Dynamic Development: Innovation & Inclusion Lecture 2: Lessons from Development Experience Munich Lectures in Economics Center for Economic Studies Ludwig Maximilian University, Munich 20 November, 2002 Nicholas Stern Senior Vice-President and Chief Economist The World Bank
Structure of the Munich Lectures ACTION LESSONS FROM DEVELOPMENT EXPERIENCE (LECTURE 2) STRATEGY (MAIN LECTURE) RESEARCH PROGRAM (LECTURE 3)
Main Themes What do we learn from development theories of the last 50 years? What do we learn from the evidence on growth and structural change?! Development as change! Drivers of change Strategy for development Implications! research programme! public policy and public action
What have we learned from development theories? Role of the State Theories of Growth Institutions and Governance Behavioral and Societal Change
Role of the State Markets & State: Complements and Contrasts From planning and protectionism in the 1950s to the libéralisme triomphant of the 1980s to markets / state complementarity in the 1990s Conceptual Underpinnings Market failures and government failures Austrian view: markets support innovation and discovery
Theories of Growth ICOR, TFP and steady states Focus so far has been on accumulation of physical & human capital, & productivity of factors Savings rate and capital-output ratio (Harrod-Domar) Balanced growth & big push (Rosenstein-Rodan) Unbalanced growth (Hirschman) Link between growth and income distribution (Kuznets) Technical progress (Solow) Learning by doing (Arrow) Optimal growth theories (Pontryagin, Mirrlees, Koopmans) New growth theories: human capital; entrepreneurship; innovation (Romer, Lucas, Aghion-Howitt, Grossman-Helpman)
Institutions & Governance Simultaneous Approaches to Policy Formation 1970s Principal-agent relationships in public policy: Mirrlees 1969; Diamond-Mirrlees 1971; Little-Mirrlees 1974 Policy influenced by interest groups (similar in terms of data requirements [winners & losers] to optimality/welfare models): Buchanan 1965; Krueger 1974; Becker 1983 Understanding the rules of the game : North 1973 1980s Market fundamentalism: Focus on markets and other things will follow 1990s Demand for institutions depends on history and power (Mancur Olson 1982; Rodrik, Roland; Shleifer; Acemoğlu)
Behavioural and Societal Change Disciplines outside the Economics Mainstream Meanwhile some social scientists were viewing development as major behavioural & societal change. Anthropology - F.G. Bailey, Caste and the economic frontier (1957) Demography - Esther Boserup, The conditions of agricultural growth (1965) Geography - Jane Jacobs, The economy of cities (1969)
Development as change The data show that development is not a story of steady state growth but of fundamental change Growth in developing countries has accelerated Periods of sustained growth Structural shifts - agriculture / manufacturing / services - rural / urban - population: dependency ratio Importance of exports and capital flows Decline in poverty in last 20 years Changes in health and education status
Secular Growth Long run world per capita GDP growth by region 1000-1820 1820-1950 1950-1998 (1950-1973) Western Europe 0.14% 1.0% 2.9% 4.1% Western Offshoots 0.13% 1.6% 2.2% 2.4% Japan 0.06% 0.8% 5.0% 8.1% Asia (excluding Japan) 0.03% 0.1% 3.2% 2.9% Latin America 0.06% 1.0% 1.7% 2.5% Eastern Europe & former USSR 0.06% 1.1% 1.1% 3.5% Africa 0.00% 0.5% 1.0% 2.1% World 0.05% 0.9% 2.1% 2.9% Source: Maddison (2001).
Sustained spurts of growth Sustained per capita income growth exceeding 4% p.a. since 1990 Country Number of Main Growth Average Real Driving Factors Groups Countries Period Growth p.c. U.S. and Canada 2 1933-1953 4.3% Post depression recovery, war OECD (except US & Canada) 13 1980-2000 4.5% Policy changes, liberalisation Eastern Europe + FSU 4 1946-1967 4.6% Post war recovery Asia (except Japan) 8 1960-2000 5.1% Policy changes, liberalisation Latin America 4 1950-1980 4.1% Import substitution & FDI Africa 14 1960-1985 4.2% Post colonial, ODA flows Middle East 5 1960-1985 5.4% Oil except Iran, Iraq, Israel Source: Summers-Heston (1993); Maddison (1995); World Bank estimates
Structural changes in developing countries Urban vs. rural population (% of total population) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 billions GDP by sector for the developing world (constant 1995 US$) 0 1970 1975 1980 1985 1985 1990 1995 2000 2000 1970 (2.9 billion) 2001 (5.1 billion) Industry, value added Services, value added A griculture, value added 28% 42% 72% Urban population Rural population 58% Age dependency ratio (dependents to working-age population) 0.90 0.80 0.70 0.60 0.50 0.40 1970 1985 2000 Low & middle income High income
Historical Perspective on Poverty Number of people living on less than $1 per day (millions) 1,400 1,200 Depression/ World War II 1,127.7 1,149.7 1,376.2 1,304.7 Historical trend 1,390.3 1,293.8 1,199.0 1,000 978.8 1,040.5 954.0 800 886. 8 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Poverty has dropped by 200 million over past 20 years, despite world population increase of 1.6 billion
Six Lessons from Development Experience 1. State necessary complement to markets Growth 2. Growth as an engine of poverty reduction 3. Role of the private sector (incl. SMEs) 4. Key role of international trade Development Effectiveness 5. Importance of empowerment and participation 6. Importance of ownership of reform process
Growth as an engine of poverty reduction Economic growth is vital in reducing poverty Percent per annum (1992-98) 10 8 6 GDP per capita growth rate Poverty reduction 5.9 7.1 6.4 7.5 9.9 8.4 4 3.8 4.4 2 0 Uganda India Vietnam China Also positive effects on other dimensions of poverty, such as education: stronger growth in primary schooling among globalizers.
Initial inequalities reduce the pace of poverty reduction Reduction in poverty associated with a one percent increase in income 3% 2% 1% 0 0.2 0.4 0.6 Initial income inequality (Gini Coefficient) Note: Data cover 65 developing countries in the 1980s and 1990s. The incidence of poverty is the share of the population living on less than $1 a day. Sources: Shaohua Chen and Martin Ravallion. 2000 (World Bank Policy Research Working Paper) and Martin Ravallion. 1997 (Economics Letters 56(1): 51-57)
Private enterprises are key: SMEs account for most employment across developing countries 89.0 Percent of households with persons employed in SMEs 91.0 89.3 88.0 81.3 99.5 77.3 75.0 64.1 India Uzbekistan Guatemala Ecuador Brazil South Africa Panama Nicaragua Madagascar Source: World Bank calculations using various country household surveys. SME refers to firms with less than 100 employees except for India (<20); and South Africa (<50)
SMEs are important for poor people 45 40 35 30 25 20 15 10 5 0 Percent of households with persons employed in large firms: Poorest and richest quintiles India Uzbekistan Guatemala South Africa Panama Nicaragua Madagascar Poorest Quintile Richest Quintile Source: World Bank calculations using various country household surveys. SME refers to firms with less than 100 employees except for India (<20); and South Africa (<50)
Share in world trade of developing countries is growing Percent 35 30 25 Developing countries share (left axis) US$ billion 2,000 1,600 20 Agriculture 1,200 15 800 10 5 Energy & other Manufactures 400 0 1970 1975 1980 1985 1990 1995 0
Trade grew at least twice as fast as GDP in last decade Ratio 4 3 2 1 0-1 1965 1970 1975 1980 1985 1990 1995 2000 Trade to GDP ratio growth rate based on 5 year moving average
Since the Asian crisis, FDI flows to developing countries have proven resilient while debt financing has fallen 200 150 Net flows $ billion 100 50 Debt FDI ODA 0 1995 1996 1997 1998 1999 2000 2001 2002-50 -100 Year
Development effectiveness Voice, information and participation matter for the success of projects El Salvador: EDUCO programme Bangalore: Report card on public services Brazilian favelas: Prosanear water & sanitation programme Cartagena: water privatisation
Effects of Participation in EDUCO 5 5 4 4 3 3 2 2 1 1 0 Hrs/mo meet w/ parents EDUCO Traditional 6 # Assoc Visits 5 4 3 2 1 0 EDUCO Traditional
Cartagena, Colombia Water privatisation: before and after performance Indicator before after 1994 2001 Connections in poor areas N/A 98% Number of employees 1300 272 Employees per 1000 connections 15 2 Water coverage 68% 91% Sewerage coverage 67% 72% % of domestic metering 30% 99% Number of water connections 84143 1172 Unaccounted-for water 60% 41% Production capacity (m3/sec) 1.6 3.1 Continuity of service (hour/day) 7 24 Response to complaints (days) 6 1.3
Development effectiveness depends on. Country ownership of the reform process! Generate broad political ownership Development strategy tailored to local conditions and history! Participatory preparation process! Innovation in institutional design! Rigorous evaluation of the experiment! Capacity building for implementation
Strategy for Development A two-pillar approach " Creating a good investment climate (encourage firms, both small and large, to invest, create jobs, and increase productivity) " Empowering and investing in poor people (by enabling their access to health, education, social protection, and by creating mechanisms for participating in decisions that affect their livelihoods)
Strategy for Development: Connections " The two processes investment climate and empowerment are intertwined and mutually reinforcing [ pro-poor growth ] 1. Growth generated by improvements in the investment climate is empowering 2. If poor people are empowered, they contribute strongly to the growth process. " Both are means and ends
Investment climate makes a big difference Investment rate (percentage), 1999 10 8 6 6.0% 6.9% 5.6% 7.5% 8.1% 4 3.0% 2 0-2 -4 Uttar Pradesh Poor West Bengal -0.7% 1.8% Kerala Delhi - 2.1% Punjab - 3.1% Tamil Nadu Karnataka Andhra Pradesh Investment climate by Indian state Gujarat Maharashtra Good
Implications of the strategy: Research Programme Empirical surveys on the 2 pillars Investment climate Empowerment, participation and change in preferences Political reform: constructing constituencies for change! Tomorrow Morning s Lecture
Implications of the strategy: Implementing Monterrey Action programme is based on the strategy Create an environment for innovation, entrepreneurship and learning Enhance empowerment; encourage participation; reduce social exclusion Avoid highly unequal social structures, which are dynamically ineffective It embodies key insights of the strategy Ownership of the reform process Importance of governance and institutions Role of investment climate for growth Need for scaling up and jointly monitorable results! Yesterday s Lecture