the poor must be able to combine their human capital with other productive assets such as land, equity capital, and job opportunities in open and competitive markets. Distribute Land More Equitably The poor are not just income poor; they also lack assets. In agrarian economies, disadvantaged households are usually landless or land poor. 168 I A Vision for Development In South Asia, southern Africa, and much of Latin America, poverty is highly correlated with landlessness (figure lOa). Income inequality also seems to be associated with inequality in landholding (figure lOb), although data on land ownership are weak. Land reform has many benefits for growth and poverty reduction, as suggested by empirical studies discussed later. In societies where a large segment of the population does not have access to the productive resources of the economy, strong demand for redistribution gives rise to civil unrest. Studies suggest that inequality in land ownership and income are correlated with subsequent lower economic growth (Alesina and Rodrik 1994); a one standard deviation increase in equality is asso- ciated with increases in growth of one-half to 1 percentage point (Pers- son and Tabellini 1994). Other studies showed that the initial inequality of assets, measured by land distribution, is more Significant than income inequality in affecting subsequent growth (Deininger and Squire 1998; Li, Squire, and Zou 1998; Lundberg and Squire 1999). Still others have found initial land inequality, along with initial education inequality, to have strong negative links to economic growth and to the income growth of the poorest (Birdsall and Londono 1998). In addition to being nega- tively correlated with growth, land inequality also appears to reduce the pOSitive effect of human capital on growth through interaction effects (Deininger and Olinto 1999). Redistributive land reform gives land to more efficient producers and reduces credit market imperfections, leading to improved invest- ment decisions by the poor. Greater wealth, as measured by land ownership, also proVides a safety net for the poor against external shocks and increases their ability to participate in the political process (Binswanger and Deininger 1997; Binswanger, Deininger, and Feder 1995). Ravallion and Sen (1994) noted that redistribution from land- rich to land-poor households would reduce aggregate poverty in rural Bangladesh. They also found that transfers from the budget would have the greatest impact on poverty if concentrated on landless and marginal farmers. Widespread ownership ofland improves not just equity, but also pro- ductivity (Berry and Cline 1979) and efficiency (Banerjee 1999). Better Improving the Distribution of Opportunities 1169 Figure lOa Poverty and Landholding, Bangladesh, 1988-89 ., c: 80 Q) ... u Q) 60 3- • >< Q) "'C c: 40 • .... • c: ::l • 0 u 20 "'C • '" Q) :r: 0 0 5 10 15 Median landholding (acres) Source: Ravallion and Sen (1994) Figure lOb Income Share in the 19805 and Land Gini Coefficients in the 19605 0.12 .... trl ..•• Q) ~ trl 0.10 .2~ \ Q) 0"\ ..c: .... 0.08 ~ .... Q) . 'O.s 0.06 • • ....c: Q) - •• •• 1~ 0.04 •• • • • •• CIJ:;:::; • • E·§ 0.02 o c- ~ 0 ~----.----.----.----.----. o 0.2 0.4 0.6 0.8 1.0 Land Gini coefficient in the 19605 Source: Deininger and Squire (1996). Note: Data are country-specific decade averages. N = 27. r = -0.40. 170 I A Vision for Development land rights have facilitated investment in Ghana (Besley 1995), and pos- session of legal land ownership documents in Thailand has significantly impacted farmers' agricultural performances (Feder 1987, 1993). Many East Asian economies have widespread landholdings, a result of tradi- tional ownership or land reform. In Korea, confiscated land at the end of World War II was first distributed to the tillers. Then in the 1950s the government distributed landlord properties, with nominal compen- sation, to 900,000 tenants, effectively eliminating tenancy. In Taiwan, China, the government obtained land from landlords in the early 1950s, compensated owners with shares in state enterprises, and then sold the land to tillers on favorable terms. In China, the household responsibility system introduced in 1979 assigned collectively owned land to households for up to 15 years. The system, which was renewed for another 30 years in 1998, tied rewards more closely to farming efforts. Together with price and other reforms, the initiative resulted in a 5.7 percent annual rise in average grain yields from 1978 to 1984 and 1.8 percent thereafter. Nearly half of the total output increase in the period can be attributed to the household responsibility system (Lin 1992). One study found that access to land can improve nutritional status in China, because it serves both as a means of generating income and as a source of cheap calories relative to the market (Burgess 2000). Another study found that in rural China, wealth, especially land, is distributed more equally (Gini coefficient of 0.31) than income (Gini coefficient of 0.34). The main source of rural income inequality is wage income rather than the returns from land, an atypical pattern for a developing country (McKinley 1996). Land reform is contentious and politically difficult. Market-assisted land reform has emerged in recent years as an alternative to traditional land reform, and is being implemented by Brazil, Colombia, and South Africa. The basic idea is that the state gives qualified, landless people a grant or a subsidized loan to buy land. This market-assisted approach differs from fully compensated land reform in two ways: there are neither explicit targets for land distribution nor fixed time schedules. In addi- tion, the reforms are demand driven; people who want the land most will come forward to buy it. Some researchers contend that market -assisted Improving the Distribution of Opportunities I 171 land reform has advantages, especially if combined with microcredit, extension programs, and complementary actions that facilitate agricul- tural cooperatives and contract farming (Banerjee 1999). The success of the programs can be enhanced if accompanied by efforts to make land markets more transparent and fluid and to involve the private sector (Deininger 1999). While it is still too soon to reach definitive conclu- sions on the costs and benefits of these reforms,· some other studies have found that this approach benefits large landholders because land prices are likely to be bid up, requiring the poor to pay elevated prices (L6pez and Valdes 2000). Distribute Equity Capital and lostcr Competition A case can also be made for better distribution of equity through employee ownership plans. In industrial countries, employee stock ownership plans have been positively associated with firms' performances. Firms in the United States have used employee ownership plans in restructuring. For example, United Airlines negotiated significant wage concessions in return for a majority equity stake for employees. By communicating the benefits of the restructuring plan to its investors and employees, the company reduced the up-front restructuring cost, enhanced the effects of the restructuring, and thereby created additional shareholder value. Both investors and employees have benefited (Gilson 1995). In countries hit by the recent financial crises, the sale of equity shares to employees may provide a way to recapitalize companies in desper- ate need of capital, and can also redistribute wealth and risks. Where restructuring leads to retrenchments, laid-off workers may be given equity shares in lieu of severance pay, and so benefit from the compa- nies' restructuring and recovery. Employee ownership plans can also help reduce workers' resistance to restructuring (Claessens, Djankov, and Klingebiel 1999). Providing micro financing to laid-off workers to establish small enterprises is another way to empower them to build physical and financial capital. Privatization offers additional opportunities for redistributing equity. Because public enterprises were built using tax revenues, a cer- tain proportion of the equity shares can justifiably be distributed or 172 I A Vision for Development sold at a discount to taxpayers during privatization. Properly designed privatization programs can reduce asset inequality and poverty. For example, using proceeds from the privatization of the six largest state enterprises, Bolivia established a pool of financial assets to fund a mini- mum flat pension for everyone in the country. While .the amount pro- vided is small, the program will reach the most vulnerable in society: the elderly poor who are unable to save for retirement. Hungary used its receipts from privatization to repay foreign debt, which raised its sovereign debt rating, reduced its interest payments, and benefited all citizens (Kornai 2000). Privatization entails efficiency gains as well as social losses, and society must maintain a balance between the efficiency gains and social losses (and compensate the losers), if the gains are to be sustainable. After privatization in Mexico, there was a 24 percentage point increase in the ratio of operating income to sales. Of those gains in profitability, 10 percent were due to higher product prices, 33 percent to a transfer from laid-off workers, and the remaining 57 percent to productivity gains (La Porta and Lopez-De-Silanes 1999). To compensate those who suffer losses as a result of privatization, equity shares in lieu of severance pay could be distributed to laid-off workers, or other forms of income transfers could be financed by taxation. Competition and regulation are vital for a market economy. The efficiency of a market economy depends on both private property and competitive markets, but many developing and transition economies lack both. Before and during privatization, competition and a regula- tory framework must be introduced (Stiglitz 1999). Evidence from the United Kingdom shows that when big public enterprises were priva- tized, antitrust regulations were crucial to ensure transparent, eqUitable, and efficient allocations of resources (see also Herrera 1992). Privatizing large public firms that have a natural monopoly without first setting up antitrust regulations, as was done in Russia, can worsen the distribution of wealth and income. And it could create powerful, entrenched inter- ests that undermine the possibility of viable regulation and competition in the future and block further broad-based reform measures (Kornai 2000). Improving the Distribution of Opportunities I 173 Combine Human Capital with Opportunities in Open Markets The urban poor must hire out their labor. Thus, the creation of job oppor- tunities is critically important to the productive use of their human capital and to poverty reduction. The World Development Report 1990 (World Bank 1990) proposed a strategy of broad-based, labor-intensive growth to generate income-earning opportunities for the poor. Some economies have pursued this strategy and more-they have combined investment in learning and education with openness, forming a virtuous circle. Exam- ples include japan in the 1950s and Hong Kong, China; Korea; Singapore; and Taiwan, China, from the 1960s through the 1980s. The accumulation of knowledge influences a country's trade and competitiveness, and trade enhances the accumulation of knowledge, especially through imports. Lucas (1993) noted that to sustain knowl- edge accumulation, a nation must be outward oriented and a significant exporter. Young (1991) and Keller (1995) found that trade itself is not an engine of growth, but must operate through some mechanism, such as the formation of human capital, to affect growth. Market openness facilitates technological progress and capacity build- ing through various modes oflearning, such as the importation of capi- tal and intermediate goods, learning by doing, and on-the-job training. Foster and Rosenzweig (1995) found strong evidence of learning-by- doing and learning spillovers: farmers' own experiences and that of their neighbors with high-yield varieties significantly increased profitability. Farmers with experienced neighbors are significantly more profitable than others, and the spillover effects associated with learning from oth- ers are small, but not unimportant. The link between overall economic policies and the impact of educa- tion is clear. The World Development Report 1991 (World Bank 1991) found that among 60 developing countries from 1965 to 1987, eco- nomic growth rates were especially high for countries with high levels of education, macroeconomic stability, and market openness. The impact of trade openness on long-term growth thus depends on how well peo- ple can absorb and use the information and technology accompanying trade and foreign investment. 174 I A Vision for Development Increases in the stock of human capital tend to accelerate growth dur- ing market reforms and under an outward-oriented economic structure, but in their absence, education has no Significant impact on growth. The growth effect of an interaction between openness and education was robust (Lopez, Thomas, and Wang 1998). Similarly, for 1,265 World Bank projects, Thomas and Wang (1997) found that the rate of return was 3 percentage points higher in countries with both a more educated labor force and a more open economy than in countries that had only one or the other (figurell).8 Protect Workers agai.nst Shocks The urban poor usually lack adequate human capital for all but unskilled work. With increased openness and globalization, job opportunities for unskilled workers have become more scarce and incomes more volatile. Figure 11 Education, Openness, and Economic Rates of Return in 1,265 World Bank Projects 18.0 Less open education Sources: Thomas and Wang (1997); annex 3. Note: Economic rates of return are from the evaluation database of the World Bank's Operations Evaluation Department. Education is measured by the aver- age level of schooling of the labor force, and openness by the logarithm of the foreign exchange parallel-market premium. Improving the Distribution of Opportunities I 175 Diwan (1999) found that labor shares in GDP have been falling for more than 20 years in most regions. Consistent with this evidence, unemploy- ment rates in Latin America have risen since the end of the 1980s. In 1989, only 5 or 6 of every 100 Latin Americans willing to work were unemployed; by 1996, nearly 8 of every 100 were not working. Unemployment rose in East Asian countries hit by the recent finan- cial turmoil, from previously modest levels to 4.5 percent in Thailand, 5.5 percent in Indonesia, and 7.4 percent in urban Korea (World Bank 2000a, p. 59). Perhaps even worse was the fall in real wages because the poor could not afford to remain unemployed. Real wages fell in 16 of 22 recessionary episodes in Latin America during the 1980s and 1990s. In 18 cases, after two years real wages remained lower than their precrisis levels (Lustig 1999). In East Asia, manufacturing real wages fell by 4.5 percent in Thailand, 10.6 percent in Korea, and 44 percent in Indonesia between 1997 and 1998 (World Bank 2000a, p. 57). As a result of both a decline in real wages and in employment growth, labor shares in GDP fell sharply following the financial crises, perhaps because labor is less mobile than capital, and so is forced to bear a large share of the financial burden of crisis resolution (Diwan 1999). Urban unskilled workers are most vulnerable to external shocks, structural adjustment, and economic downturns. Lacking adequate human capital, they are often unable to adjust to changes in labor mar- ket demand. The problem is exacerbated by labor market distortions and weak labor market institutions that further hamper labor market adjustments. Labor market distortions need to be checked: the existence of child labor and distorted wage structures discourage demand for edu- cation. Governments need to help build labor market institutions and provide the labor market information that the poor need. There is also the need to train or retrain displaced workers· and increase their mobility across sectors. Ghana trained more than 4,000 people in vocational schools or apprentice programs, which offered instruction in such skills as dressmaking, electrification, and carpentry. Participants received certificates and tools after completing the training, giving them the human and physical capital to begin work immediately as self-employed workers. Many labor exchange centers were estab- 176 I A Vision for Development lished in China to retrain and redeploy displaced state sector workers in the private sector. Some of the proceeds from liquidating the assets of bankrupt state enterprises were used to redeploy unemployed work- ers. Such measures help to ease the rise in social tensions and inequality during transition periods 9 Conclusions For growth to have an impact on poverty reduction, the assets of the poor must be augmented. This can be achieved either by investing in new assets, specifically, human capital, or by redistributing existing assets. This chapter has focused on investing in new assets by examining the quality and distribution of education and the causes and consequences of, and remedies for, large dispersions in educational attainment. When the quality of schooling is low and educational inequality is high, the poor are hurt most because human capital is often their main asset. Inadequate investment in the human capital of the poor exacerbates and perpetuates poverty and income inequality. Improving the allocation of public expenditure in education is a key. Despite making efforts to this end, many countries have not been able to concentrate public investment on primary and secondary education. Inappropriate allocations of public expenditures have led to low aver- age attainment per dollar spent on students, which affects mostly the poor. Governments need to reallocate public expenditure toward basic education, while at the same time enabling the private sector and public- private partnerships to increase efforts in higher education. Countries have compelling reasons to strengthen education at all levels. It can augment the poverty-reducing aspect of growth, in addition to improv- ing welfare directly. It enables countries to participate effectively in the global economy. Investing in education alone will not guarantee successful develop- ment or poverty reduction. Thus, this chapter went beyond education to issues related to the use of human capital, namely, the distribution of land and other productive assets and economywide poliCies. To reduce poverty, countries need a multidimensional strategy centered on peo- Improving the Distribution of Opportunities I 177 pie. There is the need to ensure access to education and health services and distribute them well; to facilitate fuller use of the human capital of the poor; and to empower the poor with land, equity capital, training, and job opportunities made possible by opening to international trade, investment, and ideas. Notes 1. On the importance of asset distribution, see, for example, Ahluwalia (1976); Birdsall and Londono (1997); Chenery and others (1974); Deininger and Squire (1998); Kanbur (2000); Knight and Sabot (1983); Lam and Levison (1991); Lanjouw and Stern (1989, 1998); Li, Squire, and Zou (1998); Ram (1990); Ravallion and Datt (1999); and Sen (1980, 1988). 2. Some arguments here apply to health, but due to space limits, this chapter focuses only on education. 3. Certain assumptions apply here. This conclusion holds if there is a competitive market and two factors of production: physical and human capital. It is also true if human capital is decomposed to skilled and unskilled labor. 4. These measures, however, are sensitive to national promotion policies. Scores on internationally comparable tests represent an improvement over traditional indica- tors, but they are available for only a few developing countries, and they are not comparable over time. Due to these problems they are not used here. 5. The same is true for industrial countries. A study estimated the cost of different kinds of national class size reduction policies in the United States and found the opera- tional costs could be as large as US$2 billion a year (Brewer and others 1999). 6. There was heated debate of the "equity of what?" Sen (1980) sees individuals' levels of functionings, such as literacy and nutrition, as attributes to be equalized. Others see the opportunities people face as the attribute to be equalized (Arneson 1989; Cohen 1989; Roemer 1993). Yet others consider the amount of resources as the attribute to be equalized (Dworkin 1981). 7. Many studies have compared income, land, and wealth Gini coefficients (for exam- ple, Leipziger and others 1992 for Korea). However, no study has compared educa- tion Gini coefficients with those of income and land. Income Gini coefficients are available only for selected years (Deininger and Squire 1996): 1970 1977 1983 1990 1992 1970 1976 1980 1985 1988 India 0.30 0.32 0.31 0.30 0.32 Korea 0.33 0.39 0.39 0.35 0.34 8. The cross-country, project-level data set included variables on education, per capita income, openness, government expenditure, and project performance. The project data covered 3,590 lending projects in 109 countries evaluated by the Independent Evaluation Group for 1974-94, with a rating of overall performance (satisfactory/ not) and economic rates of return. 178 I A Vision for Development 9. For more discussion on labor market and social protection issues, see Basu, Geni- cot, and Stiglitz (1999); World Bank (1994) on old age crisis; and World Bank (2000c) Bibliography The word "processed" describes informally reproduced works that may not be commonly available through library systems. Ahluwalia, Montek S. 1976. "Income Distribution and Development: Some Stylized Facts." 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Education Sector Strategy. Washington, DC - - - . 1999b. "Poverty Trends and Voices of the Poor." Poverty Reduction and Eco- nomic Management, Human Development, and Development Economics, Washing- ton, DC Processed. - - - . 2000a. Global Economic Prospects and the Developing Countries. Washington, DC: World Bank. - - - . 2000b. Engendering Development. New York: Oxford University Press. - - - . 2000c. World Development Report 200012001: Attacking Poverty. New York: Oxford University Press. Young, Alwyn. 1991. "Learning by Doing and the Dynamic Effects of International Trade." Quarterly Journal oj Economics 106(2): 369-405. Brazil's Agenda by Vinod Thomas An adequate conception of development must go much beyond the accumula- tion of wealth and the growth of gross national product . .. Without ignoring the importance of economic growth, we must look well beyond it. -Amartya Sen, Development as Freedom Each fall and spring during 2001-05, a Brazilian delegation led by the coun- try's finance minister met with the World Bank president and his team to take stock of progress. The meetings were always cordial and upbeat. Early concerns in this period were economic stabilization and the revitalization of growth. The extent and nature of World Bank support always featured in the discussion. The question was never whether there would be partnership, but rather how to shape it to fit Brazil's needs. The spring meeting of 2005 was the last between outgoing President James Wolfensohn and Finance Minister Antonio Palocci. The minister's statement highlighted Brazil's commitment to environmental sustainability, which was front and center in his comments. Acknowledging the difficulty of the issue, the World Bank president said that this was the best news he had received during these meetings. These memorable encounters not only show the evolution of thinking in Brazil, but also provide a cross-country perspective. These discussions emphasize the comparative experiences of the large developing countries- high growth along with the need for macroeconomic stability in China and First appeared as Chapter 7 of From Inside Brazil: Development in a Land of Contrasts, Stan- ford, CA: Stanford University Press. Reproduced with permission. 186 I A Vision for Development India, efforts to meet the challenge of good governance in Nigeria, recov- ery from natural disasters in Indonesia. In this international context, the great importance of Brazil and the country's reform agenda emerges clearly, as seen in the indications and interest of the incoming World Bank preSident, Paul Wolfowitz. Most projections by outside experts place Brazil's prospects in the mod- erate range, below those of China, India, and other Asian economies. To be sure, these projections reflect the country's various constraints, as dis- cussed throughout this book. But they also extrapolate the future based on recent trends. Past performance is not necessarily a predictor of future per- formance, especially in a country like Brazil, where breakthroughs appear imminent in so many areas-science and technology, trade, agribusiness, ecotourism, art, and culture. Some are traditional areas where one looks for value added; others are unique to Brazil. The reform agenda includes actions to improve social inclusion and augment the contribution of all citizens. It offers possibilities for making the most of the country's conven- tional and unconventional strengths, for changing course from the recent past and proving predictions wrong, as Korea did not so long ago. Early in the new administration in 2003, President Lula hosted a one- day seminar on reform priorities with a special focus on international experience relevant to Brazil. Virtually the entire cabinet of ministers was present. Co-hosting the seminar was the World Bank preSident. Other international participants included Inter-American Development Bank president Enrique IgleSias, former prime minister of the Nether- lands Willem Kok, and World Bank chief economist Nicholas Stem. An hour into the deliberations, President Lula remarked that the meet- ing resembled the usual international forum, covering the required ground but lacking any sense of urgency or practical perspective. His intervention shook up the meeting. What followed was a sharply focused discussion of global experience with social assistance programs and the political economy of change, particularly in Mexico. If one clear priority for implementation emerged from the meeting, it was the idea of Bolsa Familia. The reform agenda can be broad. The question is how to set priori- ties and proceed with urgency. To some extent the components can be Brazil'sAgenda 1187 phased in over time, but remaining open to opportunity and seizing the moment is vital. Surely this is more an art than a science. In this spirit, box 1 sets out five areas of opportunity and related reforms that Brazil is pursuing to help capitalize on them. Investing in All Assets As we look across all the areas affecting performance, a clear theme emerges: the need to emphasize human capital and people's welfare. While a focus on progress toward quantitative targets, such as school enrollment, is important, just as critical is a focus on the attributes of investments in human capital. A second theme relates to physical capital and the need to achieve higher growth by improving productivity, especially that of smaller pro- ducers. An emphasis on productivity and inclusion, rather than on accu- mulation through subsidies to physical capital, would help to address the need for growth with equity. A third theme concerns natural capital. Productivity is paramount: Brazil needs to use its precious natural resources wisely while also pro- tecting them as a source of sustainable growth. It is widely accepted that countries must invest in both physical capital and human capital to grow. It is becoming equally evident that countries also need to invest well in their natural capital to grow. Tying these three themes together to make it all happen are the insti- tutional contributions, and in this regard it is important to ask how macroeconomic accounts are managed, how political transitions are car- ried out, and how natural resources are managed. These institutional connections should be recognized and supported. Furthermore, there are institutional gaps that need to be addressed: the high cost of doing business, weak coordination across sectors and tiers of government, and inadequate property rights in rural areas. Brazil can achieve its potential if it capitalizes on its institutional capabilities and turns the weaknesses around. Unleashing the power of the private sector is one step in that direction. Building on the decentralized municipalities is another. Draw- ing on the strength of civil society is a third. 188 I A Vision for Development Box 1 Scoring Goals When you place Brazil's opportunities and constraints side by side, the question is what priorities for action are revealed. The list in the table below is the result of listening to what people have said about goals and options and then evaluating these against criteria for welfare outcomes (education, health, incomes), feasibility (such as productivity increase), the country's unique assets (human and natural resources), and the overriding role of institutions. All the goals listed below are highly desirable and feasible over the next 15 years. But scoring goals requires a vision and a game plan that peo- ple can get behind. In many ways, each goal is also proxy for a certain stage of broader advancement that is within striking distance. Corresponding to each goal is a priority area for action. These goals are not comprehensive, but each is a response to the question: which single direction would you press for before all others? Some of the actions, such as social security reform, require legislation and even constitutional approval; others, such as improving service quality, can be sparked by administrative actions. Coals and Options for Brazil, 2005-2020 Goals Areas of action Achieve investment grade rating Implementing the next round of social security reform Advance in global competitiveness Place a single-minded focus on the equality of education Shift to greater equality Carry out a campaign to boost impact of public expenditures Upgrade natural assets Enforce contracts in the states for environmental sustainability Improve service quality Improve the regulatory framework for energy and infrastructure Reform the political process Implement changes in the electoral and political financing mechanism These goals and actions are, of course, interrelated. For example, better public spending complements an improved regulatory framework to spark private investments and growth. A shift to better quality in edu- cation together with a higher priority on sustainability leads to better use of natural resources. Political reform makes socioeconomic reform more viable and sustainable. These are some of the virtuous cycles the country hopes to generate. Brazi 1'5 Agenda I 189 In each of these aspects-human, physical, and natural capital- qualitative aspects emerge as important. That means that the reform agenda and its institutional underpinnings need to factor in the quality effects-the unifying theme of this book. Growth and Beyond Economic growth dominates discussions of development, as it should because of its pervasive benefits. But it is also important to focus on the broader aspects of welfare, including basic education, health, water, san- itation, shelter, and a clean environment. Even if the impacts of interven- tions along these dimensions are not immediately captured by poverty or income indicators, they contribute to real improvements in welfare and poverty and help to overcome the fatalistic belief that those who are born poor will remain poor. Ceara's experience in that regard could have far-reaching implications for how to strengthen poverty assessments and how to use targeted poliCies to improve service provision to the poor, increase welfare, foster inclusion, and redistribute consumption. Economic growth will not be sufficient to reduce poverty rapidly in one of the most unequal countries in the world. Actions need to build on the progress already made in strengthening human capital, especially among the poor. Demographic shifts bring new challenges, such as the rising incidence of urban poverty, calling for new approaches. What stands out in this review, with implications for other countries as well, is that a combination of growth and targeted income transfers is needed to make a significant impact on poverty. It would be worthwhile to extend the initial work mentioned here on understanding the nature and extent of welfare differences as a basis for stronger social programs. The significance of the growth-poverty link goes even further. An inclusive approach that pays specific attention to poverty and welfare can contribute to faster growth and help to sustain it. For Brazil to achieve and maintain growth of, say, 7 percent, it will be essential to include a far larger share of the population in the production process. And in that way, effective social programs are not only good comple- ments of growth, they are also contributors to growth. 190 I A Vision for Development If this is true, it calls into question some of the traditional thinking about development strategies. It used to be said that countries need to grow first and distribute later, or grow first and clean up later. The truth may be that growth and distribution and growth and a better environ- ment go hand and hand, at least in Brazil. More Productivity from All Productivity growth is one of the keys to growth that is sustainable and inclusive. It can also trigger factor accumulation, which is critical to growth. The reform agenda needed to restore Brazil to a high-produc- tivity growth track is by now quite well established. The agenda includes regulatory reform, labor market reform, and capital market reform to overcome the severe infrastructural bottlenecks, facilitate better use of human capital, and improve the use of natural capital. Some of these reforms are challenging to carry out, but real progress often requires some tough choices. In the drive for growth, investments in capital should not be favored over investments in labor. That would only worsen income distribution, with little payoff in sustained growth. Also important is to avoid a bias against natural capital, which would impede progress toward sustain- able growth. A relatively neutral stance toward all three forms of capital would enable Brazil to draw on its relative strengths while ensuring that growth is inclusive and sustainable. The importance of and potential for productivity improvements comes through strongly in Brazil's particular circumstances, but has relevance for other countries as well. It would be useful to learn more about the relative importance of investments and productivity in the policy scenarios, their relative effects on fiscal outcomes and growth, and avenues for generating higher productivity and investments. Sustainability for Poverty Reduction The wealth of its natural resources sets Brazil apart from other countries. Though sometimes viewed as a constraint, Brazil's natural resources are a collection of valuable assets-some of them priceless. They are the Brazil's Agenda I 191 common patrimony of Brazil's people, making their preservation and prudent use prime considerations. Valued properly, they could be a strong force for sustainable growth with equity, Brazilian-style. Brazil will be that much richer if it succeeds in pursuing these goals success- fully. Sustainable use of natural resources would require great care in envi- ronmental management, with increasing attention to enforcement- including stronger control over illegal logging. Showing great promise are efforts to combine ecological and economic zoning with institutional strengthening, for example, in enforcement efforts in the Cerrado and the Caatinga. Also promising are efforts to integrate environmental policies with overall reforms, making environmental measures proactive rather than remedial and mainstreaming them across sectors. Natural resource man- agement also needs to rely more on economic incentives where possible (such as incentives to promote sustainable forest management), and less on costly, often unrealistic standards (such as for wastewater collection in urban areas). The careful management and protection of natural resources is a key tool for economic growth and stability. Natural resource manage- ment assumes a special importance for poverty reduction and inclusive growth because these resources make up a large share of the assets of the rural poor, and environmental mismanagement harms both the rural and the urban poor. While especially important in Brazil, a deeper understanding of the pov- erty-environment link could have broad implications. It would be valuable to follow up on the growth and poverty effects of alternative approaches to natural resource use in order to identify the most successful. Political Reform Brazil's political system, administration, and financial institutions are relatively developed and democratic. The federal contract and decentral- ization, with a strong role for states and municipalities, are major assets in Brazil's efforts to fulfill the aspirations of its people. 192 I A Vision for Development The institutional structure and political processes also slow the pace of reform, however. Some view the constitution as a stumbling block to progress and would like to see it reformed. While delays are sometimes a natural part of participatory and democratic processes, they also reflect the power of those who support the status quo. None of this is unique to Brazil, but attention to such political issues is at least as important as attention to the economic rationale of reforms. The pace of economic reforms clearly suffered with the onset of the political crisis in 2005. Analysts agreed that, first of all, there should be full prosecution of the guilty. Second, the crisis should be taken as an opportunity to launch the much-needed political reforms. Political setbacks, especially in a pre-election year such as 2005, are also not uncommon across countries. What is crucial is that where prob- lems of governance and corruption are identified, the opportunity is seized to take action, as in the previous experiences of Chile, Finland, and others. Those countries that have not responded to such crises have seen prolonged political problems and economic decline. Reforms of political processes have various facets. In light of this book's focus on economic welfare, however, a primary concern would be how political processes serve public welfare rather than vested inter- ests. Reforms improving the rule of law, transparency, and recourse to legal and judicial processes are just some of the directions that might better align the use of public resources to public welfare rather than allowing capture by special interests. Analysis of what needs to be done in Brazil has not been lacking (see, for example, Reis Velloso 2005; Gall 2005). The broad agenda for reform involves redUCing opportunities for corruption while at the same time increasing its consequences. Analysts have highlighted sev- eral dimensions of reform. One aspect, on which some steps have been taken, relates to containing political influences in the public sector, for example, by limiting political appointments to public offices. Another has to do with electoral processes, including rules for public finanCing of election campaigns, transparency in the accounts of political parties, and supervision and review of political campaigns. Brazil's Agenda I 193 Brazil is among the most decentralized of countries. It also has rela- tively developed central institutions, such as its licensing regime. The challenge is to take advantage of the strengths at each level of govern- ment and to ensure that the country's great institutions are a force for sustainable development. For Brazil, more than for most countries, there may be much value in better integrating federal, state, and municipal agencies. Brazil's people may be its greatest strength, but much of that strength is still untapped. Investments in human capital, which lagged in previ- ous decades, are recovering strongly. Further efforts in this direction, to make human capital a special asset, are not only possible but also complementary to all other measures. It will be crucial to take proper advantage of the enormous energy of Brazil's large and growing youth population. The last decade saw the largest increase in the number of young people: by 2003 there were some 34 million Brazilians between the ages of 15 and 24, nearly one- fifth of the total population (IPEA 2005). The country's civil society and its information media are complementary and positive forces. They could do much to mobilize youth, and the population in general. One reason that efforts to generate greater participation and mobilize human resources are especially important for Brazil is that the country's financial saving rate is low. Given the debt and borrowing limits, total investment is constrained by these low savings. Reforms to generate more participation and contributions of the people, some of them dis- cussed here, can help to relieve some of these constraints on financial savings and investment. Meanwhile, Brazil can also augment its financial savings by dipping into its social and natural capital. Civil society is a powerful force for generating and applying all forms of savings, including through social movements, partnerships, and volunteerism (Villela 2005). Institutions, in the broadest sense, are vital for mobiliZing these savings and putting them to work for development. The nature of political and institutional reform deserves greater attention. Brazil is likely to achieve the largest gains by striking a better 194 I A Vision for Development balance between rules and flexibility, participation and stalemate, cen- tralization and decentralization-issues important in any country, but especially in Brazil. Shift to a Focus on Quality Brazil has made good progress in setting quantitative targets in its devel- opment agenda. ImpreSSively, municipalities track human development indicators, including those of the Millennium Development Goals. The indicators relate to goals at human and social levels as well as at mac- roeconomic and financial levels. The Fiscal Responsibility Law, imple- mented at all levels of government, is one of the most noted aspects of this broad tracking effort. Qualitative aspects are also important. Brazil needs faster and better quality growth that is more inclusive and pro-poor, and it has the means to achieve it. Macroeconomic stability remains essential. Growth might also be faster and better sustained if the growth process were more inclu- sive, with greater attention to social and environmental sustainability. Policymakers and stakeholders are coming to realize the importance of these fundamental interactions in the development process. Reflect- ing this realization in the policy agenda is not always easy. Progress thus seems vitally to depend on a commitment to political reform, however difficult this may be. Tying It Together All these many strands can be woven together into an approach that goes beyond business as usual and raises the bar for all Brazilians-with the promise of better outcomes. Each of the strands summarized below is based on discussions of individual issues throughout Brazil and on a common understanding of the initiatives that Brazil needs to undertake. The task now is to integrate them into an interrelated, ambitious, and yet highly doable agenda. • Stabilization remains necessary, but it is not sufficient to achieve the upside possibilities. Government spending is high, and much can be done Brazil's Agenda I 195 to improve its composition and efficiency. Progress in this direction starts with creating greater flexibility in public resource use. Flex- ibility does not automatically mean more effectiveness, however. Rigorous monitoring and evaluation are needed to provide a sound basis for identifying the areas where spending can have the greatest impact. • Better distribution is not only a desirable end in itself but also the means to more and better growth. There needs to be a greater focus on the quality of human development, including in education, health, and social assistance, with improvements in the quality of spending in these sectors and others. The quality of secondary education in Brazil is just one of the most noted areas for action. • The key to better distribution and higher growth is productivity. Priorities and successes are often measured by how much is spent or invested. Yet it is productivity gains, not spending itself, that result in large differences in performance. Brazil needs more investments in infra- structure and other areas that will contribute to productivity gains. Coupling that with reforms in the regulatory framework, labor mar- ket, and the financial sector would not only bring higher returns to investments but also attract more investments. • Nontraditional approaches are vital in the search for higher productiv- ity. The knowledge economy could give Brazil a true competitive edge. So could complementing the usually emphasized areas such as industry with a focus on science and technology, arts and culture, and ecotourism-all areas where Brazil has uncommon advantages. Public-private partnerships and a stronger role for civil SOCiety could contribute to high-yielding initiatives. • It is crucial to invest in all assets, not just physical capital. After a long period of neglect, the importance of human capital has been stressed in recent years, though quality issues require further attention. Today it is natural capital that is heavily undervalued, as reflected in the uncontrolled deforestation in some states, the pollution of water, and the degradation of coastal areas, in addition to urban problems. Mar- ket-oriented approaches that complement government policies and investments could help turn this situation around to the benefit of 196 I A Vision for Development all, but especially the poor. Few countries in the world could benefit as much as Brazil from a new and dynamic approach that combines environmental protection with infrastructure development. • Changes in policies and investments, even with a consensus, require politi- cal reform and not just administrative measures. Administrative actions can make some headway, but real change-be it de-earmarking some revenues or reform of the social security system-depends on politi- cal and institutional reforms. Where there are opportunities for such reform, including in moments of crisis, it is essential to capitalize on them by taking prompt action. • Together, these changes represent a shift in the nature of the reform agenda from a focus on quantity to afocus on quality. Both emphases are needed, and they complement each other. But increasingly, it is the quality of inputs and the quality of outputs that seem to matter. The mayors in the 2005 IBGE survey clearly understand this needed direction. *** Brazil is marked by contrasts-between its wealth and poverty, its achievements and gaps, its prospects and challenges. A common refrain is that Brazil has enormous potential, that it is a country of the future. Yet an ambitious reform agenda must be started today, if tangible results are to reach the majority of Brazilians who will make this future. If these actions are taken, substantial progress is within reach. The needed reforms go all the way from administrative improvements and economic policy changes to deeper institutional and political transfor- mations. Their focus does not stop with stabilization and primary sur- pluses, however necessary these may be. Such quantitative measures can help to avoid certain problems, but they are not nearly imaginative enough to seize the opportunities that await Brazil. A successful development agenda will be Brazilian in nature because it needs to address Brazilian issues. Not only is the "Brasilia consensus" a holistic approach to development, but it also recognizes that with- out greater social inclusion from the start, traditional formulas will Brazi 1'5 Agenda I 197 not deliver greater competitiveness and higher growth rates, let alone greater equity. The environmental and social sustainability of growth, too, would bear the Brazilian stamp, recognizing the enormous upside of valuing all the country's assets. This is an invitation to advance Brazil's future: to recognize distri- bution and inclusion as part of growth, to value natural resources, to emphasize nontraditional areas of trade and growth, and to blend politi- cal and economic reforms. Doing so could mean the difference between performance that is mediocre and that which is exceptional-and excep- tional in a uniquely Brazilian way. References Gall, Norman. 2005. "Lula and Mephistopheles." Braudel Papers 37, Instituto Femand Braudel de Economia Mundial, Sao Paulo, SP. IPEA (Instituto de Pesquisas Economicas Aplicadas). 2005. "Brasil: 0 Estado de uma Na~ao." Rio de Janeiro, RJ. Reis Velloso, Joao Paulo dos. 2005. "Reforma Politica no Forum Nacional." Instituto Nacional de Altos Estudos, Rio de Janeiro, RJ. Villela, Milu, ed. 2005. Realizando Juntos. Sao Paulo, SP: Instituto Brasil Voluntario. Reflections from Outside: Contributions to Shaping the Thinking on Development From Inside Brazil: Vinod Thomas's Vision by Joseph E. Stiglitz Brazil is one of the world's largest countries and a powerful economic force on the global stage. It has yet to capitalize fully on all its advantages and potential-but it is on its way. In 2006, Vinod Thomas published From Inside Brazil: Development in a Land of Contrasts. Previously Brazil Country Director for the World Bank, Vinod spent three years there overseeing Bank work and development aid. He was in a perfect position, with first-hand knowledge, to discuss why Brazil had not been able to achieve growth, and how it could do so. The book is concise but rich-a model of what to do and a reflection on some wonderful experiences. I was fortunate to have the chance to talk about the book when it was launched and to comment on Vinod's insight and knowledge about the coun- try, illustrated so well by the book. Brazil has many lessons to teach, both historically and today. There is a longstanding joke that Brazil has always been the country of the future. But until 1980, Brazil's growth was impressive, averaging some 5.7 percent over the previous three-quarters of a century. In one sense, one of the legaCies of the recent past-of the bleak years of the 1980s and '90s-has been that Brazil and Latin America have low expecta- tions. Many Brazilians seemed happy if the economy grew by just 3 percent, because that was so much better than the growth to which they had grown accustomed. Yet that shouldn't be the way it is. Their aspiration should be for growth of 6 percent or more. What brought growth to an end in Brazil in earlier years is a subject of enormous controversy. Some say it was the debt crisis, some the high interest rates that the United States had when Paul Volcker, as chair of the US Federal Reserve, set to fight inflation there. Others believe it was the collapse of the 201 202 I A Vision for Development import substitution strategy. In my view, what really slowed economic growth was the debt crisis, which was precipitated by the unprecedented high interest rates, given the high level of indebtedness assumed in the '70s. The borrowing, partly induced by the low real interest rates of that period, enabled Brazil to avoid the downturns associated with the high oil prices that so many other countries in other parts of the world experienced. Brazil has been a conundrum of sorts, and Vinod's book helps us understand that conundrum. In many ways, the country has been a model of success. Vinod described its macro stance, its taming of infla- tion, and its achievement of primary surpluses. Its growth in exports too has been impressive. The numbers are actually quite astounding. Between 2002 and 2005, exports doubled. That's a fantastic record. It is a 25 percent annual increase in exports. One might expect that to have led to extremely robust growth. But this didn't happen. Some suggested that, in contrast to East Asia's export-led growth, Bra- zil had managed to have export-led nongrowth. The question is, why? First, I should say a little bit about the source of Brazil's export growth. Partially, it was the high commodity prices during that period. But there was also an increase in the volume of exports. Second, the government played a large role in some of the successes. For instance, the Ministry of Trade and Industry was active in promoting exports and took a very aggressive stance. So Brazil provides a real case of a government actually succeeding in promoting development. Technology also played a role. Embraer is one of the largest aerospace conglomerates in the world, and it is headquartered in Brazil. This com- pany has been a real success. In the 2000s it was one of the country's top exporters. Technology related to its work spawned the development of other products and parts and had a real impact in further development of technology. Brazil's success in technology has other dimensions besides exports. For example, by the mid-2000s, Brazil had achieved energy indepen- dence. One of the ways it did this was by developing new technology. Brazil's cars have been ahead of the game in moving toward biofuels. From Inside Brazil: Vinod Thomas's Vision I 203 The country developed a program that will affect one of its longstand- ing problems: income distribution. The demand for biofuels leads to the demand for sugar. So the car industry is helping raise the price of sugar, which has risen significantly, benefitting sugar cane growers. The question then is where the country's economy fell short. A clue can be gained by examining the ways Brazil is different from India and China and from the other countries of East Asia. That may give some inSight into why export growth did not lead to growth of the economy. One issue is equality. East Asia has among the lowest levels of inequal- ity among developing countries. Brazil has historically been among the highest. In spite of that, the country has had great success in improv- ing its performance as measured by several social indicators. Normally, that is very difficult to achieve in the face of high inequality-social indicators tend to deteriorate as inequality increases. So if one looks at countries where social problems (such as health and malnutrition) have persisted, they are mostly at the bottom in income distribution. If a country has a lot of people with low incomes, it is hard to get health indicators up. Given this, Brazil's achievements in health and education are all the more impressive, considering that the underlying inequality problem had yet to be addressed. Now that inequality is being brought down- and there is still some distance to go before Brazil is comparable to East Asia on this score-there could be a virtuous cycle with progress in social indicators. The country's high interest rates are, however, probably more impor- tant in explaining why high export growth did not lead to high overall growth. In the mid 2000s, Brazil's interest rates were the highest of any of the emerging markets, indeed of almost any country in the world. High debt and high interest rates meant that a very large fraction of gross domestic product was collected in taxes just to be redistributed to bondholders. The effect of the high interest rates on economic growth would have been even worse if it were not for the role of the development banks, which managed to ensure that capital was made available, at least to 204 I A Vision for Development some businesses, at lower interest rates. But lending rates for enterprises that did not have access to BNDE5-the national Brazilian bank-or to the state development banks were extraordinarily high. The high inter- est rates were obviously a dampener on economic growth. High lending rates were, at least in part, a consequence of monetary policy, which had been excessively tight. Brazil spent years trying to establish credibility with the financial markets. A third, major issue for Brazil has also been of concern to Vinod- environmental sustainability. Vinod has been very active at the World Bank in promoting an understanding of the importance of environmen- tal sustainability. This is of particular relevance to Brazil, which has the largest rainforest in the world. Brazil, like other tropical countries with large rainforests, has been providing an invaluable environmental service for the whole world- yet it has never been compensated for this service. The rainforests pro- vide carbon sequestration and biodiversity. The value of these services is enormous. Though it's very hard to place a value on biodiversity, we can put a value on carbon sequestration because of the carbon trading system, which was developed to establish a way to value these environ- mental services. One of the points Vinod makes in his book is that the social value of such services is much greater than their commercial value. Convert- ing the Amazon Basin into farmland would generate income. But that income would pale in comparison to the value of the environmental amenities the land provides-biodiversity, discoveries, carbon seques- tration, etc. Yet the world is not paying for those amenities, and without anyone receiving immediate payment for them, there is little incentive to use these resources in that way. This is not a small point. It is a significant issue for the world, both in terms of development and in terms of environment. The equivalent of emissions from the deforestation in Brazil and Indonesia together between 2006 and 2010 will undo something like 80 percent of all the carbon emissions reduction under the Kyoto Protocol. 50 all that Europe and Japan are doing to reduce carbon emissions is being undone by From Inside Brazil: Vi nod Thomas's Vision I 205 deforestation in these two counties. Thus, if you think that global warm- ing is important-and anyone who studies it comes to that conclusion- this is a very serious global environmental issue. In terms of dollars, if you value not just Brazil's rainforest but all the rainforests together, the value of developing countries' carbon services is probably greater than the value of all the foreign aid these countries are getting today. So if the countries were compensated, it would double the level of foreign aid. This is clearly both a global environmental issue and a global financial issue. Unfortunately, if the incentives aren't in place, the rainforests won't be preserved. One of the problems is that the Kyoto Protocol made a critical mistake: it prOvided incentives for countries to plant forests for carbon sequestration and for developing a carbon trading system, but it failed to address deforestation. As a result, there are more incentives for cutting down forests and then replanting them than for leaving them alone-quite frequently a far more enVironmentally valuable state. It is imperative that Brazil's voice be heard on this issue. There are obviously some special interests inside Brazil that oppose this; they want to get the land at a below-market value, and they want to engage in what they won't call deforestation, but commercialization. But although some special interests within Brazil may gain from such commercializa- tion, too often the country as a whole does not-and the world will be deprived of the invaluable environmental services of the rainforests. Preserving Brazil's rain forests is extremely important for the coun- try's sustainable development. This sustainable development is, in turn, essential for its egalitarian development-and equality, as noted earlier, is one of the large issues Brazil faces today. Vinod's expertise on Brazil and his book set the stage for an interesting and vital debate on one of the most fascinating countries in the world. What's wonderful about his book is that it gives you a flavor of the rich- ness and complexity of the country and the problems that it faces. Brazil - Vision of a Developed Country and the Economy of Knowfedge by Joao Paulo dos Reis Velloso Based on all this, let me mention my main conclusions about Brazil at the out- set. They are threefold. First, the country has among the best prospects in the group of large world economies, based on its human, natural, geographic, and institutional strengths and potential for bUilding on them. But second, real- izing this potential requires strong and urgent actions by the government and Brazilian society in a second phase of reforms that is focused on the quality dimension. And third, while this reform agenda is ambitious, covering a num- ber of areas, it is at the same time realistic and pragmatic, because progress in one area feeds progress in others in a virtuous cycle. Vinod Thomas l Having been an economist in Brazil and holding various government posi- tions there, I have a vision for the development of the country. As the head of the National Forum, which seeks solutions to economic problems in Brazil, I believe these ideas are strong and in line with visions that Vinod has had during his career. Vision of a Developed Country Our proposal is to transform Brazil from an emerging country into a developed country, in two or three decades. It is our legacy to the next generation. How? Brazil would have to advance, fast and continuously, in that direction, being as competitive (economically) as the main emerging countries, like China 1 207 208 I A Vision for Development and India. And it will have to be more advanced than those countries in a number of ways: socially, politically, culturally, and ecologically. This is the Great Transition. Is it feasible? Yes-but difficult. We have failed before. In the 1970s we were competing with Korea. Today, Korea is a developed country. Brazil is still an emerging one. There are just a few noneconomic pillars for this Great Transition: 1. An active and modem society. Bertrand de Jouvenel said, "A society of lambs tends to generate a government of wolves." II. A modem political system. This is indispensable to democracy and development. Ill. Quality education for all, at least up to the high school level. IV. High priority given to the entrepreneurial spirit. This applies to both micro and small business. The Development Strategy: Taking Advantage of the Knowledge Economy to Develop Great Opportunities The modem economic paradigm is the economy of knowledge. Why is knowledge so powerful? It is cumulative and inexhaustible. The model for Brazil, derived from the World Economic Report of 1998/99 (Knowl- edge for Development), encompasses three dimensions: 1. Taking knowledge, in all forms-higher education, R&D, generic technologies (information technology, for example), specific tech- nologies (sectoral), process engineering, product engineering, mod- em methods of management, design, logistics-to all sectors in the economy, including agribusiness, modem mining, and oiVgas. II. Eliminating low-technology sectors. The intangibles will be taken to the whole economy. Brazil - Vision of a Developed Country and the Economy of Knowledge I 209 III. Taking knowledge, in all forms, to all segments of society, even low- income segments. The meaning of these dimensions'? No form of exclusion will be accepted. The consequence of these dimensions? Comparative advantages will tend to be created. Knowledge (and institutions) will constitute the bulk of total factor productivity (Solow's Residue) and total factor productivity will become a development variable and an instrument to accelerate development. With the Knowledge Economy, Brazil can: I. Transform the natural resources sectors-in which Brazil is very rich 2-into areas of medium and high technological contents. II. Develop, selectively, certain segments of advanced technologies. The bottom line: There is no dichotomy between natural resources and advanced technologies. Using the "modern endowments" of the knowledge economy, it is possible to transform natural resources into an asset for the economy and, sometimes, into a springboard to reach areas of advanced technologies, as some Scandinavian countries did. The Knowledge Economy and Great Opportunities The point, then, is that the Knowledge Economy creates the conditions to develop several great opportunities that, taken as a whole, will trans- form the economy and lead Brazil along the route of development. The main opportunities include the following: I. Universalizing innovation and technological progress (competitive large companies and modern small business)-"innovation as the strategy of the company, not one of the strategies." 210 I A Vision for Development II. Using "pre-salt" oil to transform the Brazilian economy (through the construction of a large industrial complex around it; it will include sectors like nanotechnologies). This would provide both opportunities and challenges. III. A new energy matrix for Brazil. The emphasis would be on increas- ing the share of hydroeletric power and on a new system of mass transportation for large cities (subways and suburban trains). IV. Having a strategy for development of the electric car in Brazil. V. Transforming potential into opportunity-biotechnology on the basis of biodiversity (Brazil has the largest biodiversity of the world-but uses only I percent of it). VI. Using the "Scandinavian model" to build large industrial complexes around natural resource sectors (agribusiness-agroindustry, mod- em mining-metalurgy, oil-petrochemicals). There has to be a clus- ter of industries around the natural resources sectors. VII. A bioeconomy-mainly a new stage in the development of bioen- ergy (second generation ethanol, bioplastics). VIII. A strategy for the development of technologies of communications (including "cloud computing"). IX. Development of organic electronics, aiming at organic chips. X. A strategy for the development of modem small business (for exports and innovation). Xl. Development of "creative industries" (culture, arts, and entertainment). Essentially, transforming these opportunities (or most of them) into reality has now become feasible. And this makes Brazil one of the most promising candidates in the developed world. The main point is to have a social development strategy that defines two priority social objectives for the next decade: Brazil - Vision of a Developed Country and the Economy of Knowledge I 211 I. Elimination of extreme poverty (not enough family income to cover food expenses). II. Reduction of 50 percent of those living in absolute poverty (not enough family income to cover basic needs). The Transforming Power of Culture Without cultural development, there is no development. It is the 'Joy- less economy."3 Cultural development and cultural inclusion bring an "economy with joy." Even the poor, infavelas (slums) demand culture. Then, there is a need to support "creative industries." The Global Opportunity here: Generating a "green GNP" ("green agri- culture," "green industries," and "green services") to transform Brazil into an ecological power. Notes 1. From Inside Brazil-Development in a Land of Contracts, by Vinod Thomas, Stanford University Press, 2006. 2. "Nature was, perhaps, too prodigal with Brazil" (The Economist). 3. Tibor Scitowsky, The Joyless Economy-The Psychology of Human Satisfaction, Oxford University Press, New York, 1976. Vinod Thomas and the Colombian Economy by Roberto Junguito This book on Vinod Thomas's achievements during his professional career at the World Bank and particularly during his recent experience as head of the Independent Evaluation Group cannot be published without including at least a note on his early and very important contributions to policymaking in Colombia during the mid 1980s. That was the period of the Latin American debt crisis and a juncture where the country was near to a balance of pay- ments crisis and had to undertake significant structural reforms in order to reestablish economic growth and regain access to the international capital market. At the time, Vinod had been aSSigned as a young economist to the World Bank mission to Colombia. Perhaps it was his first experience as a policy advi- sor in economic issues in a foreign country. His responsibilities as an econo- mist were very large, because Colombia listened to the World Bank's policy advice more than the International Monetary Fund's, and Vinod, though not formally, was in fact the Bank mission member who was able to get the full confidence and support of the Colombian economic authorities. What all of us-the Colombian economists in government at the time (I was then Minister of Finance of Colombia during the Administration of Presi- dent Belisario Betancur)-appreciated most about Vinod was his capacity to suggest very practical and down-to-earth policies based on rigorous macro- economic principles that we had all learned in graduate school. We were also impressed by his ability to explain complex economic analysis in simple and intuitive terms. It is no surprise, then, that years later he excelled as Director of the World Bank Institute. Even though Vinod, at the time, helped in the early design of a structural reform strategy, which was later discussed with the International Monetary 213 214 I A Vision for Development Fund and presented to the Colombian Congress and to the international financial community "banking committies" at a period when lending to Latin America had been closed, the example that I would very much like to bring forth regards his policy advice on one particular issue: agricultural policies. Vinod's major contribution was convincing Colombian policymak- ers and congressmen that we had to abandon our highly protectionist agricultural policies, which were based on high tariffs, import licensing, government interventions, and price controls, and to reorient agricul- ture to the export markets through appropriate macroeconomic policies. Though from the theoretical viewpoint, we tended to agree with Vinod's views, we were extremely reluctant to dismantle and reduce protection in the face of the very low international reserve position of the country. His solution came about with his suggestion to undertake a significant World Bank sector loan, which provided balance of payment support with the conditionality of dismantling the high protectionist stand. His book Linking Macroeconomic and Agricultural Policies, published in 1985, explains clearly the Colombian agricultural policies at the time and Vinod's suggested way out. It was a key contribution to the understanding of Colombian agricultural policy and to economic development. Urbanization and Globalization in the 21 st Century: Emerging Challenges by Rakesh Mohan I spent the first 15 years of my professional life thinking about and working on urban issues; it is now almost as long since I had occasion to work directly on the urban problem. My pursuit of urban issues in those earlier years over- lapped with the interest of Vinod Thomas in the subject. In fact, the two of us started out together in the urban economics division of the World Bank more than three decades ago. We share some of the best recollections of our professional lives. Looking back, I am reminded of the enormous strength of that urban divi- sion, the likes of which I have seldom seen since. The issues we grappled with are still with us today, even if in different forms, and the insights we gained remain highly relevant, even seen through lens of the 21st century. So I am pleased to have the opportunity to think back and reflect again on the issues of urbanization. The crucial questions concern the prospects of urban growth over the next 30 years or so and the key challenges that must be confronted. Urban Growth in the Next 30 Years Let me start with a quote from the UN Population Fund (2007): "People intui- tively perceive the advantages of urban life. This explains why millions flock to the cities every year. Yet many planners and policy makers in rapidly urban- izing nations want to prevent urban growth." The truth in this observation is borne out by the truly epochal change that we are going through today. For the first time in human history, more people live in urban areas than in rural. 215 216 I A Vision for Development Apart from the statistical, demographic aspect, I would presume that as the majority of the world begins to live in cities, attitudes toward cities will change. The best contribution is indeed to change the views of aca- demics, analysts, policymakers, donors, nongovernmental organizations, and the like, toward a more positive welcoming attitude to urbanization and urban growth: only if this attitudinal change takes place can we begin to think constructively about all the serious problems that we are likely to face and then have a chance of solving them. We must change our attitude from being afraid of urbanization to preparing for it. The starting point for justifying this perspective must be the realiza- tion that, despite unprecedented urbanization over the last 50 years, and indeed the whole century, overall welfare has actually increased in almost every dimension that we can think of: income growth, reduc- tion in poverty, access to services, electricity, telecom, water, sanitation, education, and health. Never before have as many people had the kind of access to services as they have today. For example, even Mumbai's pavement dwellers have access to the city's municipal schools. And they certainly have better access than where they came from. But, of course, we have a long way to go. Geographically, the focus of change will now be Asia and Africa. Europe experienced rapid urbanization in the 19th and early 20th cen- turies. North America followed with some lag; Latin America followed suit in the second half of the 20th century. The 21st century will truly be Asia's urban century. By 2030, about 55 percent of the world's urban population will be in Asia. What is also interesting is that about 16 percent will be in Africa- about equal to Europe and North America combined. So the focus of our deliberations in relation to shelter, water, sanitation, and everything else connected with urbanization will have to be on Asia and Africa: and these two regions themselves contain great complexity as well as heterogeneity. Widespread, all-pervading urbanization is a truly 20th century phe- nomenon. Although we have evidence of cities in antiquity, such as Memphis, Babylon, Thebes, Athens, Sparta, Mohenjodaro, and Anurad- Urbanization and Globalization in the 21st Century: Emerging Challenges I 217 hapura, among others, there is little evidence of widespread urbaniza- tion in the early years of civilization. Rome was perhaps the first city to reach a population of 1 million around the time of Christ. Only in 1800 did London become the second city to reach this size. In 1800, only 2 percent of the world's population was urbanized. By the year 1900, only about 15 percent of the population-about 250 million-lived and worked in urban areas, fewer than the total urban population of India today, which itself is a tad less than 30 percent of India's total population. Over the next 100 years, the 250 million became 2.8 billion, almost 49 percent of total population; so the pace of urbanization in the 20th century was truly unprecedented, and it is a wonder that the world has coped as well as it has. The last 50 years have been truly remarkable in terms of the number of people who were absorbed by the world's cities. In the first half of the 20th century, the total accretion to urban popu- lation in the world was only 500 million. During the next 50 years, from 1950 to 2000, as many as 2.1 billion people were added to the world's urban areas. The important point that I want to make through this brief historical sketch is that the first 30 years (2000-2030) of this century will witness a similar addition of 2.1 billion people or thereabouts, so the pace of addition in terms of magnitude is again totally unprecedented. And two-thirds of these will be in Asia. Now that we have a grasp of the magnitudes; we can go forward to speculate on what the new challenges that we face will be. Globalization With free trade and globalization, along with the "death" of distance, prices of traded products have almost equalized across the world. The price of most goods is not dissimilar across most of the world. What then provides the source of advantage to any country? It is the relative productivity of cities that will provide the key source of comparative advantage to each country. Thus globalization has added further focus to the importance of City-level efficiency. 218 I A Vision for Development The staggering change that took place over the last 50 years is likely to be compressed in the next 30. Those countries that are not able to make their cities efficient and productive will lag behind. What can we learn from the developments that have taken place over the last 30 years or so in Asia? Who would have thought that North Americans and Europeans would begin to fear the juggernaut of Asian productivity and effiCiency? How has this efficiency been achieved? A key feature of this rapid gain in economic efficiency in Asia that is little appreciated is that this efficiency has been achieved mainly through the efficiency of its leading cities. The rapid economic growth of Asia in the last half century must be among the most spectacular periods of development in recorded human history. What have been the charac- teristics of this growth? Starting with japan, a common feature of Asian economic strategy has been the heavy concentration of economic activity in and around coastal regions. In japan, infrastructure investment was concentrated in the Tok- kaido region-the Tokyo-Nagoya-Osaka Corridor. More than 60 percent of its urban population was concentrated in this region by 1970. In South Korea, there was similar concentration of urban infrastructure and trans- portation investment in the SeoullPusan regions. By the mid-1970s, 70 percent of the South Korean urban population resided there. In Taiwan, a similar strategy was adopted in the development of Taipei/Kaohsing. This was followed by Singapore and Hong Kong as city states, jabotabek (the jakarta region) in Indonesia, Bangkok in Thailand, Kuala Lumpur and environs in Malaysia, and finally in the coastal regions in China. The result is a mega urban corridor stretching from Tokyo to Sydney through Seoul, Taipei, Shanghai, Hong Kong, Kuala Lumpur, Singapore, and jakarta. Through this strategy of concentration and contrary to popular wis- dom, these countries probably achieved great economies of scale in the provision of urban infrastructure and services. Great economic efficiency was achieved through the proximity of many activities: agglomeration economies and scale economies. Distance got killed-both within the respective countries with regard to economic activity and across borders. Thus, the great manufacturing engines of South East Asia got intertwined with each other and across the Pacific with America. This contributed to Urbanization and Globalization in the 21 st Century: Emerging Challenges I 219 flattening of the world. Tom Friedman (2005) shows how the world is inextricably intertwined through this concentrated urbanization: a good deal of off-shoring of production is concentrated in Asia. India has car- ried this concept further through concentrating its service activities in a few inland cities: it has turned the concept on its head by killing distance through satellites and jumping inland. One consequence of this emerging urban pattern is that the traditional notions of a city deriving from and servicing its hinterland have become obsolete. Now, with low transportation and communication costs, cities are more likely to be linked with their counterparts across borders than with their own hinterlands. The source of their comparative advantage is to be found within, not from their hinterlands. This is not dissimilar to the thriving city states around the Mediterranean in medieval times. New Challenges of Globalization for Cities The lesson that we learn from Asia is that we must focus on city efficiency. Our traditional notions of city efficiency are focused on the provision of efficient infrastructure, such as water, sanitation, sewerage, urban trans- portation, power, and communication. This focus will indeed have to continue. What Asia has shown is that we can economize on this through concentration of economic activity. I will return to some financing impli- cations of this investment in hard, physical infrastructure a little later. What then is new about globalization with respect to cities? I believe that now we will have to focus as much at the city level on what might be called softer areas of infrastructure. What are these softer areas? And what do we need to do? Knowledge: With a good deal of world output having become disem- bodied-witness the increasing share of services in world output-the key to city efficiency and comparative advantage will be the generation of knowledge. It is no accident that cities have been the cradles of civili- zation. Face-to-face interaction, argumentation, and debate form the sin- ews of knowledge generation. Tokyo hosts 113 universities, and Beijing 59. Similarly, Hong Kong, Singapore, Seoul, Kuala Lumpur, and Bang- kok are all attempting to ramp up their higher education and research 220 I A Vision for Development activities. Similarly, it is no accident that the Indian cities that have prospered over the last decade and a half, such as Bangalore, Hyderabad, Pune, Chandigarh, Chennai, and Delhi, all happen to be well endowed with educational institutions and research facilities. So conscious gener- ation of knowledge activities will be crucial to the welfare of cities. Such knowledge activities encompass the location of colleges and universities, research laboratories, art, and cultural institutions alike. Vocational Education: But it is not just tertiary-level education that is important. Both service and manufacturing activity need a great deal of technical support. With machines now increasingly embodying infor- mation technology, and service activities of all kinds also dependent on such technology, the days of unskilled labor are numbered. Thus, ter- tiary education and research and development themselves need a solid base in facilities for active vocational education. Bismarck in the 19th century recognized this and began the famed German vocational educa- tion system, which greatly enabled Germany to catch up in the latter part of the 19th century and then set new standards for productivity growth. So cities that actively focus on vocational education will win: public-private partnerships here are a must and provide huge opportu- nities for innovation. The generation of employment activity in cities is a must, but this will increasingly be skill based. SecondarylPrimary Schooling: Needless to say, vocational education and higher education cannot thrive without a solid base in secondary and primary schooling. Once again, the key to success will be ramping up quality in school systems from the bottom to the top. With great progress having been made over the past half century in literacy, it is now time to turn to quality enhancement. In developed countries, with their demographic transition to increasingly ageing societies, existing schools will get fewer customers. In developing countries, it will be the opposite for some time. Health: Despite the ravages wrought by high densities of urban popu- lation, it is still true that the health of even the urban poor is better Urbanization and Globalization in the 21 st Century: Emerging Challenges I 221 than that of their rural counterparts. With more than half of the world's population in urban areas, it is now that much easier to provide better quality health services in a concentrated manner. With the Asian urban population expected to double in the next 30 years, there is a great opportunity to improve overall health-in Africa as well. We will need to focus on the provision of both public health and curative services. I mention these education and health issues in particular, because concentration of population in cities is highly con- ducive to the delivery of these services. Furthermore, globalization and technical change are rendering the unskilled obsolete-hence the need for a specific city focus. Urban Amenities: One issue that has received little attention in the accelerated urban growth of the past 50 years is the provision of urban amenities. This is what sets apart the great cities of Europe-London, Paris, Rome-from those elsewhere, especially those in the develop- ing world. One consequence of globalization is that there is now vastly increased transborder mobility of the professional classes. Among other things, this is resulting in two important consequences. One, people are demanding international salaries wherever they are, thus probably lead- ing to higher inequality. And second, they are also demanding recreational amenities, clean environments, efficient and comfortable transportation, and interna- tional-level communication services. Thus, there is great pressure to invest, possibly prematurely, in world-class facilities at much lower average income levels. We are also Witnessing the emergence of an increasing number of gated communities, isolating the elite from the rest. Urban authorities must think of these issues carefully and turn this trend on its head by providing better amenities for all. Enrique Peflalosa, the great and innovative former Mayor of Bogota, did much to address this issue and looked at public space as the great equalizer. He believed that if the best urban amenities are provided for common consumption in public spaces, there would be much less incentive for the elite to segregate themselves in gated communities. Accordingly, as Mayor of Bogota, he transformed the city by concentrat- 222 I A Vision for Development ing on the improvement of public spaces and public provision of urban amenities. Bogota was characterized by what looked like a noisy, cha- otic, and polluting private urban transportation system. He innovated by instituting the new famous high-quality, high-capacity bus system known as the Trans Millenio. He favored investment in mass transit over expressways for cars. Unlike other cities, where roads for cars are typically widened and pedestrian pavements narrowed, he did the opposite. Public pedestrian space has been widened and roads narrowed. Consequently, many more people are seen on the streets, rendering the city safer. Another remark- able innovation, perhaps one of a kind, that he did was the provision of international quality public libraries all over the city-from poor areas to richer ones. Finally, he also improved many of the available green spaces. The consequence of all this is that Bogota is now much more livable; the poor have increased dignity; and the city has become much more vibrant. I have dwelt at some length on Peflalosa's exploits since I worked exten- Sively on Bogota in the late 1970s: I could never have imagined such a turnaround in that city. There are many lessons for all of us in such counterintuitive, innovative thinking. So the advent of globalization is reinforcing the need for cities to become more consciously knowledge based. Cities are also becoming more interconnected across borders; thus, a successful city or network of cities needs efficient airports, ports, other transportation, and com- munication. Unskilled labor is obsolete so much more attention has to be given to all levels of education. The provision of urban amenities for all is a must to prevent accelerating trends of increasing polarization of the rich and poor. Bogota shows that this is not a pipe dream. Demographic Changes One big change that we will witness over the next few decades is that the weight of natural population growth in urban growth will become higher, relative to rural-urban migration. Although this will make life easier in some respects, it may be more difficult in others. It will raise Urbanization and Globalization in the 21 st Century: Emerging Challenges I 223 social issues related to ageing: with continued improvements in health, sanitation, water supply, and the like, people will live longer and lon- ger, even at low income levels. At the other end, depending where a country is in the demographic cycle, either there will be increas- ing demand for schooling-and increasingly so for secondary and higher education, as retention rates improve and as demand for skills increases-or there will be need to shut down schools. The demand for space in crowded cities for schooling will need to be addressed, and also the issue of what kind of schooling. Another demographic phe- nomenon is that the largest cities begin to slow down in growth after reaching some size level, and other cities start to grow faster. Again, different kinds of problems will arise. The older, larger cities will need renewal of old infrastructure. This is difficult to do physically and is expensive-and will need financing. Much greater growth will take place in the next level of size-both in terms of population and size. To the extent that these cities will be growing in a new era, it is likely that they will have lower densities and will grow faster physically. This will undoubtedly lead to new tensions at the urban periphery between the existing landowners and the putative new ones. It will also raise issues with regard to transportation invest- ment: how much for public transit and how much for private modes? With the real cost of private transportation declining, will it be a losing battle against the ravages of the automobile. This issue goes back to the Penalosa philosophy: can we leapfrog and provide public transit of a quality that will attract the better off? This is a very difficult issue: I don't pretend to have answers, but I do believe that it poses great challenges for the future. The fastest growing cities in the coming decade will also probably be the poorest: Dhaka, Ho Chi Minh City, Lagos, and others in Africa. Will they cope as well as their predecessors? Do we need to give them spe- cial attention? Where will the resources come from? Or will they raise new problems that we have not yet seen? With ageing and increasing incomes, household sizes will fall; more health facilities will be needed; and the absence of adequate social security will lead to hitherto unfore- seen problems. Have we thought of these problems? What will we do? 224 I A Vision for Development Cities and the Poor Most approaches to the urban poverty issue have concentrated on the issue of slums and shelter for the poor. I believe that we need to separate the issues of income generation and the provision of living environ- ments. The issue of income generation is addressed by overall mac- romanagement and strategies to encourage overall economic growth. This can be helped at the city level by policies that do not discourage entrepreneurship and growth. Education, skill generation, and health facilities are of the utmost importance, but also policies that do not discourage the use of cities as incubators of entrepreneurship. Elitist tendencies toward banishing the informal sector are clearly antithetical to entrepreneurship and growth. If a city grows, and peoples' incomes grow, then it is bound to attract more migrants. At the lowest level of income, we need to understand that no level of "formal" housing is affordable. The poor basically have to squat. But no public policy can encourage squatting. Squatting can't be planned for. Initial squatting cannot, in general, be condoned, but can often be followed by eventual legalization. This needs creative and constructive tension. What is also less understood is that the poorest, apart from squatting, are generally renters from the next level of households in terms of income. Much of the financing of incremental housing is done by poor rent- ers. Typically, these renters would be from the extended family, or from the extended community back home. If one solution for shelter for the poor is increasing recognition of rentals, much greater understanding is also needed of the renters actually acting as financiers of the house owners. Provision of shelter for the poor will remain chaotic; the best we can do is to expand their access to land and not be too nasty to them. I do believe that the best strategy for helping the urban poor includes the following points: • Make the city economy vibrant. • Promote employment growth. Urbanization and Globalization in the 21 st Century: Emerging Challenges I 225 • Take care of education. • Take care of health. • Take care of clean water. • Take care of sanitation. • Reduce barriers to entrepreneurial entry. • Promote mobility. • Provide security of tenure. • Equalize public spaces. Financing There are basically two kinds of financing needs: financing for public goods and services and financing for private goods and services. In the first case, the provision of public goods and services has to be paid for by a tax cash flow and in the second case by a flow of user charges. In between, there is scope for public-private partnerships. The solutions are relatively simple; their implementation is not. A well-conceived and implemented property tax can finance most public goods. This has always been very difficult to implement, but with the advent of information technology, the maintenance of property regis- ters, regular updating, etc. has now become very easy in principle. With increasing urbanization, property values will keep rising; hence, this can be a very buoyant flow. Once cash flow is ensured, any amount of financial engineering can be achieved. The key issue is that as urbanization and city growth accel- erate, the urban infrastructure investment has to be front loaded, which then provides services over a very long period of time. For example the basic sewerage systems of Mumbai (Bombay) and Kolkata (Calcutta) are over 100 years old but still continue to function. Thus, property tax cash flows have to be leveraged to generate the up front finances for invest- ment in infrastructure. The servicing of these leveraged funds has to be over and above the needs for maintenance expenditures. Life would be easy if financing sources were such that civic authorities could raise resources so the repayment schedule matched the benefit schedule. 226 I A Vision for Development A scan of urban financing systems across the world does not reveal any uniformity in pattern. Germany has used its mortgage banks to sell Pfandbrief bonds, which enj oy high credit quality next only to the Bund. These mortgage banks issue the Pfandbriefs and then intermediate the funds to states and municipal authorities for infrastructure investment. There is a complex system of credit enhancements that makes it fea- sible to raise long-term funds. But this credit quality has been earned over more than a century, during which time the municipal authorities have made sure that their tax and user charges systems can redeem the resources raised. In the United States, the decentralized municipal bond system has largely financed urban infrastructure. Here also, because the ability to raise resources depends on the reten- tion of healthy credit ratings, municipal authorities have a very strong incentive to stay solvent and service their bond holders. In principle, therefore, such systems have been successful because they have ensured that towns and cities face an incentive structure that encourages them to remain creditworthy and essentially self-financing. In Asian countries, financial markets have not been sophisticated enough to allow for such financing methods yet. Financing for urban infrastructure has usually come from higher-tier governments, which raise resources from taxes, or from banks and financial institutions that have been typically government owned or sponsored. Such systems are not deSigned to avoid moral hazard: the recipient towns and cities do not have as strong an incentive to be essentially self-finanCing. The 1990s saw increasing attempts to privatize the provision of urban infrastructure, but this has met limited success at best. Given the magnitude of urban population accretion expected over the next 30 years, I see little choice. If Asian and other cities are to thrive and prosper, they will have to develop self-sustaining local taxation and user charge systems so that they can tap national and international financial markets for their financing needs. Most utility services are private, in the sense that their consumers can be identified. The Latin American experience of the 1960s and 1970s shows that it is indeed feasible to improve services through user charges. Again, once the cash flow is there, any financial engineering can be done to raise funds. User charges are resisted in the name of the poor. Urbanization and Globalization in the 21 st Century: Emerging Challenges I 227 The biggest beneficiaries are the rich. In principle, all activities should be charged for: the poor who cannot pay for such services should be subsidized. They tend to be self-selected and can be identified without too much difficulty. For example, the poorest do not have taps in their homes-self-selec- tion can be achieved by making public taps free, while charging fully for water supplied to all who have a tap in their homes. The rapid expan- sion of mobile phones in urban areas in India suggests that even the poor can pay for services that they value. Much needs to be done here to show that subsidies generally go to the rich and that utilities need to be paid for. The basic message is that we need to look for and ensure cash flows. They are usually there but often go in the wrong direction. As long as there is cash flow, the activity can be financed. Where the cash flow is from local taxes, the activity being financed is essentially a public good; where it is from user charges, it is essentially a private good. The former has to be supplied by the public sector, whereas the latter is susceptible to privatization. Activities in between can be supplied by public-private partnerships. The task before us is to improve local municipal governments and utilities (public or private) so they can be creditworthy. If domestic bond markets are developed enough, bond financing can be raised for such activities. One caveat is important: because cash flows arising from the consumption of urban services are baSically in local currency, foreign financing of such services should generally be avoided, unless adequate risk mitigation is feasible to compensate for currency risk. A rising tide lifts all boats. Economic growth is the key. The impor- tant message is that urban growth is welcome and that all we need to do is to prepare for it. We need to rid policymakers, academics, analysts, nongovernmental organizations, and donors of what in India is called the "third-class train compartment mentality." Those who succeed in boarding a crowded train do not want others to come in. Existing city residents tend to want to discourage new city entrants. Urban growth must be more inclusive. 228 I A Vision for Development Everything needs more innovative, thoughtful planning. Thus, the major thrust has to be on training for urban governance: An enduring puzzle is how we treat urban governments and those who work in them. Cities are among the most complex and exciting mechanisms to man- age. Large metropolitan cities also have large budgets. Yet city managers generally have low prestige, are paid poorly, and hence often lack the competence to manage modem growing cities, especially in developing countries. The largest cities are bigger than most countries. Yet urban management, urban planning, and the like are not sexy occupations. Schools of urban management, urban financial management, and urban planning are few and far between, particularly in developing countries. Conclusion Our approach to the future of urbanization in the next 30 years has to be informed by the realization that more urban population will be added during this period than any comparable period in history. This growth will be concentrated in Asia and Africa, so the best global thinking on urban management has to be brought to bear in these regions. The ongoing process of globalization and technical change will bring many new challenges, including many that cannot be foreseen today. We will certainly have many more large concentrations in Asia and Africa, and we will need to learn how to manage their infrastructure needs, both physical and social. We will need to focus more than ever before on the "soft" parts of urban needs connected with health, education, and the provision of urban amenities. Approaching public space as the great equalizer will have to be part of this approach. The demographic transitions of this century will be different from those of the last century; with overall rates of population growth falling everywhere, and with the weight of urban population increasing, there will be much more organic urban population growth than from rural urban migration. With increasing longevity everywhere, cities will get older everywhere: social security will be an issue, and providing appro- priate facilities for the aged will be an issue, including special arrange- ments for their transportation. Urbanization and Globalization in the 21 st Century: Emerging Challenges I 229 There will certainly be many poor people in the growing Asian and African cities. With increasing globalization and concomitant growth in income inequality, we will have to be careful to forestall natural processes by which the rich try to segregate themselves in urban enclaves. Encour- aging growth of entrepreneurship and urban employment opportunities in our cities must be pursued, not discouraged. There are often many impulses to thwart such growth; these must be resisted. The provision of urban services needs to be done on a sound financial basis for them to be sustainable, but the approach has to be inclusive to engender healthy city growth. As we cope with this kind of urban growth, it is of the utmost impor- tance that city governance and management is made much innovative, flexible, and responsive. We need intelligent urban governance, because problems keep changing and need dynamic responses. Urban manage- ment needs to become much more profeSSional and attractive so that the next generation of urban managers is the best and brightest. This brings me to the international dimension of urban infrastructure financing. It is usually the case that, when a country begins its rapid urban growth phase and its financial markets are yet to develop, the only way to tap long-term funds is to take recourse to external savings, which are then to be repaid over a long period of time. The typical historical experience has been that the regions undergoing intensive urbaniza- tion had to mobilize external savings intenSively, followed by periods of balance of payments crises and debt defaults. In Asia, too, the 1997 financial crisis was partially reflective of large external resource flows that were suddenly reversed, as was the Latin American debt crisis of the 1980s. Since then, however, it is puzzling that the region as a whole has exhibited financial surpluses that are being invested in Europe and North America. In the current debate on global imbalances, the assump- tion seems to be that these imbalances seem to be of a relatively durable nature, partly reflecting the favorable economic demographics of Asia and the converse in the West. I remain somewhat puzzled by this financial tum of events. I would have expected that the demands of infrastructure investment, particu- larly that of urban infrastructure, would be such that regional domestic 230 I A Vision for Development savings will not be adequate to finance the required investment. Perhaps the explanation really lies in the Asian reaction to the 1997 financial crisis, and we may expect higher investment levels in the years to come. The magnitude of urban population growth expected in China, India, Indonesia, Pakistan, and Bangladesh over the next 30 years is such that pressures on international resource mobilization are bound to arise. Urban infrastructure investment will then exceed available savings in these countries, and the current alleged savings glut will disappear over a period of time. Will there then be enhanced competition among Asian countries from available international savings? With the emerging adverse demographics in the West, and hence low savings rates there, will this competition lead to the emergence of higher real interest rates in the years to come-the exact converse of the current situation of excess world liquidity and low interest rates? If that happens, the task of urban policymakers and central bankers alike will become that much more difficult. The efficient intermediation of financial savings within countries, and across countries, will therefore be as important for urban development as for financial market development per se and for mon- etary policymakers in the years to come. References Friedman, Thomas L. 2005. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux. United Nations Population Fund. 2007. State of World Population 2007: Unleash- ing the Potential of Urban Growth. New York: United Nations. Shaping the Development Deliate: The Contributions of Vinod Thomas by George s. Tolley In addition to honoring Vinod Thomas, the present volume will help docu- ment his outstanding professional contributions. These include his contri- butions to the understanding of economic development, to bringing about effective economic development policies in countries around the world, and to building institutions to promote policies, among several others. His accom- plishments have taken place during his steadily advanCing career at the World Bank, culminating in his being appointed Director-General of the Indepen- dent Evaluation Group and special Vice President at the Bank, reporting not to the President but to the Board of Governors. Over the years, Vinod's work at the Bank has had tremendous impacts. In addition to his influence within the World Bank Group, his influence is felt as a frequent speaker at international gatherings and as a member of interna- tional advisory bodies. Even more widely, he is a well-known author of books and articles in distinguished publications on a variety of subjects related to development. Vinod is highly original and path-breaking in his ability to combine the best of economics with constructive insights on how to achieve needed economic development objectives that are consistent with overall social goals. Many will know about one or more of the pinnacles of his accomplish- ments. Fewer may be familiar with the full breadth of the multiple pinnacles. Limitations of space permit only an airplane or even a Space Shuttle view here of some of the pinnacles. I hope that together the chapters will give some idea of the totality of his work, though I am not sure that a Single volume can fully 231 232 I A Vision for Development convey what amounts to several important careers embodied in one person. Without pretending to fully cover the waterfront, I will offer only some brief comments on the high spots for recent years. I will concen- trate most of my remarks on Vinod's role in increasing the understand- ing of economic development and on his career in earlier years when he and I worked closely together. Contributor to the Understanding of Economic Development Vinod was responsible for and was the architect of the World Bank's definitive World Development Report, The Challenge of Development (1991), which synthesized and evaluated decades of development expe- rience. The Quality of Growth (Oxford University Press, 2000) explored how similar rates of economic growth can lead to quite different impacts on people and considered how to improve on the outcomes. This book has had worldwide influence as reflected in its haVing been translated into several languages. Among his other widely cited articles concern- ing the economic development question have been "Why Quality Mat- ters" (The Economist, October 2000); "Recent Lessons of Development" with Larry Summers in World Bank Research Observer 0uly 1993); and "Distortion, Interventions, and Productivity Growth: Is East Asia Dif- ferent?" with Yan Wang in Economic Development and Cultural Change (1996). His steady output of writing in recent years has included further advancement of his economic development ideas. As a leader of work at the World Bank, Vinod developed unique inSights on economic development that contribute to the field beyond what others have done. He goes into a next level of detail beyond pre- vious work, uncovering a new round of phenomena that he proceeds to analyze. The approach is characterized by creativity, maturity, and balance. He offers constructive policy suggestions far beyond the gener- alities about development often offered in the literature. His results are based on in-depth cross-country analyses that uncover unique phenom- ena and exceptions to the usual, more general approaches. He contrib- Shaping the Development Debate: The Contributions of Vi nod Thomas I 233 utes to explaining these diverse phenomena and uses the explanations as bases for sound policy suggestions. In his analysis of the growth experiences of East Asian countries, for example, Vinod has pointed out Significant similarities and differ- ences among the countries and investigated them. He brings a wider set of considerations than usual to understand the phenomena. Initial conditions or endowments have been a major consideration. These go beyond the well-known predisposition of the successful Asian econo- mies toward export orientation to labor force characteristics conducive to hard work, and values conducive to encouraging widespread sharing in development among populations at large. Another major consider- ation is policy. Policy approaches are found to have been more than usually flexible in the successful Asian countries, subject to change and adaptation and often in response to changing conditions and to pursuit of more effective ways to promote developmental goals-but still sub- ject to sometimes inexplicable differences among the countries. Another major consideration is the institutional setting in each country, featuring the nature of the bureaucracy, degree of political stability, and varying degrees of predisposition to intervene in markets. To appreciate the departure of this approach in the analysis of eco- nomic growth, a step back may be helpful. There have been many advances. A case can be made that Vinod and his colleagues at the World Bank have made a far greater contribution to the field than is generally recognized. In a reminiscence about the field that is far from systematic, the surge of interest in economic growth in the years following World War II, Edward Denison helped turn a corner in thinking about growth, supplanting the view dominant since the 19 th century that all that was needed to grow economically was to be frugal; that is, save to grow. Economic growth had been explained by physical capital accumulation, narrowly defined as accumulation of nonhuman durable assets. These are productive enough to yield a return over and above what is necessary to cover depreciation, earning the net real returns used to pay the real rates of return observed on market equity and debt instruments. 234 I A Vision for Development Denison's telling empirical questions, based on what came to be known as growth source analysis, or aggregate production function approach, asked, among other things, whether rates of return on phYSical capital are great enough to explain observed growth. Multiplying the observed rates of return on physical assets by measures of the yearly growth in these assets and noting that the elasticity of output with respect to a fac- tor of production is approximately equal to the share of income paid to the factor revealed that only a minority of growth can be explained by phYSical capital accumulation. True, the persistent 2 percent annual his- torical growth in income per worker in the United States was accompa- nied by an approximately equal 2 percent annual growth in the physical capital stock per worker. However, physical capital receives at most one- third of income (the estimate would most likely be considerably less if returns could be measured more accurately). If physical capital were the only source of growth, with an elasticity of output of one-third, physical capital would lead to persistent per worker income growth of less than 1 percent per year, instead of the observed 2 percent per year. A further question became where the rest of the growth was coming from. Concern spread to the contribution of education and other forms of human capital formation to growth, and, when there was still growth left over to be explained, to the so-called residual. The residual was ini- tially identified as catch-all technological change. A popular strand of literature became models tracing theoretical growth paths leading to a long-run golden age where the rate of technological change would be equal to the savings rate. Though intellectually intriguing, this line of thinking ultimately did not lead to practical understanding of why nations differ in their level and rate of growth of income. Analysts at the World Bank, among whom Vinod was a leader, prop- erly did not rely on these growth models and other models that still relied on narrow economic variables. These were important in some ways and captured much attention among academic investigators, with- out, however, going far in understanding the true mainsprings of eco- nomic growth. Yet a more fruitful line of thinking from a practical point of view identified the residual with increases in total factor productivity from Shaping the Development Debate: The Contributions of Vi nod Thomas I 235 research and development. Education and research and development were recognized as important to growth of advanced nations but still did not explain the impediments holding lower-income nations down. The emerging successes of Asian nations could be explained in proximate terms as transfer of technology from more advanced nations, along with importation of capital to supplement domestic savings needed to acquire the capital used in modern production. The export -oriented growth of Asian nations, applying modern technologies and their low-cost labor advantage, gave them a competitive advantage in world markets that was conducive to rapid growth. Their superior performance contrasted with the sluggish performance of countries elsewhere that relied on pro- tectionist poliCies. This idea is now well accepted and underlies much of the World Bank's work on development, but Vinod's and the World Bank's work goes on to layers of sophistication and importance that begin to solve the more underlying puzzles encountered in explaining growth. Consistent with the observation of T. W. Schultz that all people in the world have the same intrinsic abilities and should therefore have the same per capita income level, technology transfer from developed to less-developed nations attracted attention as a way to contribute to ris- ing incomes in some lower-income nations. This idea broadened into a conception of catch-up growth, as exemplified by Robert Lucas, who has noted tendencies in market economies for lower-income countries to grow faster the farther they are behind high-income countries. Catch-up growth theories are more relevant empirically than many other academic theories and are closer to the World Bank approach. However, they do not explain the major consideration that income level alone leaves major differences in income growth of low-income nations unexplained. In the end, although the growth source literature opened economists' eyes to the idea that growth comes from more than physical capital, it did not provide an explanation of why the growth sources are subject to change, which is at the heart of understanding growth. Vinod was a leader in correctly identifying and analyzing the details of policy and institutional impediments as reasons for low incomes in third-world countries. Various non-World Bank commentators have 236 I A Vision for Development focused on one or the other particular type of impediment, such as insecure property rights or rent -seeking by entrenched groups. Often these have focused on one particular impediment and often have had an ideological motivation. They have typically been short on realistic constructive ideas on how to overcome the impediments. Although attention in the economic development literature when discussing Asia has been primarily focused on the continent's highly successful economies, Vinod and his World Bank colleagues have inves- tigated the many differences in performance in Asia both among the suc- cessful nations and between the successful and less-successful nations. Why did the Philippines, with initial conditions superior to those in some more successful Asian countries, get left behind? Among the suc- cessful countries, why are the growth policies so varied? Economic development specialists give much attention to the exceedingly poor performance of the Marxist -communist countries of the world, with the unwarranted inference that therefore all one needs to do to develop is to have a market economy. But this turns out to be only a necessary and not a sufficient condition. As is well known, counterproductive insti- tutional arrangements and policies exist in myriad forms in the market economies of the world, miring many of them down. Policies ostensibly to promote growth in the rapidly growing economies of Asia vary inex- plicably. And in the end, what do we know about why the Asian-type success stories are concentrated in Asia with relatively little spread to the rest of the world? Vinod has contributed to explaining these puzzles and has set forth the agenda of concerns for future economic develop- ment work. Vinod's work has been recognized in the policy world, but my view is that he remains too unrecognized in the academic world. The attempts of academic investigators to grapple with the fundamental problem of how to explain economic growth have often not progressed much beyond conventional economic variables. When they have, they have often not done so in a balanced way. Nor have they generally progressed to a good enough understanding of what causes growth impediments to explain how they can be overcome, too often leaving as the only resort unrealistic admonitions for policymakers to change their behavior. Shaping the Development Debate: The Contributions of Vi nod Thomas I 237 Vinod's work progresses beyond the received academic work. In my opinion, it has not yet caught up with Vinod. An Antecedent: Agricultural Price Policies and the Developing Countries Let me tum now to some of Vinod's earlier work, when our association was particularly close. His early writings stand as lasting and highly use- ful contributions to knowledge about particular development issues and how to deal with them. In this work one can begin to see the continuity of his career. Roots of later work can be found in his earlier work. Agricultural Price Policies and the Developing Countries, with G. S. Tolley and C. M. Wong (1982), is on a narrower topic than Vinod's later work on general economic development. This book is an antecedent shOwing the type of commitment that flowered in his later work, attempting to bring comprehensive, objective, and useful aid to decision making in developing countries. Agricultural price policies have taken a variety of forms. They have been undertaken in pursuit of goals that have varied greatly from coun- try to country. They have almost always been undertaken in the sincere belief in their efficacy, though sometimes they received overzealous sup- port among benefited groups. A common feature has been a general lack of accurate knowledge on the part of those undertaking the policies of what the true effects will be. The limited profeSSional infrastructure capable of analyzing the consequences of sometimes complex economic interventions has led, to a greater or lesser degree, to hasty and ill- informed decisions about policies. The consequences have ranged from governments being thrown out of office, as when food promised during shortages has not become available, to unintended, large government expenditures interfering with other fiscal needs, to deleterious effects sometimes outweighing beneficial effects, to effects opposite to what was intended, to simple waste from imperfect program design. A motivation of Agricultural Price Policies and the Developing Countries was, if you will, to prOVide technical assistance to developing coun- tries dealing with agricultural price policies to aid in making them more 238 I A Vision for Development effective. We attempted to provide a tool kit for understanding their consequences and even more to aid in making them contribute more fully to their intended goals. To encompass a wide range of different purposes of agricultural price policies and to ensure empirical relevance, we first reviewed experi- ences in Korea (rice price policy under rapid development), Bangladesh (efforts to raise food production under poverty), Thailand (rice in an international setting), and Venezuela (attempts to satisfy consumers and producers for a country with lagging food production in a volatile inter- national setting, complicated by interrelated effects of poliCies on grain and livestock production). For each of these countries, we reviewed the goals of their agricultural price policies and assessed the extent to which the goals were met. In the second part of the book, we dissected the types of poliCies considered in the first part, using the tools of applied welfare analysis as supplemented by dynamic considerations, including overall economic development effects. We attempted to show how to rigorously estimate the effects of policies on people as producers, consumers, and taxpayers in the economy at large. The tools provided the means to design poli- cies that could avoid previous unintended deleterious consequences and more effectively meet goals. In a follow-up to the price policy book, Vinod, James Snyder, and I wrote a chapter entitled "What We Know About Agricultural Prices, Policies and Supply," in Essays in Honor of D. Gale Johnson (1996). We extended the work on agricultural price poliCies in three ways: (1) con- sidering the effects of agricultural prices on induced innovation, (2) providing a regression analysis for a large number of countries, and (3) presenting a public choice analysis of why price policies took the course they did in various countries. Developing economies continue to struggle with trying to provide low- cost agricultural products to urban consumers while maintaining farmer incomes. Many do this under unstable domestic market conditions, and many continue to be subject to the vagaries of unpredictable world market fluctuations, against which the countries attempt to protect themselves. Shaping the Development Debate: The Contributions of Vi nod Thomas I 239 The work on agricultural price policies remains at least as relevant today as when it was written. It has been offered in the same construc- tive vein as the more general economic development work discussed above. As a coauthor, lowe Vinod a debt because, without his prodi- gious extra effort, the book would not exist. Another Antecedent: The Economics of Urbanization and Urban Policies in Developing Countries The Economics of Urbanization and Urban Policies in Developing Countries, published by the World Bank in 1987 and edited by Vinod and myself, was concerned with developing a unified framework bringing together major strands of work by investigators from universities and the World Bank on urban problems in the developing world. It dealt with the role of cities in economic development stressing their role in open economies, representing a move from traditional closed econ- omy models previously used to explain the relative growth of urban and rural populations. The role of productivity of modem activities carried on in cities was stressed, along with the lever of international trade to enable early realization of the gains without having to wait for the development of domestic markets. At the same time, roots of urban problems in market failures were analyzed. The burning question of whether city sizes should be controlled was analyzed. Evaluation was undertaken of whether cities are "too big" in the context of size and location policies of third world countries. Public managerial problems in cities were considered, ranging from fiscal problems to housing, transport and pollution. Excerpts from the Foreword by Anthony Churchill help tell the story: Urban problems have become more acute in recent decades as people have flocked to cities ... In coming years, as population growth continues throughout the developing world, urban prob- lems promise to become increaSingly severe. This volume seeks to promote better understanding and evaluation of policies designed to cope with these issues. 240 I A Vision for Development To devise policies intelligently, we need to understand why urban- ization has taken the forms we see today and what its future course is likely to be. Considerable progress has been made recently in the economic analysis of urbanization as a whole and its facets, includ- ing employment, housing, transport, pollution and poverty. This book draws together studies of the causes of observed urbaniza- tion patterns and builds on them to provide a better foundation for policy analysis ... Urban poliCies are of two main types. The first attempts to influ- ence the degree of urbanization and the distribution of population among regions and cities .... A second type of urban policy attempts to make the best of urbanization by coping with the urban man- agement problems encountered during economic development, particularly as they are aggravated by urban policies .... A unique contribution of this book is that the findings as a whole provide a unified framework ... The studies build on progress to date to make new contributions that should be of value to policymakers, advisers, project analysts, and observers of urban problems. Part I provides the underpinnings for understanding urbaniza- tion ... Part II provides a framework for policy analysis. Correction of market failures, redistribution of income, and other goals are considered as basis for policy ... The remainder of the book draws on the first two parts to derive tools for the evaluation of policies (page v). The book is a forerunner of continuing urban work on city externali- ties and agglomeration that has served to emphasize the interrelation between economic development and city growth. This later work has reinforced the continuing importance of the 1987 volume. As with the price policy book discussed above, lowe Vinod deep gratitude for his coauthorship and coeditorship, without which the book would not have come to be. Shaping the Development Debate: The Contributions of Vi nod Thomas I 241 A Sequel on Growth: China's Regions My own later work has continued to benefit from the earlier work that Vinod and I did together and from Vinod's insightful and balanced anal- ysis of economic development in more recent years. In following Vinod's contributions after the time we collaborated closely, I have particularly benefited from his analyses of differences in development experiences among nations. He was among the first to bring understanding to the reasons for, and differences among, the developmental experiences in East Asia. In contrast to many narrower analyses, Vinod has taken a balanced approach, not only identifying the multiple common causes but going beyond to answer questions of why they have differed, including important issues of initial conditions, policies, and institutions. His approach transcends temptations to dwell on one overriding consideration. To my mind, Vinod's work remains the best in this area. I have benefited from it in continuing work at the University of Chicago, investigating development in eastern and west- ern China, where many of same types of differences among nations that Vinod analyzed have come into play among the different provinces of China. Principle thrusts of previous concerns about economic performance of the provinces in China have centered on the lagging performance of western China relative to eastern China, with attempts to ascertain whether there is a tendency toward income convergence between the two parts of China. At the policy level, measures concerned with western China's lagging performance initially centered on transportation infra- structure investments designed to make western China more accessible, with some more recent widening of policies, especially to education and training. In our work at Chicago we are viewing provincial performance as a matter principally of not convergence implying that the rich prov- inces bend down toward the poor, but rather as principally a matter of catch-up of income in the process of growth toward income levels in the advanced economies of the world. We are searching for reasons for impediments to development that will throw light on the great variation 242 I A Vision for Development in performance of different provinces, leading to reasoned ideas on poli- cies that will be effective in overcoming growth barriers. Among several ways that China differs from other rapidly developing nations of Asia is that it is vastly bigger. In some ways, the provinces of China are like separate developing nations. Indeed, many of the indi- vidual provinces are larger than other Asian nations, and great distances separate many of the provinces. China's rural to urban migration shares the well-publicized declining proportion of population engaged in agri- culture that has typified developing nations. We have made estimates of intra- and interprovincial migration from primary to nonprimary employment and find that the majority of migration has taken place within provinces. Only a minority of the migration takes place between provinces. Most provinces feature very substantial movements from pri- mary to nonprimary employment within the same province. The indi- vidual provinces are urbanizing rapidly. Incomes are rising as part of provincial adjustments throughout China. Our current work builds in part on work we did on the relation between rural and urban experiences and their link through internal migration. Gross domestic product in all provinces is rising rapidly, with differences in the rate of rise being due to institutional and related retardations of development. A part of the analysiS is spatial modeling of the effects of interprovincial transportation improvements. We find that the improvements lead to rises in the rate of growth of outlying western provinces but are by no means the major influence. Meanwhile, the large numbers of people still engaged in primary employment on traditional low-income farms provide a pool of potential migrants to cities if they can earn a living commensurate with that real- ized in farms. They prOvide to a first-order approximation an essentially perfectly elastic supply of labor that will hold unskilled wage rates of labor in China down as long as there is a supply of migrants willing to move if wages in cities show any tendency to rise. Our projections indi- cate that it will be two decades or more before the population engaged in primary production is reduced to the low scarcity proportions observed in other countries when the migration is completed. Only then will wages of lesser skilled labor throughout modern China begin a really substantial Shaping the Development Debate: The Contributions of Vi nod Thomas I 243 rise toward world levels. We appear to be at the beginning of a period of gradual transition toward higher wages, moving along a gradually upward sloping supply curve of unskilled labor. The press features stories about rising wages, which, however, are largely anecdotal. The lack of systematic wage data precludes exact estimates, but our age-specific demographic economic projections of migration as Chinese modernization proceeds give estimates of how long we will be proceeding along the upward slop- ing supply of lower skilled labor until the supply becomes essentially perfectly vertical in about two decades. Until that time, China through its exports seems likely to exert continuing substantial downward pressure on earnings of lesser skilled labor throughout the world. The Environment Vinod has published widely on environmental problems of developing countries, both academically and in the more popular press. He exhibits the all-too-rare combination of sound economic analysis with reasoned consideration of distributional and broader goals. Roots of Vi nod's later work on the environment can be found in his early environmental work, which honed the tools of applied welfare analysis in the estimation of the benefits and costs of environmental con- trols with careful awareness of externalities as a source of environmental failures needing to be corrected. He used these as he brought his policy wisdom to bear on environmental issues around the world. Deserving of notice is Vinod's unique and important work on the increasing frequency of environmental disasters as a possible conse- quence of global warming. One observes with awe its prescience here in 2011, a substantial time after publication, this year's unprecedented Ring of Fire earthquake-tsunami inJapan and the unprecedented multi- state tornado storm in the United States. These serve to bear out his analysis. Policy Participant and Policy Advisor As Country Director for Brazil and Vice President of the World Bank from 2001 to 2005, Vinod was in charge of the Bank's financial portfolio 244 I A Vision for Development in Brazil and led negotiations with the government. He was responsible for aiding Brazil's macroeconomic, social, and environmental initiatives. Growing out of his extensive experience in Brazil, Vinod authored the widely acclaimed book, From Inside Brazil: Development in a Land of Con- trasts (2006), which has become a standard reference. It is a culmina- tion of his imagination and maturity in giving advice on a country's challenges. He has advised in China, India, and Korea. He has been a speaker at the World Economic Forum, the Brazil National Forum, the Asian Development Bank, and the International Monetary Fund. He is an advi- sor to the Emerging Markets Forum. He has made various lasting contributions to the economies of Colombia, Peru, Chile, and Bangladesh. He still visits these countries to provide advice and has become an expert on financial matters. Institution Builder Others closer to Vinod's recent work will know the details, but Vinod appears to have accomplished break-through achievements in evalu- ation. He has made serious program and policy evaluation a reality. Achieving effective program evaluation in government has been a largely unmet challenge. Sponsors of policies and those charged with carrying them out believe so wholeheartedly in the worthiness of what is done that they often see little need for evaluation. Often there is a fear that efforts will be shown in a less-than-perfect light, or that the pot will be stirred up by the suggestion of unsettling changes. Achieving good evaluation is certainly one of our greatest needs and one that has been stubbornly resistant to being met. As Director-General of the Independent Evaluation Group (lEG) reporting to the World Bank's Board of Governors rather than the Presi- dent, with reports being made public, Vinod has created truly effective independent evaluation that is being copied by other agencies. Path- breaking evaluations concerning trade, natural disasters, education, the environment, climate change, and Africa's agriculture have led to impor- tant agency changes. He brought together under one tent of oversight Shaping the Development Debate: The Contributions of Vi nod Thomas I 245 the three parts of the World Bank Group: the World Bank working with governments, the International Finance Corporation working with private entities, and the Multilateral Investment Guarantee Agency, also working with private entities. He has adopted measures to ensure that the lEG's independent voice will be long-standing and institutionally grounded. Meanwhile he has ensured that lEG is an active member of the Evalu- ation Cooperation Group and is an advisor to other groups, including the United Kingdom's evaluation group and the Asian Development Bank's evaluation office. Vinod's contributions to institution building have not been limited to his most recent activities. Earlier, as Vice President of the World Bank Institute, he was responsible for expanding the Economic Develop- ment Institute into the vastly larger World Bank Institute, with greatly expanded and improved functions. He also established the Global Dis- tance Learning Network, and fostered meaningful cooperation among numerous partners around the world. He oversaw the Joint Program with the African Development Bank and supported the African Virtual University. He chaired the Joint Vienna Institute providing economic and social training programs for the former Soviet and Eastern European economies. Friend Vinod has remained my friend and confrere. Though we have been engaged differently in recent decades, a transcending professional and personal affinity exists between us. Our recent differing work has com- mon roots dating to the times when we worked closely together. An underlying concern, shared by many other than ourselves, has been understanding economic development of lower-income nations and, based on this understanding, helping overcome barriers impeding development. In our joint work, we shared the vision that economic policy can be shaped for the better if 0) it is based on the best solid and objective economic analysis that can be brought to bear and (2) it is devoted to the purpose of improving the quality of decision mak- 246 I A Vision for Development ing, free of ideological predispositions. Many actual and recommended policies do not live up to these precepts. The lack is often greatest in less-developed countries, where the level of economic literacy is low and the quantity and quality of public discourse is limited. The affinity is further strengthened by our strong common interests in poverty and the environment. In Vinod I have encountered a gifted and kindred investigator and scholar. In addition to its careful foundation in sound analytic under- standing, a characteristic of Vinod's approach to policy is that it is con- structive. He finds criticism aplenty in current policies of a country, but they are couched not in admonition or ideology but rather in terms of opportunities they offer for improvement. As someone who is very well acquainted with Vinod, I can say with confidence that he ranks among the most vigorous and productive scholars active today, bar no one in the world. He is unusually person- able and likeable. It has been a privilege and gratifying experience to work with Vinod. Not the least of the rewards has been association with a truly wonderful person, whose fine traits as a human genUinely interested in the well- being of others-extending down to the personal level and offered in a spirit of kindness and humanity-have undoubtedly been an important contributor to his uniquely successful career. Bracing for a Tumultuous Future by Kristalina Georgieva My World Bank colleague Vinod Tomas has a long and distinguished record of service-one that has allowed him to witness and be part of some of the most profound changes shaping today's world. His work helped the World Bank and its many clients understand better what makes economies grow, how to lift up millions of people from poverty, why development is more eqUitable in some places and less so in others, and what to do about the grow- ing competition for resources. We crossed paths many times, and at one point in the early 2000s we were privileged to head the World Bank offices in two major emerging market economies (Vinod was based in Brazil, while I was in the Russian Federation). Some 11,000 kilometers away from each other, we saw first-hand how in both places sound macroeconomic policies and a strong natural resource base defined the upward trajectory of the countries and made them part of the quartet commonly known as BRICs (Brazil, Russia, India, and China). But we also witnessed the difficulties that rapid growth causes for those left behind and the risks it creates for the environment. And it was these last themes that connected Vinod and me more than anything else throughout our careers. We have always shared a passion for the environment and a con- viction that the quality and equality of growth matter more than its speed. As I painfully learned at the World Bank, and even more so in my new capac- ity as European Union Commissioner for International Cooperation, Humani- tarian Aid and Crisis Response, the world today may be richer, but it is also more fragile. In 2005, for the first time, the developing countries produced more gross domestic product in purchasing power parity than the developed ones. Also for the first time, more people lived in cities than in rural areas. As new poles of growth started to emerge, the rise of the middle classes in the develop- ing world became irreversible and an increasingly important factor in resource allocation across the globe. The World Bank expects the world's middle class to 247 248 I A Vision for Development triple in three decades, from 430 million in 2000 to nearly 1.2 billion in 2030-almost entirely due to growth in the emerging economies. If these numbers are adjusted to local purchasing power, today already more than 2 billion people belong to the middle class. This is good news in terms of standards of living for those who join the middle class ranks. But the other side of this coin is growth of consump- tion, demand for resources, and pressures on the global environment. Despite the growth of the middle class, the numbers of the "bottom billion" remain unchanged, and approximately half the people in the world still live on less than 1 percent of its wealth. If the current trends of population growth, quality of economic development, and environ- mental pressures continue, those left behind will only swell in numbers, inflaming more vulnerability, emigration waves, and conflicts. Yes, today we live in a multipolar world and, as we saw in 2010, there are more engines to pull the global economy out of trouble, among them the two countries-Brazil and Russia-that Vinod and I know well. Yet much of the optimism about these new engines of growth is clouded by the upward trends in commodity and food prices, and the implications they have for the poorest people around the world. And a new critical risk is building up: a growing vulnerability to natural disasters in both mature and emerging economies. The World Bank has estimated that just in the past decade, natural catastrophes have affected around 2.6 billion people-a billion more than during the previous decade. The two markers of the shift in balance between the developed and the developing world, 2005 and 2010, are also years recording global peaks in the upward trend in the frequency and intensity of disasters. The very beginning of 2005 will be remembered with the effort to cope with and bring relief to the victims of the Asian tsunami that struck on December 26,2004, killing more than 235,000 people. Later, Hurricane Katrina topped the list of costliest disasters to date. Back in Asia, a mas- sive earthquake took at least 87,000 lives and left millions displaced in northern Pakistan, while in South America, Hurricane Stan killed more than 1,1 00 people in EI Salvador and Guatemala. The year 2010 was another high point on the disaster curve, pummel- ing the planet with 950 natural disasters-of which at least five qualify Bracing for a Tumultuous Future I 249 as mega-disasters. As early as January 12, 2010, a 7.2 magnitude earth- quake ravaged Haiti, killing close to 300,000 people, shattering the lives of 2 million others, and provoking a humanitarian crisis from which Haiti still struggles to recover. Another, much stronger, 8.8 magnitude earthquake, rattled Chile, causing 800 deaths and severe housing and infrastructure damage. In the months that followed, drought pushed up the risk of hunger in some of Africa's poorest regions. Record high temperatures turned timber into ash in the region around Moscow, and later in the year in parts of Israel. Floods covered a fifth of Pakistan's ter- ritory and shredded the livelihoods of millions in Sri Lanka, West Africa, and Brazil. Flooding did not bypass Europe, where its impact stretched from Poland, through the Western Balkans, to Moldova. The eruption of a minor Icelandic volcano closed airspace for days on end, stranding thousands of passengers and millions of tons of goods and inflicting a major loss on the airline industry. But increased frequency and magnitude of disasters are not the only problems. We also face a growing complexity and spillover of impacts, leading to much larger crises to cope with. We saw this in 2005, when Hurricane Katrina produced a triple disaster-the destructive storm surge, the flooding that resulted from broken levees, and the massive pollution caused by the oil spill. We saw this also in 2010, when Haiti suffered two interrelated disasters-the earthquake and the cholera epi- demics that followed. In March 2011 we saw it in Japan, where the earthquake triggered a massive tsunami, which in tum caused a major nuclear accident. Indeed, 2011 provides the evidence that 2005 and 2010 were not just aberrations, but that we need to brace for more bad news. Barely four months into the year, Australia has suffered catastrophic floods and New Zealand a major earthquake; Japan has been engulfed in a triple earth, water, and atomic calamity that is likely to cost 3 percent of its gross domestic product; and tornados struck the United States with a terrible force. The harsh truth is that the confluence of disasters we experience today is related to the very issue of sustainability on which Vinod and I have been working on throughout our professional lives. What we observe 250 I A Vision for Development is neither incidental nor likely to abate any time soon, particularly if we judge by the factors that cause so many disasters and make their destruc- tive potential so high. Through its effect on weather patterns, climate change is one of the game-changers responsible for this trend. In Europe alone, more than 90 percent of the disasters that happened in the past decade are directly linked to extreme weather. It warms up oceanic surfaces and thus trig- gers hurricanes; it pushes up continental temperatures and hence kills crops through either protracted droughts or biblical floods; it unleashes heat waves that ignite forest fires and melt glaciers. Examples of the effect of climate change are the extraordinarily vio- lent hurricane seasons of both 200S and 2010. According to recent research, both years ranked close to the top in storm totals on record in the Atlantic region. In just that area, 2010 saw 19 tropical storms and 12 hurricanes-five of them major. One of them-Tomas-barely missed Haiti, which at that time was struggling both with the earthquake aftermath and the cholera epidemics. Haiti was spared, but other coun- tries were not-the damage hurricanes inflicted in 2010 is estimated to cost 8.06 billion EUR ($11.6 billion). And according to meteorologists, 2011 is expected to be another year of high hurricane intensity. And that should come as no surprise: the reason for this unusual storm activity has been determined to be the record sea surface temperatures in the North Atlantic. A second factor in the rising impact and frequency of disasters is the intensity of industrial activity and the associated risk of incidents such as chemical spills. Although we are often powerless in front of Nature's random cruelty, we are equally vulnerable to the prospect of disaster caused by our own industries, factories, and energy sources. The past year has given us too many examples of the destructive potential of man- made disasters-the Deepwater Horizon oil rig explOSion, the Hungar- ian red mud spill, the Fukushima Nuclear Power plant. Third, the rise of disasters is particularly challenging in combination with the current demographic growth. We will see the world's popu- lation surge to 7 billion by this year's end, increasing the number of Bracing for a Tumultuous Future I 251 vulnerable people and putting them at even higher risk. But the implica- tions of this demographic record go even further: Demographics affects economic growth and the demand for raw materials, food, and com- modities; it changes political relations; it shapes development or lack of it. Among the communities that will contribute the most to population expansion, many are vulnerable to these risks-for instance, Liberia, Afghanistan, Western Sahara, and Niger, which are the countries with the highest fertility rates, and which are also among the poorest and most disaster prone in the world. Fourth, urbanization Significantly increases the human and economic costs of disasters. Although cities offer more opportunities and in many countries are the main contributors to growth, poverty reduction, and an increased standard of living for millions of people, higher concen- tration of population and economic assets in urban areas also means a higher toll when a disaster hits. This is particularly important in the developing world, where uncontrolled and unplanned urban develop- ment has already given ample evidence of this risk. And the trend in increased frequency, intensity, and complexity of natural disasters is accompanied by fragility caused by the changing nature of security challenges-from terrorism and failed states, to civil wars and migration. Consider, for instance, the recent conflict in Cote D'Ivoire, which started as a political battle between a former and a newly elected president, but which, barely four months later, had turned the country into a battlefield for rivaling militias who fought among the population, targeted civilians, and cut off hospitals' water supply. This created a massive human displacement inside the country and a wave of refugees toward neighboring countries-particularly Liberia, where the host communities were already living on the verge of a humanitarian crisis and malnutrition. How does this change our vision for development? The link is com- plex. First, we must recognize that just one random event like a natural disaster, or a purposeful act of terrorism, can not only thwart the devel- opment prospects of a country or a region, but also has an impact on the whole world. We have seen examples of the jittery response of the world markets to major disastrous events-the 9/11 terrorist act in the United 252 I A Vision for Development States in 2001 or the earthquake, tsunami, and nuclear incident that hit Japan on March 11,2011. If we look at the map of the new emerging economic powers-the countries on which we rely for the new impetus of growth for the global economy-we see that it coincides troublingly with the map of areas that are most prone to disasters, thus adding a risk to world growth prospects that has not yet been fully assessed. Neither have we made sufficient progress in thinking about the inter- dependence of different risks-to our economy, finances, climate, food security, communications, health-nor how we can address them in a comprehensive manner. Second, this matrix of interlinked reasons for man-made and natural disasters is particularly challenging in the context of underdevelopment, as disasters strike most severely less developed countries, killing hun- dreds of thousands of people every year, affecting millions, and causing billions in annual damage. Disasters set back years of economic growth, thwart its quality, and damage its inclusiveness. As we have seen on numerous occasions-from the 2004 Asian tsunami to Haiti to Paki- stan-disasters can derail societies, nations, and regions in their efforts to provide their members with a better life today and better promise for tomorrow. Thus, sound development is the best disaster risk reduction factor. The earthquakes in Haiti and Chile illustrate this well. In Haiti, the earthquake killed 230,000 people, and according to the Inter-American Development Bank, the damage it caused costs over 5 billion EUR ($7.7 billion). In contrast, the much stronger earthquake in Chile inflicted between 3 and 5 billion EUR ($4-7 billion) in damage and took 800 victims, most of whom died not in the quake, but in the tsunami that followed. This difference is so enormous because Haiti is the least devel- oped country in the Western hemisphere; it was so badly damaged not because the earthquake was so huge, but because of decades of bad governance. Chile, in contrast, has an excellent prevention and reaction system and sound building codes. It suffered the sixth largest recorded earthquake in history, and of course, that caused serious structural dam- age and the loss of homes and livelihoods. But most of the buildings resisted the shock. Those that didn't were mainly old, built with tradi- Bracing for a Tumultuous Future I 253 tional clay bricks, or wooden houses on the coast, which were washed away by the tsunami. Third, we must do more to reach the right balance between disas- ter risk reduction and disaster response. Studies show that every dollar invested in prevention and preparedness brings 4-7 dollars in returns, yet the world continues to spend more on response and reconstruction, and not enough on reducing vulnerability and risks. Being properly pre- pared can make the difference between a manageable emergency and a catastrophe. Sustainable development policies stimulate just this kind of preparedness and can therefore achieve a double goal-not only reducing poverty, but also reducing vulnerability to disasters. Although it is impos- sible to predict where and when disasters will happen, in many regions of the world one thing is certain-natural disasters are a permanent threat. The anticipation of these recurring events may make people feel power- less when they face the destructive forces of nature. But the success of disaster preparedness programs proves that a lot can be done to minimize risks and that we are far from helpless when disaster strikes. This increasing frequency and intensity of disasters has called for a rethink of what Europe is doing to prepare for and respond to disasters. We have long been in the lead in addreSSing the challenge of climate change and in promoting both mitigation and adaptation to its impacts. This remains a top priority for the European Union, at home and inter- nationally. We believe the time has come for green growth and in our Europe 2020 strategy have spelled out the transformative steps needed to achieve it. We cannot avoid disasters altogether, but there is a lot we can do to limit their damaging potential. We in Europe have included disaster risk reduction as a priority-both in European Union member states and in our aid poliCies around the world. Inside the Union, substantial financing is available in the European budget for disaster prevention- for instance, strengthening riverbanks to avoid floods and replanting lands affected by deforestation. Outside the European Union, we help countries reduce the risk of disasters through our preparedness and prevention programs, funding 254 I A Vision for Development adaptation activities in countries most vulnerable to climate change. For instance, in 2010 we supported the Greater Hom of Africa deal with droughts. We reached out to some 12 million people in Djibouti, Eritrea, Ethiopia, Kenya, Somalia, and Uganda, whom we help adapt to increasingly severe and unpredictable weather patterns: through teaching water-management techniques and encouraging the use of drought-resistant seeds. Another example is the support we provide for disaster risk reduction programs at the community level. It covers seven disaster-prone regions: the Caribbean, Central America, South America, Central Asia, South Asia, South East Asia, and South East Africa and the Southwest Indian Ocean. The projects we finance through this instru- ment, often implemented by the benefiCiary communities themselves, contribute to decreasing vulnerability and raising the ability to cope with disasters-through training, building capacity, raising awareness, establishing or improving local early-warning systems, and contingency planning. In the fragile world we live in today, we must strive to better understand risks and strengthen the agility of our physical and institutional infra- structure to cope with them. For me and my team, and for my colleagues around the world, this means three things. First, it means focusing on the whole disaster cycle, from prevention and preparedness (ensuring that hazards do not tum into disasters and that disasters do not evolve into major crises) through response (ensuring the mobilization and deploy- ment of adequate resources where needed, when needed, and as soon as needed after a disaster strikes) to resilience (building back better) and ensuring that a disaster does not permanently stifle development. Second, it means building up global solidarity in the face of mega- disasters, so we are collectively better prepared when the next one strikes. For this, I see a tremendous role for the global financial institutions, such as the World Bank, where Vinod and I had the chance to work. They provide the right forum to place natural disasters in development context, to make the economic case for preparedness and prevention, and to discuss the policy choices that can reduce risks and increase resilience. They also offer tools like disaster risk insurance that can help nations pool resources against the devastating powers of nature. Bracing for a Tumultuous Future I 255 Last, but not least, it means a shift to a risk management policy mind- set-at global, national, community, and individual levels. Our world is prone to multifaceted crises, whether caused by men or nature, and we have an obligation to our children to develop the capacity to deal with them. e- Central Asia's Trad ....... Rising to the Challenge by Kazi M. Matin Introduction The longstanding view that trade policy liberalization has to be accompanied by other reforms at the border and behind the border to generate sustained expansion and diversification of trade are nowhere more relevant than in Cen- tral Asia. In addition, these countries have to cooperate with each other to provide regional public goods such as transit rights and energy, without which they cannot diversify or expand trade in a sustained manner. Thus, continued diversification and expansion of trade, critical for employment and equity, faces many challenges. The countries of the subregion are diverse in respect of their characteristics and their chosen development paths. Uzbekistan is five times the smallest coun- try Tajikistan in terms of population and Kazakhstan is twenty-five times the smallest in terms of economic size. Kazakhstan, Turkmenistan, and Uzbekistan are rich in oil and gas resources, while the Kyrgyz Republic and Tajikistan are not. All of them are landlocked and some double landlocked. Trade policy bar- riers have come down the most! in these countries since the transition began, but there remains a large unfinished agenda in other areas. Among the coun- tries in this subregion, Turkmenistan is the least open, followed by Uzbekistan, while the Kyrgyz Republic is the most open (as the only World Trade Organiza- tion member), followed by Kazakhstan and Tajikistan. Between 2000 and 2008 Central Asia's trade grew rapidly, though diversi- fication was mainly in respect to partners rather than products. Two-thirds of merchandise exports comprised fuels, ores, and metals, but exports exclud- ing those items have nevertheless exhibited robust growth, as indeed have services exports. Total merchandise imports also expanded rapidly, financed in part by oil and gas receipts, as well as remittance inflows. Today, total 257 258 I A Vision for Development trade of goods and services as a share of gross domestic product ranges from 140 percent for the Kyrgyz Republic to around 90 percent for Kazakhstan and Tajikistan and percent for Uzbekistan (see Figure 1). The growth and diversification of trade that has taken place so far is no doubt owed to the reforms that liberalized trade policy as well as those that improved their business climate and trade facilitation, and probably to investments in rails and roads within individual borders. But in addition it is owed to similar investments made by neighbors in a coordinated manner, so as to ensure transport connectivity across these countries, to the east to China and to the south toward South Asia, instead of just north and west to the Russian Federation, as was the case in Soviet times. Nevertheless, the current state of private investment climate and trade facilitation within individual countries leaves a lot to be desired, and without Significant improvements, sustained expansion and diversification of trade will be difficult. 2 Figure 1 Share of Trade and Exports in CDP (0/,,), 2007-08 Average 160 140 140.1 120 1: 100 QJ ... 80 u QJ c.. 60 40 20 0 • Exports and imports of Exports of goods and services goods and services as as percent of GOP percent of GOP Central Asia's Trade-Rising to the Challenge I 259 Central Asian countries also need each other. Individually they cannot ensure transportation to external markets for their exports and imports or assure reliable energy or irrigation for their firms and farms. Without cost-effective, reliable rails and roads and assured transit rights through neighboring countries, firms in each country cannot transport goods competitively from and to Russia, Europe, China, or Turkey, which are important sources of imports and markets for exports;3 some of these countries are double landlocked, requiring transit rights through more than one country. Ensuring reliable energy for their firms also requires agreements with neighbors; even the Kyrgyz Republic and Tajikistan, which have significant potential for generating their own hydropower, cannot do this without agreements with lower riparian or with neigh- bors for transmission rights to export surplus power. Successful regional cooperation is needed for the provision of essential regional public goods for producers, farmers, and traders in individual countries. Recent Trade Performance Between 2000 and 2008 total merchandise exports rose five and half times, driven mainly by fuel, ores, and metals exports. Kazakhstan accounts for three-quarters of Central Asia's total exports, followed by Turkmenistan and Uzbekistan, each accounting for around a tenth, and the two smallest economies together account for the rest. In fact, Central Asia's share in world exports more than doubled over this period, led no doubt by Kazakhstan and Turkmenistan. The global crisis reduced exports sharply, but the recovery to precrisis levels is under way. Exports excluding fuels, ores, and metals grew by three and half times exceeding the CIS and world average (Figure 2), albeit with little product diversification. Most of the growth in these exports came from growth in existing products to existing markets or existing products to new mar- kets. SpeCifically, in Tajikistan, Kazakhstan, and the Kyrgyz Republic around 80-95 percent of the export growth came from existing exports to existing markets and to new markets, implying little growth in new products (Coulibaly 20lO). The markets for these non-oil-non-mineral resource exports continue to be Russia and the CIS 4 and in 2008 they 260 I A Vision for Development Figure 2 Merchandise Exports (excl. fuel, ore, and metals)- Central Asia versus Others (Index, 2000 = 100) 500 450 400 g 350 ..... 300 o 250 o ~ 200 150 100 50 O~--~------~--~--~--~--~~--~--~~ 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 - Central Asia South Caucasus EUlO - W Balkans CIS (excluding CAl Developing countries •••• World (excluding ECA) Source: UNCOMTRADE (partner country data). bought the largest share of these exports, though other markets are tak- ing a higher share than before; Central Asian countries depend on them for most of the labor-intensive, low-technology exports that account for a good deal of the employment. There has been much greater geographic diversification in the imports of Central Asia. Between 2000-01 and 2007-08, Russia's share in total imports fell from 34 to 28 percent, while China's share rose from 7 to 29 percent (Figure 3). Diversification of import sources has moved further away from its Russia and CIS centric character. China's shares in imports are much higher for individual countries than the average reveals, rang- ing from 77 percent of imports for the Kyrgyz Republic to 43 percent for Tajikistan and 25 percent for Kazakhstan. This trend toward geographic diversification in imports and exports reflects their citizens' and firms' preference to buy imports from the least cost country and to sell exports in the best market possible. Even though most of these countries are yet to accept World Trade Organi- zation obligations, they appear to have chosen policy autonomy and Central Asia's Trade-Rising to the Challenge I 261 Figure 3 Change in Sources of Imports, 2000-01 versus 2007-08 (% of Central Asia's Total Imports) China, ROW, 6.9% Other 10.4% EU-27, 18.4% Russia, EU-27, 34.0% Other Other 25.2% East Asia, CIS, 6.0% 3.5% Other Russia, CIS, 28.6% 6.0% Source: UNCOMTRADE. multilateral trading for the most part. This has been made possible by the opening of China's western borders; by increased transport con- nectivity to the east and south, an important departure from the Soviet times; and by the reforms that have gradually opened up the economies. In fact, although countries in this region have Signed a large number of regional agreements, they were mostly for nontrade objectives, as is evident from the large share of multilateral trade that these countries actually conducted. A large part of Central Asia's multilateral trade is also carried out through "non-standard channels" and not recorded in these coun- tries' statistics. Most of this trade is, however, legal, as it feeds the large bazaars, a key aspect of economic activity in the region. The Kyrgyz Republic and Kazakhstan are the largest official participants in this form of trade, in line with their relatively more open environments. In fact, both countries adopted a "simplified customs arrangement" with low tariffs and a light touch with inspection that are applicable to small exporters and importers that live around the border areas (some up to 30 miles on each side). Under this arrangement the Kyrgyz Republic operates almost like a regional entrepot, selling Chinese consumer goods in its two huge bazaars 5 to customers inside the country but also those 262 I A Vision for Development from other Central Asian countries that have more restricted economic regimes. Chinese exports of consumer goods to Kyrgyz are re-exported by Kyrgyz entrepreneurs to Kazakhstan and to other countries of Central Asia, using their relatively well-developed trucking and logistics ser- vices, which were built mainly to cater to the bazaars; this amounts to as much as $3 billion a year. Even more important, Kyrgyz firms also import fabrics and other accessories to convert them into garments for exports into Kazakhstan and Russia through both nonstandard and standard channels. Garment exports as well as trucking and logistiCS services provide an important source of employment, and one that has been growing in recent times. Private Investment Climate Growth and diversification of trade depend on private investment. Such investment is typically mobile and very responsive to incentives. Coun- tries with large domestic markets, plentiful low-cost labor, and easy access to markets are attractive to investors, so these countries can do with poorer business and governance environments, relative to coun- tries without those characteristics. Natural resource-rich countries are also able to attract investors in resource sectors, but not easily in non- resource exports necessary to create employment. Central Asia, with relatively small domestic markets and landlocked or double landlocked economies, has an initial disadvantage; it needs business and gover- nance environments superior to other countries' to attract both domestic and foreign investments into nonresource sectors. Since the transition began, all countries of Central Asia have made some progress in improving their business environment, as reflected in the Doing Business (DB) ratings. Kazakhstan and the Kyrgyz Republic have probably made the biggest improvements, followed by Tajikistan and Uzbekistan. Kazakhstan has the advantage of a larger economy and a larger middle-class market, though it does not compare favorably on that score in relation to countries elsewhere; it has made improvements in the business environment, as reflected in overall DB rating, but on construction permits and trading across borders it does not perform Central Asia's Trade-Rising to the Challenge I 263 well. The Kyrgyz Republic is a much smaller economy with a very lim- ited domestic market, but it adopted more market-oriented policies soon after its independence and has continued liberalization of the pri- vate sector rules and regulations, as reflected in better overall DB rat- ings. However, it does poorly in respect of trading across borders (Table 1). Tajikistan has also improved its business environment but lags far behind the other two, with Uzbekistan coming in last. In all the coun- tries, perceptions about corruption remain high and the track records of policy consistency and respect for property rights are limited. In business enterprise surveys of these countries, firms conSistently cite absence of reliable electricity as a major constraint for the private sector, in addition to regulations, taxes, and corruption (BEEPS 2010). Lack of reliable power is a surprising constraint in a region that has plentiful energy resources. This is in part due to the uneven distribution of such resources across countries and also to problems of poor man- agement by power utilities and low tariffs. In the Kyrgyz Republic and Tajikistan, the problems go beyond the above factors, which are in the 139 178 -87 116 154 150 169 185 n/a 172 Note: Doing Business (DB), the Global Competitiveness Index (GCI), and the Corrup- tion Perceptions Index (CPI), issued by the World Bank and the World Economic Forum and Transparency International, respectively, are used commonly to assess aspects of the business environment. DB is an assessment of the cost of meeting the laws, regulations, and processes for businesses in the country with individual compo- nents like trading across borders and registering property; the GCI is a complex mix of factual data and opinion; and, (PI, as its name implies, is a collection of percep- tions collected from investors. 264 I A Vision for Development country's own control, to those requiring cooperation with neighbors for ensuring adequate power generation to ensure year-round reliable energy for firms, a regional public good for these countries. Central Asia's economies must move aggressively to improve their private investment climate and make progress beyond their competi- tors, which have larger domestic markets, more skilled labor, and easier access to external markets. It will be important to liberalize regulations and restrictions more than competitors, to create a track record of respect for property rights, and to improve reliability of energy supply for firms. Even with these improvements, investors may not find it profitable to invest in exports if they cannot transport goods competitively to exter- nal markets or have access to power. Yet without these improvements, private investment in nonresource sectors will be more limited and the benefits from trade policy liberalization are not likely to be sustained or equitable. Trade Facilitation For most countries, trade facilitation seeks to reducte costs of interna- tional shipping, which includes domestic transport to port, logistics at ports and customs, and shipping itself. But for the landlocked and dou- ble landlocked countries of Central Asia the focus is still on reducing the cost of domestic transport to border checkposts and the cost of logistics and customs at those border posts; in addition, there is still the issue of how to transport exports across neighboring countries. The latter is less in the control of individual countries, as roads built to reach the border checkposts would require corresponding roads on the other side of the border if these roads are to reduce cost. In fact, today the costs of trade are higher here than almost anywhere else in the world, due in part to the disadvantageous mix of poor physical (or "hard") infrastructure domestically and high transactions costs (or poor "soft" infrastructure). Central Asia is surrounded by some of the world's most dynamiC economies, so transport, even long distance overland transport, can be competitive if it is efficient. The challenge is to identify compara- tive advantages in transport as well as in trade. That will require public Central Asia's Trade-Rising to the Challenge I 265 policy and public investment because transport is an area of large fixed costs and positive externalities, but in a way that allows market forces to guide decisions. The top-down planning and collaboration need to be flexible enough to avoid compounding wasteful spending on unneces- sary infrastructure while allowing responsiveness to unforeseen demand for increased capacity on certain routes or by certain modes. The current approach to this challenge in Central Asia is to identify corridors6 for priority investments combined with trade facilitation. Increasingly, the obstacles to trade in Central Asia are not just poor physical infrastructure but more the "softer" side of trade facilitation, especially at border checkposts. Police and customs officials are not doing their jobs, in part due to poor capacity but also due to pressures to supplement their incomes. Customs processes remain time-consuming, multiple government entities have responsibility to clear consignments, and visa regimes are difficult. If trade growth is to be sustained and pro- moted, the soft infrastructure of trade facilitation has to be improved in addition to the hard infrastructure of rail, road, and air within countries. The opportunities lie in the potential for substantially reducing the costs of trading and increasing the volume and gains from trade, and this is still a task for national governments, which, as everywhere, have pri- mary responsibility for maintaining the physical infrastructure in their countries and are the only parties that can reduce the red tape and attack the corruption at border checkposts. Regional Cooperation in Transit Rights over Land Transit corridors are regional public goods and should be managed as such through international/regional cooperation. Such cooperation in roads and transit arrangements could reduce the tragedy of anti-com- mons, where people promoting self-interested goals choke off trade that would be otherwise beneficial. The regulation of national borders, the search for public revenue through levies on traders, and the spread of petty corruption all increase the cost of trade, while sensitivity to newly acquired sovereignty and personal antipathies of leaders inhibit regional cooperation. International financial institutions can and should 266 I A Vision for Development continue to playa role in this respect by providing advice, assistance, and coordination, as well as participating in the relevant policy dialogue in each country. Clearly there has been much progress in regard to regional coopera- tion in transport and transit rights through the development of transport corridors. Corridors combine investment in hard and soft infrastructure and are amenable to monitoring (for example, by time-cost studies of a standardized truck or container), which permits ex post evaluation of policy actions and their success. They have already established greater transport connectivity not only to the west and the north, which existed before, but also to the east and south. The north-south road corridor, which links the cities of Dushanbe, Khujand, Osh, Bishkek, Almaty, and Astana to the Afghan-Tajik border at Nijny Panj (southern Tajikistan) and to the Kazakh-Russian border at Petropavlovsk (northern Kazakhstan), makes possible transportation from Central Asia to markets in Russia, Europe, and South Asia; similarly, the west-east corridor, with links to the north- south corridor, connects Russia, Kazakhstan, and China. There is a lot to be said for regional cooperation to expand and diver- Sify transport corridors through the integration of road, rail, and air transport systems, as well as the harmonization of border posts and customs procedures. This would prevent the creation or maintenance of monopoly positions in transit and in transshipment platforms, so a denser menu of corridors is needed to provide alternatives. The develop- ment of Aktau port on Kazakhstan's Caspian shore, for example, allowed direct trade from Kazakhstan to Baku without requiring material to pass through Turkmenistan; this was also used by Uzbekistan, some of whose trade has been diverted to this route, which is longer but less troublesome than using a Turkmenbashi port. Uzbekistan's restrictive border policies encouraged the Kyrgyz Republic to nationalize its road network so that the main Osh-Bishkek road no longer passes through Uzbekistan; it has also encouraged Tajikistan to use routes via Osh and Almaty rather than via Tashkent. Similarly, the strategic development of new transit corridors to the east led to the progressive shift in trade toward China and improvements in corridors to the south to help with increased trade with South Asia once Afghanistan has stabilized. Central Asia's Trade-Rising to the Challenge I 267 Central Asia has made a good start on meeting the challenge of trans- port and transit rights across countries. The hard infrastructure has developed and is developing quite well with good regional coopera- tion, but there is still a long way to go to complete and implement the cross-border agreements that comprise the "soft" infrastructure. Efforts to improve effectiveness of transport corridors and to promote their conversion to economic corridors with economic spillovers into ser- vice stations, food outlets, and small businesses around them depend a lot on ensuring effective and cost-competitive transit rights and border crossings. This is a key determinant of competitiveness and is where the future challenge of expanding and diversifying trade lies. Regional Cooperation in Energy Private firms in nearly all countries cite the absence of reliable power sup- ply to be a major constraint to investment, production, and exports (BEEPS 2010). Although inefficiencies in domestic transmission and distribution and low tariffs account for a part of this problem, a significant part is caused by the recent breakdown of the Central Asian Power System (CAPS) of the Soviet era. CAPS combined thermal power systems of Kazakhstan, Turk- menistan, and Uzbekistan with the hydro systems of the Kyrgyz Republic and Tajikistan to ensure mutual dependence on each other and adequate and reliable power supply all year round;7 this was particularly helpful for countries dependent on hydro systems and vulnerable to winter shortages, when water availability is low and power demand is high. CAPS has been under strain ever since the 1990s and finally broke down in the face of the severe winter of 2007-08. In search of greater energy security and self-sufficiency, the three oil- and gas-rich countries increased thermal and transmission capacity, thereby reducing their dependence on CAPS. This is evident from a decline in Central Asian electricity trade to a sixth of the level it was in 1990. This came to a head in 2007-08, when the system failed to deliver. A dry year in 2007 reduced summer water inflows into Kyrgyz and Tajikistan reservoirs and lowered summer exports, making it difficult for them to accumulate balances needed to buy power or gas in the winter. Gas prices rose that 268 I A Vision for Development year, too; in addition the severe winter of 2007-08 reduced water and hydro power generation further, leading to severe electricity rationing in the winter and adverse effects on the economy. The Kyrgyz Republic and Tajikistan were the worst affected by the breakdown, but their power self-sufficiency depends on successful regional cooperation to share water and transmission rights, in addition to domestic actions to increase efficiency in the use of power. Clearly raising tariffs, rationalizing operations of state-owned power utilities, and investing in better transmission and distribution systems are actions that are no different than what is done in countries elsewhere. However, adding to power generation to meet winter demands cannot be done by the two countries on their own. New hydro projects will require cooperation with lower riparian countries to ensure adequate irrigation water for the later. Additional hydro capacity will generate larger sum- mer surpluses to export to countries outside Central Asia (for example, to Russia, South Asia, and so forth) to make these new hydro projects financially viable, and they require cooperation with several neighboring countries for the rights of power transmission over their territory. Conclusion There is no doubt that countries of Central Asia have done very well over the last decade in expanding trade, including exports (excluding fuels, ores, and metals), and this has been an important contributor to growth in these countries. There has also been a gradual diversification of trading partners during this period, especially noteworthy for imports, where China is playing a bigger role than Russia. However, there may be few grounds for complacency about sustaining and increasing future growth and diversification of trade, critical for employment and equity, given the challenges these countries face. The Central Asian countries individually and as a group have to focus on the challenges in following three areas: • Behind the border reforms relating to domestic reforms to improve the private investment climate and property rights to increase private Central Asia's Trade-Rising to the Challenge I 269 domestic and foreign investment, and to ensure there are locations in the country where it is competitive to produce for the external market. • At the border reforms refer mainly to trade facilitation having liberal- ized trade policy, and this relates to reduCing cost of domestic trans- port to border checkposts and cost of logistics of customs and other agencies at the border checkposts. This is a large and difficult agenda, given political, security, and bureaucratic interests. • Regional cooperation for provision of regional public goods of transit rights and energy refers to the special situation that Central Asian countries face that makes their trade agenda more daunting than elsewhere. Notes 1. Trade policy liberalization in these countries began with price liberalization opening up domestic markets to international prices. Import tariffs were lowered, import quotas were removed, and export taxes were reduced, though all of these happened later and more slowly than in other transition economies of Eastern Europe and Central Asia. 2. Lagging reforms in the private sector and in trade facilitation have been found to be responsible for substantial differences across countries in respect of the beneficial impact of trade policy liberalization on exports, employment, and poverty (Limao and Venables 2001; Iwanow and Kirkpatrick 2009). 3. Kazakhstan is probably the least dependant on transit rights and on regional energy, as it borders the two large markets of Russia and China, and possesses sufficient fos- sil energy resources to be self-sufficient; however, it receives a third of its irrigation water from outside its borders. In contrast, the Kyrgyz Republic and Tajikistan are the most dependent on other countries, as they need both transit rights and energy; Uzbekistan also depends on transit rights to access external markets to the north and east and also for irrigation water. 4. Trade with Russia and CIS have remained far in excess of what is predicted by "nor- mal" economic factors (Fidrmuc and Fidrmuc 2003; Broadman 2005), even after several years of transition. The hysteresis in former Soviet Union countries' trade has been explained variously by remoteness and by being landlocked (Kaminski, Wang and Winters 1996; Grafe, Raiser, and Sakatsume 2005), poor access to markets, weak institutions, poor product quality (for example, Bevan et al., 2001), and so forth. 5. The two bazaars are Dordoi outside Bishkek and Karasu outside Osh, both being the largest bazaars in the region. 6. Several initiatives such as the Central Asian Regional Economic Cooperation, sup- ported by the Asian Development Bank, the UN Special Program for the Economies of Central Asia, and the regional organizations such as the Eurasian Economic Com- munity and the Shanghai Cooperation Organization support "transport corridors," which cover both hard and soft infrastructure along the corridors. Even where the 270 I A Vision for Development road and rail connections along the corridors are well advanced, the soft infrastruc- ture, especially at border checkposts, is not. 7. Four countries of Central Asia that trade energy under CAPS have surplus power production relative to peak demand, but the Kyrgyz Republic and Tajikistan have summer surpluses and winter shortages and thus depend on other countries to provide power during winter, which can be paid for by their power exports during summer. The net balances were settled at the end of the year. References Brenton, P., and R. Newfarmer. 2008. "Watching More Than the Discovery Channel: Export Cycles and Diversification in Development." Policy Research Working Paper 4302, World Bank, Washington, DC Broadman, Harry ]. 2005. From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade. Washington, DC: World Bank. CAREC (Central Asia Regional Economic Cooperation). 2008. Action Plan for Implemen- tation of Trade Facilitation Strategy. Baku: CAREC Coulibaly, Souleymane, et al. 2010. Central Asia: Expanding Trade by Connecting Markets. Washington, DC: World Bank. Eurasian Development Bank. 2009. "EURASEC Transport Corridors." Sector Report. Eurasian Development Bank, Almaty. Grigoriou, Christopher. 2007. "Landlockedness, Infrastructure and Trade: New Esti- mates for Central Asian Countries." Policy Research Working Paper 4335, World Bank, Washington, DC. Limao, N., and Venables, A.]. 2001. "Infrastructure, Geographical Disadvantage and Transport Costs." World Bank Economic Review 15: 451-79. Shepherd, B., and]. S. Wilson. 2006. "Road Infrastructure in Europe and Central Asia: Does Network Quality Affect Trade?" Policy Research Working Paper 4104, World Bank, Washington, DC World Bank. 2009. Bazaars and Trade Integration in CAREC Countries. Washington, DC: World Bank. Reflections from Inside: The Transformation of the Independent Evaluation Group New Directions in Development Evaluation by Daniela Gressani and Patrick Grasso Vinod Thomas was the head of the Independent Evaluation Group (lEG) of the World Bank Groupl during an eventful period for the development community, when learning and adapting gained in both importance and urgency. Not only did the international community set higher expectations for the standards of internal governance and for the role in global governance of the World Bank Group; it also developed greater awareness of the chal- lenges posed by climate change, food security and the global economic crisis of 2008-09. Ensuring that evaluation played an influential role during this eventful period was Vinod Thomas's priority. To this end, he made a deter- mining contribution to three major thrusts of lEG: shortening the feedback loop between evaluation and action; enhancing evaluation synergies across development institutions; and making the World Bank Group's instruments and processes more effective. Background Independent evaluation at the World Bank Group dates from 1975, when the post of Director-General of Evaluation was established as head of a unit reporting to the Board of Executive Directors, rather than to the President. 2 Originally focused on evaluation of individual projects, the Independent Eval- uation Group (lEG) has expanded its role and reach in a variety of ways under a succession of Directors-General. In its early years, lEG concentrated on ex post evaluation of completed proj- ects. This conformed to the charge given by World Bank Group President Robert McNamara when he first established the Operations Evaluation Unit, prede- cessor to lEG, in 1970: 'The principal task of this unit will be to review past lending operations with the central objective of establishing whether the actual 273 274 I A Vision for Development benefits of the completed projects are in accordance with those expected at the time of appraisal and, in case of divergence, the reasons."3 From this beginning developed a system of project self-evaluation at completion, with lEG providing an independent validation, along with in-depth independent evaluations for some projects. Over time, how- ever, it became apparent that although this kind of operation-by-oper- ation completion reporting was adequate for purposes of accountability assessment, it was limited in its utility for learning or helping gUide the design and execution of future work. The identification of lessons of broad relevance and applicability in fact requires looking across proj- ects and the conditions under which they are implemented-whether specific to country, sector, instrument, etc. By the 1990s the model of ex post, project-level evaluation was being overtaken by events. New challenges from both outside (for example, the "Fifty Years Is Enough" movement 4 ) and inside (for example, the 1992 Portfolio Management Task Force report on project qualityS) demanded changes in how lEG conducted its evaluation business. In 1997 Director-General Robert Picciotto charted a new direction through a renewal process that focused on five objectives: moving evaluation to the higher plane of country, sector, and global program evaluation; building evaluation capacity, espeCially in developing countries; invest- ing in knowledge and partnerships; promoting management for results; and shortening the feedback loop from evaluation to operations, while filling evaluation gaps.6 By the time that Vinod Thomas became Director-General in 2005, both the internal and external environments were demanding that evaluation show its worth by informing ongoing decisions, providing a broader perspective on what works (or does not) in development, and helping improve the performance of the World Bank Group and other development organizations. Shortening the Feedback Loop Although lEG already had made shortening the feedback loop one of its strategic objectives as part of the 1997 renewal, progress toward this New Directions in Development Evaluation I 275 goal was modest. There was some success at the country level, where Country Program Evaluations/ introduced in the mid-1990s, were timed to be conducted as new Country Assistance Strategies were due, provid- ing opportunities to use evaluation findings to shape future programs. Later, when the Bank adopted a requirement for Country Assistance Strat- egy Completion Reports before new Country Assistance Strategies were agreed, lEG developed a validation system for these self-evaluations at the country program level. This new lEG instrument, covering all Country Assistance Strategies and tightly focused and timed to feed into the con- sideration by the Board of a new Country Assistance Strategy, represents considerable progress in making evaluative lessons available at the time they can be most useful. With the same objective, lEG also expanded its program of sector reviews, where possible tying them to pending changes in sector strategies and articulating recommendations for future strategies. Like Country Program Evaluations, sector evaluations remain, however, a complex instrument, requiring significant lead time; thus, they are less apt to provide lessons in a flexible and timely manner. Developments outside the World Bank Group were going further to make evaluation feedback more timely and effective. By the early 2000s, a number of development institutions had begun to introduce real-time evaluation, studies that were conducted as projects and programs were under way, rather than after they were completed B The concept of real- time evaluation derives from the distinction between summative evalua- tion and formative evaluation. 9 Summative evaluation focuses on results of projects, programs or activities; ex post evaluation typically is sum- mative. By contrast, formative evaluation is designed to assess progress and identify areas for possible improvement throughout the process, from design to completion. Real-time evaluation typically is formative. Also outside the World Bank Group, prospective evaluations-eval- uations that use the results of past operations to assess the likely suc- cess of future ones-increasingly were used to shorten the feedback loop. This kind of work was pioneered at the Program Evaluation and Methodology Division of the US Government Accountability Office in 1990 through its development of the prospective evaluation synthesis. 10 Others have worked on different prospective evaluation methods,ll 276 I A Vision for Development although the prospective synthesis seems particularly apt for lEG, which has a large body of project, country, sector, and global evaluations from which to draw. Early in his tenure, Vinod Thomas pushed lEG to move more aggres- sively on shortening the feedback loop through prospective synthesis and real-time evaluation approaches. A galvanizing event was the Paki- stan earthquake that struck in October 2005. The Bank's country team was aware that lEG was conducting an evaluation of responses to natural disasters and asked for help in devising a response strategy. lEG qUickly supplied the team with initial findings on what had been found to be effective in past such events. The country team found lEG's work rel- evant and timely-and lEG found that it could improve its effectiveness by doing prospective evaluation work. Since 2008, lEG has used a combination of prospective synthesis and real-time evaluation to provide timely feedback on the global crisis. First, it reviewed the experience of past financial crises l2 to identify les- sons relevant to the World Bank Group response as the crisis was break- ing out. This prospective synthesis evaluation identified a number of lessons that proved highly relevant in the World Bank Group response to the global crisis of 2008-09, in particular the critical importance of delivering speed with quality, leveraging resources through partner- ships, and factoring in environment and climate change considerations. Following this evaluation, lEG provided a series of real-time evaluative findings on the activities of the World Bank Group 13 as its response to the crisis was being implemented, again to identify timely lessons that could inform Bank Group actions. This assessment of ongoing activities identified, among other things, the need going forward to strengthen World Bank Group's support for crisis preparedness and its own pre- paredness, as well as to focus on the fiscal consequences of the global crisis beyond the immediate response. The value of prospective and real-time approaches in bringing to the fore evaluative lessons at the time they are most needed to influence develop- ment policy and operations is quite obvious in these two cases. lEG has since conducted other prospective syntheses for a series of natural disasters that have hit developing countries during 2010, including Haiti's earth- New Directions in Development Evaluation I 277 quake and the floods in Pakistan and West Africa. This work has been con- sistently appreciated by the World Bank Group and development partners and has developed into a well-established line of work for lEG. At the same time, the potential benefits from a broader use of pro- spective and real-time approaches beyond crises also became evident. An important prospective evaluation was the first of the climate change series,14 which focused on energy policy reform with the objective to "seek lessons from policy experience in the energy sector to guide future policies on greenhouse gas mitigation."15 The evaluation looked at a broad range of Bank projects and programs in the energy sector, and also at non-Bank experience, to identify win-win approaches that- by removing energy subsidies and promoting energy effiCiency of end users-could reduce greenhouse gas emissions and at the same time generate economic benefits for governments and citizens. Enhancing Evaluation Synergies across Development Institutions Development evaluation often has been limited by focusing on the work of individual organizations, but this is a bit like looking for lost keys only under a lamp post because that is where the light is. Valuable lessons can be learned by taking advantage of the synergies that come from looking across organizational boundaries to learn development lessons. How- ever, institutional barriers had long limited lEG's ability to realize these synergies-within the World Bank Group as well as over the broader development community. Within the World Bank Group, these barriers cut across the Bank (IBRD and IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (M1GA). Some 20 years after the establishment of an independent evaluation unit at the World Bank, an evaluation unit reporting to the Director-General was established for 1FC in 1995; one for MIGA followed in 2002. Each of the three depart- ments was housed in its respective institution, and it was not until 2003 that the first truly joint report by the Bank and 1FC evaluation depart- ments was carried out; the M1GA department also participated. 16 278 I A Vision for Development Looking at development effectiveness across World Bank Group insti- tutions offered great opportunities not only for learning from different organizational structures that share the same ultimate goal-fighting pov- erty-but most important for learning across public and private sector activities. This was the focus of the first joint report mentioned above, which looked at private participation in electricity and assessed the impact of different instruments on private sector development in this sector. As Director-General, Vinod Thomas set out to exploit this potential. With the support of the Board, he completed the process of making the IFC and MIGA evaluation departments fully independent, and in 2008 brought the three departments together into one functional group, with a combined management team. He also arranged for the three departments to move into a common space, breaking down the physical and social barriers among the groups. This allowed for much greater communication and cooperation on evaluation work across the entire World Bank Group. Finally, in January 2011, he reconfigured the structure of lEG to further facilitate evaluation work across Bank Group institutional boundaries, by establishing departments for public sector evaluations, private sector evaluations, and country, global, and corporate evaluations. These changes were designed to facilitate evaluation across the World Bank, IFC, and MIGA-which has become a strategically important part of lEG's work program during Vinod Thomas's tenure. The majority of sector and thematic evaluations is now conducted across institu- tions, as is lEG's annual report on results and performance. The value of this approach has been amply demonstrated by the impact of these joint evaluations. A recent example is the evaluation of the safeguards and sustainability policies 17 put in place by the World Bank Group to prevent and mitigate adverse effects of its projects in people and the environment, which provoked a debate-currently in progress-on the structure of accountability and grievance redress mechanisms in the World Bank Group. This grew out of the lEG recommendation to build on the different strengths on the World Bank and IFClMIGA processes, and specifically to create a conflict resolution mechanism in the Bank similar to what is in place in IFC and MIGA, to complement its Inspec- tion Panel; 18 and that the Compliance Advisor/Ombudsman l9 of IFC and New Directions in Development Evaluation I 279 MIGA strengthen the independence of the compliance review process by submitting findings directly to the Board. Country evaluations now also prominently include all three World Bank Group institutions, and this approach has been formalized by the establishment of a department in lEG dedicated to cross-institution evaluation of country, corporate, and global programs. This approach has already demonstrated that it can facilitate the identification of syn- ergies that have come to fruition, as well as missed opportunities for country-level cooperation within the World Bank Group. In the case of Peru,20 for example, the Country Program Evaluation highlighted that IFC investment had demonstrated clear additionality, complementing IBRD's role, though MIGA needed to be more proactive in leveraging the strong field presence of the World Bank and IFC. At the project level, most evaluations remain institution centered, but selected cluster project evaluations have been conducted across institu- tional boundaries. One example that has yielded very important findings is the evaluation of a cluster of World Bank and IFC activities supporting the Chad-Cameroon pipeline.2! The evaluation concluded that the fun- damental development objectives of this program-reducing poverty and improving governance through sustainable use of oil resources- were not achieved despite the technical and financial success of the main pipeline project, principally because of lack of government ownership. This perspective on development effectiveness could not have been obtained by looking at individual activities in isolation. The value of evaluation work cutting across the World Bank, IFC, and MIGA has, however, not supplanted institution-specific evaluations, espeCially when they can shed light on important, institution-specific aspects of development impact. The IFC poverty impact evaluation and the MIGA financial guarantees evaluation have aimed at informing strat- egy design and implementation in the corresponding institutions; the Bank cost benefit evaluation has been directed to highlighting an impor- tant limitation in the Bank approach to investment lending. The potential for evaluation impact of looking across institutions does not stop at the boundaries of the World Bank Group. Vinod Thomas also 280 I A Vision for Development took the lead in an ambitious effort to bring together evaluative findings from across the multilateral development banks. Most of these major banks have their own independent evaluation departments. In 1996 these organizations created the Evaluation Cooperation Group (ECG), a cooperative group with the primary purpose of strengthening the use of evaluation for greater development effectiveness and accountability. The ECG initially concentrated its efforts on harmonizing evalua- tion methods by developing good practice standards for evaluation and benchmarking members against those standards. But at a meeting in 2005, Thomas proposed that the ECG, as a group, take on a substan- tive topic to which members could contribute evaluation findings and lessons. The objective was to bring together data and experience from across the multilateral development banks in order to provide a more comprehensive review of what was learned on a particular development issue. The first such effort looked at the nexus between infrastructure development and environment. 22 It demonstrated both the feasibility and the value of sharing evaluative findings from multilateral develop- ment banks in a systematic fashion to glean lessons that are relevant for development effectiveness across a broad range of institutions. These syntheses have become a regular part of the work of the ECG, helping to illuminate major development issues in a new way. Most recently, an ECG paper presenting key lessons emerging from evaluations of agri- culture and agribusiness across multilateral development banks high- lighted the critical importance of boosting agricultural productivity and the need to focus multilateral development bank support for this challenge-following the near-exhaustion of opportunities to expand agricultural lands and associated inputs and the decline of attention to agriculture that has taken place for two decades until the mid-2000sY Making Bank Croup Instruments and Processes More Effective lEG long has evaluated World Bank Group instruments and processes. The first such study, on delays in project effectiveness, was carried out in 1975. 24 Only in the late 1990s did such evaluations become a regu- lar part of lEG's work program, thanks to the 1997 renewal initiated New Directions in Development Evaluation I 281 by Robert Picciotto that created a group specifically to do process and corporate studies. Early evaluations of corporate processes and instruments tended to address broad strategy and management issues, such as aid coordina- tion, IDA, and the Highly-Indebted Poor Countries Program 25 Evalua- tions of this kind remain important today, as, for example, the gender evaluation and the evaluation of regional programs, in addition to the evaluation of safeguards and sustainability policies, already noted. A particularly influential evaluation on World Bank Group instruments was that on guarantees,26 which put squarely on the agenda the need to increase the flexibility of MIGA's business model to increase its perfor- mance and impact-and led to amending MIGA's Convention. Aside from its work on the use and quality of monitoring and evalua- tion instruments in the World Bank Group, lEG generally did not assess the quality of Bank Group instruments. However, the increasing use and importance of new instruments-such as indicator-driven measurement systems to guide Bank lending, regional strategies, or sub national instru- ments-made such reticence untenable. During the tenure of Vinod Thomas, lEG began to take a systematic look at a wide range of Bank instruments and processes. Underlying this change is recognition that independent evaluation has an important role to play in making the World Bank Group's instru- ments more effective in meeting the world's development needs. Just as independent evaluation traditionally has provided verification of the extent to which the Bank Group projects and programs are meeting their objectives, it now also aims to provide assurance that the decision-mak- ing processes and other instruments the World Bank Group is employ- ing are of good quality and effective in doing what they are designed to do. This expansion ofIEG's role marks an important development that is complementary to the efforts on shortening the feedback loop to opera- tions and leveraging the synergies from cross-institutional evaluation. A key element of lEG's recent evaluations of corporate processes and instruments has been a perspective on quality going beyond nar- row technical aspects to questions of design, use, and relevance. The 282 I A Vision for Development evaluation of Doing Business 27 assesses an instrument that has acquired great importance and has generated great controversy, including out- side the World Bank Group, by providing country rankings based on indicators of their level of effort at reducing barriers to business entry and operation. The evaluation examined not only issues of appro- priate design of indicators, representativeness of sources, and trans- parency of data changes; it also assessed the use of these indicators as proxy for progress on reform of the business environment, well beyond their ability to measure a subset of business costs, and recom- mended greater clarity and transparency about their limitations in this context. Another important evaluation of a Bank instrument focused on the Country Policy and Institutional Assessment,28 the principal measurement tool of development effectiveness at the country level and a determinant of allocation of IDA resources. That tool also devel- ops country ran kings based on indicators of their level of effort in broad areas of economic management and institutional reform. The evaluation provided not only an assessment of technical quality and characteristics of the Country Policy and Institutional Assessment, but also their disclosure and use in IDA resource allocation. Most recently, lEG evaluated an instrument that the World Bank Group has developed and used exclusively for Africa, with the objective to support the achievement of the Millennium Development Goals and effective utilization of aid by that region. The evaluation of the Africa Action Plan29 assessed not only the design of the instrument, but also the top-down process through which it was formulated and the resulting shortcomings in its implementation. The evaluation provided an input to the formulation of a new World Bank strategy for Africa, which was developed on the basis of a more inclusive and consultative process and is expected to lead lEG to conduct new evaluative work at the regional level. Conclusion The six years during which Vinod Thomas has served as Director-Gen- eral of Evaluation at the World Bank Group have been times of great institutional change, for the Bank Group in general and for independent New Directions in Development Evaluation I 283 evaluation in particular. These changes have had important implications for the conduct and use of evaluation. For lEG, the development of a new strategy and a new organizational structure have moved the organization far from its roots in ex post proj- ect evaluation to real-time and prospective evaluation, while breaking down internal and external barriers so that evaluations can provide more learning from a wider range of experiences. This combination of new methods, broad syntheses, and a focus on instruments and processes has increased the relevance and value of independent evaluation. Notes 1. World Bank Group is used here to refer to International Bank for Reconstruction and Development (lBRD), the International Development Association (IDA), Inter- national Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). World Bank refers to lBRD and IDA. 2. Patrick G. Grasso, Sulaiman Wasty, and Rachel Weaving, eds., 2003, World Bank Operations Evaluation Department: The First 30 Years, Washington, DC: World Bank, p. 1. 3. Grasso, Wasty, and Weaving, 2003, p. 155. 4. Kevin Danaher, ed., 1994,50 Years Is Enough: The Case against the World Bank and the International Monetary Fund, San Francisco: Global Exchange. 5. Portfolio Management Task Force, 1992, "Effective Implementation: Key to Devel- opment Impact," Washington, DC: World Bank. 6. Portfolio Management Task Force, 1992, pp. 62-65. 7. Initially called Country Assistance Evaluations. 8. Peta Sandison, 2003, Desk Review of Real-Time Evaluation Experience, New York: UNICEF. 9. Joseph S. Wholey, 1996, "Formative and Summative Evaluation: Related Issues in Performance Measurement," American Journal of Evaluation 17 (2): 145-49. 10. US GAO, 1990, "Prospective Evaluation Methods: The Prospective Evaluation Syn- thesis," GAO-PEMD-lO.l.lO. 11. See, for example, Karen Mossberger and Hal Wolman, 2003, "Policy Trans- fer as a Form of Prospective Policy Evaluation: Challenges and Recommen- dations," Public Administration Review 63 (4): 428-40. 12. lEG, 2008, "Lessons from World Bank Group Responses to Past Financial Crises," lEG Evaluation Brief 6. 13. lEG, 2009, "The World Bank Group's Response to the Global Crisis - Update on an Ongoing lEG Evaluation," lEG Evaluation Brief 8; lEG, 2011, The World Bank Group's Response to the Global Economic Crisis-Phase I, Washington, DC: World Bank. The Phase II evaluation is planned for 2011. 14. lEG, 2009, Climate Change and the World Bank Group-Phase I: An Evaluation of World Bank Win-Win Energy Policy Reforms, Washington, DC: World Bank. 284 I A Vision for Development 15. lEG, 2009. 16. Fernando Manibog, Rafael Dominguez, and Stephan Wegner, 2003, A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector, Washington, DC: World Bank. 17. lEG, 2010, Safeguards and Sustainability Policies in a Changing World, Washington, DC: World Bank. 18. The Inspection Panel of the World Bank is the independent recourse mechanism for IBRD and IDA. It responds to concerns of people who believe they have been adversely affected by Bank-financed operations. 19. The Compliance Advisor/Ombudsman is the independent recourse mechanism for the lFC and MlGA. It responds to complaints from project-affected communities with the goal of enhancing social and environmental outcomes on the ground. 20. lEG, 2011, Peru: Country Program Evaluationfor the World Bank Group, 2003-2009, Washington, DC: World Bank. 21. lEG, 2009, 'The World Bank Group Program of Support for the Chad-Cameroon Petroleum Development and Pipeline Construction," Project Performance Audit Report. 22. ECG, 2007, "The Nexus Between Infrastructure and Environment," ECG Paper No. 1, Washington, DC: lEG. 23. ECG, 2011, "Evaluative Lessons for Agriculture and Agribusiness," ECG Paper No.3, Washington, DC: lEG. 24. lEG, 1975, Management Policy Review: Delays in Loan and Credit Effectiveness, Wash- ington, DC: World Bank. 25. John Eriksson, 2001, The Drive to Partnership: Aid Coordination and the World Bank, Washington, DC: World Bank; Catherine Gwin, 2002, IDA's Partnership for Poverty Reduction: An Independent Evaluation of Fiscal Years 1994-2000, Washington, DC: World Bank; Madhur Gautam, 2003, Debt Relief for the Poorest: An OED Review of the HIPC Initiative, Washington, DC: World Bank. 26. lEG, 2009, The World Bank Group Guarantee Instruments, 1990-2007, Washington, DC: World Bank. 27. lEG, 2008, Doing Business: An Independent Evaluation-Taking the Measure of the World Bank-IFC Doing Business Indicators, Washington, DC: World Bank. 28. lEG, 2010, The World Bank's Country Policy and Institutional Assessment: An Evalua- tion, Washington, DC: World Bank. 29. lEG, 2011, The Africa Action Plan: An lEG Evaluation, Washington, DC: World Bank. On Strategy and Independent Evaluation by Hans-Martin Boehmer "All of us are strategists, whether we like it or not. "1 The concept of evaluation has been around for many years. In the World Bank, it can be traced back at least to 1973, when Robert McNamara, then President of the World Bank, established the first Operations Evaluation Department to provide him with an honest assessment of the organization's performance. Today, it would be unimaginable for the work of a public institution not to be subject to some form of evaluation. The Institutions of the US govern- ment are subject to evaluation by the US Government Accountability Office, and similar institutions exist in most developed and developing countries. In international institutions, particularly those involved in development, an increaSingly strong system of evaluation has evolved. Public interest in these institutions and public expectations for good governance have raised a clearer distinction between self-evaluation and independent evaluation. Today, though to varying degrees, all the major regional and global development institutions have independent evaluation functions. Yet it was not until 2010 that the Independent Evaluation Group (lEG) of the World Bank Group became the first evaluation group of a multilateral development bank to establish a department with responsibility for "strategy" (as well as learning and communication) that was on a level equal to those conducting the core evaluative work. It is probably fair to say that had it not been for Vinod Thomas's determined push, this department would not exist today. 286 I A Vision for Development "It is better to be a good strategist than a bad one."2 Although it may seem obvious to some, thinking about strategy in the context of an independent evaluation function is far from the norm. In fact, when asked what "strategy" means for an independent evaluation function, it often takes considerable time and effort to explain and often still leaves one with more questions than answers. Unlike its mother institutions, the World Bank, the International Finance Corporation, and the Multilateral Investment Guarantee Agency, lEG has a well-defined mandate. 3 In fact, members of the Board of Executive Directors are often careful to ensure that units such as lEG carry out their mandate effectively and efficiently, but don't stray beyond the boundaries of their mandate. In contrast, organizations such as the World Bank have long been accused of "mission creep."4 The clarity of lEG's mandate, and a shared understanding of it, is essential to the strat- egy formulation. The key elements of the mandate are as follows: • Assess the relevance, efficacy, and efficiency of World Bank Group oper- ational programs, and their contribution to development effectiveness • Appraise other World Bank Group evaluation systems and method- ologies, including self-evaluation methodologies • Work closely with development partners to foster international evalu- ation harmonization, to develop evaluation capacity in developing countries, and to encourage evaluation of the international develop- ment system. Typically, implementing an effective strategy requires a clearly defined outcome objective, as well as a careful assessment of capabilities and choices. Although the mandate is clear on what activities are expected from lEG, it does not have an outcome objective and therefore leaves open the question of the essential impact lEG's work seeks to have. In fact, the question of the outcome objective is essential to the question of strategy-without it, translating the mandate into action would simply boil down to doing the job well, irrespective of the outcome. In my few years working with Vinod Thomas, one thing has defined his vision of On Strategy and Independent Evaluation I 287 lEG in my mind more than anything else-good work is a prerequisite, but cannot be the final contribution that lEG is making to the World Bank Group and the broader development community. So the question then remains-how does lEG make a contribution to the World Bank Group? The Bank Group's governance has been subject to much debate. 5 lEG is situated within the World Bank Group, though with a considerable degree of independence. There can be no doubt that lEG's ultimate purpose and mission is to contribute to the Bank Group's over- all mission. There have been a variety of articulations over the years, the most recent put forward by President Zoellick early in his tenure: "It is the vision of the World Bank Group to contribute to an inclusive and sustain- able globalization-to overcome poverty, enhance growth with care for the environment, and create individual opportunity and hope."6 Despite its mission, the World Bank Group as a whole does not have a clear operational strategy with defined outcome goals. This compli- cates the role of independent evaluation, as ideally it should challenge assumptions within the strategy, test its robustness, and ultimately lead to continuous learning and adaptation to enhance the development effectiveness of such a strategy. In the absence of a clear strategy articulation by the institution, choices in evaluation need to be related to the essential challenges that the organization faces and where evaluation, particularly independent evaluation, can have an impact. To help articulate those choices, lEG has over the past three years set out strategic directions that guide its work- (i) to respond rapidly to emerging challenges, (ii) to forge stronger links with World Bank Group directions, and (iii) to promote greater lEG integration. While these directions are clear, they provide only partial guidance on how best to ensure lEG's impact. To take the question of impact one step further, I found it useful to think about the Bank Group in its broader multilateral context, and the essential challenges that these organizations face in the coming decades. Again, President Zoellick articulated this challenge well by saying, "The new multilateralism must respect state sovereignties while solving inter- connected problems that transcend borders."7 288 I A Vision for Development This articulation of the fundamental challenge rings even more true today, following the global economic crisis, than it did even at the time these remarks were delivered. In fact, much of lEG's recent work has been devoted to those border-transcending problems-water, climate change, food and agriculture. Addressing each of these problems from an evaluation perspective is challenging; even more challenging is addressing their inter-connectedness B . 9 "Ideology, Ignorance, and Inertia"IO So what is an independent evaluation group to do? Despite, and perhaps because, of the absence of a clear operational strategy and outcomes by the World Bank Group, the role of independent evaluation is a pre- cious opportunity for the organization to ask the right questions. Those questions-evaluation questions-each must serve a clearly defined purpose, II with each purpose closely linked to lEG's mandate, the Bank Group's mission, and an understanding of the essential development challenges of the future. Every organization comes with its flaws, and many of them exist for good reasons. The World Bank Group is no exception. 12 Despite employ- ing perhaps a greater concentration of doctorate degrees than any other organization in the world, for the Bank Group, fighting ideology and inertia remains a constant struggle. There are reasons why even today, the words "Washington Consensus" are associated with the World Bank and the International Monetary Fund nearly a quarter century after the term was first used. Challenging assumptions must be among the first evaluative purposes. An independent evaluation group is particularly well placed to challenge both long-standing assumptions-for example, good projects add up to good development 13-and assumptions made about the future-for example, all growth will lead to poverty reduction. To be clear, the pur- pose here is not to find what's wrong, but to have within an evaluation portfolio sufficient focus on challenging assumptions to guard against following an entrenched ideology, or even the risk of doing so. On Strategy and Independent Evaluation I 289 Unblocking reform is an equally important function that can often best be served by an independent evaluation group. Inertia, at least in the World Bank Group, is typically not the result of "laziness"-quite the contrary. It is typically the result of policy compromises among share- holders, or prior management decisions that cannot easily be revisited without stakeholders questioning why. Here, independent evaluation can and should play an important part in unblocking obstacles that keep the organization from changing its course. 14 Informing policy debates is a third critical evaluative purpose. Unlike the caricature of the Washington Consensus, the World Bank Group has moved a great distance in taking the concept of country ownership seriously. As a result, the notion of technocrats imposing reforms on uninformed developing countries is largely a perception of the past. Nevertheless, informing discussions around development policies through evidence remains a principle purpose of evaluation-just like ideology can perpetuate false assumptions, ignorance can lead to over- looked opportunities. Among its peer evaluation departments in mul- tilateral development banks, lEG has embraced this concept probably more than any other in trying to bring evidence right into global and national development policy dialogues; though much more remains to be done. IS Doing so takes some courage, as virtually all lEG evalua- tions contain elements with which some audiences will agree and others will strongly disagree. The leadership of a Director-General in standing behind uncomfortable messages vis-a.-vis a critical external or internal audience is essential. Vinod has been exemplary in making the case for informed policy debates. This short inventory of evaluative purposes is, of course, not intended to be exhaustive. As with any public sector institution, the World Bank Group is accountable to its shareholders as well as the gen- eral public. It is clear that lEG therefore has an important role to play through its accountability function. Similarly, development remains an uncertain business, and the World Bank Group must take not only financial risks, but also developmental risks. Contributing to a sound assessment of these developmental risks is another important purpose of evaluation. 290 I A Vision for Development "One should guard against preaching to young people success in the customary form as the main aim in life. "16 lEG, or any other independent evaluation group, must guard against the risk of its own inertia. The World Bank Group has a very strong and persistent corporate culture. Independent evaluation often serves as the final 'Judge" of the success and failure of programs that staff may have devoted years of their lives to make work, often under difficult circum- stances. Nobody wants to have his work characterized as unsuccess- ful, regardless of whether a more successful outcome could have been feasible. This makes independent evaluation powerful; it also makes it integral to the incentives for staff to focus on doing the right thing. The judgment of success and failure, of what methods to use, and of what standards to apply must be aligned with the evaluative purpose. What was considered success in the past may not be right for the future. Over the last few years, lEG has expanded its evaluation toolkit beyond retrospective evaluation. As the challenges of the future become increas- ingly interconnected and transcend borders, adopting new evaluation methods that are consistent with the evaluation purposes remains an important agenda if lEG is to fulfill its mandate effectively. It is my strong hope that the course Vinod has charted during his time at lEG, particularly the push for impact and innovation in methodologies, will remain as a lasting contribution that will only grow stronger in the years ahead. Notes 1. Dixit and Nalebuff (2008). 2. Dixit and Nalebuff (2008). 3. The World Bank refers to the International Bank for Reconstruction and Develop- ment (IBRD) and the International Development Association (IDA). 4. See, for example, Einhorn (2001). 5. See, for example, Zedillo (2009) 6. Zoellick (2007). 7. Zoellick (2008). 8. lEG has attempted to do this leading up to the World Bank and International Mon- etary Fund Spring Meetings in 2011 by hosting a high-level dialogue, jOintly with On Strategy and Independent Evaluation I 291 the World Bank Institute: The Challenge of Managing Crisis in a Rapidly Changing World. 9. See also Thomas (2011). 10. See Banerjee and Duflo (2011). 11. I have to thank Prof. Mel Mark, a member of lEG's External Advisory Group, for pointing me to the idea of a Portfolio of Evaluative Purposes. 12. See Weaver (2008) for an interesting account. 13. lEG has found consistently that country-level performance of World Bank Group programs falls short of project-level performance within the same country. 14. This was very much the case in lEG's evaluation of safeguard policies (lEG 2010). 15. I want to acknowledge Shanta Devarajan, the current World Bank Chief Economist in the Africa Region, who speaks about "nourishing conversations with evidence" as one of the goals behind his very successful blog. 16. Quote attributed to Albert Einstein. Bibliography Banerjee, A., and E. Duflo. 2011. "Poor Economics." Public Affairs. Dixit, Avendish K., and Barry]. Nalebuff. 2008. The Art of Strategy. New York: W. W. Norton. Einhorn,]. 2001. 'The World Bank's Mission Creep." Foreign Affairs. lEG (Independent Evaluation Group). 2010. Safeguards and Sustainability Policies in a Changing World. Washington, DC: World Bank. Thomas, Vinod. 2011. "Facing the Floods of an Altered Climate" The Philadelphia Enquirer, May 17. Weaver, C. 2008. Hypocrisy Trap: The World Bank and Poverty of Reform. Princeton, NJ: Princeton University Press. Zedillo, E. 2009. "Repowering the World Bank for the 21" Century." Report by the Zedillo Commission, October. Zoellick, R. 2007. "An Inclusive and Sustainable Globalization" Speech delivered at The National Press Club, Washington DC., October 10. Zoellick, R. 2008. "Modernizing Multilateralism and Markets." Remarks delivered at the Annual Meeting of the Board of Governors, Washington DC, October 13. Evaluation for Results by Jiro Tominaga The mission statement of the Independent Evaluation Group (lEG) of the World Bank Group, "Improving Development Results through Excellence in Evaluation," epitomizes the vision that Vinod Thomas pursued during his tenure as Director-General, Evaluation (DGE). During the time Vinod led lEG, development stakeholders worldwide increased their focus on improving and measuring development results. Various international initiatives, including the Monterrey Conference on Financing for Development, the Paris Declara- tion on Donor Harmonization, and the Accra High-Level Forum for Aid Effec- tiveness, attest to this shift. To sharpen lEG's focus on results, Vinod stressed four areas: relevance, timeliness, a mixed approach, and independence. Relevance Evaluation must be relevant to the current development challenges to make a meaningful contribution. Thus, evaluation topics must be strategically selected, and their recommendations must be applicable to future work. In this context, understanding the drivers of the development agenda is vital to ensuring the quality of evaluations. During Vinod's tenure at lEG, there were three distinct characteristics of rapidly changing environment affecting lEG's strategic directions. First, because of tighter linkages across countries, it was increasingly clear that the costs of failure have become much higher than they were before. Two prominent transformative changes that affected lEG's operation were the global financial crisis and climate change. On the former, the extraordinary speed with which the situation unfolded made it vital that actions be taken rapidly: obtaining lessons in real time therefore became essential. Ex post findings-lEG's primary evaluation approach-are likely to come too late and to have little value. [293 294 I A Vision for Development Second, it became evident that to focus on results, one needs to look for cross-cutting solutions. The focus should be on those results that contribute to sustainable development at both the outcome and the impact levels. Such results are typically generated through extended causality chains compris- ing interlinkages of activities and interventions undertaken by government agencies, international organizations, the private sector, and civil society organizations. Thus, defining results involves capturing synergies and missed opportunities from cross-project and cross-sectoral linkages. Third, there has been a growing recognition of the importance of poliCies and knowledge services as well as financial support. Diverse forms of policy support, capacity building, and knowledge services are becoming major tools of engagement for many development institutions in middle-income as well as low-income countries. Development results are driven not only by the volume and quality of financing, but also by the knowledge and learning that accompany the funding. In this era of growing complexity and rapid transformation, lEG set three strategic directions to ensure that its operations remain relevant to the key development challenges of the times. These directions include responding to emerging issues, forging stronger links with World Bank Group directions, and promoting greater integration of lEG's work. The underlying thrust is the effort to maintain flexibility in order to maximize the value of evaluative knowledge in addressing global uncertainties and the World Bank Group's changing role. lEG's work program was set to ensure that the discussion of issues with strategic significance to the Bank Group would benefit from the findings of independent evaluations. Each strategic direction introduced a new approach to how business was done in lEG. For example, rapid response to an emerging issue was not a conventional tool in lEG's arsenal. Today, quick turnaround notes have become an established product to offer insights while actions are being developed or adjustments are being made. Examples of such a note include those related to the global financial crisis in 2008 and the earthquake in Haiti and the floods in Pakistan and West African countries in 2010. The effort to continue engaging on issues with particular importance for the World Bank Group has also increased in the past several years. Evaluation for Results I 295 lEG has been providing inputs to sector strategies and corporate issues in various ways. Large-scale evaluation reports are most visible, but brief lEG statements at the time of Board meetings and evaluation notes consolidating relevant findings have proven highly effective. Challenges remain to ensure that follow-up to recommendations is made, and lEG maintains its skills and knowledge base to remain on top of the evolv- ing issues. In this context, lEG introduced the notion of programmatic engagement in issues with particular importance to the World Bank Group. This approach is expected to provide flexibility andjust-in-time inputs as situations develop around these topics. Finally, to respond to the growing importance of the interlinkages between the activities of the public and private sectors, the integration of lEG was actively pursued. When Vinod assumed the position of DGE in 2005, he inherited an organization comprised of three independent evaluation departments attached to the World Bank, the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA)-located in different World Bank Group buildings. At the time of his departure, lEG consists of three departments responsible for evaluating public sector activities, private sector activities, and coun- try and corporate programs, as well as a strategy and communication department. Staff affiliated with different World Bank Group institu- tions work together in these departments-a reflection of a considerable institutional transformation that took place in the years since 2005. Timeliness The period that Vinod headed lEG was a challenging time for evaluators. International development was undergoing a fundamental transforma- tion. One major aspect of this is the growing Significance of emerging economies in the overall world economy, as underscored by the estab- lishment of the G-20 as a premier policy coordination body in the wake of the 2008 financial crisis. Meanwhile, the global financial crisis and the growing concerns over climate change put a heightened premium on the timeliness of evaluative findings. On both issues, short-term actions will make a critical difference to 296 I A Vision for Development the pace and degree of changes taking place in the medium to long term. An evaluation that comes late-even when performed with the highest quality and using the most sophisticated techniques-will fail to have the desired impact. The cost of waiting to evaluate until projects are completed is high, so timely feedback is crucial. The greatest challenge is to provide evaluative inSights while actions are being formulated. The follOWing approaches that lEG took in this extraordinary environment have generated some promis- ing outcomes; their full contributions are yet to be known. First, a series of briefs rather than a large report covering many years proved to be effective in informing policies as they progressed and con- tributed to midcourse adjustments. In 2008, lEG initiated a three-phase evaluation of World Bank Group activities related to climate change mitigation and adaptation. The first report in this series, which was completed in 2008, examined energy policies, including energy pricing and subsidies (lEG 2008a). The second phase focused on investments in projects and technologies to affect development and mitigate green- house gases (lEG 2010a). The third phase will look at the emerging challenges of climate adaptation. The evaluation of the World Bank Group's responses to the 2008 finan- cial crisis is another example. Since the crisis began, the Bank Group has committed $138 billion to its members and disbursed a record $81 billion-including $21 billion to the world's 79 poorest countries (lEG 2010b). The expansion is vast, the costs of errors are large, and the actions taken are irreversible. This evaluation, which consists of a series of brief notes and large-scale reports to be published over several years, looks at les- sons learned as well as the quantity, quality, and key drivers of the World Bank Group's response to the crisis. It identifies emerging issues; draws attention to the importance of speed, quality, coordination, and prepared- ness; and highlights the urgency of attention to climate change issues. Second, each transformation is unique. At the same time, all transfor- mations share certain similarities. In a time of crisis, when urgent actions are needed, useful lessons can be drawn from a study that builds on these similarities. Consolidation of useful findings from previous evalu- ative work, as well as customization to fit the situation at hand, is a valu- able evaluative strategy. Evaluation for Results I 297 A note that lEG issued a month after the January 2010 earthquake in Haiti (lEG 2010c) drew on a large-scale lEG evaluation of World Bank Group responses to past natural disasters (lEG 2006c). This note empha- sized that the vital elements for success in disaster responses are the nature of the immediate response, diagnosis, project design and supervision, use of local capacity, private sector links, and coordination among partners, including those within the Bank Group. Many of the lessons from previ- ous episodes remained relevant; at the same time, Haiti's distinct country conditions also had to be kept in mind. Similar notes were produced after the devastating floods in Pakistan and West African countries. lEG also examined the World Bank Group responses to financial crises that had occurred between 1993 and 2003 in the hope of identifying lessons that could inform the response to the new crisis (lEG 2008d). This study pointed to several factors vital for addressing a crisis. Both the speed of the response and the quality of the intervention were found to be crucial. With the pre- mium on speed, results frameworks that link objectives, program costs, and benefits take on added importance. Financial and risk management, as well as environmental and social safeguards, are critical to ensure that resources reach their intended beneficiaries. During past financial crises, poverty issues did not get sufficient attention. In addition, climate change and environmen- tal problems need to be integral factors in any crisis response. Several features of the initial support programs to respond to these crises are consistent with the directions that emerged from evaluative evidence. For example, the composition of the World Bank Group response to the 2008 financial crisis seems aligned with the need for poverty reduction and financial stability. In Haiti, as recommended in lEG's note, the World Bank and its partners were involved from the outset in the development of the response program. Taken together, these examples point to the value that evaluations can add in a time of uncertainty characterized by rapidly shifting pri- orities. It pays to conduct evaluation alongside the implementation of response measures. It is particularly useful when an evaluation pro- vides views in a shorter time horizon, as assumptions change rapidly. Therefore, waiting until the entire event unfolds to conduct ex post evaluations would have limited relevance. 298 I A Vision for Development These efforts involve moving evaluations upstream. An outcome of such a shift is that it could blur the line between evaluation and policy development, with a potential risk to the real and perceived indepen- dence of evaluative function. Clear and transparent gUidelines to miti- gate the risks would be useful. The experience also shows that examining the past can gUide actions in the future. The key is to extract lessons at the level of strategic, overall direction as well as principles for specific actions that, although valu- able, may not be applicable in all cases. A Mixed Approach Evaluation against results should be the goal at all times, but the growing recognition of the linkages between projects and programs across devel- opment partners and multisectoral activities adds a new dimension to evaluation. In this complex environment, it is increasingly clear that the strict application of objectives-based evaluation-the primary approach of multilateral development banks' evaluation function-contributes little to improvement in results. It has become evident that evaluations should capture unintended consequences, both positive and negative. At the same time, evaluators need to draw on diverse views and multiple disciplines to address the cross-cutting nature of emerging issues. Results-Objective Gap The growing focus on results is the driver for an effort to close the gap between the objectives-based approach and evaluation against results, an attempt to capture outcomes beyond those stated for the project. For example, a project's stated objective might be to provide clean water, but the evaluation of such a project would be flawed if it omitted the complementary health benefits or resettlement costs or did not consider unanticipated effects of the project on a city's growth and revenue. The inquiry in objectives-based evaluation is whether the stated objectives were met. In the shift toward a results-based model, the emphasis should be on the results contributing to poverty reduction and sustainable development. The convergence of objectives-based and Evaluation for Results I 299 results-focused evaluation may be achieved when the objectives are results based. In other words, an assessment against the stated objec- tives could be a proxy for results-based evaluation if the objectives are formulated as results. Constructing a well-defined results framework becomes a vital first step in such a case. Another way to get closer to results is to consider omitted objec- tives as complementary or conflicting aspects. For example, an lEG evaluation, From Schooling Access to Learning Outcomes-An Unfinished Agenda (lEG 2006b), found that two-thirds of Bank primary education projects focused on increasing enrollment and reducing dropout rates, and almost every project emphaSized getting the necessary materials, such as books and blackboards, to schools. However, only one-fifth of projects had objectives explicitly covering the expected outcomes, such as improving reading, writing, and mathematical skills. Although most projects focUSing on improved learning outcomes succeeded in achieving their objectives, the inappropriate targeting of intermediate outcomes in many projects lowered projects' effectiveness. The Doing Business Indicators build on the premise that businesses are more likely to flourish if there are fewer and simpler regulations. The indicators successfully drew attention to the burdens of business regula- tion and offered a consistent yardstick for comparing countries' regulation as seen from a private firm's point of view. Regulations, however, generate social benefits, such as safety, environmental protection, worker protec- tion, and transparency. An lEG evaluation of the Doing Business Indica- tors (lEG 2008b) suggests that what is good for an individual firm is not necessarily good for the economy or society as a whole. Focusing only on the Doing Business Indicators can distort the policy priorities by sending Signals that discourage good and valuable regulations. CroSS-Boundary Intcrlinkagcs Examining growing cross-boundary interlinkages is essential in today's development evaluation. The synergies between public and private sec- tor operations are particularly consequential in light of the growing sig- nificance the private sector plays in development. lEG's evaluation of the World Bank's support for trade (lEG 2006a) found that the objective was 302 I A Vision for Development for accountability, it is essential to cover a broad range of activities, mak- ing it difficult for impact evaluation to serve as the only solution to the attribution challenge. Evaluation needs to find alternative means to fill the gap. It would be realistic to use impact evaluation as one of the meth- odologies in the mix of diverse approaches needed to delineate results. These examples, and many others, show the critical value of not tak- ing an eye off the final results and of evaluators' role in ensuring that multifaceted nature of development activities is recognized. The chal- lenges in today's environment require the flexible evaluation strategies that match the growing complexities of the development scene, the value of impact evaluations in getting at attribution, and the need to complement them with approaches from a toolkit of mixed methods and approaches. Independence Independence of the evaluation function is essential to ensure objective accounts of institutions' effectiveness. Without independence, evalua- tive findings could lose credibility, and thus their impact. An indepen- dent evaluation function is also important to prevent gaming of internal incentives and disincentives (Thomas and Tominaga 2010). Much debate has taken place on the institutional framework for the evaluation function. Some argue that only external evaluators can safe- guard the independence of evaluations. At the other extreme, the bulk of evaluations undertaken by government agencies and international devel- opment organizations remain as self-evaluation. Evaluation functions in multilateral development banks, including the World Bank Group, were created to serve as independent evaluation groups within the institutional architecture to validate self-evaluations and enhance accountability. The independent evaluation functions within the institutional archi- tecture encompass the inherent tension between the dual roles of inde- pendent assessor and engaged advisor. Some would seem to err on the side of too little independence and some too little engagement. Yet it is important to capture the benefits of both: independence and engage- ment. A critical question for the DGE is what the best balance is between ___........._____...,_II8l... ...._ "l1'i1 . . . . ._ _......_ _ _ _ _ 11""'«1!'~ "'. rs, UI '!PU'8b1l\l!O • 4A Evaluation for Results I 303 independence and engagement in view of improving results and ensur- ing credibility. The source of lEG's independence is the DGE mandate and associated institutional processes. These collectively ensure lEG's organizational independence. The processes related to the appointment and evaluation of the DGE are critical. The Board appoints the DGE and conducts the DGE's performance evaluation. Impartiality is further safeguarded by preventing the DGE from subsequent employment in the World Bank Group. The DGE reports to the Board, not to Bank Group manage- ment, and provides the findings of each evaluation without negotiating or clearing them with management. Equally important is behavioral independence, which must complement organizational independence. In particular, the issues involved with poten- tial conflicts of interest need to be addressed systematically. For example, it is common to allow evaluators to move to and from the affiliated orga- nization after some time in the independent evaluation unit. To manage the risks inherent in such interchanges, lEG developed and issued recusal guidelines to prevent evaluators from assessing their own past work, or to negotiate for operational positions in areas they are evaluating. Disclosure of the evaluation reports is another vital measure to sus- tain this balance. Evaluation reports should be made available for public scrutiny to enhance the accountability of the evaluated institution as well as of the evaluation itself. It is crucial that the evaluation group develop its own disclosure policy, separate from that of the affiliated organization, to avoid potential influence on the timing, modalities, and degree of disclosure. In the end, however, it requires determination at the institutional level to protect independence. An important task of the evaluator is to deliver the messages as he or she sees them. To ensure credibility, tough decisions have to be made in favor of clearer messages as opposed to self-restriction, keeping in mind that the accountability of the evaluees will be strengthened that way. Two articles in The Wall Street Journal symbolize the turnaround in lEG's perceived independence that happened during Vinod's tenure. 304 I A Vision for Development On May 31, 2007, the Journal published an article, "Zoellick's Clean-Up Duty," in which the abolishment of lEG was called for. The article says, Beyond the INT [Integrity Vice Presidency], Mr. Zoellick would also do the bank-and the English language-a favor by abol- ishing the Independent Evaluation Group. Despite its name, the group, which is supposed to provide independent assessments of the effectiveness of bank projects, is staffed by bank employees who have every incentive to kiss the hand that feeds them. If the bank truly wants "independent evaluation," it would be better served asking Transparency International to set up a field office in the atrium of the bank's D.C. headquarters. After three and half years, another Wall Street Journal (Europe) article covering the lEG report on the World Bank Group's response to the financial crisis ("World Bank is lauded for helping ease crisis," Novem- ber 19, 2010) says, The lEG is an in-house auditor for the bank and is known for its independence, haVing sharply criticized the bank's practices on corruption and agricultural policy. Maintaining the appropriate balance between independence and engagement continues to be a difficult challenge for lEG. Leaning to either side would result in evaluations that are detached from the World Bank Group's operational needs or that lack credibility. Neither situa- tion can contribute to development results. Combining the measures to protect and enhance organizational and behavioral independence, as well as disclosure as pursued in recent years, offers a useful approach to build on down the road. Concluding Thoughts Evaluations must contribute to improving results, but today's increas- ingly complex and uncertain environment poses a formidable challenge Evaluation for Results I 305 to evaluators. A number of actions that lEG took under Vinod's leader- ship have scored some success. First, the strategic directions gave lEG the flexibility to systematically address emerging issues and enabled the group to maintain engagement in issues of great relevance to the World Bank Group's direction. Real- time evaluation is an innovation that came out of the new directions. A series of notes on rapidly evolving subjects enabled lEG to provide timely input to inform discussions at the Board and to the senior man- agement of the Bank Group. These notes cover a shorter time horizon than a traditional evaluation, but given the uncertainties involved, they may well be the most effective way to make evaluation useful for timely decision making. Brief notes consolidating lessons from similar events also proved use- ful at times of urgent need for evaluative knowledge. Lessons from the past can be a guide to the future, even in an uncertain time and even though every case is different. The key is the ability to discern common threads emerging across events and to identify principles applicable in individual cases. Second, evaluation for results increases the importance of looking beyond the stated objectives to find synergies and unintended conse- quences. Given the multiple sectors, players, and interventions involved in producing outcomes, it is vital that the evaluation team be able to assess the situation from diverse perspectives. A team with cross-cut- ting expertise is critical. At the same time, diverse evaluation methods, including impact evaluation, should be brought to bear to draw lessons under a complex environment. It pays to appreciate diversity and com- plexity in a time when unpredictability is the norm. Third, underpinning the quality and credibility of all this work is the independence of the evaluation function. Maintaining and enhancing organizational and behavioral independence is vital. Disclosure and the determination of the evaluation function's management team both play a key role in keeping the system honest. As uncertainties grow, evaluations with a focus on results become even more important in guiding the future. Evaluators face a clear 306 I A Vision for Development opportunity to provide gUidance based on the analysis of the past and the present. lEG's experience points to the value of taking a holistic approach to strengthening the evaluation system consisting of the strat- egy, evaluation approaches, and independence. References lEG (Independent Evaluation Group). 2006a. Assessing World Bank Support Jor Trade, 1987-2004: An lEG Evaluation. Washington, DC: World Bank. - - - . 2006b. From Schooling Access to Learning Outcomes: An Unfinished Agenda- An Evaluation oj World Bank Support to Primary Education. Washington, DC: World Bank. - - - . 2006c. Hazards oj Nature, Risks to Development: An lEG Evaluation oJ World Bank Assistance Jor Natural Disasters. Washington, DC: World Bank. - - - . 2008a. Climate Change and the World Bank Group Phase I: An Evaluation oJ World Bank Win-Win Energy Policy ReJorms. Washington, DC: World Bank. - - - . 2008b. Doing Business: An Independent Evaluation: Taking the Measure oj the World Bank-IFC Doing Business Indicators. Washington, DC: World Bank. - - - . 2008c. Environmental Sustainability: An Evaluation oJ World Bank Group Support. Washington, DC: World Bank. - - - . 2008d. "Lessons from World Bank Group Responses to Past Financial Crises." Evaluation BrieJ 6. Washington, DC: World Bank. ---.2009. The World Bank Group Guarantee Instruments 1990-2007: An Independent Evaluation. Washington, DC: World Bank. - - - . 201Oa. Climate Change and the World Bank Group phase II: The Challenge oj Low- Carbon Development. Washington, DC: World Bank. - - - . 201Ob. World Bank Group Response to the Global Economic Crisis. Washington, DC: World Bank. - - - . 201Oc. World Bank Group Response to the Haiti Earthquake: Evaluative Lessons. Washington, DC: World Bank. Available from: http://siteresources.worldbank.orgl INTO EDlResources/disastecnote. pdf. Ravallion, M. 2008. "Evaluation in the Practice of Development." World Bank Policy Research Working Paper, Washington, DC. Thomas, V., and]. Tominaga,. 2010. "Evaluation for Better Development Results."Jour- nal oj Development EJJectiveness 2(3): 371-86. The LaslWord Reflections on My World Bank Group Career by Vinod Thomas Over the past 35 years, my professional life dovetailed the evolution of think- ing on development in the countries and at the World Bank Group. In this journey, lessons learned-from both successes and failures-have been plen- tiful, associations with clients and colleagues have been rich, and issues of concern have been complex and challenging. I have worked in support of the World Bank Group, realizing its enormous strengths and unique potential to help improve the living standards of mil- lions of people and the well-being of the planet. In that spirit, I have taken highly supportive as well as critical positions regarding the Bank Group's directions, especially in my most recent assignment as the head of indepen- dent evaluation, a position that calls for objective and candid assessments of the performance of the institution. I have valued these years of work at the World Bank Group enormously and consider it a true privilege to have had this opportunity. I now have this special chance to record in these pages put together by Ray Rist and Heather Dittbrenner some of what I learned in the company of colleagues- in the Independent Evaluation Group (lEG), at the World Bank Group, and beyond-with whom I had the good fortune to work over the years. Formation of Experiences Changing emphaSiS, if not changing fads, characterized development work over the decades. Late in the 1970s, it was clear how a flourishing research depart- ment at the World Bank resulted in a great deal of spillover benefits, not only for the organization but also for the rest of the world. Research in urban eco- nomics, the area in which I started with Douglas H. Keare, Rakesh Mohan, and others, anticipated some of the future changes. At the same time, the neglect of 309 310 I A Vision for Development the subject at the World Bank in later years was costly for the effective- ness of development work. My thinking on the priority for connecting research to policy was shaped by my unique experience at the University of Chicago with my great mentor George S. Tolley and others. Agriculture was another such area of priority in the 1970s and '80s, but of declining importance subsequently. During the 1980s I was intensely involved in the work on agriculture in Bangladesh and Colom- bia. Bangladesh's Minister Obaidullah Khan championed the cause of investments in agricultural productivity, and Colombia's then Minister Roberto Junguito showed how agricultural performance was linked to macroeconomic policies. The World Bank's research and policy analysis made a crucial contribution in the areas of agricultural price policies, as did its work on trade policy reform, where I had the good fortune to work with Jaime De Melo, John Nash, Kazi Matin, and others. Today, many rightly blame the rising food prices on the declining stress placed on agricultural productivity in the recent decades. Efforts are under way to reverse this past trend through higher investments, but the crucial question is whether these investments will translate into results on the ground. During my work on the 1991 World Development Report, I was struck by the vision of then President Barber B. Conable on the interlinkages among economic growth, social progress, and environmental sustainabil- ity. Chief Economist Stanley Fischer emphasized the need to establish ana- lytical underpinnings behind these links and their implications for action (I recall his handwritten note to me: "How are you going to incorporate the environment within development priorities?"). The interconnections featured in the report under the subsequent Chief Economist Lawrence H. Summers, who nevertheless was skeptical about the importance of the environment in growth. Chief economists at the World Bank have been vital for the direction of the institution. Even when their views were not accepted during their time, they were often embraced later. Joseph E. Stiglitz's scathing comments on the International Monetary Fund's misplaced role in Asia during the financial crisis of the 1990s were uncomfortable to both the Fund and the Reflections on My World Bank Group Career I 311 World Bank at that time, but these ideas have now become part of conven- tional wisdom. Justin Yifu Lin today is providing a compelling perspective on industrial policy that would not have had traction a decade ago. My most exhilarating years were in the East Asia region during the first half of the 1990s, when the description of the East Asian Miracle went hand in hand with a recognition of the uncertainties and fragili- ties of the domestic and global economies. I learned a great deal from the region's Vice President Gautam Kaji, who deftly maneuvered the relations in a region that was at once supremely confident of its achieve- ments and also in great need of support. Learning programs for World Bank Group staff and for the clients were the focus of the World Bank Institute that I headed in the second half of the 1990s. Here is where I witnessed most vividly the broader vision of development set out by President James D. Wolfensohn. I recall Mr. Wolfensohn explaining to the Board of Directors why learning pro- grams were as important as lending operations and how the two inter- acted to provide stronger results on the ground-and why the World Bank needed to be in the forefront of forging this link. The environment was not far behind in Mr. Wolfensohn's priority. I remember him asking at one of the management meetings, "Does any- one care about biodiversity?" to which no one responded. Kristalina Georgieva, Andrew Steer, and others did pioneering work in this area, and several years later I was struck by the enormous emphasis the cur- rent President Robert B. Zoellick placed on the subject (for example, his leadership for the initiative to save the tiger), even as the rest of the institution was slow to follow suit on the importance of biodiversity or the environment. Mr. Zoellick's span of interest and concern has been remarkably broad, which has served to foster (rightly) the broad concept of development that the World Bank has come to support-embracing financial, economic, social, and environmental aspects. Personal and Family Reflections I am blessed to have a wife and three children who have always been next to me and supported me in my endeavors as a World Bank staffer. 312 I A Vision for Development As with many large organizations, working for the Bank sets a certain lifestyle and pace. People outside the Bank may not realize that World Bank staff deeply care about development issues, travel long distances to get their job done, and are willing to relocate to faraway places. I remember being posted in Brazil as a Country Director, which was one of the most fascinating experiences for me and my family. Being in Brazil was an opportunity to return to my deep interests in the workings of development all at once in one place-macroeconomics, urban issues, education, health, and the environment (I had spent a year and half earlier in the 1980s at the University of Sao Paulo on leave from the Bank). The relation with the country was exceptionally rewarding. A memorable event was a visit to India at the invitation of President Luiz Inacio Lula da Silva on his first visit to that country. Another was my writing of a book on Brazil in collaboration with former Minister Joao Paulo dos Reis Velloso. There were tensions, too: I recall strong resis- tance from the Ministry of Finance officials to our wanting three pillars in the country strategy for Brazil-the third being the environment. The move to Brazil was interesting for my family as well. I spoke some Portuguese, which was helpful during our relocation. But my wife Leila and children Milan, Aman, and Amita had to learn the language as they started life in Brasilia. My Portuguese, however, was far from adequate in the early going. I recall some of the events in my first year when I spoke in English and relied on a translator. At one of these meetings, I remem- ber switching to Portuguese to please the audience. To my dismay, the translator continued to translate-Portuguese into Portuguese. We had our share of homesickness initially and had to adjust to the new lifestyle, building our social networks and getting used to the new culture. Aside from the association with the international community through work and school, we built friendships with Brazilian families as we visited various places. We formed a very strong bond with our landlords, the Perezes, who became dear friends. My last posting in my Bank career was as the Director-General of lEG. The job of an independent evaluator is to call it like it is, for which the support of the Committee on Development Effectiveness and the Board Reflections on My World Bank Group Career I 313 has proved critical. For the most part, lEG has been able to function as an impartial provider of evaluation findings for the Board's deliberations and the institution's learning. Since the first day I joined lEG, it was my mission to make the unit more effective and increase its impact on World Bank Group operations, as I strongly believed in its role as a catalyst for change. lEG also made progress in furthering knowledge sharing within the Bank Group. Since 2010, lEG has adopted processes to mainstream and track which of its recommendations were implemented by the Group's management and how effective they were. It is a big step forward-both for strengthening lEG's impact and for making its work better and more aligned to the institution's goals. During my six years, lEG has evolved into an integrated organization covering the World Bank, the International Finance Corporation, and the Multilateral Investment Guarantee Agency, emphasizing collabora- tion across these departments and providing inSights into the function- ing of the whole World Bank Group. In my last year, we carried out a reorganization to formalize the concept of "one lEG." Some questioned why these changes were being initiated in my last year at lEG. My con- viction was that they needed to be done because they were the logical follow-up to all we had done previously and precisely because it was my last year at lEG. As it turned out, the changes seem to have eventu- ally facilitated working across boundaries, having flexibility to deploy resources and share lessons across institutions and sectors. I would like to pay tribute to my wonderful colleagues in lEG who worked with me in this transformation, including Hans-Martin Boehmer, Patrick Grasso, Daniela Gressani, andJiro Tominaga, who contributed to this volume. The Value of Independent Evaluation lEG's mandate is to comment on development effectiveness, which includes the impact of the World Bank Group programs as well as processes that deliver the programs. In 20ll lEG carried out its first full-fledged self-evaluation. The report notes areas where lEG needs to improve its early involvement for greater effectiveness, where Bank 314 I A Vision for Development management could assume a less defensive stance on the findings, and where the Committee on Development Effectiveness needs to be a stron- ger supporter of independence. As I wrote in one of my exchanges with the Committee members, lEG's strength is in its independence, which makes its findings credible and strong. With independence also comes the obligation to be transparent and accountable. There were times when World Bank Group manage- ment was able to put evaluation findings to good use. But there were also times when it did not want the findings to get traction. There were also moments in the past when some members of the Committee on Develop- ment Effectiveness were uncomfortable with differences between lEG and Bank management. On one occasion, some members asked lEG to sort out these differences and come back with a negotiated position-which would have diminished the value of having an independent assessment. But because of a comprehensive disclosure policy that lEG has, we were able to be fully transparent and to voice our findings. In the long term, this seems to have helped strengthen the organization, benefited those who were evaluated, and sometimes supported the funding of some of the programs. Some of the difficult and critical evaluations, despite disagreements, have been the most influential or effective in the long term-for example, the assessment of health, nutrition, and population or Doing Business. The tensest moments concerned assessments that covered institutional processes. One such occasion was my note to the Board on the need for a change in leadership and direction during the time of President Paul D. Wolfowitz. lEG's proposal to evaluate the internal governance of the orga- nization encountered strong objection from Bank management, as well as some members of the Board, and lEG did not pursue this direction. The proposal to evaluate matrix management also was objected to by manage- ment, but with Board support, lEG has proceeded to do this evaluation. Another matter of tension involved the process for the selection of the Director-General, on which lEG provided input, asking that the process be independent and transparent. lEG advocated a change in the selec- tion process and recruitment of a new Director-General at lEG. To avoid misperception and ambiguity of lEG's independence, it was suggested Reflections on My World Bank Group Career I 315 that the Board of Directors be the sole decision maker in the recruitment for this position. This was important, considering that since 2004 the development community has been pressuring for fuller disclosure and independent assessments of the work of development organizations, which was further reiterated in the 2009 Zedillo Commission report. Evaluators found much to cheer about in the functioning of the World Bank Group as well. The Bank Group comes through as a strong organi- zation with more checks and balances than most other similar organiza- tions. Overall, its performance has improved in the past three decades. In fiscal years 2009-10, the World Bank's leadership and response to the financial crisis was striking, with loan disbursements that exceeded those of the more publicized International Monetary Fund. An evalu- ation supported the International Finance Corporation's new direction to emphasize development effectiveness and poverty reduction. Another major evaluation emphasized the efforts across the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Agency to follow up on safeguards. In fact, a recurrent theme has been that wherever the three parts of the World Bank Group pulled together, the organization's unique role was better realized. In all this, the progression of the processes of learning has clearly been nonlinear. So have been the development and revision of ideas over these past decades. Lessons from Development We have known for some time that sustained and sustainable develop- ment is the most pressing challenge facing the human race. Despite the enormous opportunities created by the advances in technology, some 1 billion people-one-fifth of the world's population-still live on less than $1.25 a day, a standard of living that the United States and Europe attained two centuries ago. The decade of the 2000s saw unprecedented economic growth in the two most populous nations, China and India, and solid expansion in much of the developing world. Yet the plight of the poor and conditions of poverty remain harsh. Income distribution across and within countries 316 I A Vision for Development has worsened for the most part in the decade. Periodic financial crises and the new challenges posed by climate change have made development that much more daunting. In the past, development efforts may have mattered primarily to the citizens of poor countries. But now demographic, political, and techno- logical trends make development an urgent priority for rich countries as well. Ninety-five percent of the growth in the world's labor force will take place in the developing world over the next quarter of a century. With the end of the cold war, economic and environmental issues now occupy the center of the diplomatic stage, and these issues will increasingly involve developing nations. As improvements in transpor- tation and communication shrink the world, rich and poor countries inevitably impinge more and more on each other. The Internet's impact on the less-advanced nations and the sharp increase in migration and remittances already signal major changes. In this connection, a remarkable transformation in views about how governments can best promote economic development has occurred. It was once thought that government needed to occupy an economy's commanding heights by allocating credit, rationing foreign exchange, ensuring against dependence, and operating key industries. Then the view changed to the belief that government should step out of the busi- ness of development. Today it is widely accepted that government has an important respon- sibility for setting the regulatory framework and ensuring it is followed, but not directing the production and distribution of goods and services. The private sector's role would be that much more enhanced for eco- nomic activities and generating economic growth. It is in those tasks for which markets prove inadequate or fail altogether-for example, invest- ing in education, health, or physical infrastructure-that government has a central role. Why Quality Matters The Economist of October 7, 2000, emphasized the centrality of growth in redUCing poverty. I agree with that. But I also argue that it would be Reflections on My World Bank Group Career I 317 a big mistake to neglect, as the magazine did, lessons on how to achieve more and better growth-growth that is sustained and whose benefits flow to all. The number of poor people in the world (outside China) has been rising, including in India, the second most populous country in the world. To reverse this trend, economic growth is crucial. At the same time, it is not merely more growth but also better growth that deter- mines how much welfare improves-and whose welfare. Countries with similar incomes and growth over the past three decades have achieved widely differing outcomes in education, health, and environ- mental protection. These experiences demand that we seek answers beyond the "Wash- ington consensus." Understanding the process of growth, including its social, environmental, and institutional aspects, builds country owner- ship and improves development outcomes. Quantity versus quality is a false dichotomy. The two are jOintly determined, and their interaction is what decides whether the results will be good, bad, or indifferent. First, severe inequalities in investment in education and health imply that millions of people lack opportunities to improve their lives. Edu- cational differences in India are one reason the impact of growth on poverty is five times greater in Kerala than in Bihar. Poland, the United States, Canada, and the Czech Republic seem to provide the most equi- table opportunities for schooling; at the other extreme, Egypt, India, Pakistan, and Tunisia have much greater educational inequalities. Second, poor governance retards growth and particularly hurts the poor. Large-scale corruption allows domestic elites and some trans- nationals to steer policies and laws to their own advantage, at others' expense. Civil and political liberties and freedom of the press help reduce corruption, improve the effectiveness of social spending and safety nets, and increase the productivity of investments. Third, improving environmental quality and protecting natural resources spur growth and welfare directly, especially for the poor. Deal- ing with pollution in cities, the depletion and deterioration of water supplies, or the destruction of forests and precious biodiversity is urgent 318 I A Vision for Development and can make a big difference. Indonesia's forest fires, caused partly by bad policy, caused at least $8 billion in direct losses in 1997-98, argu- ably harming the poor even more than did the financial crisis. Some question whether this broader agenda is too ambitious. It should not be. The quality agenda is not a veiled demand for big gov- ernment. Rather, it is an invitation to all parts of society, within market- friendly policy frameworks, to participate in development. This calls for strengthening government and nongovernment institutions alike. Triple Danger Today we face a threefold global crisis-economic and financial downturn, a rise in food prices and poverty, and climate change and environmen- tal stress-presenting joint threats to life and well-being on this planet. Increasingly, it would be a mistake to think that governments should deal with poverty and the environment only after they have put the financial crisis behind us. In the absence of high growth, it is hard to see how pov- erty will be lessened or environmental actions financed. And unless carbon emissions are cut and poverty reduced, growth prospects will be doomed. The truth is that poverty and climate change are no longer distant threats to economic growth. Climate change presents the greatest threat to sustaining high growth. In the past 100 years, the world economy expanded sevenfold, the global population increased from 1.6 to 6.5 bil- lion, and the world lost half of its tropical forests. Consequently, atmo- spheriC carbon dioxide levels are now 385 parts per million and rising fast. This is close to the 450 ppm threshold beyond which it may be impossible to achieve the Cancun-agreed goal of limiting global tem- perature rise to 2° Celsius. National economies are already seeing the effects of climate on local agriculture. Natural disasters are on the rise: remarkably it is the hydro- meteorological events, not the geological ones, that have shot up, sug- gesting the ominous link to global warming. The proximate reason for the doubling of wheat prices over the past year is the collapse of produc- tion in the former Soviet Union and elsewhere, linked to unprecedented heat waves and floods. Reflections on My World Bank Group Career I 319 The economic costs, including the losses caused by air pollution, water contamination, and solid wastes, as well as deforestation, are estimated to amount to some three percent of gross national product in China as well as India, Argentina, Turkey, and elsewhere. Strik- ingly, prevention is often far cheaper than cure-whether it's curbing industrial pollution, arresting deforestation, or reinforcing structures in disaster-prone areas. Sustained growth has been the most powerful means to reduce pov- erty, especially in China, India, and elsewhere in Asia. China's growth averaged 10 percent yearly for the past 25 years, lifting some 400 mil- lion people out of poverty. But allowing poverty to balloon jeopardizes political stability and continuation of growth itself, increasing the preva- lence of failed states and making the world less safe for investment and trade. Some 150 million more people slipped into poverty worldwide during the financial crisis of 2007-08 and a further 50 million during 2010 because of food price rises. Yet it is unquestionably tough to attack the three heads of the hydra simultaneously. Deep down, it is my conviction that growth paradigms and models need, for industrial and developing countries alike, an over- haul. The aim ought not to be just the pace of growth but its patterns and quality, if progress is sustained. This line of thinking opens up large issues for discussion and by its sheer breadth might even come in the way of pragmatic action. Therefore, it is wise to pursue win-win opportunities. Remarkably, the threefold crisis offers some unique opportunities that can be seized. There are policies, investments, and deals that can help these nations separately and collectively confront two if not all three of these dangers at a single swipe. First, this is the time for nations to reverse policies that sacrifice the climate in the name of immediate growth. The most egregious example is energy subsidies, which cost almost a third of a trillion dollars in 2007 worldwide. These are frequently justified as protecting the vulnerable, but the bulk of subsidies does not reach the poor. They also encourage energy waste and drain fiscal resources. 320 I A Vision for Development Another dual-purpose policy is to set up robust social safety nets, providing a boost to consumption while lifting millions out of poverty. Conditional cash transfers in Brazil and Mexico are examples of efforts to both reduce poverty today and, by tying them to children's educa- tion and health, boost future growth. Outlays amounting to just about 1 percent of gross domestic product can make the difference. Second, this is the chance for countries to invest in energy efficiency. Government funding for green and carbon-saving technologies, as in the United States or China, could not be better timed. Taking advantage of declining capital costs of hydro, wind, geothermal, and solar energy, it would pay to invest in these technologies now, anticipating the resur- gence of fossil fuel prices. Such investments would help sever a link that has long been the bane of antipoverty campaigners. No country has managed to lift liv- ing standards without increasing its carbon footprint. But under today's vastly changed global environment, it is essential that they do so. Global warming hurts the poor the most. Climate change is causing a spike in natural disasters as well as gobbling up arable land and reducing water availability in critical areas. Third, this is the moment to make deals that will lead to a surge in financing for development and its effective use. You only have to look at global projections to see that the boost to growth from the fiscal stimu- lus is envisaged to be greater in developing countries. That is because infrastructural investments or policy improvements can deliver sharper increases in growth in these economies than in the more affluent ones. Hard though it may be to sell this idea in rich nations, their gov- ernments might consider proactive actions that promote capital flows to emerging economies as well as augment development assistance in low-income settings. When the world is increasingly dependent on developing economies to re-energize the failing global economic sys- tem, support for such financial flows would be an important aspect of the global stimulus. Policies aimed at immediate growth at the expense of social safety nets or greener investments will be suicidal. Economic, social, and envi- Reflections on My World Bank Group Career I 321 ronmental dimensions of the recovery are no longer distinct goals with phased solutions. They are part of the same package of needed actions. Lessons from Evaluation Evaluation often confirms existing knowledge, but sometimes it also brings out factors that otherwise get short shrift in discussions and actions. Some of these factors can be crucial links in the chain connect- ing actions and results in development. The lessons follow a logical path from what results are (or should be) the focus of attention, to how those results are being measured, to the use of information on those results to improve development results. One issue is that focusing exclusively on short-term objectives can impair long-term results. Such a partial focus can incur high sunk costs and may do more harm than good. For example, responses to natural disasters often target reconstruction but not mitigation or prevention. But disasters should be treated as risks to development, not interrup- tions in development. lEG found that among countries that had received World Bank support to deal with disasters, fewer than half of Country Assistance Strategies even discussed disaster response. Focusing only on intermediate outcomes also may put at risk the achievement of desired results. An example was the Bank's primary edu- cation projects that focused on increasing enrollment and reducing drop- out rates until 2005, while they largely ignored the long-term goal of learning. The new Education Sector Strategy in 20 II put the central focus on results and learning, in part following lEG's evaluation findings. Second, country-level results differ Significantly from project-level results. Country objectives tend to be broader than project goals and are likely to be affected by factors well beyond the scope of any project, or even the portfolio as a whole. For example, the Chad-Cameroon oil pipeline project was well implemented and a financial success; but the main country-level objectives-capacity bUilding in the sector, improved governance, and reduced poverty-were not met. Third, ignored or missed cross-sector linkages may lead to short- falls in outcomes and impacts: Often outcomes in a sector are linked 322 I A Vision for Development to results in other sectors in nonobvious ways, and it pays to take them into account. For example, in Bangladesh, rural electrification has done more than bring power to communities. An lEG evaluation found that it also has reduced child mortality by helping raise incomes through better business opportunities, improve delivery of health services, and increase water sterilization. Fourth, the approach to measuring results can send wrong signals when what is being measured does not match the claim. For example, the Doing Business Indicators claim to measure the overall state of the business regulation in a country, if not the state of country reform. But it is a misleading indicator of regulation and reform, as by and large it only values the lower cost to business from lighter regulation and lower taxes, and not the benefit to society from a certain degree of regulation. Also, averages can miss crucial targets. A project or program may be successful on average, but fail to address the right constraint or reach tar- geted beneficiary groups. For example, the Bank's community-directed projects aimed to reach the poor, but an evaluation found that benefits tended to be greater for the better-off than for the poorest, and in some cases the poor were worse off. Fifth, the past can sometimes be an inadequate gUide to the future. Changing environments and new challenges make a direct application of findings from past work to future efforts problematic. For example, the Bank's work in water has improved steadily, but its focus on water availability does not provide much learning to help in coastal zone man- agement, pollution reduction, or groundwater conservation. Also, identifying missed opportunities can help craft better strategies. For example, evaluative evidence shows that reducing energy subsidies, which often go disproportionately to the better off, leads to efficiency gains, creating a win-win situation in which conservation can be linked to better targeting of subsidies to the poor. In all this, the timing of monitoring and evaluation is crucial. Eval- uative information can be effective only if it is delivered when it can affect key decisions. Thus, early evaluations of Mexico's conditional cash transfer program showed positive results on schooling, health, labor Reflections on My World Bank Group Career I 323 supply, and consumption just as a new administration was coming into office, convincing them to retain the program. Concluding Thought Each of us approaches work and life somewhat differently; we have dif- ferent roles, and our expectations vary greatly. But we all do our work to the best of our ability. And when that work is seen to have been useful or to have had an impact, fulfillment is also high. The World Bank Group is a unique organization with enormous strengths as well as vulnerabilities. Its greatest value comes from the interaction its staff have with the clients and the people they work with. It is my hope that open dialogue all across the board will remain every bit a part of the process of these interactions, and by the same token the organization will use all its strengths in the service of its clients. Working for the Bank has been an extraordinarily enriching experi- ence personally for me and my family. Moving to different places and meeting amazing people from around the world who deeply care about making the world a better place formed my family values and instilled a strong sense of community and responsibility in my children. With the opportunities that the World Bank Group provides to its staff and clients, it still has a distance to go in responding to urgent global needs. Evaluations tell us that World Bank Group needs better coordination on knowledge sharing, stronger links across various units and institutions, and a keener eye on getting results on the ground. Let me conclude with a saying from Mahatma Gandhi: "If I keep on saying to myself that I cannot do a certain thing, it is possible that I may end by really becoming incapable of doing it. On the contrary, if I have the belief that I can do it, I shall surely acquire the capacity to do it even if I may not have it at the beginning." This might be a motto for anyone who works on development-aiming to see a world without poverty, conflict, and environmental destruction. About the Authors Hans-Martin Boehmer has worked in international finance and development over the past 20 years, holding positions in private sector, government, and international organizations. He is currently Senior Manager of the Independent Evaluation Group's Communication, Learning, and Strategy unit. Before his previous position as Head of Corporate Strategy and Integrated Risk Management at the World Bank, he led the preparations for the UK's 2005 twin presiden- cies of the G-8 and the EU the areas of AIDS, education and health for the U.K. Department for International Development. Hans-Martin also led the secretariat for the Education for All- Fast-Track Initiative and managed the operations of the World Bank's Human Development Network. He holds a Ph.D. in Economics from Georgetown University and an undergraduate degree in Economics from the University of Bonn. Mansoor Dailami is a well-known expert on international monetary issues, infrastructure development and finance, emerging market corporate finance, and design of foreign economic policy for emerging market economies. He is Manager of the Emerging Global Trends Team of the Development Prospects Group at the World Bank and is responSible for the monitoring and analysis of emerging global economic and financial trends that affect the prospects for developing countries' growth, investment, and finance. He also manages the Bank's flagship publication, Global Prospects Report. Since joining the Bank in 1986, Mansoor has been a team leader in major lending operations, advisory services, and policy dialogue with the Bank's cli- ent countries in a number of regions. Prior to joining the Bank, Mansoor worked at the United Nations Secretariat in New York, Massachusetts Institute of Technology and New York Univer- sity. He holds a Ph.D. in Economics from Harvard, as well as a B.5c. (First Class Honor) and M.5c. from the London School of Economics. Ashok Dhareshwar is a development expert, currently consulting with the World Bank in the Development Economics Operations and Strategy unit. He has consulted with the Bank since 2001, focusing his work in the Poverty Reduction and Economic Management Network. Prior to working with the Bank, he held research positions at Stanford University and the Indian Insti- tute of Management in Bangalore, India. Before that he was a marketing officer with Hindustan Machine Tools, Ltd. Ashok holds a post-graduate diploma in Management and Quantitative Methods from the Indian Institute of Management, an M.S. from Stanford University, and a Ph.D. in Engineering and Economic Systems from Stanford. Sebastian Edwards is an international economist, professor, speaker, and consultant. He is currently the Henry Ford II Professor of International Business Economics at the Anderson I 325 326 I A Vision for Development School of Management at the University of California, Los Angeles (UCLA). In the mid- 1990s, he was the Chief Economist for the Latin America and Caribbean Region of the World Bank. He is also a research associate of the National Bureau of Economic Research, a member of the advisory board of Transnational Research Corporation, and cochair of the Inter American Seminar on Economics. Earlier, Sebastian was an assistant, associate, and full professor of economics at UCLA and Professor Extraordinario at the IAE, Universidad Austral, Argentina. He is the author of more than 200 scientific articles on international economics, macroeconomics, exchange rates, country risk, interna- tional investment, and economic development. Sebastian received an M.A. and Ph.D. in economics from the University of Chicago. Stanley Fischer has been Governor of the Bank of Israel since May 2005. Prior to joining the Bank of Israel, Stanley was Vice Chairman of Citigroup. He was the First Deputy Managing Director of the International Monetary Fund. Before he joined the IMF, Stanley was the Killian Professor and Head of the Department of Economics at the Massachusetts Institute of Technology. Before that he was Vice President, Development Economics and Chief Economist at the World Bank. He was Assistant Professor of Eco- nomics at the University of Chicago until 1973 and Associate Professor in Economics at MIT, where he became full Professor in 1977. He has held visiting positions at the Hebrew University, Jerusalem, and at the Hoover Institution at Stanford. Stanley is a coauthor of Macroeconomics and of Lectures in Macroeconomics. He earned a B.Sc (Eco- nomics) and M.Sc. (Economics) at the London School of Economics and obtained his Ph. D. in economics at the Massachusetts Institute of Technology. Kristalina Georgieva is a Bulgarian economist and politiCian, currently serving as European Commissioner for International Cooperation, Humanitarian Aid and Crisis Response in the second college of the Barroso Commission. She was appOinted as Vice President and Corporate Secretary of the World Bank Group in March 2008; in January 2010 she was nominated to the Commission of the European Union and left the Bank. She has also served as a member of the board of trustees and associated professor in the Economics Department of the University of National and World Economy in Bulgaria. Kristalina held a range of academic and consulting positions in Bulgaria and the United States and has lectured on development topics in universities around the world. She holds a Ph.D. in Economics and an M.A. in Political Economy and Sociology from the University of National and World Economy in Sofia, Bulgaria. She also did post -graduate research and studies in natural resource economics and environmental policy at the London School of Economics and at the Massachusetts Institute of Technology. Patrick Grasso has worked in the evaluation field with the Independent Evaluation Group since the mid 1990s. He currently consults with the Independent Evaluation Group's Office of the Director-General. He was an editor of Operations Evaluation Depart- ment: The First 30 Years. Before his work with lEG, Patrick was Director of Evaluation and Learning Resources for the Pew Charitable Trusts, Assistant Director, Program Eval- uation, at the U.S. General Accounting Office, and Assistant Professor of Political Science at both Wayne State University and Oklahoma State UniverSity. Patrick has a Ph.D. and an M.A. in Political Science from the University of Wisconsin. About the Authors I 327 Daniela Gressani has been the Deputy to the Director-General and Senior Advisor to the Director-General of the Independent Evaluation Group since 2009. Before that, she was Vice President for the Middle East and North Africa Region of the World Bank. She has been in the World Bank since 1988, serving in a number of senior positions, including Country Director for Central Europe and the Baltic States; Interim Director at the Office of the President; Director for Strategy and Operations, Latin America and the Caribbean Region; Sector Manager for Poverty Reduction and Economic Management, Europe and Central Asia and the Middle East and North Africa; as well as various assignments as economist (1988-97). Prior to joining the World Bank, Daniela served as an economist in the Research Department of the Central Bank of Italy. An Italian national, Daniela holds an M.Sc. degree in Economics from the London School of Economics and Politi- cal Science. Thomas Hutcheson is an economist. He was a Senior Economist with the World Bank in the 1990s, working on an economic management program for Nigeria. He also contrib- uted to various Bank publications, including Best Practices in Trade Reform Policy, which is excerpted in this volume. His experience includes economic statistics, public expenditure, financial management, and judicial and other dispute resolution mechanisms. Roberto Junguito became President of Aero Republica (now Cop a Airlines Colombia) in 2005, leading the airline's turnaround process including the alliance with Copa Airlines. Prior to joining Aero Republica, Roberto was Planning Vice President and Chief Operat- ing Officer at Avianca. From 2001 to 2003, he was vice president of Valores Bavaria, where he was involved in defining the portfolio strategy of this private equity fund and recruiting its top management team. For four years he worked at McKinsey &: Company on a variety of projects in the financial sector, consumer goods and services, and indus- trial products. One of his major projects was the development and implementation of the Transmilenio transportation system in conjunction with the Bogota Mayor's Office. He currently serves in the Universidad de los Andes Board of Directors. Roberto has a degree in industrial engineering from Los Andes University in Bogota, Colombia. He also earned an MBA from Wharton School and an M.A. in international relations from the University of Pennsylvania. Daniel Kaufmann is Senior Fellow at the Brookings Institution and was previously Director at the World Bank Institute, leading the work on governance and anticorrup- tion. For most of his professional career Daniel has held positions at the World Bank. He is regarded as a leading expert, researcher, and policy adviser on governance and development. He previously held other positions at the World Bank: Senior Economist for Africa, working on trade, industry and macroeconomy; an author of the World Devel- opment Report; the first Chief of Mission of the World Bank to Ukraine; and Manager of the Finance, Regulation and Governance unit at the World Bank Institute. He is also a member of the World Economic Forum (Davos) Faculty. His research on economic development, governance, macro-economics, investment, corruption, privatization, and urban and labor economics has been published in leading journals. Daniel is also a fre- quent keynote speaker on governance and development issues in major fora. 328 I A Vision for Development Donald Keesing spent more than 20 years at the World Bank and its private investment affiliate, the International Finance Corporation. Prior to his work at the Bank, starting in 1975, he was a professor of economics at Colombia University (1964-68), Stanford University (1968-72), and the University of North Carolina at Chapel Hill (1972-75) He is the author of Improving Trade Policy Reviews in the World Trade Organization (1998) in addition to numerous publications on international trade. Nalin Kishor has worked in economic development and poverty reduction issues for more than 25 years, including more than 20 at the World Bank. Currently, he is Senior Natural Resources Economist at the Bank. In his work at the Bank, Nalin has focused on forestry and environmental issues. He has a long list of publications on forest management and pro- tection. Before beginning with the Bank in 1989, he was Assistant Director in the Ministry of Industries for the government of India and a Lecturer in Economics at SGTB-Khalsa Col- lege, University of Delhi. Nalin has Ph.D. in Economics from the University of Maryland, an MA in EconomicslLabor and Demographic Economics from the State University of New York, and an M.A. in EconomicslMacroeconomics from the University of Delhi. Danny M. Leipziger is a professor of International Business at the George Washington University. Prior to that, he headed the Poverty Reduction and Economic Management Network at the World Bank. He was heavily involved in positioning the Bank on major economic policy issues and in managing the Bank's overall interactions on these issues with key partner institutions-including the International Monetary Fund, the Organisation for Economic Co-operation and Development, regional development banks, and the European Union. Other World Bank assignments included Director for Finance, Private Sector and Infrastructure in the Latin America and Caribbean Region and managerial assignments at the World Bank Institute and in the East Asia and Pacific Region. Danny previously served in the Economic Bureau of the U.S. Department of State and on its Policy Planning Staff, where he was an economic advisor to the Secretary of State, as well as in USAID. With a Ph.D. in Economics from Brown University, Danny has written and lectured extensively on development economics and finance. Ramon Lopez is a Professor of Economics at the Department of Agricultural and Resource Economics at the University of Maryland, College Park. He has been an invited scholar at several academic institutions, including the University of Bonn ( Germany), University of Gothenberg (Sweden), and University of Chile, and is an international consultant with the World Bank, Inter-American Development Bank, FAO, among other international institutions, as well as with governments. He is also Chair of the Publication Review Board at the International Food Policy Research Institute in Washington, DC, and cochair of the Environmental Task Force at the Initiative for Policy Dialogue, Columbia University. Ramon is the author of several books and of a large number of journal articles on economic development, poverty, and the environment. In 2002 he was awarded the prestigious Alexander Von Humboldt Prize. Kazi M. Matin is Sector Manager for the Poverty Reduction and Economic Management Network at the World Bank. He has focused on East Asia and the Pacific. His earlier Bank experience includes Senior Economist positions in the Africa Region Lead Economist in East Asia and the Pacific. Before working at the World Bank, he was Economic Affairs About the Authors I 329 Officer in the United Nations Secretariat, Lecturer at Hunter College in New York, con- sultant to UNCTAD in Geneva, and researcher for the Bangladesh Institute of Develop- ment Studies and the Oxford Institute of Economics and Statistics. Kazi has a Master's of Philosophy in Economics from Columbia University. Rakesh Mohan is an Indian economist and former Deputy Governor of the Reserve Bank of India. He is presently the Director of Indian Institute for Human Settlements, and in April 2010, he joined Nestle India as a Non-Executive Director. He is currently Professor in the Practice of International Economics of Finance, School of Management, and Senior Fellow, Jackson Institute or Global Affairs at Yale University. He started his career in urban economics with the World Bank. He returned to India in 1980, where he first joined the Planning Commission as a senior consultant. He became the Deputy Governor, Reserve Bank of India in 2002. In 2009 he took up an assignment at Stanford Center for International Development at Stanford University and subsequently joined McKinsey and Co.'s economic research wing. In 2010 he helped set up the Indian Insti- tute of Human Settlements, in Delhi. Rakesh earned a B.A. in Economics from Yale University and an M.A. and Ph.D. in Economics from Princeton University. John Nash is Lead Economist in the Latin America and the Caribbean Sustainable Devel- opment Department of the World Bank. His Bank experience has been concentrated in Central America and Europe and Central Asia. He started at the Bank in 1978 as a Research Assistant in the Latin America and the Caribbean Region, then held various economist and advisor positions across project and sector units. John holds an M.S. and a Ph.D. in Economic DevelopmentlPublic FinancelEconomicslInternational Economics from the University of Chicago. Garry Pursell is a Visiting Fellow of Australia South Asia Research Centre at the Australian National University. He did his B.Ec. from the University of Sydney and his Ph.D. in Eco- nomics from the Australian National University. Between 1962 and 1971, he researched and taught in Australia. In 1971 he joined the World Bank and served in various capacities in the Research Department. He retired from the World Bank in 1996. Garry is an inter- nationally reputed trade economist and has published extensively on various aspects of trade issues. His current research interests are international trade with speCial emphasis on protection and related policies in developing countries; trade policies in India and other South Asian countries; trade and agriculture; trade and industrial organization poliCies; and export policies of developing countries. Ray C. Rist is an expert on results-based monitoring and evaluation. He is the co-manager of the International Program for Development Evaluation Training OPDET), a month-long summer institute held in Ottawa, Canada. Previously, he was Senior Evaluation Officer in the World Bank and Evaluation Advisor and Head of the Evaluation and Scholarship Unit of the World Bank Institute. His career includes 15 years in the U.S. government, with appointments in the Department of Health, Education and Welfare and the U.S. General Accounting Office. Ray has held academic appointments at Cornell University, the Johns Hopkins University, and the George Washington University. He has authored, edited, or co-edited 30 books, written more than 135 articles, and lectured in more than 85 coun- tries. He serves on the editorial boards of nine professional journals and on the Governing 330 I A Vision for Development Board of the School of Business at Durham University in the UK. He is the editor of the "Comparative Policy Evaluation" book series for Transaction Books. Joseph Stiglitz is recognized around the world as a leading economic educator. He was awarded the Nobel Prize in Economics in 2001 for his analyses of markets with asym- metric information, and he was lead author of the 1995 report of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize. He has made major contributions to macro-economics and monetary theory, to development economics and trade theory, and to the theories of welfare economics and of income and wealth distribution. Joe was a member of the White House Council of Economic Advisers from 1993 to 1995 and then served as chair for two years. He then became Chief Economist and Senior Vice-President of the World Bank. In 2009 he was appointed chair of the Commission of Experts on Reform of the International Financial and Monetary System. A graduate of Amherst College, he received his Ph.D. from MIT in 1967 and became a full professor at Yale in 1970. He is now University Professor at Columbia University in New York and Chair of Columbia University's Committee on Global Thought. Lawrence H. Summers is President Emeritus of Harvard University. During the past two decades he has served in a series of senior policy positions, including Vice President of Development Economics and Chief Economist of the World Bank, Undersecretary of the Treasury for International Affairs, Director of the National Economic Council for the Obama Administration from 2009 to 2011, and Secretary of the Treasury of the United States, from 1999 to 2001. He received a B.S. degree from the Massachusetts Institute of Technology in 1975 and was awarded a Ph.D. from Harvard in 1982. In 1983, he became one of the youngest individuals in recent history to be named as a tenured member of the Harvard University faculty. Vinod Thomas is Director-General and Senior Vice-President, Independent Evaluation Group (lEG) at the World Bank Group. He reports directly to the Board of Executive Directors and oversees the activities of lEG. He was formerly Country Director for Brazil and Vice President of the World Bank. In this capacity, he managed the Bank's large lending and nonlending portfolio in Brazil, helped shape the dialogue with the govern- ment and the Bank's Brazil Country Assistance Strategy, and participated in key events with the government. Prior to that, he was Vice President of the World Bank Institute (WBI). Before heading WEI, he held positions as Chief Economist for the World Bank in the East Asia and Pacific Region. He was the staff Director for the 1991 World Develop- ment Report, entitled The Challenge of Development. He was also Chief of Trade Policy and Principal Economistfor Colombia. Vinodjoined the Bank in 1976. He has a Ph.D. in Economics from of the University of Chicago, a master's degree from Western Michigan University, and B.A. Honors from St. Stephen's College, Delhi. He is the author of more than a dozen books, numerous journal articles, and opinion pieces in areas from trade and macroeconomics to project evaluation and finance. George S. Tolley is the president of RCF Economic and Financial Consulting, Inc., and Professor Emeritus of Economics at the University of Chicago. In a career spanning nearly a half-century, George has helped shape domestic policy and influence international development as a consultant to the governments of China, Venezuela, Panama, Korea, About the Authors I 331 Thailand, Iran and Gambia. From 1955 to 1966, he was a member of the NC State Depart- ment of Economics and Business. Since 1966, he has been a Professor of Economics at the University of Chicago, where he received his master's and doctorate degrees in Economics. In addition to his academic career, George served as the Director of the Economic Devel- opment Division of the U.S. Department of Agriculture and the Deputy Assistant Secretary for Tax Policy for the U.S. Treasury Department. He currently serves as a consultant for both the World Bank and the Agency for International Development. He has written 17 books and published more than 100 articles in professional journals. George received his undergraduate degree in economics from American University in 1947. Jiro Tominaga is Special Assistance to Vinod Thomas in the Independent Evaluation Group. He was a former senior information officer in the e-Government Practice Unit in the Information Solutions Group of the World Bank and has been responsible for a wide range of operational and analytical work related to the use of information and communica- tion technology in developing countries. His work focused primarily on relevant applica- tions in service delivery and government administration in the South Asia and Europe and Central Asia Regions. Prior to working with the Bank, Jiro was Section Chief for the Ministry of Finance in Japan and worked for Japan Bank for International Cooperation. He holds a master's degree in economics from the London School of Economics. Joao Paulo dos Reis Velloso is a Brazilian economist. Currently he chairs the National Forum, which seeks solutions to economic issues in Brazil. He also serves on the Board of Economic and Social Development. He was Minister of Planning during the admin- istration of Garrastazu Emilio Medici and Geisel between 1969 and 1979. His tenure as minister was marked by two distinct periods: the heyday of the "Brazilian Miracle" and the oil crisis of 1973. Joao was graduated from the University of Brazil with a degree in Economics. Yan Wang is Senior Economist and Program Leader of the Investment Climate team at The World Bank Institute (WBI). Her current responsibilities include managing several capacity building programs in the areas of regulatory reform, finance, and improving investment climate for private sector-led growth. Her recent publications include "Foreign Bank Entry and Domestic Bank Performance: Evidence using Bank-level Data," "Measur- ing Downside Risk and Severity for Global Output," and "Sources of China's Economic Growth, 1952-99." She has received several awards and has published extensively in academic journals and several books, including The Quality of Growth (2000), Manag- ing Capital Flows in East Asia (1996), Modern Securities and Futures Markets(1993); Bank Management and Reforms (1995), and Investment (1998). Before joining WEI, she was an economist for the World Bank and participated in economic work and provided policy advice to governments of East Asian countries. She holds a Ph.D. from Cornell University and taught economics as an assistant professor before joining the World Bank. James D. Wolfensohn was the ninth president of the World Bank. During his 10 years as President, Mr. Wolfensohn focused the spotlight on the institution's true purpose- fighting global poverty and helping the world's poor forge better lives. Under his lead- ership, the World Bank implemented a range of significant reforms to help achieve its mission and broke ground in several major areas including corruption, debt relief, 332 I A Vision for Development disabilities, the environment, and gender. Before his work at the Bank, Mr. Wolfensohn worked in Europe and Australia for various firms and banking institutions. In the late 1970s, he was instrumental in working to save Chrysler. He established his own invest- ment firm before being tapped to lead the World Bank. On May 31, 2005, at the end of his second term, he left office and assumed the post of Special Envoy for Gaza Disen- gagement. He studied arts and law at the University of Sydney, and in 1959 earned an MBA degree at Harvard Business School. Alexander J. Yeats is Principal Economist, International Trade Division, at the World Bank. While on the staff of the U.N. Conference on Trade and Development, he pro- vided studies of developing-country trade, with emphasis on its composition and direc- tion and the need for more study of a number of issues including the part played by multinational corporations.