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About Development Economics

Shanta Devarajan's picture

UPDATE (May 15th, 2012) Caroline Freund, World Bank Chief Economist for the Middle East and North Africa has joined the debate. See her remarks.

The Chief Economists of all the regions where the World Bank implements programs got together recently to exchange thoughts about the current state of development economics.

You can read a summary of our views related to Africa, South Asia, and Europe and Central Asia here. 

And we hope you can participate in this debate by sharing your own views via the comments section below.  

 

 

African Development Economics

By Shanta Devarajan

 

In a speech to the United Nations in 1957, Ghanaian President Kwame Nkrumah said that, because institutions and capacity in his country were so weak, the government had to control the economy.  His soon-to-be Ivoirian counterpart Felix Houphouet-Boigny disagreed.  Precisely because institutions and capacity in Cote d’Ivoire were so weak, he would rely on the market to drive the economy.  They took a bet.  While the outcome of the “West African wager” is uncertain—Nkrumah was toppled in a coup d’état, Cote d’Ivoire enjoyed 20 years of rapid growth but then declined with a decade-long civil war—it represents the two competing visions of development economics that have guided African economic policy over the last half-century.

 

There is no question that the first phase (“Development 1.0”) was geared towards overcoming market failures.  There is also little doubt that this phase resulted in massive failures, such as the Morogoro shoe factory in Tanzania that never exported a single pair of shoes.  The reason was that these well-intentioned government interventions led to government failures, mostly having to do with political capture of the rents associated with the interventions.

 

However, the second phase, described as the “neoliberal Washington consensus”, did not result in elimination of these government interventions and a return to the market.  That was the prescription of many of the development agencies.  But many governments did not implement these reforms because there was no domestic political consensus.  The vested interests were able to block the reforms, especially since they were imposed from outside.  Some governments would agree to do the reform (to get the money) and then reverse them, as Zambia did with maize price reform in the early 1990s.   Others would simply promise and never deliver.  The World Bank issued three structural adjustment loans in a row to Kenya for the same agricultural price reform.  And Africa emerged from this phase with the highest rate of protection in the world.

 

The big shift came in the late 1990s and early 2000s when, in the context of debt relief, low-income countries were asked to design their own programs, the Poverty Reduction Strategy Papers.  These strategies contained most of the same policies as those of the structural adjustment era.  But the difference was that they emerged from a domestic consensus.  As a result, the reforms were implemented and sustained.  And economic growth in Africa accelerated from about 3 percent a year to almost 6 percent a year.

 

To be sure, this growth has not led to structural transformation.  African countries are still dependent on primary commodity exports.  The labor-intensive manufacturing boom has yet to occur.  But the reason for this is not that reforms have gone too far, but they have not gone far enough.  Take the two most common factors behind Africa’s lack of structural transformation—infrastructure and skills.  Africa’s infrastructure deficit has at least as much to do with policies and regulations as with lack of “hardware”.  Road transport prices are so high because of monopoly profits accruing to trucking companies that are protected by regulations that prohibit entry into the trucking industry.  And the skills deficit is at the primary level where, in Tanzania, for example, 20 percent of the 7th grade students could not read Kiswahili at the 2nd grade level, and 30 percent could not do a two-digit multiplication problem.  Why?  It may have something to do with the fact that teachers in public primary schools are absent 23 percent of the time.  When present, they spend about 2 hours a day teaching.

 

In short, what is preventing Africa from achieving structural transformation is a series of different government failures from the ones that were addressed in the first phase of reform.  But these too are difficult to overcome because they are deeply political.  Powerful rent-earning interests can resist them.  That is why the Ethiopian Light Manufacturing Study is so valuable.  By focusing on a few sectors (garments and footwear), it shows that, by removing some of the distortions in the economy such as import tariffs or domestic monopolies, employment can increase from 9,000 workers to almost a million.  Such findings focus the mind of policymakers, and may enable them to address the political constraints to reform, so that the labor-intensive growth can take off.

 

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South Asia and Development Economics

By Kalpana Kochhar

 

Until about 2 decades ago, the South Asia region (SAR) development philosophy was based on heavy handed government presence in all aspects of the economy, production, finance, trade, and on weak information-sharing, and accountability. This was close to Justin Lin’s characterization of Development 1.0, and was a clearly failed strategy and resulted in low growth, famously dubbed the “Hindu” rate of growth in India. 

 

Then from the early 1990s, SAR countries introduced a significantly more business friendly and market oriented set of reforms founded on bringing down tariff walls, liberalizing financial markets, and removing the choking license requirements on industry. Progressive reforms were also implemented to reduce financial repression by reducing the scope of  heavy handed government policies to allocate finance. In addition, more key financial prices, such as the exchange rate and interest rates, became market determined, which gave agents the incentive to create the markets and the instruments to price and hedge risk. 

 

Thus, the development model moved close to Development 2.0 but it is worth stressing that SAR countries never went to the caricature of the “Washington consensus” namely unfettered markets and light handed regulation. Another point to stress is that the reforms that were implemented especially in India were “home grown”, with policy makers at the time having a blue print of what was needed to stabilize the economy and rejuvenate growth—in other words, the Washington Consensus or some version of it was NOT imposed on these countries. It was very much part of their own plans. The much greater competition internally and externally set off a process of creative destruction that set them off a much higher growth path. Financial liberalization, and favorable demographics resulted in high savings and the greater competition and larger markets raised investment, productivity and growth. 

 

By and large, the lesson from the SAR experience is that expanding production, increasing product variety, inserting producers into global production chains results basically from self-discovery. Examples include government-lite sectors--India's IT industry and manufactured exports, Bangladesh (contrast with Pakistan and Sri Lanka) garments and textiles (these are not niche products, they are economywide drivers of growth).  

 

Where is SAR now? As a broad characterization, the growth and development challenge in SAR needs to be framed against the following conditions: (a) despite a much reduced role, still strong government presence in the agricultural and manufacturing sectors that distort incentives for production and trade, (b) despite reforms, insufficient economy-wide external trade orientation, (c) policy induced restrictions on the mobility of products and factors, (d) lack of appropriate or sufficient physical infrastructure, (e) fragility and post-conflict problems that are depriving large parts of their populations of the gains from economic development; (f) few natural resource endowments; (g) weak governance environments.   

 

In all of these, while there is a role for the government, it is subsidiary to the trinity of market led innovation, marketing to the world, and steady, but firm, competitive pressures overseen by functioning institutions.

Put differently, the role for the government is not the strategic selection of industries. In general, the Government's role in creating rents should be severely circumscribed.

Instead, the simple (but not necessarily easy) rules for public spending decisions should be: 

  • Invest in the general rather the specific, and as human capital is the most general, invest in education, health, opportunity and security. 
  • Invest in other public goods of a multi-purpose, multi-beneficiary and contestible nature (e.g., roads). If other specific sectoral investments are considered necessary, policies need to build in explicit sunset clauses and early opportunities to offload the financing risk on as many partners as possible. But I should add that even this is risky— as Milton Friedman said “nothing is so permanent as a temporary government program.”
  • Provide transparent and accountable regulatory framework which is applied consistently and is protected from rent seeking behavior. 

 

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Development thinking and Europe and Central Asia

By Indermit S. Gill

 

Preparing for this roundtable make me think back a lot. To my education in India in the 1980s, to my years as an economist in Brazil during the 1990s, to my work on East Asia and China in the 2000s, and to work that we are doing on Russia as part of my current job.  I realized that I have a connection with the four BRICs—obviously not as close as the connection that Bert Hofman has with China, or the one that Kalpana Kochhar has with India, or Augusto de la Torre’s with Brazil.  But I have connections with each of the four.  I also have connections with America and Europe, both places that I admire, for different reasons: I live in the United States, and I work in Europe.  So what I will say is based in good measure on the long-term experience of the BRICs, of Europe, and of the United States.  

 

Let me start with three observations that summarize what I learned:

 

• First, for many years governments were not employing the right mix of policies—that is, they were both overactive and not active enough in areas important for development.  To quote Amartya Sen (1996), the decades of economic planning illustrate both “horrendous over-activity in controlling industries, restraining gains from trade, and blighting competitiveness, and soporific under-activity in expanding school education, public health care, social security, gender equality, and land reform,” sometimes in the same country.  This was the story of India and of China in the 1950s, 1960s and 1970s, and it was a sad story.   

• Second, aided by the experience of countries around the world and by debates in the World Bank, the IMF and other Washington-based institutions, there was a noticeable shift in development policy in the 1980s and 1990s: governments reduced their control of industry and embraced trade, and increased their attention to education and health and social security.  There was a surge in development—especially in Asia and Europe. This is a very happy story. 

• Third, there was a rush to claim credit for this success.  This is human nature.  Everyone likes to claim credit for success.  Brazil, Russia, India, and China all feel they did things their way, and that succeeded by not taking the advice of the Bretton Woods institutions.  In the 2000s, even Nobel Prize winners got into the act: the prize of being right about development policy seems to be even more prestigious than the highest award in economic theory.  So there seems to be a lot of disagreement, because some of these folks were actually wrong back then.  It is an amusing story.

 

Actually, if you read carefully, people agree on a lot of things today:  

 

• Everybody agrees about the importance of fiscal and monetary discipline, the reliance on markets, and the benefits of trade.   To quote one former chief economist at the Bank, nobody has made “a serious intellectual case against disciplined macroeconomic policies, the use of markets, and trade liberalization.” 

• Everybody agrees on the need for establishing property rights, a switch of government spending towards basic education and health and infrastructure, broad and moderate taxes, and sensible deregulation of product and factor markets to ease barriers to entry and exit by enterprises. 

• Almost everybody agrees on the need for a competitive exchange rate, liberalization of foreign direct investment, and well-executed privatization of public enterprises. 

 

Financial deregulation and capital account liberalization remain areas of debate, and they should.  But even here a consensus seems to be emerging.   

 

So as I prepared for this discussion, I thought: Was there anyone who had put all these things together into a list?  Of course, I was also thinking: wouldn’t it be cool if nobody had done it, so I could write something up and post a blog on Shanta’s website?   So I did what every serious chief economist does—I went to the Joint World Bank-Fund library to look up development economics between 1980 and now.  

 

I’m kidding of course.  I went to Google.  And I discovered that it had all been written up in a very nice way by—of all happy coincidences—a  former regional chief economist.  To give you a hint, it was written more than twenty years ago by someone who later became the chief economist of South Asia.  For some reason—with apologies to my colleagues from other regions—South Asia seems to always have had the smartest chief economists. They’ve also had Gobind Nankani, and Shanta, and now Kalpana Kochhar.  

 

But let me get back to why it is important to have these thoughts clear in one’s head.  It is because of one reason: being clear-headed helps to be both principled and practical in dispensing policy advice.  You know as World Bank economists that it is not enough to be just one—you have to be both principled and practical.  So why is it important to be clear about development thinking? Three reasons:

 

• It is important because you need to distinguish what are the first-order changes that have occurred in development policy, and what is second order stuff.  The big shift is that governments are less active in industry, and more active in education. Less active in farming, and more active in land reform.  And so on.  Governments are doing more of what is social, and less of what should be private.   And that is the way it should be.  

 

• It is also important because the line between what is social and what is private is often blurry, it is necessary to know one from the other.  After starting out in the right direction, governments can go too far.  This is what I think has happened in Europe.  Many European governments made the right moves in the 1960s and 1970s and 1980s by getting out of the productive sectors and into the social.  With such policies as reliance on markets, and trade and financial integration, Europe created a convergence machine that took in poor countries and made them into high income economies.  If you want evidence, take a look at what Poland has done during the last two decades. But then some countries went too far in social security—and made everyone less productive.  If you want evidence, take a look at our recent flagship report on European Growth, which the Polish Presidency of the European Council sponsored, and to which Caroline Freund, World Bank Chief Economist for the Middle East and North Africa, contributed.

 

• The third reason is that you can start to overemphasize the second-order stuff—such as which of the private sector activities governments should favor.  This is not dangerous, until you inadvertently start to deemphasize the policies of first-order importance.  Of course I am talking about the new industrial policy, which my boss and good friend Justin has been championing with energy and earnestness.  

 

In doing this, I have seen that Justin—perhaps because such things happen in the course of vigorous debate—has  come close to asserting things that another former chief economist of the World Bank has been saying and writing about what policies have worked and which have failed.  I am talking of course about Joe Stiglitz and what he has had to write about the Washington Consensus during the last two decades, after being a part of it as head of the President Clinton’s Council of Economic Advisers.  I noticed in a recent article that Justin also wrote somewhat dismissively of the Washington Consensus, and yesterday I heard him recommend something called the “Seoul Development Consensus.”  

 

Now maybe after June 30 we will all be talking about the Korean Consensus, and Bert will be its author.  But I must say that I still believe in the Washington Consensus, and not just because it was proposed by perhaps the most distinguished of all regional chief economists, John Williamson.  I believe that it is a list of ten necessary (not sufficient) things, and the experience since 1989 in all parts of the world has only validated it.  Take a look at a humble and thoughtful article by John Williamson called “Short History of the Washington Consensus” that he wrote in 2004. I think it will persuade you that I am right.    

Let me end with a few words on the issue of the new industrial policy.  I think I know why Justin believes so strongly in this.  It is because he has seen up-close the workings of a very capable government, and has helped the Chinese people pull off an amazing feat.  Such success can make you forget even big parts of a Chicago education.    But don’t forget that there is an even more amazing story.  I am talking of the economic success of a people that were not even a country 250 years ago, and which is today the economic center of the world.  There is a reason why we are debating these things here in America, a block away from the White House.  

 

Of course, we should learn from the experience of all countries, not just one.  But if I had to learn from just one country, I would pick the United States.  This is what the most influential policy practitioner of the last century had to say about America. I quote: 

  

“The American people, in the short span of two hundred years, brought into being gigantic forces of production and abundant material wealth, and made an outstanding contribution to human civilization.  In the course of expanding production in the United States, a wealth of experience has been gained from which others can learn.”  

 

These are not the words of a former chief economist.  They are the words of Deng Xiaoping— who I consider one of the most important people who ever lived and who was perhaps the person who best combined principle and practicality.  I can’t think of a better role model for practitioners of policy. And I can’t think of a better list with which to start than the one compiled by John Williamson. 

 

Selected references:

Sen, Amartya.  1996.  “Development thinking at the beginning of the 21st Century.” Paper presented at a conference on Development Thinking Practice’ of the Inter-American Development bank, Washington DC, 3-5 September, 1996. 

Krueger, Anne. 2011.  “Comments on “New Structural Economics” by Justin Yifu Lin,” World Bank Research Observer, vol. 26, no. 2.

Lin, Justin Yifu. 2011. “New Structural Economics,” World Bank Research Observer, vol. 26, no. 2. 

Lin, Justin Yifu. 2011. “Development Thinking 3.0: The Road Ahead,” World Bank Research Observer, vol. 26, no. 2. 

Stiglitz, Joseph. 2011. “Rethinking Development Economics,” World Bank Research Observer, vol. 26, no. 2. 

Williamson, John. 2004.  “A Short History of the Washington Consensus,” Paper commissioned by Fundacion CIDOB for a conference “From the Washington Consensus towards a new Global Governance,” Barcelona, September 24-25, 2004.  

 

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The path to transformation: Creative destruction or destructive creation?
By Caroline Freund

Structural transformation is about moving resources to into most productive sectors and raising the living standards of the population.  Conventional wisdom is that increased openness to trade and investment is a mechanism to facilitate this move, as it pushes resources to the sectors that are globally competitive.  But as many countries have liberalized over the last two decades, openness has not always brought widespread gains.  In some cases, when there are other distortions in place--such as weak governance or excessive business regulations-- structural transformation can be perverse, with labor traveling overwhelming to the informal sector. The intuition is that as a country opens to trade, resources are stuck so new sectors have trouble expanding, while some existing sectors shrink in response to greater competition.

 

In the case of the MENA region, where only 10 percent of labor is working in the private formal sector and firms are on average nearly twice the age of their counterparts in Easter Europe and East Asia, this seems to be at least part of what has happened.  Growth has not been associated with an expansion of manufacturing and decent jobs, as has occurred in other parts of the world. 

 

The question is how to encourage a productive reallocation of resources to new dynamic firms, when distortions are present that prevent them from emerging.  I argue that what is needed is to address these distortions head on.  That is, improve governance and build a level playing field for business. Property rights and rule of law give investors confidence, simple regulations that are uniformly enforced allow new firms to enter and thrive.

 

An alternative is for the government to intervene directly with some form of industrial policy to steer resources to the sectors it deems more productive.  But if structural transformation has failed to advance because we can't trust the government to allow good businesses to thrive, why should we trust that same government to select and develop new productive sectors?

 

Indeed, the principle concern with such a policy is that if the distortions are in weak governance and a poor business climate then the government is highly likely to be subject to the same special interest groups that encourage arbitrariness in regulation when it proceeds with this intervention.  This can create a process of destructive creation, where resources are steered toward uncompetitive incumbent firms that are unlikely to develop the productive industry for which the policy was intended.  Put differently, the same distortions that prevented structural transformation from happening naturally are very likely to prevent it from happening via targeted policies. Moreover, those targeted policies could very well create a new beast that is difficult to discipline and costly to feed. 

 

Instead what is needed for structural transformation is creative destruction, where bad businesses exit and new and strong firms grow and create jobs. This requires good governance and a strong business climate.  Specifically, respect for property rights, simple and uniformly applied regulations, clear bankruptcy procedures, and accountability.  While industrial policy can work in theory, it seems especially unlikely to be successful in economies where distortions push resources to cronies, where business regulations protect incumbents and where governance makes new investors wary.  

 

shant

Comments

Submitted by Demba on
Indeed here are the real questions as per why, to date there is no progress, economic development so to speak in Africa... And as we go backward to understand where this all come from, it's easy to understand Paul Valery, that french writer and philosopher who said "we enter in the future backward" ... Agreeing without shadow of a doubt that the answers to our economic development should be found in the success stories of the past when it comes to development priorities and strategies... We cannot be complacent of our own people and expect change to happen overnight... and Yes there is need for a "clear separation of the infrastructural development roles of the state and the market development role of the private sector" That statement I paraphrased it somewhere else saying this: Two major leads only will save our fragile african countries: 1-Reinforcing intra-regional trade along with supporting local small businesses 2-Diversifying trade partners in a context of Global economy where seemingly we have more choices to opt to deal with whoever we want to deal with... This context of disarray across board gives us the UNIQUE opportunity to chose and initiate our own well-thought endogenous development models... Indeed the fourth paragraph of this exposé over african background info, it appears that it's when given the tools and the time to diagnose their own needs that african countries have started making substantial progress albeit minimal compared to the extent of the crisis... Often CSO, NGO and CBOs are ready to meet the challenges ahead... that's why there is a disconnect between our official leaders and the masses of aware and active citizens they're supposed to manage... Are our african governments ready for the Challenge, left alone, to decide our own fate? No...And that's why non governmental actors are the future of Africa... Demba Ndiaye

Submitted by Windy M. on
BBC World this week covered two huge indicators of true African economic wellbeing. The first whereby Elephants are still a poacher's target for China artisans, etc. The second where there is a huge swell around markets in Kimara. The third goes back to March 2012 with the huge news break of the 60 Billion trade deal between Africa and India. The first is indicative of a repressive situation in Africa. Yet "ivory" will depreciate fast since synthetics are much better for culinary uses, chopsticks. Furthermore carvings with Ivory is an "art" for museums. Already enough art in that style has been made. It doesn't sell well. The newer trends are synthetics, molds, mass production of buddhas, and other godheads, with materials that can far exceed the beauty, resonance, shine, and longevity of ivory. The elephant orgs should be able to push a viable PR campaign to be picked up by Discovery Channel etc. Since, in fact Ivory is not worth it for China's best choice of materials. In fact, those who have given so much great thought and involvement in Africa have to understand that development comes in ABCs. BBC covered the huge success of markets with kiosks in Kimara, Kenya this week. Thus, to get around the "political" realistic projects that can succeed with remittance and micro loans is obviously manifesting in the success factor in K. markets. Government actions somehow wielded the great India/Africa trade deal. http://www.pambazuka.org/aumonitor/comments/358/ http://allafrica.com/stories/201203081008.html The future of Africa in a next gen. food/commodities/etc. discount exchange scenerio won't manifest without the first stage of a strong relationship with a trade partner such as what has manifested for Africa, via the strong India accomplishments in the trade regard. http://commerce.nic.in/pressrelease/pressrelease_detail.asp?id=2915 http://www.trademarksa.org/news/india-africa-revise-trade-target-us-90bn-2015 A great leader found Zambato as a great source for connecting investors with projects. http://blog.zanbatogroup.com/wp-content/uploads/2011/09/Zb_OrgPage_v1B.png connecting investors with projects- a gainful approach for African growth.

Submitted by Subramanian on
I would like to draw your attention to this passage: “Another point to stress is that the reforms that were implemented especially in India were “home grown”, with policy makers at the time having a blue print of what was needed to stabilize the economy and rejuvenate growth—in other words, the Washington Consensus or some version of it was NOT imposed on these countries. It was very much part of their own plans.” Ms. Kochhar has the facts wrong. In India’s case the so-called liberalization in 1991 was not “home grown.” India was nearly bankrupt in 1991 was close to default. The foreign reserve was about $1.5 billion just barely enough to service 3 weeks of imports and was matter of weeks before India would have defaulted on its sovereign debt for the first time. Let us revisit what had happened: In April 1991, India sold 20 tons of gold to the Union Bank of Switzerland and raised about $200 million and sold 47 tons to the Bank of England for about $400 million. Then there was this IMF. India received ~$200 million and ~ $600 million in 1991. By the end of 1991, India reached a standby arrangement with IMF that promised $2.3 billion over next two years months to build its foreign reserves. There is no need to expand on how IMF dispenses money in such a situation. India was forced to undertake institutional reforms and liberalization of the financial sectors. Devaluation of currency took place. Rupee went from $1 – 14 in 1990 to $1-40 in 1991. There are 100s of articles have been written on how India was forced to liberalize its fiscal and trade policies. Looking back, it was a blessing. But the poor suffered from double-digit inflation during 1991–1996. So coming back your statement that “reforms…..it was NOT imposed on these countries.” is absolutely incorrect. “It was very much part of their own plans.” again absolutely incorrect. India had no choice and I wouldn't say defaulting was their plan. Your central thesis of the post is wrong.

Submitted by Kalpana on
Mr. Subramanian is right that the reforms took place after India experienced a severe balance of payments crisis. But let me quote Montek Singh Ahluwalia, one of the architects and executors of India's economic reforms of the early 1990s. "India's economic reforms began in 1991 when a newly elected Congress government, facing an exceptionally severe balance of payments crisis, embarked on a programme of short term stabilisation combined with a longer term programme of comprehensive structural reforms. Rethinking on economic policy had begun earlier in the mid-eighties by when the limitations of a development strategy based on import substitution, public sector dominance and pervasive government control over the private sector had become evident, but the policy response at the time was limited to liberalising particular aspects of the control system without changing the system itself in any fundamental way. The reforms initiated in 1991 were different precisely because they recognised the need for a system change, involving liberalisation of government controls, a larger role for the private sector and greater integration with the world economy." I emphasize especially his statement that rethinking of policies had begun already in the mid-1980s but like in many other countries,it is very difficult to muster the political will to implement significant policy changes until the economy's back is against the proverbial wall. That the reform program happened only after the BOP crisis occurred and that it was supported by an IMF standby does not negate the fact that the newly elected Congress government under Narasimha Rao, with Manmohan Singh, Montek Ahluwalia and P. Chidambaram in the drivers' seat were instrumental in designing the contours of the reform program as much as or more than their counterparts in the IMF.

Submitted by Subramanian on
Ms. Kouchhar, Thank you for your kind reply. However, your reply raises more questions than it answers. Now, this has turned into a question of “intent” versus “action.” What transpired after 1991 does not change what had brought the said reforms in 1991. That is to say, who the Finance Minister, Manmohan Singh, P. Chidambaram, Yashwant Sinha or Jaswant Singh, was after 1991 does not negate why the reforms took place when it did. The reforms were economical as it was political. Many political events triggered the BOP crisis. The 1991 Gulf War played a key role. India repatriated millions of workers from Gulf countries. This resulted in a sudden drop of remittances but was substantial enough to push India to the brink. Your original premise was that India’s reforms were “home-grown” and was central to your earlier post. Indeed, Rajiv Gandhi made numerous attempts in the 1980s to reform India’s “License Raj” without much success. So the question is whether India would have undertaken the reforms that it did in 1991 without BOP crisis. The answer is unequivocally “No.” Were the economic reforms based on consensus built in mid-1980s? No, India was reacting to the situation it found itself in 1991. Of course, we wouldn’t know if and when India would have undertaken reforms without the BOP crisis. It could have been 1995, 2005 or 2010. We can speculate. But India was forced to so in 1991 and it was not undertaken by its own design or its willingness. Now the question of political will. We have to keep in mind, the political conditions in 1991 were precarious than it has ever been since. Rajiv Gandhi was assassinated, Gulf War was unfolding, IPKF was in Sri Lanka, and Soviet Union crumbled. India had a positive trade balance with Russia and most of India’s debt was in Rupees. Now, 2012, India is under control; its economy is strong and has almost $400 billion in foreign reserve. How come India has been unable to undertake next (many next) rounds of reforms, such as allowing foreign carrier participation in India’s civil aviation or allowing multi-brand consumer retailers? As you said there is no political will as it was in 1980s. So why was it different in early 1990s? 1991, there was a consensus across the political spectrum that there were no options other than to drink the poison. We drank. Although, as it appears, very little! At micro-level, India paid dearly. Poor suffered the most as they always do in a crisis. It took almost a decade to reverse the social welfare lost during 1990-1995. With double digit inflation, under-nutrition rate went up, which was/is high as is. PS: I would humbly submit that Mr. Alhluwalia is the last person you (as the Chief Economist) should quote. He is what we call in India, a spent force. As you may recall, he recently put the Indian poverty line at Rs. 28. Put that in context of World Bank’s $1.25/day, India has very few poor people. Your predecessor (Shanta Devarajan)’s dream of Ending Poverty in South Asia in a generation may already have become a reality. Kind Regards, Subra

Submitted by John Paton on
I have lived and worked in SS Africa for more than 20 years - much of that time running development projects and managing assignments for the major cooperating partners (CPs), so have seen the various policies of these CPs and governments through several cycles. My conclusion is that the CPs should let African governments get on with managing their respective countries without any aid programmes or even budget support and reduce their offices to mere skeletons - leaving a small staff to handle the political engagements. This would leave the elected governments able to make their own decisions - right or wrong - and be more accountable to their people for their actions. The second result would be that these CPs could then release thousands of redundant staff on to the market to make their own way in the real world and apply their undoubted skills to making a difference in whatever they choose to do in an unsheltered market without the enormous salaries and benefits they now enjoy. These two actions would release billions of dollars to be put to more effective use, such as eliminating all forms of protectionism and production and export subsidies and letting trade be truly fair. In my view, the only way African economies will be able to achieve sustained growth, irrespective of any mineral wealth they may have, is by investing heavily in education over the next fifty years: people who are well educated will be brighter, more innovative. less tolerant of corruption and political rent seeking, healthier and more productive. They can leave their compounds and unsanitary living conditions behind - that for so many have not changed in generations - and start to enjoy a better quality of life.

Submitted by Mwakarama on
Shanta, Great view - I would first focus on imports/exports: there seem to be a confusion in trade that seem to perennially snare most African economies; first African exports are shackled by western and faster developing countries... they dictate the prices, create quotas systems (coffee, tea, vanilla etcetera) and there is daylight robbery at the maritime shipping rates - when it is goods destined or going-out of Africa, it ups the costs and not only that - terms of trade for now close to 20 years have reverted to Telegraphic Transfers TTs - Africa has to pay cash in advance all over the world. While Africa's exports are paid on delivery - sham economics - whatever happened to good old "Documentary Credits"... African countries can't ever talk of economy when they must buy in cash and be paid on delivery - how do we even accumulate a "sinking fund" in and finance clearing houses? Africa has no Economic development to write abroad about...

Submitted by Chandan on
Neither SAP in Nepal in 1985 was “home grown” nor the austerity in all the sectors (where it was applied) warranted, at least when we look at its outcome from today’s lens. The change in economic paradigm was necessitated by the BoP crisis and the liberalization path of Nepal was pretty much in line with India’s liberalization drive because of the pegged exchange rate and high dependence on the Indian market for pretty much everything used by households and firms (it still hasn’t changed; in fact, market concentration is increasing). There were resistances to such reforms from extractive economic institutions, both private and public sectors, which were abetted by the extractive political institutions. Even though the liberalization tide swept pretty much all sectors, resulting in increased competition in the market, it did not have strong impact on sustaining competitive behavior for lack of effective supervisory institutions. For instance, the point raised by Mr. Devarajan about syndicates distorting markets in Africa applies to Nepal as well. Initially, the competition in transport sector benefited consumers in terms of better service and lower fare. But, influential investors started accumulating market power via acquisition and forced merger. Now, in the absence of a strong regulatory body to check accumulation of monopoly power by few investors, syndicates have emerged again. Fares have gone up, but services have done down. The syndicates are one of the reasons (others include poor infrastructure, lack of R&D, load-shedding, rents) why trading costs are so high in Nepal. Middlemen in the agriculture sector still distort market prices and supply, resulting in the disconnect between farms and wholesale/retail markets. Creative destruction and creative creation in the market never applied in its true sense. Instead, liberalization in the face of extractive political and economic institutions led to creative accumulation of market power. What Mr. Devarajan outlines for Africa is relevant to other countries in South Asia not mentioned by Ms. Kochhar. Given the sheer volume of remittance inflows to South Asia each year, it would be interesting to see a discussion about its role in aiding to macroeconoimc stability and poverty reduction. Remittances are an important part of Development 3.0 in South Asia.

Submitted by Wordsmith1 on
It is not justifiable to make the statement, as Shanta does, that African economic growth accelerated in the 2000s decade because Africans owned the PRSPs. In fact many studies say they did not and that the PRSPs were little different in substance from previous externally imposed strategy documents of varying absurdity. African economic growth accelerated largely because of the expansion of world demand and it will stop accelerating in the 2010s because of recession in World demand. However there is one big difference - there is increasing entrepreneurial energy in Africa - partly inspired by the diaspora. The removal of regulatory hurdles, eradication of corruption and the reallocation of investment funds to sensible places will not happen because of PRSPs. It will happen because of accumulating pressure from a proactive entrepreneurial class which finally forces Governments to pay attention, helped by democratization. But these entrepreneurs themselves are not necessarily squeaky clean - they are often on the edge of illegality etc. I.e. they are opportunists and rent seekers - (who would have thunk it !). They may not dress well enough to be suitable discussants at an ABCDE conference. Indigenous entrepreneurial drive and rent seeking is what economic development is all about and has always been. Development aid to Africa has had little if any credible bearing on either entrepreneurship or democratization which are esstentially cultural phenomena. The most important technical breakthrough may have been the cellphone - a commercial product sold at market price which has revolutionized knowledge and comunication.

My colleagues who serve as regional chief economists at the Bank -- Shanta Devarajan, Kalpana Kochhar, Indermit joined me at a roundtable discussion during the recent World Bank-IMF Spring Meetings in Washington and a lively debate ensued about whether a new wave of thinking in development economic is needed. A joint rejoinder to my ideas by Shanta, Kalpana and Indermit was posted on his space last week, and now I have a full counterpoint on Let’s Talk Development: http://blogs.worldbank.org/developmenttalk/the-development-debate-a-rejoinder Let me summarize some of my views here: First, I think the World Bank should reopen the search for the causes of structural change. Another big takeaway message is that pragmatism is paramount. Many past and existing policy prescriptions for poor countries overlook that they will not be implemented in the context of a ‘first best’ world. In fact, all World Bank country clients are in the ‘second best’, ‘third best’, or even ‘nth best’ world. While we should understand what an ideal, first-best world looks like, our recommendations to be helpful should pragmatic and sensitive to context. I do not share with my colleagues what seems like blind faith in the reforms proposed as part of the Washington Consensus of the 1990s, which Shanta claims failed largely because national level policymakers did not buy-in to them and because corruption and vested interests blocked any hope of enduring reform. Unlike Shanta, I do not believe that the recent acceleration of economic growth in Africa from about 3 percent a year to almost 6 percent a year is due to the implementation of Washington Consensus policies “that they emerged from a domestic consensus.” The simple, back-of-the-envelope cross-country regression shown below reveals that the most important parameter explaining the growth performance in Sub Saharan African countries is the resource intensity of the country. The World Bank Group’s Doing Business ranking, which started to be available in 2006 and has evolved considerably since then as a means of ranking the quality of countries’ investment climates, does not consistently appear to predict which countries will record strong growth. In fact, their rankings of African countries seem to reveal just the opposite (their positive coefficients may suggest that a worse business environment at times goes hand in hand with stronger country growth performance): http://blogs.worldbank.org/africacan/files/africacan/equation.gif I also hold the countervailing view that a country with a poor business environment does not have to wait until all the distortions/interventions are removed before it takes off. However, the caveat is that it should pursue targeted industries that are consistent with comparative advantage and the government should proactively help overcome the inherent coordination and externality issues in their growth. Many distortions certainly result from political capture, financial repression, or to the imperative of revenue generation. Political leaders always have some discretionary powers and are not necessarily hostages of elite capture. The key to success is to use those discretionary powers in areas where they can achieve quick wins. My colleagues also underestimate the scope and importance of proactive government support to create the conditions for successful industry. I do not share Indermit’s view that a noticeable shift in development policy in the 1980s and 1990s (with governments reducing their control of industry, embracing trade, and increasing their attention to education and health and social security) led to “a surge in development—especially in Asia and Europe.” The issue of reform is not only the direction of reform, but also the scope, pace and sequencing of reforms because the countries are not operating in a first-best environment but Nth-best world. While I agree with Indermit that government interventions in pursuit of comparative advantage defying (CAD) strategies are misguided, I also believe that the generic Washington Consensus-type of policy prescription to simply move away from facilitating structural transformation (a prescription based on past failures of CAD strategies) amounts to throwing the baby away with the bath water. I appreciate Indermit’s acknowledgement that I believe in new industrial policy because I have seen up-close the workings of a very capable government. But it has not made me forget my training of economic history at the University of Chicago, which I cherish. It has made me understand that in the catching up stage from an agrarian to an industrialized and most technologically-advanced economy in the world, the US government played proactive role in the structural transformation of the American economy. Long after the catch up, the US government continues to play a proactive role in facilitating technology and industrial innovation through patent, support for some basic research, procurement schemes to specific firms, and mandates. Except for patents, the other policy measures used by the US government actually correspond to picking winners. I hope this debate can continue, as I think it’s central to the mission of poverty reduction.

Justin states that I underestimate “the scope and importance of proactive government support to create the conditions for their success. The booming of India’s IT industry was in part due, among other things, to strong government support, including large investments to improve land-based telecommunications.” The facts are that the government’s support for India’s IT industry was neither proactive (in the sense of taking the initiative) nor strong (in the sense of dollars and cents). Proactive? To the contrary, in the area of information technology, the Indian government’s strategic industrial policy choice was a failure because it backed the wrong horse. In the early 1980s, in its effort to move Indian industry up the value added chain, the Indian government focused its efforts on IT hardware, thinking this is where India’s comparative advantage would be. Attempts were made to develop the hardware sector behind high tariff walls. To quote AnnaLee Saxenian (2002), “Personal computers, components and other IT products manufactured in India in the 1980s were both costly and technically backward, which limited demand and hence the volume production.” Recall that India’s booming IT industry today is based heavily on software and software enabled services. The software industry had its beginnings in the late 1980s (through private companies like Datamatics, Patni, TCS), with no help or backing from the government but was hamstrung by the government’s focus on developing the hardware sector. By the mid 1990s, it was clear that something big was going on in software, and that the scope for growth was significant. The Indian private sector organized itself into a powerful lobby NASSCOM which ultimately prevailed on the government to lower tariffs on hardware so that prices would come down. This move has two effects—the local hardware industry, the government-backed horse, died, and the door opened to the spread of low cost imported hardware, which in turn sparked the IT revolution. Strong? Justin cites the government’s strong support to improve land based telecommunications? I outline the story below and the bottom line is that the government’s support came in the form of a very small sum of money and a deliberate strategy to get out of the way. An electrical engineer named Sam Pitroda spent several successful years in various companies in the U.S. telecommunication industry. In the early 1980s, he came to the conclusion that telecommunication connectivity was an essential ingredient for India’s development. He presented his ideas on how this could happen to his close friend, Prime Minister Rajiv Gandhi, who invited him to return to India and gave him a tiny amount of seed money (Rs. 360 million or 0.01 percent of GDP in 1984) to modernize the national telephone system. In 1984, the Center for Development of Telematics or CDOT was set up to build Indian technology for digital switching systems with a focus on rural connectivity. The rural exchanges were used to provide landline based public calling facilities to a population that hitherto had absolutely no virtual connectivity whatsoever. Other than the small amount of money provided by the government, what was the government’s contribution to this venture? By Sam Pitroda’s own account “CDOT was essentially a bypass to the legacy system which was full of bureaucracy, vested interests, large unions, confused priorities, and political interference.” He also states that “ Rajiv Gandhi understood and appreciated the bypass system to expedite development”. In other words, whatever success was achieved by CDOT happened because the company was allowed to bypass the government and the bureaucracy. There is no doubt that CDOT improved telecommunication access to rural India from the woefully low levels of the 1970 and early 1980s. But that was absolutely not the essence of India's software exports evolution. The latter required high capacity data lines to allow Indian companies to hook up to the Internet. These only came, in high volume and low cost, when the private telephone companies were let in. CDOT was absolutely not a part of the main trajectory of the Indian telecom story which led up to the high bandwidth lines that supported the software export boom. Based on this, it is unclear that the government was either proactive or strong in the success of India’s IT industry. Instead it was very much a story of the private sector seeing opportunities where the government did not, followed by a stance of policies that reacted to private sector and market pressure.

Submitted by Subramanian on
Ms. Kochhar is absolutely on the mark. Indian government did not play a role in the development of India’s IT software industry. I would say it was a blessing. India’s attempt with hardware industry is well summarized by Ms. Kochhar. The government did involve in software industry only after it realized that there is a success story and it wanted to be part of it. The government had setup IT parks, other related infrastructure and revised tax policies. But it was catching up with the IT industry and the government was surprised that a robust industry was in place before it got involved. By then the IT industry was a foreign currency cash-cow. So the government stayed away. Its role has been limited to bringing up the customary H1-B visa issue with the U.S. government. Mr. Lin is right in that a government could play a proactive role to create conditions for a successful industry. But in India, they fail more often than they succeed. Clean energy industry is a good example. So far India’s attempt has been a failure. GOI did play a nominal role in textile export industry but countries like Bangladesh and Vietnam have done much better job in this sector. The underlying point that Mr. Lin touches on without elaborating is whether top-down industrialization is still the way for rapid economic development. It did work for China but not necessarily for others. India’s top-down IT hardware industry failed but IT software exploded because government had no role. So there may be other ways a country could advance. Regards, Subra

Submitted by Chandan on
But what about the government's role in establishing IITs, which trained scientists and engineers with the aim of developing a skilled workforce? Weren't they used by the IT companies, both domestic and foreign, who were attracted to India in part due to the smooth supply of qualified IT workforce and business friendly regulations in this sector? Wasn't this proactive in terms of aiding the sectors that had comparative advantage?

Submitted by Kalpana on
As I have written (with my coauthors Raghu Rajan and Arvind Subramanian)in our 2006 JME paper: "The one area where Indian manufacturing appears to have thrived is in the industries using highly skilled labor. The far greater investment in tertiary education for a country of its per capita income—of which the Indian Institutes of Technology and the Indian Institutes of Management are just the best-known examples—resulted in the plentiful availability of highly skilled, cheap labor. This then enabled India to generate relatively greater value added and employment in skill-intensive industries as compared to the typical poor country." Based on this, I would agree that the investment in the IITs did pay off. But I disagree that that this is evidence that the government was proactive in aiding sectors that had a comparative advantage. Economic theory tells you that a labor abundant country has a comparative advantage in labor intensive industries. Yet, as we note in our paper "The paradox of Indian manufacturing...is that of a labor-rich, capital-poor economy using too little of the former, and using the latter very inefficiently." We interpret this as evidence of mostly distortionary policies.

Submitted by DELALI NDO on
'In a speech to the United Nations in 1957, Ghanaian President Kwame Nkrumah said that, because institutions and capacity in his country were so weak, the government had to control the economy. His soon-to-be Ivorian counterpart Felix Houphouet-Boigny disagreed. Precisely because institutions and capacity in Cote d’Ivoire were so weak, he would rely on the market to drive the economy'. the socio-economic woes of Africa will continue if the right diagnosis is not done. Kwame Nkruma of Ghana and Houphouet-B'oigny of Cote d'Ivoire referred to above adopted different approaches to economic development. i can say both failed. our study conducted into 'lack of sustainability in the socio-economic development in Ghana since independence' revealed a number of issues. Whiles Nkrumah relied on the use of state power to grow the economy, he created a populace that is highly dependent on the state with little belief in themselves. But it takes the collective will and ingenuity of the people to grow an economy. The dependent mind-set of the people is sustained by an educational system that fails to design an INTENT for what type of educated Ghanaian the school system must churn out. Without changing the fundamentals of education bequeathed from the colonial master, Britain, Ghana has produced 'parrots' who try to outdo one another in copying the socio-cultural, economic and political ways of life of foreigners, without belief in themselves. Thus instead of graduates helping solve problems, they literally ran away from problems because the can hardly ascribe solutions. They shun almost everything local but promote almost everything foreign. In other words, the three 'Rs' still being taught in our schools in the raw state, can hardly produce the sophisticated technical minds we need to stir up sustainable development. What Ghana has also failed to do is its inability to dispassionately diagnose her difficulties today without partisan politics. Just before Kwame Nkrumah's overthrow, economic difficulties had began to show ugly heads. By year 2000, about 400 state-owned companies built from independence, had been sold by governments that claimed allegiance to Nkrumah. What are the implications? Even though we cannot go into the analysis here, it proved the failure of Nkumah's economic approach as against that of his counterpart, Houphoet-B'oigny. Even though i do not have deep insight to do a deep interrogation of the socio-political, economic and cultural dynamics of Cote d'Ivoire, the civil war in the sister country after the death of Houphoet B'oigny can be traced to fundamental weaknesses: the economic path adopted could not inure to political stability. In Cote d'Ivoire the influence of the French in its developmental equation sustains a dependent mind-set of the population. Thus it is clear that, which ever way we look at Ghana and Cote d'Ivoire, both failed. And both failed due to weak foundations. And no amount of technological advancement will be safe if the equation is not changed to adopt strategies that will provide opportunities to the mass of the people to put their ingenuity to work within their own socio-cultural, economic and political contexts. This is the real danger to sustainable development in Africa and to all countries that have experienced colonial domination before. Once the fundamentals of psyching the populace for national development is wrong, no amount of prescriptions will succeed, but constantly generate political upheavals that destroy the little gains made. The Arab spring can easily erupt anywhere. The situation is getting more critical under globalisation as African leaders are looking up more to play the darling of developed nations without watching the ground on which they place their steps in that quest. As the world praises my country Ghana about democratic and economic gains, as against the realities on the ground, I pity the leaders who look oblivious of the looming dangers posed by discontentment and lack of faith in leadership, but especially political leadership. This is the danger to economic sustainability. My study of the Ghanaian situation between 2002 and 2006 identified NEGATIVE ATTITUDES, 60.9% of the time, as the cause of failure of most projects and programmes funded by government and development partners. The danger is that the people hardly see themselves as part of these failures, but the political leadership. We define negative attitudes as, 'an impervious seal on the mind that defies all forms of training and education'. ‘Attitudes are not quick judgments that you make casually and can easily change. You have acquired attitudes throughout your life and they are deeply ingrained in your personality’. Bob Goyer Unfortunately, African governments and development partners speak about attitudes as a mere problem. I have come to tell all that, this is the bane of our developmental woes. We need to tackle it hard. Our negative attitudes have evolved from an environment bonded by 'half-education'. Ghana has produced numerous agricultural experts of international repute, Ghana has received agricultural grants and loans from several development partners running into tens of billions of dollars over the decades, Ghana has the environment congenial for agricultural production, ex-Presidents Jerry Rawlings and John Kuffour have been awarded international prizes for reducing hunger. But Ghana CANNOT feed itself. It is a tragedy. The human resource of any nation is most critical to its success. Humans are not like animals whose actions can be determined. the human being is rational and supposed to think and act freely within the ambit of laws. Thus the challenge in preempting how a person thinks and acts at a particular time in a given situation becomes an issue. It is in these scenarious that attitude formation and judgment come to the fore. I shed tears as I see billions of dollars invested in our economy go down the drain since independence whiles we still grapple with poverty and underdevelopment using the same failed approaches over the years. The study also revealed that, project reports from various development partners - the World Bank, IMF, IFAD, AfDB etc often stated that, 'this project cannot guarantee sustainability'. On President Barack Obama's first official visit to Africa and specifically to Ghana in 2009,he stated categorically that, 'Africa needs strong institutions and not strong men'. This statement confirms that the institutional weaknesses encountered in 1957, persist till today. And I dare say that, this is the result of attitudes evolving from 'half-education'. Thus we attempt at solving socio-cultural challenges with borrowed legal regimes and in so doing destroy and alienate social bonds that must inure to economic development through sound local governance. From our study, we decided not to leave this yawning developmental gap to chance. We have designed a training and implementation tool called, 'BACK TO ROOTS PROJECT' to help our institutions/people to appreciate the challenges, believe in themselves and take up the mantle of development on all fronts with self-satisfaction and motivation. The pilot phase has made tremendous waves. It worthy to incorporate this into project designs and development. BACK TO ROOTS is a 'probing, animation, motivational and attitudes transformational tool for nationalism, efficient service delivery, increased productivity, wealth creation and sustainable development'. contact : ronjectgroup@rocketmail.com

Submitted by Anonymous on

it indicates our developmental stages

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