From the World Bank files:World Development Report 1997
The state in a changing world
Around the globe, the state is in the spotlight. Far-reaching developments in the
global economy have us revisiting basic questions about government: what its role should
be, what it can and cannot do, and how best to do it.
The last fifty years have shown clearly both the benefits and the limitations of state
action, especially in the promotion of development. Governments have helped to deliver
substantial improvements in education and health and reductions in social inequality. But
government actions have also led to some very poor outcomes. And even where governments
have done a good job in the past, many worry that they will not be able to adapt to the
demands of a globalizing world economy.
The new worries and questions about the state's role are many and various, but four
recent developments have given them particular impetus:
- The collapse of command-and-control economies in the former Soviet Union and Central and
- The fiscal crisis of the welfare state in most of the established industrial countries
- The important role of the state in the "miracle" economies of East Asia
- The collapse of states and the explosion in humanitarian emergencies in several parts of
This Report shows that the determining factor behind these contrasting developments is
the effectiveness of the state. An effective state is vital for the provision of the goods
and services--and the rules and institutions--that allow markets to flourish and people to
lead healthier, happier lives. Without it, sustainable development, both economic and
social, is impossible. Many said much the same thing fifty years ago, but then they tended
to mean that development had to be state-provided. The message of experience since then is
rather different: that the state is central to economic and social development, not as a
direct provider of growth but as a partner, catalyst, and facilitator.
What makes for an effective state differs enormously across countries at different
stages of development. What works in the Netherlands or New Zealand, say, may not work in
Nepal. Even among countries at the same level of income, differences in size, ethnic
makeup, culture, and political systems make every state unique. But this very diversity
enriches this Report's inquiry into why and how some states do better than
others at sustaining development, eradicating poverty, and responding to change.
Rethinking the state--the world over
The world is changing, and with it our ideas about the state's role in economic and
social development. Today's intense focus on the state's role is reminiscent of an earlier
era, when the world was emerging from the ravages of World War II, and much of the
developing world was just gaining its independence. Then development seemed a more easily
surmountable--and largely technical--challenge. Good advisers and technical experts would
formulate good policies, which good governments would then implement for the good of
society. State-led intervention emphasized market failures and accorded the state a
central role in correcting them. But the institutional assumptions implicit in this world
view were, as we all realize today, too simplistic. Flexibility to implement the policies
devised by technocrats was accorded pride of place. Accountability through checks and
balances was regarded as an encumbrance.
In a few countries things have indeed worked out more or less as the technocrats
expected. But in many countries outcomes were very different. Governments embarked on
fanciful schemes. Private investors, lacking confidence in public policies or in the
steadfastness of leaders, held back. Powerful rulers acted arbitrarily. Corruption became
endemic. Development faltered, and poverty endured.
Over the last century the size and scope of government have expanded enormously,
particularly in the industrial countries (Figure 1).
The pre-World War II expansion was driven by, among other factors, the need to address the
heavy toll on economic and social systems brought on by the Great Depression. The postwar
confidence in government bred demands for it to do more. Industrial economies expanded the
welfare state, and much of the developing world embraced state-dominated development
strategies. The result was a tremendous expansion in the size and reach of government
worldwide. State spending now constitutes almost half of total income in the established
industrial countries, and around a quarter in developing countries. But this very increase
in the state's influence has also shifted the emphasis from the quantitative to the
qualitative, from the sheer size of the state and the scope of its interventions to its
effectiveness in meeting people's needs.
As in the 1940s, today's renewed focus on the state's role has been inspired by
dramatic events in the global economy, which have fundamentally changed the environment in
which states operate. The global integration of economies and the spread of democracy have
narrowed the scope for arbitrary and capricious behavior. Taxes, investment rules, and
economic policies must be ever more responsive to the parameters of a globalized world
economy. Technological change has opened new opportunities for unbundling services and
allowing a larger role for markets. These changes have meant new and different roles for
government--no longer as sole provider but as facilitator and regulator. States have come
under pressure even where governments have previously seemed to perform well. Many
industrial countries find themselves grappling with a welfare state that has grown
unwieldy, and having to make difficult choices about the services and benefits that people
should expect government to provide. Markets--domestic and global--and citizens vexed by
state weaknesses have come to insist, often through grassroots and other nongovernmental
organizations, on transparency in the conduct of government, and on other changes to
strengthen the ability of the state to meet its assigned objectives.
The clamor for greater government effectiveness has reached crisis proportions in many
developing countries where the state has failed to deliver even such fundamental public
goods as property rights, roads, and basic health and education. There a vicious circle
has taken hold: people and businesses respond to deteriorating public services by avoiding
taxation, which leads to further deterioration in services. In the former Soviet Union and
Central and Eastern Europe it was the state's long-term failure to deliver on its promises
that led, finally, to its overthrow. But the collapse of central planning has created
problems of its own. In the resulting vacuum, citizens are sometimes deprived of basic
public goods such as law and order. At the limit, as in Afghanistan, Liberia, and Somalia,
the state has sometimes crumbled entirely, leaving individuals and international agencies
trying desperately to pick up the pieces.
A two-part strategy
How can we cut through the maze of questions and pressures now facing the world's
states? No one-size-fits-all recipe for an effective state is suggested here. The range of
differences among states is too enormous, as are their starting points. Rather this Report
provides a broad framework for addressing the issue of the state's effectiveness
worldwide. It points to a number of ways to narrow the growing gap between the demands on
states and their capability to meet those demands. Getting societies to accept a
redefinition of the state's responsibilities will be one part of the solution. This will
include strategic selection of the collective actions that states will try to promote,
coupled with greater efforts to take the burden off the state, by involving citizens and
communities in the delivery of core collective goods.
But reducing or diluting the state's role cannot be the end of the reform story. Even
with more selectivity and greater reliance on the citizenry and on private firms, meeting
a broad range of collective needs more effectively will still mean making the state's
central institutions work better. For human welfare to be advanced, the state's
capability--defined as the ability to undertake and promote collective actions
efficiently--must be increased.
This basic message translates into a two-part strategy to make every state a more
credible, effective partner in its country's development:
- Matching the state's role to its capability is the first element in this
strategy. Where state capability is weak, how the state intervenes--and where--should be
carefully assessed. Many states try to do too much with few resources and little
capability, and often do more harm than good. A sharper focus on the fundamentals would
improve effectiveness (Box 1). But here it is a matter not just of choosing what to do and
what not to do--but of how to do it as well.
- But capability is not destiny. Therefore the second element of the strategy is to raise
state capability by reinvigorating public institutions. This means designing effective
rules and restraints, to check arbitrary state actions and combat entrenched corruption.
It means subjecting state institutions to greater competition, to increase their
efficiency. It means increasing the performance of state institutions, improving pay and
incentives. And it means making the state more responsive to people's needs, bringing
government closer to the people through broader participation and decentralization. Thus,
the Report not only directs attention to refocusing the state's role, but also shows how
countries might begin a process of rebuilding the state's capability.
|Box 1 The pathway to a more effective state
|A more capable state can be a more effective state, but effectiveness and capability
are not the same thing. Capability, as applied to states, is the ability to
undertake and promote collective actions efficiently--such as law and order, public
health, and basic infrastructure; effectiveness is a result of using that
capability to meet society's demand for those goods. A state may be capable but not very
effective if its capability is not used in society's interest.
The path to a more
effective state, although not linear, is likely to be a two-stage process. First, the
state must focus what capability it has on those tasks that it can and should undertake.
As it does this, it can then focus on building additional capability. As the figure
illustrates, countries in Zone I pursue a broad range of activities in an unfocused manner
despite little state capability, and their efforts prove ineffective. But countries cannot
move to Zone III overnight--building capability takes time. The pathway to greater
effectiveness leads, first, to focusing on fundamental tasks and leveraging the state's
limited capability through partnerships with the business community and civil society
(Zone II). Countries then can move gradually to Zone III by strengthening their capability
Matching role to capability
Matching role to capability is not a simple message of dismantling the state. In some
areas much greater focus is badly needed to improve effectiveness: choosing what to do and
what not to do is critical. But this also involves choosing how to do things--how to
deliver basic ser-vices, provide infrastructure, regulate the economy--and not just
whether to do them at all. The choices here are many and must be tailored to the
circumstances of each country.
The first job of states: Getting the fundamentals right
Five fundamental tasks lie at the core of every government's mission, without which
sustainable, shared, poverty-reducing development is impossible:
- Establishing a foundation of law
- Maintaining a nondistortionary policy environment, including macroeconomic stability
- Investing in basic social services and infrastructure
- Protecting the vulnerable
- Protecting the environment.
Although the importance of these fundamentals has long been widely accepted, some new
insights are emerging as to the appropriate mix of market and government activities in
achieving them. Most important, we now see that markets and governments are complementary:
the state is essential for putting in place the appropriate institutional foundations for
markets. And government's credibility--the predictability of its rules and policies and
the consistency with which they are applied--can be as important for attracting private
investment as the content of those rules and policies.
A survey, specially commissioned for this Report, of domestic entrepreneurs (formal and
informal) in sixty-nine countries confirms what was already known anecdotally: that many
countries lack the basic institutional foundations for market development (Box 2). High
levels of crime and personal violence and an unpredictable judiciary combine to produce
what this Report defines as the "lawlessness syndrome." Weak and arbitrary state
institutions often compound the problem with unpredictable, inconsistent behavior. Far
from assisting the growth of markets, such actions squander the state's credibility and
hurt market development.
|Box 2 Credibility, investment, and growth
|A survey of local entrepreneurs in sixty-nine countries shows that many states are
performing their core functions poorly: they are failing to ensure law and order, protect
property, and apply rules and policies predictably. Investors do not consider such states
credible, and growth and investment suffer as a consequence.
Firms were asked to rank
each of several indicators on a scale from one (extreme problem) to six (no problem).
Averaging the answers, as the left panel does for each world region, yields an overall
indicator of the reliability of the institutional framework (normalized here to the
high-income OECD countries) as perceived by private entrepreneurs--we call it credibility.
The other two panels show that, once differences in income and education and policy
distortions have been controlled for, there is a strong correlation between countries'
credibility rating and their record of growth and investment. The credibility ratings are
based on investors' perceptions. But it is these perceptions that determine investment
Note: The credibility index (left panel) is a summary indicator that
combines the measures in Figure 2.3. Each bar in the two right panels is the average for a
group of countries. The graphs are based on regressions for the period 198493 of GDP
growth (thirty-two countries) and investment (thirty-three countries) on the index,
controlling for income, education, and policy distortion. South and Southeast Asia and
Middle East and North Africa are each represented by only three economies. Source: World
Bank staff calculations using data from the private sector survey conducted for this
Report and Brunetti, Kisunko, and Weder, background papers.
To make development stable and sustainable, the state has to keep its
eye on the social fundamentals. Lawlessness is often related to a sense of
marginalization: indeed, breaking the law can seem the only way for the marginalized to
get their voices heard. Public policies can ensure that growth is shared and that it
contributes to reducing poverty and inequality, but only if governments put the social
fundamentals high on their list of priorities.
Too often, policies and programs divert resources and services from the people who need
them most. The political clout of the more affluent in society sometimes leads governments
to spend many times more on rich and middle-class students in universities than on basic
education for the majority and scholarships for the less well off. In many regions poverty
and inequality are often biased against ethnic minorities or women, or disfavored
geographic areas. Marginalized from public discussion and excluded from the broader
economy and society, such groups are fertile ground for violence and instability, as many
parts of the world are increasingly learning.
Public policies and programs must aim not merely to deliver growth but to ensure that
the benefits of market-led growth are shared, particularly through investments in basic
education and health. They must also ensure that people are protected against material and
personal insecurity. Where poverty and economic marginalization stem from ethnic and
social differences, policies must be carefully crafted to manage these differences, as
Malaysia and Mauritius have done.
Government regulation is not the only answer to pollution. An expanding toolkit of
innovative and flexible incentives is now available to get polluters to clean up their
act. Although there is no substitute for meaningful regulatory frameworks and information
about the environment, these new tools, which rely on persuasion, social pressure, and
market forces to help push for improved environmental performance, can often succeed where
regulation cannot. Countries are using some of these tools, with promising results, in
- Harnessing the power of public opinion
- Making regulation more flexible
- Applying self-regulatory mechanisms
- Choosing effective market-based instruments.
Going beyond the basics: The state need not be the sole provider
There is a growing recognition that in many countries monopoly public providers of
infrastructure, social services, and other goods and services are unlikely to do a good
job. At the same time, technological and organizational innovations have created new
opportunities for competitive, private providers in activities hitherto confined to the
public sector. To take advantage of these new opportunities--and better allocate scarce
public capability--governments are beginning to separate the financing of infrastructure
and services from its delivery, and to unbundle the competitive segments of utility
markets from the monopoly segments. Reformers are also moving to separate programs of
social insurance, designed to address the problems of health and employment insecurity for
all, from programs of social assistance, intended to help only the poorest in society.
COPING WITH HOUSEHOLD INSECURITY. It is now well established that the state can help
households cope with certain risks to their economic security: it can insure against
destitution in old age through pensions, against devastating illness through health
insurance, and against job loss through unemployment insurance. But the idea that the
state alone must carry this burden is changing. Even in many industrial countries the
welfare state is being reformed. Emerging economies from Brazil to China will be unable to
afford even pared-down versions of the European system, especially with their rapidly
aging populations. Innovative solutions that involve businesses, labor, households, and
community groups are needed to achieve greater security at lower cost. This is especially
important for those developing countries not yet locked into costly solutions.
EFFECTIVE REGULATION. Well-designed regulatory systems can help societies influence
market outcomes for public ends. Regulation can help protect consumers, workers, and the
environment. It can foster competition and innovation while constraining the abuse of
monopoly power. Thanks to regulatory reforms initiated in the early 1980s, Chile's
telecommunications industry has enjoyed sustained private investment, increasing service
quality and competition, and declining prices. By contrast, until some recent reform
initiatives, dysfunctional regulation led the Philippine telecommunications industry--long
privately owned--to underinvest. The result was poor and often high-priced service,
imposing a high cost on citizens and other firms. Making the best use of the new options
emerging for private provision of infrastructure and social services will also rely,
often, on a good regulatory framework.
INDUSTRIAL POLICY. When markets are underdeveloped, the state can sometimes
reduce coordination problems and gaps in information and encourage market development.
Many of today's oldest industrial economies used various mechanisms to spur the growth of
markets in their early stages of development. More recently, Japan, the Republic of Korea,
and other countries in East Asia used a variety of mechanisms for market enhancement, in
addition to securing the economic, social, and institutional fundamentals. Sometimes these
interventions were quite elaborate: the highly strategic use of subsidies, for example.
Other times they were less intrusive, taking the form of export promotion and special
infrastructure incentives. But the ability to choose wisely among these interventions and
use them effectively is critical; ill-considered trade, credit, and industrial policies
can and have cost countries dearly. Many developing countries pursued ill-thought-out
activist industrial policies, with poor results. Countries that have pursued an activist
industrial policy successfully could not have done so without strong institutional
MANAGING PRIVATIZATION. Carefully designed regulations and other active government
initiatives can enhance the growth of markets. But in many countries this can take time,
as private initiative is held hostage to a legacy of antagonistic state-market relations.
And poorly performing state enterprises are often a big drain on the state's finances.
Privatization provides an obvious solution. In general it is easier to sell off state
assets once a supportive environment for private sector development is in place. Economies
such as China, Korea, and Taiwan (China) have therefore opted not to give top priority to
privatization, but to allow the private sector to develop around the state sector. This
option, however, may not be available where the fiscal burden is very high, and where the
presence of poorly performing state enterprises impedes much-needed overall restructuring
of the economy.
Experience has shown that the way privatization is managed is terribly important to the
end result. The key factors are transparency of process, winning the acquiescence of
employees, generating broad-based ownership, and instituting the appropriate regulatory
reform. Where privatization has been managed carefully, it is already showing positive
results: in Chile, for example, and the Czech Republic. Its importance in the strategy to
foster markets may vary, but for many developing countries seeking to scale back an
overextended state, privatization must be kept on the front burner. A carefully managed
privatization process brings very positive economic and fiscal benefits.
Knowing the state's limits
The key to predictable and consistent implementation of policy is a good fit between the
state's institutional capabilities and its actions. In well-developed states,
administrative capability is normally strong, and institutionalized checks and balances
restrain arbitrary action, even as they provide government organizations the flexibility
to pursue their mandates. By contrast, states with weaker institutions may need to err on
the side of less flexibility and more restraint. This can be done in two ways:
- Through self-restricting rules, which precisely specify the content of policy and lock
it into mechanisms that are costly to reverse. Regional common-currency arrangements, such
as the CFA currency zone in francophone Africa or quasi currency boards as in Argentina,
are examples of such mechanisms in the field of monetary policy. "Take-or-pay"
contracts with independent power producers serve a similar function in utilities
- Through working in partnership with firms and citizens. In industrial policy, for
example, states can foster private-to-private collaboration. In financial regulation they
can give bankers an incentive to operate prudently. And in environmental regulation they
can use the spread of information to encourage "bottom-up" citizen initiatives.
Countries in transition face a special challenge: not only are roles changing as a
result of the adoption of market-based systems; so are capabilities. Some transition
countries retain inherent capabilities in the form of qualified people and usable
equipment, but they are not organized to perform in their new roles. Sometimes islands of
excellence are found in countries where overall effectiveness has suffered. The task of
improving effectiveness here is in some ways easier and in some ways more difficult:
easier because capability does not start from a low base, more difficult because
rebuilding capability means changing attitudes. Reform is not a matter of simply assigning
people new responsibilities.
Reinvigorating state institutions
Acknowledging the state's existing, possibly meager capabilities does not mean
accepting them for all time. The second key task of state reform is to reinvigorate the
state's institutional capability, by providing incentives for public officials to
perform better while keeping arbitrary action in check.
Countries struggle to build the institutions for an effective public sector. One reason
the task is so difficult is political. Strong interests may develop, for example, to
maintain an inequitable and inefficient status quo, whereas those who lose out from this
arrangement may be unable to exert effective pressure for change.
But the problem of continued ineffectiveness, or of corruption, is not entirely
political. Often politicians and other public officials have strong incentives and a
sincere interest in improving public sector performance. But managing a public bureaucracy
is a complex business that does not lend itself to clear, unambiguous solutions. In fact,
building institutions for an effective public sector requires addressing a host of
underlying behavioral factors that distort incentives and ultimately lead to poor
outcomes. Three basic incentive mechanisms can be used, in a variety of settings, to
combat these deeper problems and improve capability (Figure
- Effective rules and restraints
- Greater competitive pressure
- Increased citizen voice and partnership.
Effective rules and restraints
Over the long term, building accountability generally calls for formal mechanisms of
restraint, anchored in core state institutions. Power can be divided, whether among the
judicial, legislative, and executive branches of government or among central, provincial,
and local authorities. The broader the separation of powers, the greater the number of
veto points that can check arbitrary state action. But multiple veto points are a
double-edged sword: they can make it as hard to change the harmful rules as the beneficial
In many developing countries legislative and judicial oversight of the executive is
weak. The setting of goals and the links to the policies needed to achieve them are
sometimes diffuse, legislatures suffer from limited information and capability, and
judicial independence is compromised. An independent judiciary is vital to ensure that the
legislative and executive authorities remain fully accountable under the law, and to
interpret and enforce the terms of a constitution. Writing laws is the easy part; they
need to be enforced if a country is to enjoy the benefits of a credible rule of law. These
institutions of restraint take time to establish themselves, but international commitment
mechanisms such as international adjudication, or guarantees from international agencies,
can serve as a short-term substitute.
A major thrust of any effective strategy to reinvigorate the public sector will be to
reduce the opportunities for corruption by cutting back on discretionary authority.
Policies that lower controls on foreign trade, remove entry barriers for private industry,
and privatize state firms in a way that ensures competition--all of these will fight
corruption (Figure 3). Such reforms should not be
half-hearted: reforms that open opportunities for private entry into closed sectors of the
economy, but leave that entry to the discretion of public officials rather than establish
open and competitive processes, also create enormous scope for corruption. Formal checks
and balances can also help reduce official corruption, but they are seldom enough.
Reforming the civil service, restraining political patronage, and improving civil service
pay have also been shown to reduce corruption by giving public officials more incentive to
play by the rules.
Where corruption is deeply entrenched, more dramatic efforts will be needed to uproot
it. These efforts should be focused on better monitoring of official action--both by
formal institutions and by individual citizens--and punishment of wrongdoing in the
courts. In Hong Kong (China, as of July 1, 1997), an independent commission against
corruption is one successful example of such an approach. Likewise, recent reforms in
Uganda have incorporated several elements of the anticorruption strategy outlined here,
with some encouraging results. The same mechanisms could be applied around the globe:
corruption, despite claims to the contrary, is not culture specific. Reducing it will
require a multipronged approach, which must include the private sector and civil society
more broadly. The briber has as much responsibility as the bribed; effective penalties on
domestic and international business must be part of the solution.
Subjecting the state to more competition
Governments can improve their capability and effectiveness by introducing much greater
competition in a variety of areas: in hiring and promotion, in policymaking, and in the
way services are delivered.
BOOSTING COMPETITION WITHIN THE CIVIL SERVICE. Whether making policy, delivering
services, or administering contracts, a capable, motivated staff is the lifeblood of an
effective state. Civil servants can be motivated to perform effectively through a
combination of mechanisms to encourage internal competition:
- A recruitment system based on merit, not favoritism
- A merit-based internal promotion system
- Adequate compensation.
Starting in the nineteenth century, all of today's established industrial countries
used these principles to build modern professional bureaucracies. More recently these
principles have been applied in many countries in East Asia, which have transformed weak,
corrupt, patronage-based bureaucracies into reasonably well functioning systems. But many
developing countries do not even need to look overseas or to history for role models: they
exist at home. Central banks, for example, often continue to work effectively and retain
their competence even when all other institutions have declined. These agencies work well
for all the reasons listed above. They are less subject to political interference. They
have limited but clear objectives. They are given adequate resources and training. And
their staff are usually better paid than their counterparts in other parts of government.
Cross-country evidence reveals that bureaucracies with more competitive, merit-based
recruitment and promotion practices and better pay are more capable. In several countries
(Kenya, the Philippines) political appointments run quite deep, whereas countries such as
Korea have benefited from reliance on highly competitive recruitment and a promotion
system that explicitly rewards merit. Ongoing reforms in the Philippines are examining
these issues in an effort to improve bureaucratic capability. By and large, countries in
which broader checks and balances are weak need to rely more heavily on more transparent
and competitive systems. The experience of certain high-performing East Asian economies
also shows that meritocracy and long-term career rewards help build an esprit de corps, or
a shared commitment to collective goals. This reduces the transactions costs of enforcing
internal constraints and builds internal partnerships and loyalty.
In many countries civil servants' wages have eroded as a result of expanding public
employment at lower skill levels and fiscal constraints on the total wage bill (Figure 4). The result has been a significant
compression of the salary structure and highly uncompetitive pay for senior officials,
making it difficult to recruit and retain capable staff. Some countries, such as Uganda,
are undertaking far-reaching reforms to reduce overstaffing dramatically, increase average
pay, and decompress the salary structure. But in many countries these problems have yet to
MORE COMPETITION IN THE PROVISION OF PUBLIC GOODS AND SERVICES. In many developing
countries services are delivered badly or not at all. Politicians often intervene in the
day-to-day operations of public agencies, and managers have limited flexibility. There is
limited accountability for results. And in many countries the public sector has assumed a
monopoly in delivery, eliminating pressures for better performance.
Building an effective public sector in these circumstances will mean opening up core
government institutions, to improve incentives in areas that the public sector has long
monopolized. Dozens of countries through- out the Americas, Europe, and Asia have
capitalized on changes in technology and introduced competition in telecommunications and
electric power generation. This has resulted in lower unit costs and a rapid expansion of
service. Competition is also being enhanced by contracting out services through
competitive bids and auctions. This is a significant trend in industrial countries (the
United Kingdom, Victoria State in Australia), but such mechanisms are also being used to
improve efficiency in developing countries (for example, that of road maintenance in
Brazil). Faced with weak administrative capacity, some countries (Bolivia, Uganda) are
also contracting out the delivery of social services to nongovernmental organizations.
There is a growing trend to set up focused, performance-based public agencies with more
clarity of purpose and greater managerial accountability for outputs or outcomes. New
Zealand provides the most dramatic example among the high-income countries. It broke up
its conglomerate ministries into focused business units, headed by chief executives on
fixed-term, output-based contracts with the authority to hire and fire and to bargain
collectively. Singapore has long followed a broadly similar approach with its
performance-based statutory boards. Other developing countries are following suit, with
Jamaica, for example, establishing executive agencies along the lines of the British
But countries with inadequate controls and weak capacity need to proceed with caution.
For these countries, giving public managers more flexibility will merely increase
arbitrariness and corruption with no commensurate improvement in performance. And writing
and enforcing contracts, particularly for complex outputs, require specialized skills that
are scarce in many developing countries. These countries need first to strengthen
rule-based compliance and financial accountability (as Argentina and Bolivia have done)
within the public sector, provide greater clarity of purpose and task, and introduce
performance measurement (as in Colombia, Mexico, and Uganda). As output measurement and ex
post controls on inputs are strengthened, agencies can be provided more flexibility in
exchange for their greater accountability for results.
Bringing the state closer to people
Governments are more effective when they listen to businesses and citizens and work in
partnership with them in deciding and implementing policy. Where governments lack
mechanisms to listen, they are not responsive to people's interests, especially those of
minorities and the poor, who usually strain to get their voices heard in the corridors of
power. And even the best-intentioned government is unlikely to meet collective needs
efficiently if it does not know what many of those needs are.
GIVING PEOPLE A VOICE. Partnership involves bringing the voice of the poor and of
marginalized groups into the very center of the policymaking process. In many countries,
voice is distributed as unequally as income. Greater information and transparency are
vital for informed public debate and for increasing popular trust and confidence in the
state--whether in discussing expenditure priorities, designing social assistance programs,
or managing forests and other resources. Client surveys (in India, Nicaragua, and
Tanzania) and citizen charters (in Malaysia) are providing new options for making voices
The best-established mechanism for giving citizens voice is the ballot box. In 1974
only thirty-nine countries--one in every four worldwide--were independent democracies.
Today, 117 countries--nearly two of every three--use open elections to choose their
leaders. But periodic voting does not always mean the state is more responsive. Other
mechanisms are needed to ensure that the concerns of minorities and the poor are reflected
in public policies. Getting genuine intermediary organizations represented on policymaking
councils is an important first step in articulating citizen interests in public
policymaking. Even more effective in local and provincial government, these organizations
have recently become very active in developing countries--especially where the state has
performed poorly and where such organizations are not suppressed.
BROADENING PARTICIPATION. Evidence is mounting that government programs work better
when they seek the participation of potential users, and when they tap the community's
reservoir of social capital rather than work against it. The benefits show up in smoother
implementation, greater sustainability, and better feedback to government agencies. Higher
returns from water-borne sanitation systems in Recife, Brazil; housing schemes for the
poor in Port Elizabeth, South Africa; forest management efforts in Gujarat State, India;
and health care in Khartoum, Sudan, are all testament to the power of partnership--the
participation of local people. This is in contrast with top-down approaches, which often
In successful countries policymaking has been embedded in consultative processes, which
provide civil society, labor unions, and private firms opportunities for input and
oversight. In East Asia public-private deliberation councils--such as Korea's monthly
export promotion meetings, Thailand's National Joint Public and Private Consultative
Committee, and the Malaysian Business Council--have provided mechanisms for feedback,
information sharing, and coordination.
DEVOLVING POWER, CAREFULLY. The typical developing country has a more centralized
government than the typical industrial country. But with some significant exceptions, the
past thirty years have seen a small shift in public spending power in developing countries
from the national to lower levels. The industrial economies have seen an opposite trend,
with spending power moving to the center. Neither of these observations, of course, takes
into account the decentralization implicit in recent market reforms, which have clearly
reduced the direct power and resources of central government in a broad range of
Decentralization is bringing many benefits in China, India, much of Latin America, and
many other parts of the world. It can improve the quality of government and the
representation of local business and citizens' interests. And competition among provinces,
cities, and localities can spur the development of more-effective policies and programs.
But there are three big pitfalls to watch out for:
- Rising inequality. The gap between regions can widen--an issue of considerable
concern in China, Russia, and Brazil. Labor mobility provides a partial solution, but it
is seldom easy, especially in ethnically diverse countries where migrants are not always
- Macroeconomic instability. Governments can lose control of macroeconomic policy
if local and regional fiscal indiscipline leads to frequent bailouts from the center, as
occurred in Brazil.
- Risk of local capture. A serious danger is that of local governments falling
under the sway of special interests, leading to misuse of resources and of the coercive
power of the state.
These dangers show, once again, how central government will always play a vital role in
sustaining development. The challenge is to find the right division of labor between the
center and the other tiers of government.
Strategic options for reform
Building a more responsive state requires working on mechanisms that increase openness and
transparency, increase incentives for participation in public affairs, and where
appropriate, lessen the distance between government and the citizens and communities it is
intended to serve. This yields four broad imperatives for policymakers:
- Where appropriate, ensure broad-based public discussion of key policy directions and
priorities. At a minimum this includes making available information in the public interest
and establishing consultative mechanisms--such as deliberation councils and citizen
committees--to gather the views and make known the preferences of affected groups.
- Encourage, where feasible, the direct participation of users and other beneficiaries in
the design, implementation, and monitoring of local public goods and services.
- Where decentralization is considered desirable, adopt a carefully staged and/or sectoral
approach in priority areas. Introduce strong monitoring mechanisms and make sure sound
intergovernmental rules are in place to restrain arbitrary action at the central and the
- At the local level, focus on mechanisms--and horizontal incentives in government's
relations with the rest of the community--that build accountability and competition.
Of course, a strategy of more openness and greater decentralization has its dangers.
The more numerous the opportunities for participation, the greater the demands that will
be made on the state. This can increase the risk of capture by vocal interest groups, or
of gridlock. Bringing government closer to some people must not result in taking it even
further away from others. Equally, without clear-cut rules to impose restraints on
different tiers of government, and incentives to encourage local accountability, the
crisis of governance that afflicts many centralized governments will simply be passed down
to lower levels. But there are some safe ways to start the ball rolling, including the use
of communication and consensus building to render reform intelligible to citizens and
firms and enhance its chances of success.
Beyond national borders: Facilitating global collective action
Globalization is a threat to weak or capriciously governed states. But it also opens
the way for effective, disciplined states to foster development and economic well-being,
and it sharpens the need for effective international cooperation in pursuit of global
Embracing external competition
The state still defines the policies and rules for those within its jurisdiction, but
global events and international agreements are increasingly affecting its choices. People
are now more mobile, more educated, and better informed about conditions elsewhere. And
involvement in the global economy tightens constraints on arbitrary state action, reduces
the state's ability to tax capital, and brings much closer financial market scrutiny of
monetary and fiscal policies.
"Globalization" is not yet truly global--it has yet to touch a large chunk of
the world economy. Roughly half of the developing world's people have been left out of the
much-discussed rise in the volume of international trade and capital flows since the early
1980s. Governments' hesitance to open up to the world economy is partly understandable.
Joining the global economy, like devolving power from the center, carries risks as well as
opportunities. For example, it can make countries more vulnerable to external price shocks
or to large, destabilizing shifts in capital flows. This makes the state's role all the
more critical, both in handling such shocks and in helping people and firms grasp the
opportunities of the global marketplace. But the difficulties should not be exaggerated,
particularly when laid against the risks of being left out of the globalization process
The cost of not opening up will be a widening gap in living standards between those
countries that have integrated and those that remain outside. For lagging countries the
route to higher incomes will lie in pursuing sound domestic policies and building the
capability of the state. Integration gives powerful support to such policies--and
increases the benefits from them--but it cannot substitute for them. In that sense,
globalization begins at home. But multilateral institutions such as the World Trade
Organization have an important role to play in providing countries with the incentive to
make the leap.
Promoting global collective action
Global integration also gives rise to demands for states to cooperate to combat
international threats such as global warming. Economic, cultural, and other differences
between countries can make such cooperation difficult--even, at times, impossible. But
stronger cooperation is clearly needed for at least five major concerns that transcend
- Managing regional crises. The threat of nuclear war between the superpowers has
given way to a mushrooming of smaller conflicts, entailing costly problems of refugee
relief and rehabilitation. No solid international framework exists for managing these
conflicts or helping avoid them. A more integrated assessment of how state policies (and
international assistance) help manage nascent conflict is needed in designing economic and
- Promoting global economic stability. Concern has been growing about the
potentially destabilizing effects of large and rapid flows of portfolio capital,
particularly when a crisis in one country can spill over into other markets. A variety of
international mechanisms have been suggested to guard against such problems, and the
International Monetary Fund has recently created a new facility to help members cope with
sudden financial crises. But prudent and responsive economic policies at home will be
countries' best protection. Growing international labor mobility is also raising a host of
issues requiring international collective action.
- Protecting the environment. Urgent global environmental issues include climate
change, loss of biodiversity, and protection of international waters. International
collective action can help through better coordination, greater public awareness, more
effective technological transfer, and better national and local practices. Progress has
been slow, however, raising the worry that it will take a major environmental catastrophe
to goad countries into concerted action.
- Fostering basic research and the production of knowledge. Now being revitalized
to meet renewed challenges in food production, the Consultative Group on International
Agricultural Research has shown how technology can be developed and disseminated through
international collective action. Similar consultative mechanisms need to be developed to
tackle other pressing research problems in the domains of environmental protection and
- Making international development assistance more effective. To become more
effective, foreign aid needs to be tied more closely to the policies of the recipient
countries. A high priority for aid agencies is to systemati-cally channel resources to
poor countries with good policies and a strong commitment to institutional reinvigoration.
Removing obstacles to state reform
The history of state reform in today's established industrial countries offers
hope--and gives pause--to today's developing countries. Until the last century many of the
problems that now appear to have reduced the effectiveness of the state in the developing
world were in plain evidence in Europe, North America, and Japan. But the problems were
addressed, and modern states with professional systems emerged. This gives us hope. But it
also gives us pause, because institutional strengthening takes time. The reforms of the
Meiji restoration, which launched Japan onto the path of development, took almost
twenty-five years to take root. A more capable state can be built, but the process will be
slow and will require immense political commitment. It is urgent to act now.
Over the past fifteen years many governments have responded to internal and external
pressure by launching far-reaching reforms to improve their performance. Typically,
changes in macroeconomic policy--dealing with exchange rates, fiscal policy, and trade
policy--have come fastest. These reforms have political implications but do not require
the overhaul of institutions. They can be undertaken quickly, often through decree, by a
small group of competent technocrats. All it takes is the political decision to make the
But other state reforms, dealing with regulation, social services, finance,
infrastructure, and public works, cannot be accomplished so rapidly because they involve
changing institutional structures established for different purposes, to fit different
rules of the game. This kind of institutional reform involves wrenching changes in the way
government agencies think and act, and often a complete overhaul of long-established
systems of patronage and corruption. But such change is absolutely essential if the
capability of the state is ever to improve. The two together--good policies and more
capable state institutions to implement them--produce much faster economic development (Figure 5).
Comprehensive reform along these lines will take a great deal of time and effort in
many developing countries, and the agenda varies considerably from region to region (Box
3). Reform will also encounter considerable political opposition. But reformers can make a
good start by strengthening central agencies for strategic policy formulation, introducing
more transparency and competition, hiving off activities and agencies with easily
specified outputs, seeking more feedback from users about the delivery of services, and
working with labor unions on programs that will enable workers to seek security in change
rather than seek security against change.
|Box 3 The regional agenda
|The key features and challenges of improving the effectiveness of the state in the
various developing regions are summarized below. These are of necessity broad
generalizations, and each region includes several countries whose experiences are very
- Many countries in Sub-Saharan Africa are suffering from a crisis of statehood--a
crisis of capability. An urgent priority is to rebuild state effectiveness through an
overhaul of public institutions, reassertion of the rule of law, and credible checks on
abuse of state power. Where the links between the state, the private sector, and civil
society are fragile and underdeveloped, improving the delivery of public and collective
services will require closer partnerships with the private sector and civil society.
- The capability of the state in most East Asian countries cannot be considered a
problem. But states' ability to change in response to the new challenges facing the region
will play a critical role in their continued economic success.
- The main issue in South Asia is overregulation, both a cause and an effect of
bloated public employment and the surest route to corruption. Regulatory simplification
and public enterprise reform, and the resulting contraction of the role of the state, will
be complex and politically difficult.
- The job of reorienting the state toward the task of "steering, not rowing" is
far from complete in Central and Eastern Europe. But most countries have made
progress and are on the way to improving capability and accountability.
- Low state capability in many countries of the Commonwealth of Independent States
is a serious and mounting obstacle to further progress in most areas of economic and
social policy. Reorientation of the state is still at an early stage, and a host of severe
problems have emerged from a general lack of accountability and transparency.
- In Latin America, decentralization of power and of spending, coupled with
democratization, has dramatically transformed the local political landscape, in what some
have called a "quiet revolution." A new model of government is emerging in the
region. But greater emphasis is also needed on reform of the legal system, the civil
service, and social policies.
- In the Middle East and North Africa, unemployment is by far the greatest economic
and social problem and makes government downsizing especially difficult. Because the
political and social difficulties of reform are considerable, although not insurmountable,
a promising approach might be to begin decentralizing selected services, and focus on
reforming state enterprises, while preparing the ground for wider-ranging reforms.
When do reforms occur?
Deep distributional conflicts and constraints embedded in state institutions are at the
heart of the explanation for so many countries' failure to reform. But they are not
immutable. Ultimately, change comes when the incentives to throw out the old policies and
old institutional arrangements become stronger than the incentives to keep them. An
economic crisis or an external threat, or the arrival of a new government with fewer
vested interests in the old system, may provide the impetus for reform. But reform can be
delayed if those in power stick with outdated policies because it is in their (or their
allies') interest to do so. And the delay can sometimes be painfully long, as in Haiti
under the Duvaliers, or Zaire today.
Neighbors, too, can be a powerful motivator for change. There is a clear domino effect
at work in the wave of reform sweeping East Asia, Latin America, and much of Eastern
Europe and the former Soviet Union. The threat of being left behind can goad countries to
improve the functioning of their bureaucracies. But research has yet to explain why some
countries respond to crises and others do not. Why, for example, does popular tolerance of
inflation seem to be much lower in Asia than in parts of Latin America? And why can some
countries endure a long period of economic decline before responding, while others take
action much sooner?
Often the analysis of winners and losers yields a prediction of when--or at least
whether--reforms will be undertaken. Reforms have little appeal if the winners cannot
compensate the losers. Even when the potential gains are enough to allow for compensation,
reform can be hard to achieve because the gains are spread over many people, whereas the
losers, although smaller in number, are powerful and articulate. A further problem is that
the benefits are often realized in the future, whereas the losses are immediate. Yet
sometimes conditions have deteriorated so far that the winners far outnumber the losers.
Then reform can produce immediate economic and political gains.
How can reforms be sustained?
Reform-oriented political leaders and elites can speed reform by making decisions that
widen people's options, articulate the benefits clearly, and ensure that policies are more
inclusive. In recent years farsighted political leaders have transformed the options for
their people through decisive reform. They were successful because they made the benefits
of change clear to all, and built coalitions that gave greater voice to often-silent
beneficiaries. They also succeeded--and this is crucial--because they spelled out a
longer-term vision for their society, allowing people to see beyond the immediate pain of
adjustment. Effective leaders give their people a sense of owning the reforms--a sense
that reform is not something imposed from without.
Reforming the state requires cooperation from all groups in society. Compensation of
groups adversely affected by reform (which may not always be the poorest in society) can
help secure their support. Although compensation may be costly in the short run, it will
pay off in the long run. Deep-seated differences and mutual suspicions among groups can
also delay reform. There are no quick fixes for removing age-old enmities, but social
pacts, such as Spain's Moncloa Pacts and Benin's National Economic Conference, can help.
International agencies can encourage and help sustain reform in four ways. First, they
can provide important technical advice on what to do and what not to do. This assistance
is often invaluable, especially for smaller states that lack the resources to handle all
the technical issues internally. But it must be complemented by local expertise, to adapt
reforms to local conditions and institutions. The World Trade Organization plays a major
role in trade reform, the World Health Organization on health issues, and the
International Labour Organisation on labor legislation and employment policy. Second,
international agencies can provide a wealth of cross-country experience on a wide range of
issues. Often staffed by people from all over the world, they can bring in experts from
different backgrounds. Third, the financial assistance these agencies provide can help
countries endure the early, painful period of reform until the benefits kick in. Fourth,
they can provide a mechanism for countries to make external commitments, making it more
difficult to backtrack on reforms. If the history of development assistance teaches
anything, however, it is that external support can achieve little where the domestic will
to reform is lacking.
Good government is not a luxury--it is a vital necessity for development
The approach of the twenty-first century brings great promise of change and reason for
hope. In a world of dizzying changes in markets, civil societies, and global forces, the
state is under pressure to become more effective, but it is not yet adapting rapidly
enough to keep pace. Not surprisingly, there is no unique model for change, and reforms
will often come slowly because they involve a fundamental rethinking of the roles of
institutions and the interactions between citizens and government. But the issues raised
in this Report are now an integral part of the rethinking of the state in many parts of
the world and are on the agenda of the international organizations that assist them.
People living with ineffective states have long suffered the consequences in terms of
postponed growth and social development. But an even bigger cost may now threaten states
that postpone reforms: political and social unrest and, in some cases, disintegration,
exacting a tremendous toll on stability, productive capacity, and human life. The enormous
cost of state collapse has naturally turned attention to prevention as a preferable and
potentially less costly course of action--but there are no shortcuts. Once the spiral into
collapse has occurred, there are no quick fixes.
Instances of state collapse are both extreme and unique, but they are growing. As the
Report elaborates, no simple generalizations about their causes or effects can be made,
nor, for that matter, are there any easy solutions to their reconstruction; each case
brings its own challenges for countries, their neighbors, and the international system.
The consequences, however, are almost uniformly borne by ordinary people, illustrating
once again how fundamental an effective, responsive state is to the long-term health and
wealth of society.
The quest for a more effective state even in the established industrial countries
suggests that the returns to incremental improvements are high. This is especially true in
countries where the effectiveness of the state is low. Over time, even the smallest
increases in the capability of the state have been shown to make a vast difference to the
quality of people's lives, not least because reforms tend to produce their own virtuous
circle. Small improvements in the state's effectiveness lead to higher standards of
living, in turn paving the way for more reforms and further development.
A tour of the world's economies in 1997 would turn up countless examples of these
virtuous circles in action. But it would provide equally plentiful evidence of the
reverse: countries and regions caught in vicious cycles of poverty and underdevelopment
set in train by the chronic ineffectiveness of the state. Such cycles can all too easily
lead to social violence, crime, corruption, and instability, all of which undermine the
state's capacity to support development--or even to function at all. The crucial challenge
facing states is to take those steps, both small and large, toward better government that
set economies on the upward path, using the two-part framework suggested in this Report.
Reform of state institutions is long, difficult, and politically sensitive. But if we now
have a better sense of the size of the reform challenge, we are also much more aware of
the costs of leaving things as they are.