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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)
(MAIN LECTURE)
STRATEGY
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
Western Europe
Western Offshoots
Japan
Asia (excluding Japan)
Latin America
Eastern Europe & former USSR
Africa
World
Source: Maddison (2001).
1000-1820
0.14%
0.13%
0.06%
0.03%
0.06%
0.06%
0.00%
0.05%
1820-1950 1950-1998
1.0%
2.9%
1.6%
2.2%
0.8%
5.0%
0.1%
3.2%
1.0%
1.7%
1.1%
1.1%
0.5%
1.0%
0.9%
2.1%
(1950-1973)
4.1%
2.4%
8.1%
2.9%
2.5%
3.5%
2.1%
2.9%
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
GDP by sector for the developing world
(constant 1995 US$)
bi l l i ons
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Urban vs. rural population
0
1970
(% of total population)
1970 (2.9 billion)
2001 (5.1 billion)
1975
1980
Industry, value added
19851985
Services, value added
1990
2000
1995
A griculture, value added
28%
42%
72%
58%
Age dependency ratio
Urban po pulatio n
(dependents to working-age population)
Rural population
0.90
0.80
0.70
0.60
0.50
0.40
1970
1985
Low & middle income
2000
High income
2000
Historical Perspective on Poverty
Number of people living on less than $1 per day (millions)
1,400
1,376.2
Depression/
World War II
1,200
1,127.7
1,000
1,149.7
1,390.3
1,304.7
Historical
trend
1,293.8
1,199.0
1,040.5
978.8
954.0
800
886.
8
1820
1840
1860
1880
1900
1920
1940
1960
1980
Poverty has dropped by 200 million over past 20 years, despite world population increase of 1.6 billion
2000
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
GDP per capita growth rate
Poverty reduction
8.4
7.1
5.9
6
4
9.9
3.8
7.5
6.4
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
Initial income inequality
(Gini Coefficient)
0.6
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
$1 a day. Sources: Shaohua Chen and Martin Ravallion. 2000 (World Bank Policy Research Working Paper) and Martin Ravallion. 1997
(Economics Letters 56(1): 51-57)
Private enterprises are key:
SMEs account for most employment across developing countries
Percent of households with
persons employed in SMEs
91.0 89.3
89.0
64.1
81.3 77.3
75.0
88.0 99.5
a
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a
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Source: World Bank calculations using various country household surveys.
SME refers to firms with less than 100 employees except for India (<20); and South Africa (<50)
SMEs are important for poor people
Percent of households with persons employed
in large firms: Poorest and richest quintiles
Poorest Quintile
Richest Quintile
U Ind
zb
i
ek a
G ist
ua an
So tem
ut
al
h
a
A
fr
Pa ica
n
N am
ic
a
M ara
ad gu
ag a
as
ca
r
45
40
35
30
25
20
15
10
5
0
Source: World Bank calculations using various country household surveys. SME refers to firms with less than
100 employees except for India (<20); and South Africa (<50)
Share in world trade of
developing countries is growing
US$ billion
Percent
2,000
35
Developing countries’ share (left axis)
30
1,600
25
Agriculture 1,200
20
15
800
10
5
0
1970
400
Energy & other
Manufactures
0
1975
1980
1985
1990
1995
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
Trade to GDP ratio growth rate based on 5 year moving average
1995
2000
Since the Asian crisis, FDI flows to developing
countries have proven resilient while debt
financing has fallen
200
150
Net flows
Debt
100
$ billion
FDI
ODA
50
0
1995
1996
1997
1998
1999
-50
-100
Year
2000
2001
2002
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
6
# Assoc Visits
5
4
3
2
1
0
EDUCO
Traditional
EDUCO
Traditional
Cartagena, Colombia
Water privatisation: before and after performance
Indicator
Connections in poor areas
Number of employees
Employees per 1000 connections
Water coverage
Sewerage coverage
% of domestic metering
Number of water connections
Unaccounted-for water
Production capacity (m3/sec)
Continuity of service (hour/day)
Response to complaints (days)
before
after
1994
2001
N/A
1300
15
68%
67%
30%
84143
60%
1.6
7
6
98%
272
2
91%
72%
99%
1172
41%
3.1
24
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
8.1%
8
7.5%
6.9%
6.0%
6
4
3.0%
2
0
-2
-4
5.6%
1.8%
West
Bengal
Uttar
Pradesh
Delhi
Punjab
Kerala
Tamil Karnataka Andhra Gujarat Maharashtra
Nadu
Pradesh
-0.7%
2.1%
Poor
3.1%
Investment climate by Indian state
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