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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 $1 a day. Sources: Shaohua Chen and Martin Ravallion. 2000 (World Bank Policy Research Working Paper) and Martin Ravallion. 1997 (Economics Letters 56(1): 51-57) Private enterprises are key: SMEs account for most employment across developing countries Percent of households with persons employed in SMEs 91.0 89.3 89.0 64.1 81.3 77.3 75.0 88.0 99.5 a a r r a il ia tan ala c a o z u i m d a d g r a sc r f a In ekis tem ua a n r B A g a a c a a P c h b E i t d u a u N Uz G M So Source: World Bank calculations using various country household surveys. SME refers to firms with less than 100 employees except for India (<20); and South Africa (<50) SMEs are important for poor people Percent of households with persons employed in large firms: Poorest and richest quintiles Poorest Quintile Richest Quintile U Ind zb i ek a G ist ua an So tem ut al h a A fr Pa ica n N am ic a M ara ad gu ag a as ca r 45 40 35 30 25 20 15 10 5 0 Source: World Bank calculations using various country household surveys. SME refers to firms with less than 100 employees except for India (<20); and South Africa (<50) Share in world trade of developing countries is growing US$ 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