BOX 1

DETERMINANTS OF DEVELOPMENT    (A World Bank Staff analysis)

Development is a complex process and we don't fully understand it.
There are many lessons, some harder than others, but it remains a
challenge to present succinctly the three or four keys than will
unlock sustained and shared growth. Nevertheless, we will try to
do this here.

There is a body of research and analysis of the lessons of development
that argues persuasively, with some quantitative backing, for the
importance of some key factors, such as
        investment in physical and human capital or
        a particular mix of economic policies
in spurring efficient and equitable growth.

But there is a lot that we don't understand, and that too will be
mentioned here.

Before we get into that, a little bit of stylized history might help.
The postwar period from about 1950 to 1975 was characterized by
relatively steady and smooth growth, with the classical development
model prevailing.

The subsequent quarter century can be termed the age of shocks and
adjustment, because many countries (including the industrial countries)
at one point or another went off-track because of a variety of sharp
exogeneous shocks. In the late 1970s and 1980s, throughout the world,
economies had to be adjusted, by more than just simple stabilization
policies. The story of growth from about 1975 onward is really a
question of reactions as much as of the shocks themselves.

Steady Growth: 1950s to 1974

During the age of steady growth, emphasis centered on the role of
investment, mainly physical, and with time, human capital. It was a
period of recovery from the war and catch-up in technology, of military
to civilian in the industrialized countries, of the old to new in the
developing countries.

External factors played a supportive role, mainly positive changes in
terms of trade, growing world markets, and external finance, then
almost exclusively public, with the Bank in command.

Investment, technology, and the expansion of the markets explained
growth and the distribution of the pie, including poverty.

Elements of the model and its empirical and policy ramifications,
including its sectoral breakdown, from agriculture to manufacturing
and so on, filled the textbooks and earned their builders Nobel prizes
(Kuznets, Lewis, Solow).

Volatile growth from 1975 onwards

The subsequent more stormy period complicated the development agenda
and highlighted the role of the acompanying factors.

Then came the recognition of environmental depletion, with the
overarching goal turning into that of sustainable development.

Global linkages and external forces have played an even bigger role
in our age. How countries reacted to the oil shocks of the 1970s had,
by-and-large, more to do with their subsequent performance than the
shocks themselves. The shocks and the debt crisis disrupted world
markets, but, led by expanding trade flows, we are now again seeing an
increase in integration. The next age, into the nex century, may become
the age of shrinking space and time.

There is, however, surprisingly little continuity in growth. The same
country has been shown to develop magnificently in one period and
completely mess up in the next. Cote d'Ivoire was a success story until
1975, but has been a disaster since.

Globalization has produced a convergence in economic policy and a new
form of market discipline. But economics alone is clearly not enough.
Politics and economics are interlinked, and both influence the
institutional fabric that holds society together (or fails to hold it
together). We still understand little about this, and it is difficult
to separate institutions from politics and history. Institutions are
one of the important forces linking current outcomes to past and
future performance.

And this brings us to the topic of this presentation: policies do
matter. We will focus on economic policies that promote growth, and
through growth a reduction in poverty. Success, in this story, has a
lot to do with the capacity to establish the right incentives for
efficient long-run investment in physical and human capital.

This presentation is divided into three segments. The first segment
tries to answer the question. What kinds of investment and economic
policies matter for growth and poverty outcomes and why? The second
segment narrows in within Africa and tries to follow the cross-country
experience with adjustment. The fact is that even in Africa, when
adjustment policies are pursued and implemented with reasonable
efficiency, the outcomes are higher growth and reduced poverty. The
third segment tries to draw some lessons for the Bank's actions.

Why didn't Africa grow?

We will first discuss the dimensions of Africa's lag behind other
regions and then consider explanations of Africa's lag.

GDP per capita ($)
                        1960        1980         1993
Latin America           2,000       4,250        4,000
Africa                    700       1,250          950
East Asia                 800       2,250        3,800
Average for LDCs          800       1,500        2,000
_______________________________________________________________
Source: GDP per capita is calculated from the Penn World Tables
data aggregated by World Bank regions. China is excluded from
East Asia, and South Africa is excluded from Sub-Saharan Africa.
________________________________________________________________

Many developing regions showed substantial progress. The average
developing country grew at a healthy per capita growth rate of near
2 percent over the last three decades.

Latin America achieved substantial progress before leveling off in
the 1980s. East Asia, in particular, achieved an unprecedented economic
boom. But Africa made only modest economic progress, then lost even
that in an economic decline since 1975.

The news is slightly better on social indicators than on GDP per
capita. Infant mortality declined in all regions, including Africa,
over the last three decades. But Africa's cumulative progress on infant
mortality still lags behind other regions.
_____________________________________________________________
Infant mortality has declined worldwide
                          
                   Deaths per thousand live births
                        1967      1992
       Africa            160        90
       East Asia          90        35
  Average in LDCs        110        55
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Source: World Bank Basic Economic and Sector Data (BESD) database

_______________________________________________________________
Poverty Remains Very High in Africa
             Percentage of people
                 in poverty (%)
South Asia           48
Africa               47
Middle East          33
Latin America        25
East Asia            11
Eastern Europe        8

(Memorandum Item: United States, in 1994, 13.5%)
_______________________________________________________________
Source: Demery. L. and L. Squire, "Macroeconomics Adjustment and
        Poverty in Africa: An Emerging Picture", World Bank
        Research Observer.
________________________________________________________________

Poverty reduction requires achievement both in overall economic growth
(to create opportunities) and in poor peoples' health and education
(to enable them to seize opportunities). East Asia made dramatic
progress in both, and poverty is low today. Africa lagged behind on
both, and poverty remains high today.

Why has Africa lagged behind? Let us consider two determinants of
growth. The first is the amount of long-run investment in human capital
and physical capital.

Fast-growing countries indeed started with more long-run investment in
education, communications, and transport than slow-growing countries.
Compared to the slow growers, the fast growers started with twice the
years of schooling of the labor force, twenty times the communications
infrastrucrure, and twice the transport infrastructure.

But accumulation of physical and human capital does not explain
everything. Like East Asia, Africa had a fairly healthy rate of growth
of the capital stock, but the growth payoff in Africa was far lower
than in East Asia. Other policies affect the rate of return to capital
investment.

In recent years, adjustment programs have been introduced to restore
macroeconomic balance by combining 
         fiscal contraction -cutting government spending and/or
                             raising taxes-
  with supply-side measures aimed at reducing inefficiency 
                            -devaluing the currency toward a more
                             realistic exchange rate,
                             correcting repression of the
                                                 financial system,
                             liberalizing international trade,
                             privatizing parastatals, and so on.

These economic policies are a significant determinant of growth.

How much of the growth gap between East Asia and Africa can be
explained by these two factors:
                   long-run investments and
                   economic policies?

Investment does matter, but economic policies also matter. For example,
three indicators of economic policies -fiscal discipline, realistic
exchange rate, and financial depth- explain nearly half the growth gap
between East Asia and Africa.

HOPE: Economic policies can be implemented relatively quickly.
      Unrealistic exchange rates can be corrected with a devaluation,
      punitive interest rate controls on the financial sector can be
      removed, and artificial restrictions on international trade can
      be removed practically overnight.

CAUTION: There can be tension between the two determinants of growth.
         Badly implemented economic policies could hurt long-run
         investment in physical and human capital. For example, fiscal
         discipline could be implemented badly by cutting government
         support for primary education.

Africa's Reform Efforts. Failure of Adjustment, or Failure to Adjust?

Africa was clearly in need of a major adjustment in its policies.
Africa had highly distorted macroeconomic policies in the late 1970s
and early 1980s, as evidenced by the black market exchange rate premium.
The average premium, already high by the standards of other countries
that undertook adjustment programs in the 1980s, had doubled by the
first half of the 1980s. Many African countries were in an economic
crisis by the middle of the 1980s and clearly needed to reform their
policies.

Adjustment programs have been criticized in Africa because GDP per
capita continued to fall throughout the 1980s and into the early 1990s,
despite five to ten years of adjustment programs in many countries. At
the same time that GDP fell, aid flows rose substantially. Are the
critics right to conclude that adjustment has failed in Africa and
that more assistance is required?

The critics assume that policy reform has been a homogeneous process
across Africa. This is not the case, however. There has been dramatic
variation in the extent of macroeconomic policy change across the
continent. Taking an index of macroeconomic policy change that combines
changes in exchange, fiscal, and monetary policy for twenty-seven
countries undertaking adjustment programs in Africa, seven showed
significant improvement, ten made modest improvements, and ten actually
showed a deterioration in their policies between 1981/1986 and 1989/93.
The conclusion is that at least in part, a number of countries failed
to adjust.

Did adjustment fail in those countries that undertook serious policy
reforms? No. In countries that made major improvements in policies,
median growth rates increased by 1.5 percentage points. In countries
where policies deteriorated, GDP per capita growth rates fell by 1.7
percentage points.

Thus, where reforms have been undertaken, there has been a growth
payoff. Moreover, the payoff has come rapidly, in the first year or
two after reforms.

Policy reform helps the poor. Based on household survey data that have
recently become available, we can now trace what has happened to the
incidence of poverty over time in six countries, macroeconomic policies
improved and the number of people living in poverty fell.

(The six countries: Nigeria, Ghana, Tanzania, Ethiopia (rural), Kenya
and Cote d'Ivoire)

In the sixth country, Cote d'Ivoire, poverty increased by more than
50 percent over four years as the real exchange rate became
increasingly overvalued. Policy reforms, rather than increasing
poverty, work to reduce it by bringing about economic growth.

(The critics...)


We can redraw World Bank's model to make a more logical structure to create
a basis for analysis.
Five requirements are posed by the World Bank model:
1) Fiscal discipline
2)trade and financial liberalization
3)stronger emphasis on market mechanisms
4)greater reliance on private investment, and
5)new incentive and regulatory systems
Of course, all the above will have an impact on at list 8 areas
which are part of the process of development:
1)internal sustainability
2)insertion in the process of globalization
3) poverty reduction
4)unequal social relations
5)environmental protection
6)human development
7)political participation
8) democratic institutional development
The pattern emerging from the impact of the five World Bank
requirements will depend upon the internal socio-economic
structure of each developing society. Potential damaging
outcomes to avoid are, in accordance with the UNDP,
the following:
JOBLESS GROWTH: the overal economy grows, but fails to expand
job opportunities.
RUTHLESS GROWTH: the rich get richer, and the poor get nothing
VOICELESS GROWTH: the economy grows, but democracy and
empowerment of the majority of the population fails to keep
pace
ROOTLESS GROWTH: cultural identity is submerged or deliberately
outlawed by central government in the hands of the economic/
ethnic/religious/gender elite
FUTURELESS GROWTH: the present generation squanders resources
needed by future generations
DEPENDENT GROWTH: the economy grows, but to meet the needs of
transnational capital
What the World Bank does not address in its model is the basic
general concept that in any process of social development/change
the strategies adopted interact with
1) technical relations of production, and
2) social relations of production
Therefore the strategy adopted will have outcomes
posed by the social structure of the society applying the strategy.
Thus, in most cases, if the strategy is based on the dynamics of
the capitalist market, which tends to concentrate economic and
political power in fewer hands, we should expect the reinforcement of a
particular social structure based on economic/ethnic/religious/gender
and therefore social stratification.
The above amounts to be aware of the complex set of relations ruling
the roles of agencies and structure in any particular society.
By and large, to be aware of the relationship between the governing
agency/ies and the society of which is part, the process through
which such agency/ies came to power, the idelogy they promote, and the
extent and direction of control they exert on the state and other
agencies.
Also, to be aware of tensions unfolded by the internal dynamics of
the free-market, mainly between more or less industrialization, state
control or individual control, and interaction with the world economy
leading to contradictions between internal social development and
internal capitalist elite development, and external capitalist
development and internal social development.

Non of the above is included in the World Bank model, because the model
is technical, it ignores, because of ideological reasons (free-market
fundamentalism), the sociological side of any economic process.
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