-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ z 0E" .~~~~~~~ ,, - W : t S~~ !9fe-e +=- =tu- i i . _- f.-S-.R,i '--. ~~~~~~~~~~~~~~~~~~~~~ .' . ~~~~rmJ4....... r ;v~~e - ->H The Evolving Role of the World Bank The East Asian Economic Miracle Vinod Thomas and Peter Stephens The World Bank wshinon, DC The World Bank Group The World Bank Group is a family of multilateral development institutions owned by and accountable to member governments. These governments exercise their ownership function through Boards of Governors on which each member country is represented individually. All the powers vested in the Board of Govemors, with a few exceptions, have been delegated to Boards of Executive Directors, who are appointed or elected by member governuents. The President of the Banlk Group is appointed by the Executive Directors The World Bank Group today includes five international organizations: The International Bank for Reconstruction and Development (TBRD), the original institution in the group, opened its doors for business in 1946. Today, it is the largest source of market-based loans to developing coun- tries and is a major catalyst s similar financing frorn other sources. It lends to goverments or to public orpri- vate entities with govermnent guarantees. It is funded mainly through borrowings on the intemational capital markets. The International Fmance Corporation (IFC) was established in 1956 to support private enterprise in the developing world through the provision and mobilization of loan and equity financing and through its advi- sory activities relating to, among other things, capital market development and privatization. IFC is also a major catalyst of both local and foreign private investment Its lending and equity investment actirvities are based on the pnnciple of taking market risk along with private investors. Under the tenrs of its Articles of Agreement it cannot accept govnment guarantees. The international Development Association (IDA) was created in 1960 to provide finance on concessional terms to low-income countries that lack creditworthiess for IBRD borrowing. IDA is primarly funded from grants it receives from donors in periodic replenishments. The Intenational Centre for Settlement of Investment Disputes (ICSID) was added to the World Bank family in 1966 to provide conciliation and arbitration services for disputes between foreign investors and host gov- ernments that arise directly out of an investmenL The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to provide noncommercial invest- ment nsk insurance and technical services that help promote investment flows. It also disseminates informa- tion on investment opportunities. As is now common practice, the "World Bank" or simply the "Bank' are used interchangeably to mean both IBRD and IDA. The 'World Bark Group" refers to IBRD, IDA, IFC, ICSID, and MIGA. *Contents . Foreword v . Introduction 1 Diversity and Commonality 2 * Investing in People in Korea 4 Reducing Poverty in Indonesia S Macroconomic Stability in Malaysia and Thailand 12 Worling with the Private Sector in the Philippines 15 China and the Batlc Partners in Transition 17 Conclusion 21 Vmod Thomas is Chief Economist in the World Bank's East Asia and adcfic Regional Office. reter Stephens is External Affairs Officer n the same office. The authon aru grateful for contributions finr other regional staff The findhngs, iterpretons, and conclusions cepressed m tis paper arecntirey those of the authors and should not be attributed in any maner to the World Bank, to its affliaed aganizains, or to mem- bers of its Board of Exctdve Directors or the countries they represent. Foreword The world has changed dramatically over the last five decades and so has the World Bank. The Fiftieth Anniversary of the World Bank has provided us with an opportunity to reflect on and learn from the Bank's experience and to apply the lessons to the Bank's future agenda. This series of essays is devoted to improving understanding of the evolving role of the World Bank. Each essay analyzes the Bank's approach to the major development challenges its borrowing countries have faced, starting with the reconstruction and development needs of Europe and Japan in the 1940s and 1950s and ending with the transition of Central and Eastern Europe and the former Soviet Union. One essay examines rhe evolution of the Bank's relations with the world's capital markets as it mobilizes private savings for develop- ment. An overview paper provides a picture of the fifty-year period as a whole. The story that emerges is one of an evolving and learning institution that has built on its successes and its mistakes. The Bank has responded with vigor and energy to the challenges confronting its borrowers. In this process, it has made a significant contribution to the impressive developmental gains recorded in these past fifty years. In responding to those challenges, the Bank itself has changed, learning from its experiences, deepening its under- standing of the development process, and recasting its analytical and financial support to help its borrowers better. The Bank will continue to nurture its tradition of self-evaluation and learning. These essays will, I hope, contribute to a better-informed debate on the Bank's future role. They comple- ment the recently issued paper, The World Bank Group-Learning from the Past, Embracing tbe Future, which sets out the future directions for the Bank Group. Armeane M. Choksi Vice President, Human Resources Development and Operations Policy, and Chairman of the Bank Group Committee on the 50th Anniversary The East Asian Economic Miracle Vinod Thomas and Peter Stephens East Asia has been uniquely successful in fostering growth, reduc- ing poverty, raising living standards, and integrating with world markets. The credit for this remarkable achievement belongs to .EastAsia has been the governments and peoples of the region. They were not alone, uniquely successful in fos- however. Open markets in industrial countries and development teringgrowtj, reducing assistance contributed to progress Since its first loan to Thailand poty, raising living in 1950, the World Bank has had a long and active involvement standamds, and integrating in the region-in lending some $71 billion through fiscal 1994, witb world markets and in policy dialogue (see Figure 1). 'With remarkable commitment and perseverance, East Asia has practiced the key messages emphasized by the Bank in its devel- opment strategy: macroeconomic stability, investment in people, and building on export growth. The impact of the Bank's involvement is not easily defined in monetary or economic terms; it is better understood through the diversity and continu- ity of the relationship with its East Asian member nations. It is a mature relationship, and there have been differences along the way. For example, the Bank and its member countries have, at times, differed on the allocation of resources across the spec- trum of social and infrastructural services, or on the appropriate 1 The Evolving Role of the World Bank timing of a switch in industry has been achieved in East Asia, policy. And this is as it should but much remains to be done. be: the Bank's advice and recommendations are just part Diversity and Commonality of the menu of options countries may choose from in East Asian economies are managing their development remarkably diverse. The region includes some of the richest And though the region is the developing nations-such as fastest growing, East Asia's Korea, and some of the Much7 has been achievzed . record is not unblemished. poorest-such as Vietnam. It Not ali countries have sus- includes the world's most inreans Atoa, but mich .tained high rates of growth. populous country, China, as East Asian governments have well as one of the least popu- not always given adequate lated, Laos. Some counties, attention to such crucial issues like Malaysia, have a store of as protection of the environ- natural resources, while Korea ment and investment in infra- has virtually none. structure, which have too often lagged behind rapid No single development formu- economic expansion. Much la lies behind the 'East Asian Figure L IBRD and IDA Commitments, 1950-94 World Bank commitments to East Asia totalled over US $6 billion in 1994 (S billion) 2s5 Total IBRDIIDA E A 20~~~~~~~~~tI commnibents 10 w Total IBRDIIDA 5 _ commitments East Asia has accounted for 21% to East Asia of total Bank commitments between 1947 and 1994. 1950 1960 1970 1980 1990 2 The East Asian Economic Mircle miracle," and the Bank has not Why has East Asia, with its adopted a single development diverse economies and prob- template. The sheer size and lems, been so successful? There cultural diversity of a region is no simple answer. Policy that is home to 1.67 billion approaches by East Asian eco- people-about one-third of the nomies have also been diverse. Outwd-orented East world's population and about The first generation of newly Asian economies have 20 percent of its poor-pro- industrialized economies-with integrated with the global vides a wide variety.of devel- the exception of Hong Kong-. economy to a remarkable opment challenges and atten- opted for relatively more state extent, and have emerged dant development problems- intervention, asihad Japan as the driving force behind inclnding environmental earlier on. Among the second global trade growth degradation, infrastructural generation, Indonesia and bottlenecks, and poverty. Malaysia had litde success with early interventions. Less Such problems notwithstand- interventionist over the past ing, today, rapid economic dozen years, they both achieved development is a common markedly better economic feature of much of East Asia. performance. Most recently, There has been a near quadru- newly industrializing economies pling of per capita incomes in and areas such as Thailand and the past twenty-five years, a coastal China, have been marked improvement in health inclined to less extensive and education, a decline in fer- intervention. tility, and a surge in agricultur- al and industrial output. Behind country variations, Outwardoriented East Asian howeer, are significant economies have integrated common features. One such with the global economy to a factor is human resource devel- remarkable extent, and have opmentr In this respect, strong emerged as the driving force public policies were augmented behind global trade growth. with high household Perhaps most important, cco- investments in education in nomic growth has not only most countries. been dramatic, it has been broad-based and, on the whole, Investment in people is closely equitably distributed. linked to the notion of equity 3 The Evolving Role of the World Bank with growth. Some economies, policy design to effective such as Korea, brought about implementation. Pragmatism an early and relatively equitable means the relative absence distribution of land. These of ideology in setting policy countries, and others and the willingness and ability (including, for example, to change failed policies. Malaysia) continued to ensure Socialist economies in that a majority of the transition illustrate both the population shared the benefits cost of ideology and the gains of economic growth in a variety to be made from changing of ways. The result was a course. China's reform striking decline in absolute program has been litde short poverty, which is illustrated of breathtaking. most dramatically in Indonesia. The sections that follow are Common to East Asia7s success devoted to one important were policies for participation aspect of the Bank's involve- in world markets and macro- ment in each of the six economic stability. Because the countries in the region that economies took international accounted for 95 percent of prices as a primary guide to the Bank-Is lending to East Asia domestic resource allocation, (see Figure 2). macroeconomic stability was At the core of develop- seen as central to maintenance Investing in People in Corea ment success in East Asi of international competitivness. bas been pragmatic policy Moreover; most governments In the 1960s, when the Bank's making, fr-om policy had a strong aversion to infla- involvement in the region non, which strengthened the began in earnest, East Asia's designt to effective fmpl?lC .hands of technocrats. Where people placed high value on mnentatioL Pragzmatismn external or internal factors education, which was reflected means the relative absence threatened overall equilibrium, in public and private spending of ideology in setting governments moved quicldy In later years, educational policy and the willingness and credibly to restore stability. investments have provided to change failed policies universal primary education At the core of development and widely available secondary success in East Asia has been education. pragmatic policymaking, from 4 The East Asian Economic Mliracle Education was revered not only income had reached $6,790, for its own sake but as a means and by 1995 it will have of achieving economic develop- graduated fully from Bank ment. Equally important was lending.) the emphasis on strong human resources in goverrunment, From the 1960s, successive which complemented the Korean governments invested prevalent ethic of public service heavily and effectively in prima- in East Asia. This provided ry, secondary, and high-school In just one generation, fertile ground for the Bank's education. Korea's program Korea has left the ranks of emphasis on human resource involved heavy investments in tbose qualifying for World development, physical facilities. In 196070, * Bank loans the number of primary schools Witness Korea. hn just one increased from 4,496 to 5,961, generation, Korea has left the and middle schools from 1,053 ranks of those qualifying for to 1,608. By 1989, they had World Bank loans. (Korea reached 6,396 and 2,450, received its first IDA credit in respectivcly. The number of 1962 and its first IBRD loan in high schools also expanded 1968. By 1992, per capita from 640 in 1960 to 1,672 by Figure 2. IBRD and IDA lending to Enst Asia by major rmpient. 1950-94 Indonesia and China received the largest share of the US $71 billion lent to East Asia Philippines 13% Malaysia 5% Rest of Thailand 7% East Asia 5% Indonesia 30% China 28% Korea 12% S The Evolving Role of the World Bank 1 1989. Government financial in 1960-89, with the ratio of support at the primary level primary school students per also extended to targeted teacher falling from 59 to 36, subsidies for items such as and for middle school students, I school meals and uniforms. from 40 to 29. Govern-ment education expen- ditures rose from 2.6 percent of Korea's aim was two-fold: to In Korea, adult Literacy . GNP in 1960 to 3.4 percent in achieve a high literacy rate and, reached 92 percent by . 1989, while-as a proportion by emphasizing technical skills, of government expenditures- to create a well-educated work the allocation for education force capable of meeting the perCnt today .rose from 11 percent to almost challenge of rapid and technol- 20 percent. ogy-based economic develop- ment. Korea succeeded on both The impact on school enroll- counts. Adult literacy (and ment was dramatc. By 1970, numeracy) reached 92 percent Korea had 100 percent by 1985 and is almost enrollment in primary 100 percent today. Since the education, while between 1970 1960s, a large pool of educated and 1989, those enrolled in labor, including many women, I middle schools grew from 57 to has helped underpin Korea's 99.7 percent of all school-age industry-intensive and export- children. High school enroll- oriented development drive. ment rose from 30.5 percent in 1970 to 78 percent by 1985. Past Bank lending focused on Along with population expan- strengthening science and sion, this meant that the num- technical education to under- ber of primary school studcnts pin Korea's ambitious plans in Korea increased from nearly for industrialization. In the 3.6 million in 1960 to 1970s, lending was mainly for 4.9 million in 1989. Middle expansion and quality improve- school students rose from ment of vocational and techni- 530,000 to almost 2A million, cal education in high schools, -while hgh school students junior technical colleges, and increased from 273,000 to undergraduate programs in 2.3 million. The number of science and engineering In the teachers also increased sharply early 1980s, emphasis was 6 The East Asian Economic Miracle placed on improving policy institutes, in line with the with the aid of two education government's increasing sector loans, which led to concern about environmental I institutional improvements in problems. The Bank has also such areas as evaluation and continued lending for vocation- accreditation, personnel plan- al and technical education to ning, equipment maintenance, ensure that training of crafts- curriculum development, and men and technicians keeps pace I private education. These efforts with rapid technological change were reinforced by the Sector in industry. A continued Survey of Science Education interest in supporting policy (1982) which set a long-term improvements is reflected in strategy for strengthening the last Bank education loan to science education at the Korea (1994). This includes a secondary and higher levels. range of institutional improvc- ments in secondary and higher As Korea's industrial sector snhnce and technical education. moved toward higher value- Building on previous changes, added, technology-intensive these are expected to help production, the government guide policies over the next placed greater importance on decade. strengthening local capacity for research and innovation. In Over the past quarter cerntury, response, Bank lending shifted the Bank made sixteen its emphasis in the late 1980s education loans totaling toward strengthening graduate $906 million (and with total schools of science and project costs of almost engineering (which train $2.6 billion). Lending has, in research personnel) and general, been consistent with Lending has. . . been directly supporting selected Korea's needs and priorities in i i ', iconisten wtath Korea's national research institutes. science and technical education ,, ,,, ,, s ~~~need and pnorfities in and has paralleled the g In some recent projects, the increasing sophistication of its Bank has also focused on industry. There was early recog- strengthening environmental nition that the restructuring of Paralleled the incrasing science and technology in industry toward skill-intensive, ' sophistication of universities and research high technology production its industry 7 The Evolving Role of the World Bank would require continuous facilitating financing and upgrading of Korea's skill base. provision of best practices in Bank lending matched this human resource development change in demand. But, in in East Asia. This role is likely addition to helping Korea, the to assume even greater Bank learned much about form- significance in the years ahead, ing workable policies to as countries of the region increase the quality and continue to grow and become relevance of education and ever more competitive. research. It also learned lessons on practical issues (such as Reducing Povert in Indonesia mechanisms for curricular change and the preparation of An education policy aimed at equipment lists) relevant to a broadening the base of the range of institutional, teaching, work force enables wider and research objectives. These participation in the fruits of lessons are now benefiting the national growth, and can In addition to helping design of projects in Thailand, contribute significantly to Korea, the Bank learned Indonesia, and Malaysia. poverty reduction and social much about forming equity. But poverty must also be workable policies to I Human resource development addressed through other policy is still a major challenge in East instruments. Here the East increase the quality and Asia. Problems concern not Asian record has been particu- relevan?ce of educcation only the provision of basic larly impressive- As a result of and research education in low income rapid economic growth and a economies but also the multi-faceted development provision of adequate approach, involving human secondary and higher education resource development and the and the adequacy and quality of provision of basic physical all education. With the region infrastructure, absolute poverty committed to international in the region has declined by markets, it is crucial that the around two-thirds during the educational system be flexible past twenty-five years. enough to respond to needs of skill formation so that countries The number of absolute poor in remain competitive. The Bank East Asia is estimated to have continues to be a key player in fallen from 400 million in 8 The East Asian Economic Miracle 1970, to 300 million in 1980, improvements in nutrition, life to 180 million by 1990.' This is expectancy, basic schooling, all the more remarkable given and health of the poor. that the region's population has expanded by some 425 million Three key reasons led to the n e number of absolute over the past twenty years. progress of Indonesia's poor: Moreover, reducing poverty to - ., . , . ~~~~~~~~~~~esmed to have fallen little more than one-tenth of * Rapid economic growte the region's population generated strong growth in from 400 million in 1970, contrasts sharply with the demand for labor (and so, in to 300 million in 1980, experience of other developing incomes), first in rural areas, to 180 million by 1990 regions. In 1990, the absolute and later in cities. poor still accounted for roughly half the population in South Relatively free labor markets Asia and Africa and one quarter allowed workers to migrate to in Latin America. How did East jobs, especially from rural to Asia manage to reduce poverty urban areas. to such an extent? * Basic infratructure, health, Indonesia is a good example. education, and family planning Twenty years ago, Indonesia services were expanded and was among the poorest made accessible to most of the countries of the world, with a population, raising productivi- per capita income much less ty and the quality of life, and than that of India, Bangladesh, breaking down barriers to tlde and Nigeria. Today, Indonesia's movement of goods and GNP per head has reached people. $670, and those living in absolute poverty have dropped Indonesia has achieved from around 70 million sustained and high economic (60 percent of the population) growth, averaging more than at the beginning of the 1970s 6 percent a year in 1970-90 to near 27 million by 1990 More important, this growth (about 15 percent). This is the was broadly based, spreading fastest rate of decline in its benefits to even the poorest. poverty in any country, and it This was because: coincided with enormous 9 The Evolving Role of the World Bank * The government placed provide education, health, emphasis on improving the family planning, and other agriculture sector, on which the social services nationwide. livelihood of most people, Special progms (the INPRES, especially the poor, depended. or Presidential Instruction, programs) covered the country- * The shift to rapid industrial side with roads, primary growth in the mid-1980s schools, and public health emphasized a more labor- facilities. Between 1978 and intensive, outward-oriented 1987, primary school path of industrialization. enrollments among the poorest 40 percent rose from * These two growth processes 78 percent to 90 percent; created new service jobs in non- lower secondary enrollments farm activities and urban trade, rose from 42 to 65 percent; construction, and finance. and the utilization of health services doubled (though it One central reason why so remains low). many poor people were able to raise living standards was that In the 1980s, Indonesia even the great increase in job managed to reduce poverty, in opportumties coincided with both relative and absolute slower growth in labor supply. terms, at a time of difficult Indonesia had been successful adjustment to external shocks. Reducing the growth of in reducing fertility and in External strains severely the laborfore and . providing basic education and affected the economy, creating incresing its quality, per- health to the population, the need for two rounds of Reducing the growth of the adjustment-in 1982-85 and haps more than an single labor force and increasing its again in 1985-88. These strains fc quality, perhaps more than any included a sharp decline in the Indonesia's sustained single factor, lies behind terms of trade, falling oil prices, decline in poverty Indonesia's sustained decline in and an appreciation of the U.S. povCert dollar, which then increased Indonesia's external debt Many of the dramatic gains in burden. Adjustment involved human capital came as a result significant devaluation of the of government decisions to rupiah, reductions in public 10 The East Asitan Economic Miracle expenditure, and comprehen- Indonesia still faces daunting sive tax, trade, and financial problems, but why was the reforms. Some of these contin- country able to avoid or ue to be key challenges ahead. overcome some of the problems encountered in other countries Indonesia's attack on poverry, over this period? Credit goes to however, predates the adjust- a clearly articulated long-temnn ment period of the 1980s. In vision of development, an The Ba.. . ecouraged the 1970s and early 1980s, it able economic team given development of labor- made use of buoyant oil considerable freedom to make iztensiue manufactwing revenues to finance rural decisions, a desire for macro- ind ... to absorb infrastructure (such as economic stability, and a real- l.bor that migbt otherwise irrigation facilities, rural ization of the importance of the have eered te Tanks of electrfication, and roads for agrcultural sector for economic the poor transporting produce to growth and poverty reduction. market) and to provide fertilizer subsidies. This was in The World Bank played a marked contrast to the supportive and vital role, experience of other oil- providing timely and relevant exportng counties of the economic advice and substantal region. Though much of the financing for Indonesia's public iniiauive behind these invesunent program in educa programs was Indoncsias, the don, health, agriculture, and Bank was heavily involved in inasucure. The Bankis certain areas, such as irrigation, policy advice intensified during (The Bank has been prepared the crucial years of adjust- to throw its weight behind ment-the 1980s-on maior policies proposed by able macroeconomic reforms. It technocrats-Indonesia's encouraged development of included-to help counter labor-intensive manufcturing political and other vested industries, as an alternative to interests ranged against commodity exports, to absorb economic reform. In the case of labor that might otherwise have Indonesia!s attack on poverty, entered the ranls of the poor. however, the decision to pro- These reforms (backed by three tect rural groups found support World Bank structural adjust- at the highest political level.) ment loans) were effective 11 The Evolving Role of the World Bank because the government was onward, East Asian inflation committed to them. It averaged half that of other implemented reforms quickly lower-middle-income countries. and consistently and took Real interest rates averaged a ownership of the reform positive 4 percent (compared agenda, adapting it to suit the with a negative 3 percent country's needs and yriorities. elsewhere) ensuring a good return on savngs and seting a But while East Asia has had dear benchmark for the cost of great success in reducing capital. povert, the region still has a large share of the world's poor. East Asia's excellent inflation The task of poverty reduction record is largely the result of remains daunting Increasy, - sound fiscal policies and bud- the challenge is to reach the so- getary discipline. Over the past East Asia's excllent called "hard-core" poor, which twenty-five years, the region's inflation record is largely - requires sustained economic fiscal and current account the result of sound fiscal growth as well as human deficits averaged less than half policies and budgetay resource development and those of other developing discipline targeted poverty programs. countnes. Macroeconomic -management also gained from Macroeconomic Stability in generally strong and prudent Malaysia and Thailand central banlcing institutions. Almost universally, successful While East Asian countries East Asian economies have have not completely avoided adhered to sound macro- macroeconomic difficulties, economic policies. Steady they have usually reacted more economic growth and low quicldy, and often adjusted less inflation have provided a stable painfully, than have other framework for long-term plan- developing countries. In both ning and encouraged saving, Malaysia and Thailand, for investment, and the efficient instance, the central bank deployment of resources. At the tends to be the most powerful same time, exchange rates have economic agency and has a generally not been overvalued strong preoccupation with in real terms. From the 1970s controlling inflation. But even 12 . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.01 The East Asian Economic Mirade a conservative macroeconomic export activities. The new out- policy managed by able ward orientation was support- technocrats cannot insulate an ed by other policies, including economy against external a significant depreciation of shocks. Between 1980 and the baht, tax exemptions for 1985, following the second oil exporters, and the setting up shock and a general decline in of export-processing zones. commodity prices, Thailand came under severe financial In the 1980s, when inflation strain, particularly on its exter- and other macroeconomc va Een a conseruative - nal account Malaysia also ables were threatening to get macroeconomic policy suffered severely, and at a time out of hand, the Bank was managed by able when heavy investments in called upon to intervene more tecbnocrats cannot capital-intensive industries directly. It provided Thailand insulate an economy were absorbing a large part of with its first tructr adjust against exteral shocks natonal resources. ment loan ($150 million) in 1982 and a second one ($175 But following the second oil million) in 1983. Subsequently, shock-which revealed the Thai economy weathered structural weaknesses in the the crisis: current account and country's balance of pay- fiscal deficits improved despite ments-Thailand adopted a significantly higher world real strong adjustment program. interest rates, weaker export T-he government redesigned its demand, and less favorable trade and industrial policies to terms of trade. offset the bias against exports. Tarffs were rationalized and The consensus among Thai average rates reduced (though government officials and Bank effective protection rates for staff was that Bank involve- manufacturing remained ment had made a real differ- significandy higher than in ence in helping to solve the other East Asian countries). At country's problems. Here, too, the same time, the Board of the Bank's involvement can be Investments adopted foreign- said to have been cooperatve exchange generation as a cnte- with the govermment and rion for approving inward responsive to concerns that investments, thereby stressing were identified early on in 13 The Evolving Role of the World Bank | what proved to be a protracted problem had been sown in the period of macroeconomic early 1980s, whc n frstration stress. with the pace of economic development in Malaysia Bank support through prompted a state-led drive to structural adjustment loans had upgrade industry. This was advantages. First, by underwrit- buttressed by an increase in oil ing a broad structural and gas revenues. By 1981, adjustment program, the Bank public expenditure bad reached strengthened the domestic and 58.4 percent of GDI as actrnal credibility of the effort Malaysia invested in a range of and helped to maintain its capital-intensive manufactuning momentum. Second, by work- activities-mainly through the ing with the Thai government Heavy Industries Corporation on the program supported by of Malaysia. But by 1988, the the loans, the Bank helped inefficiencies associated with translate the strucual adjust- this drive became evident when ment stratr gy into policies and a set of major state-owned speed their implementation. enterprises suffered a net Third, by including policy deficit of M$1 billion. measures under structural By underwTiting a trOd adjustment lending, the Bank By then, Malaysia's fiscal suraliZI t˘lmWUt helped focus and supervise deficit had ballooned to progra4 the Bank . related technical assistance 16 percent of GD1 and the stewthened the dcomestic activities. country had generated large and extern edibility of volumes of external debt. The the effort ard helped to -- h1alaysias case, the Bank Bank offered advice on macro- mainain its momen*tum was asked to augment its tradi- economic management, fiscal tional support for projects with controls, tax system reforms, greater involvement in macro- and trade reforms aimed at economic adjustment. By encouraging foreign direct 1985-87 the international investment It also advised on price of oil had virtually state involvement in heavy halved, and MalaysWs heavy industry Macroeconomic industry was absorbing a large adjustment continued from part of the nation's investment 1986 to 1990, as government resources. The seeds of this policy began emphasizing 14 The East Asian Economic Miracle market liberalization and Accompanying a reliance on promotion of private sector market forces has been East growth and foreign investment. Asia's dependence on the During this period, too, private sector as the engine of Malaysia's external debt growth. Nonsodalist govern- declined significantly and ments in the region, too, have recourse to external borrowing had public enterprises, but Aeainga reliance was reduced in favor of foreign their support for the private on market forces bas been equity funding and domestic sector is older and deeper than I East Asia's dependence on borrowing The ringgit was it is in other developing the pr;iate sector as the depredated to boost manufac- regions. Supporting this eg of growth. tured exports. While Malaysia approach, the Bank has helped A1tboagb nonsociist did not require adjustment provide adequate financing for . in the gion. lending to carry out the World private sector actvities, Banlks policy advice, both the worked with governments to w pport Malaysian government and the improve the economic Bank deemed Bank environment, and encouraged for the private sector is intervention successful. governments to increase the oler and deeper than range of activities open to the it is in other developing Working with the Private private sector. Formerly .egios Sector in the Philippines socialist economies in East Asia have also recognized the East Asian countries have power of the private sector traditionally relied to a great and are now moving, with extent upon market forces. Bank advice and assistance, to Their development strategies encourage rapid growth in cannot be characterized as hais- their own pnvate sectors. sez faire, but they have consis- tently subjected their industmes Rapid growth has created large to international price competi- demands for infascture tion. Their ability to penetrate especially in power, telecom- world markets is an indication munications, and transport. But of the validity of ths strategy. within their fiscal constraints, Increasingly, East Asian nations are increasingly unable countries are opening their to finance such demands. markets to competition from Governments have begun to abroacL turn to private financiers for - IS The Evolving Role of the World Bank major projects and to explore burden came to dominate innovative forms of project economic policymaking. financing and management to accommodate these private The Bank has worked with Rapidgrowth has creted..... interests. authorities to redesign policies lage demands for infra- meant to promote stable structure ... The Philippines, for instance, growth and to recover from Governments ... unable has led efforts to involve the the problems of the 1980s. to finance such demands private sector in a wide range One Bank-supported activity ... have begun to tun to of development activities, was a market-oriented debt- prte financier- ... an particularly infrastructure. relief scheme that the to explore innowative Early Bank support included Philippines negotiated with its f t ^ dialogue with the Philippine commercial creditors. Another frmofrojctfianci -. s government to encourage was a macroeconomic reform anXd mawgemn2et' . trade reforms and export program that gave the private development Bank loans have sector new confidence to supported such development invest in the Philippines. The finance institutions as the Bank has also supported Development Bank of the policies to improve trade and Philippines, as well as industrial incentives that improvement in the financial resulted in increased foreign sector. and domestic competitiveness. While the Philippines' growth While the Philippine govern- over the past twenty years has ment is committed to the not matched that of its neigh- private sector as a mainstay of bors, both the government and dcevelopment, it has been less the Bank. have demonstrated a successful in providing a stable mutual commitment to political and macroeconomic overcome particularly difficult environment or to encourage economic times that efficient investment and strengthens the basis for future competition. Consequently, collaboration. growth did not accelerate in the Philippines as it did in Due in part to difficulties in other East Asian countries, managing its debt and to the and by the mid-1980s, the burden that sach debt placed country's large private debt on public finances, the 16 The East Asian Economic Mirack Philippine government has China and the Bank: Partners actively sought private sector in Transition help in providing infrastruc- ture and public utilities. Since While East Asia continues to 1989, it has been working give high priority to a stable with private financiers to carry macroeconomy, there are still out build, own, operate and serious concerns. Socialist build, own, operate, and economies in transition, such transfer projects to produce as China and Vietnam, are power for the electricity- struggling to maintain stability starved Philippines economy. while they carry out structral Already, thirty-three contracts reforms and liberalizing price have been signed and thirteen and trade policy. Far-reaching projects have been complet- institutional reforms-for ed-greatly reducing power example, the restructuring of One ofthe Bank's key shortages and enabling faster centrai banks or revenue and tasks will be to bring to economic growth. The Bank expenditure reassignment the table the best pracies worked with the Philippine between the center and the in macroeconomic government to provide provInces-are needed. One of aa fgsocial complementary financing for the Bankes key tasks will be to c i r .. . . ~~~~~~~~~~~~economses in transkion additional power investments, bring to the table the best and innovative projects have practces in macroeconomic been started in other sectors as management for socialist weLL economies in transition. The Philippines now seems to In 1979, after years of little have a solid policy foundation contact with the world and is moving to restore economy, China was eager to economic stability and growth. learn about the policies and These activities are being experiences of market followed atentively in other economies. It made great use countries in the region. China, of the Banlr's accumulated Tndonesia, Malaysia, and others cross-cuntry experience and are inviting more private sectr information on other involvement in infrastructure as countries. Even today, after well as in more traditional areas having remarkably accelerated of production. its partcipation in the world 17 The Evotling Role of the World Bank economy, China's government to effect changc. The Bank has remains strongly interested in also learned from China that * how other countries address where circumstances permit, specific economic issues, an there are merits in a gradual interest sustained and stimulat- approach to economic change. ed by World Bank economic China achieved notable work. progress using this approach in handling price reform, for Chinese leaders have also example. Policymakers invited advice from the adopted a dual-track approach The Bank has learned world's most competent eco- that allowed market prices to important lessons from its nomic analysts. The World coexist with plan prices, while engagement with China. Bank's role here has been to the scope of planned resource These i.ndude lssons of gather international experts on allocation was gradually process, of the value of China and organize brain- reduced. Today, more than opJten disassion a?uS storming seminars with the 90 percent of goods in China debate, and of the need to . highest levels of China's are at market prices. economic leadership. These dausmnbae iXzs to all conferences began im the early China's approach to 1980s and were repeated every ownership change has been two or three years. At last unusual. It has offered y year's conference at Dalian, remarkable encouragement to China confronted several key nonstate enterprises, which macroeconomic issues. More now account for about half of specialized conferences have indubtrial output. China's been organized around such gradual but steady strides in specific themes as poverty other areas-from establishing (1991) and central banking a land market to giving state (1993). enterprises more auronomr; from financial sector reform to The Bank has learned adopting sophisticated new important lessons from its markets in commodities and engagement with China. These se'rities-llustrate tat, wit include lessons of process, of commitment to change at the the value of open discussion highest levels, incremental and debate, and of the need to market reform can work. disseminatte ideas to all levels 18 The East Asian Economic Miracle China is now among the Bank's examined such issues as revenue most active borrowers. Serious mobilization and fiscal reform, involvement by the Bank began financial intermediation, and around 1980 with a good deal development of market and of basic work in documenting distribution systems. the size and nature of China's newly-opening economy. Between 1981 and the end of Operational involvement began 1993, the Bank's work in China with technical assistance loans has been backed by loans of to finance university education $9.97 billion and by IDA credits projects and quickly broadened of $6.97 billion, supporting to embrace economic and sec- various investment and tor work and contimuous moni- technical assistance projects. toring of the Chinese economy. Conceptually as well as finan- This phase culminated in two cialy, the Bank has supported maor reports on China-one at China's own efforts throughout the beginning of the 1980s and the transition from a command one in 1985. The second report to a partial-market economy. dealt with indusry, agriculture, For example, from the early health, and other economic and 1980s the Bank began doing social aspects of the Chinese significant work on China's economy. It was built around a state-owned enterprises and on uiiquely designed long-term collectives and small-scale rural growth model, which estimated enterprises, looking at the kind the conditions necessary to of changes needed to make Wtb commitment to meet targets for overall and them more dynamic and change at the highest sectoral growth rates and competiive. A series of Bank reek crental market offered comprehensive recom- reports around this time mendations regarding the infra- emphasized the need to reduce .eform can wo structure support (social as well the number of government plan as physical) needed to underpin targets and to increase effiden- economic growth. Later studies cy and managerial autonomy in looked at the need for trade state- owned enterprises. Many liberalizaton and how China of the suggested reforms could exploit its comparative reflected or reinforced ideas advantage in the world already under consideration economy. Other sectoral studies within China itselK 19 The Evolving Role of the World Bank Given the size of China's enterprises have traditionally economy, however, the Bank's been responsible). lending assumes less signifi- cance than its techical The Bank has supported assistance nd economic advice. China's drive to develop Initially, Bank advice to China collective enterprises to provide inidally drew more on the insti- employment and produce daily tution's broad experience with consumer needs. The Chinese East Asian and other developing govenrment, however, has now countries (as well as with indus- widened the scope of its trial countries) than on lessons reforms to indudc price and learned from other socialist financial market reform as well economics in traiion. In any as measures aimed at ensring Gruen tbe size of China's .casr China's economy is more macroeconomic stability. The decentralized than other need to develop a social-securi- tr.nsitional economies. This ty net, to introduce measures to Bank s lendig assumes * Idecentaization has increased increase labor market mobility, l;ess sgmtflca7zce thant its .witi the ntiaton of econonic and to offer better health, tedhnical asis e and reforms and center-local fiscal education, and housing services conoim adaiw contracting. which builds on has also been centul to the the local self-sffidency and Bank-s policy advice in China. cellular" structure inherited The aim has been to create an from the Third Front polices of intal market wiin which the Maoist era. change can be introduced. hlis involves creating competition Yet the fundamental problem of for state-owned entrprises dealing with state-owned from collecily owned, town, enterprses remans. Here the and willage enterprses while Bank has supported China's encouraging the state-owned own sr to work around entities to contract out more the problem rather than to con- production, a system that has front it direcdy, which would be already begun to make Chinese politically risky in terms of industry more competitive and unemployment and other social dynamic. At the same time, the factors (such as health, social consequences that accom - educaion, welfare, and pany changes in the role of state housing, for which state-owned enterprises are being addressed_ 20 The East Asian Economic Miracle Fiscal and financial reforms- responsibility for the consider- more efficient tax collection, able successes of the region equitable to both the center and rests squarely with the countries the provinces-along with the themselves. Similarly, the coun- creation of a strong central tries have overall responsibility bank, are two other essential, for managing the demanding parallel reforms. agenda of the environmental, poverty, infrastructure, and The Bank's dialogue with China trade issues that will dominate In East AMia, daunting has been at the highest political the economic horizon of the tasks bave a way of being and administrative level and has twenty-first century. Country performed quietly and been chararcrized by a fruitful commitment and effective poli- efficiently exchange of ideas. China has cymaking is at the root of eco- initiated and implemented nomic success-and failure- much of the reform agenda, both now and in the future. with the Bank providing guid- ance and support for what are The Bank has had a strong and essentially local initiatives. consistent involvement in East Chinese leaders listen to what Asia, providing both money Bank representatives suggest and policy and analytical and adapt bank policy or pro- support. The Bank has helped ject advice to fit their specific to produce tangible results and needs. The occasional policy has learned valuable lessons, differences-for example, over both from the region's the relative priority to be given considerable achievements and to rural education and health- from areas needing much stand out against a background greater attention. But despite of mutually rewarding dialogue. the challenges still ahead, one lesson offers considerable Conclusion encouragement. In East Asia, even daunting tasks have a Whatever the level of World way of getting done, quietly Bank involvement in East Asia, and efficiently. Note 1. Souce: Frida Johansen, Poverty Reduction in East Asia-The Sile Rewoldion, World Bank Discsion Paper 203, East Asia Pacific Region Series ITis esmte uses individual country poverty lins that are made broadly comparablt Usig another common US$1-per-day poverty line (at purchasing-power parity in exhange rates) yields a 1990 head count estimate for the poor in East Asia of 170 million. No companhie estimates exdst for 1970. 21 I Distributors of World Bank Publications ARGENTINA EGYPT. ARAB REPUIC OF KENYA * SAUDI ARABI. QATAR Carks HIllcht.SRL Al Aham Afica Bok Servce IEAJ LtdL Jnr BookStoe Caleb Guste Al CGa Stet QuaHan Hss. MinanoStrt P.o. Box 31% Rride 16S.4th Floor-Ok. 453/465 Calr PAr Doe 45243 Rlyadh 11471 1333 buaso Amr NaIrabi. The Middle Eastbener SINGAPORE,TAIWAN. 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