TOWARDS A NEW PARADIGM FOR DEVELOPMENT by Dr. Joseph E. Stiglitz, Senior Vice President and Chief Economist, The World Bank

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT 9th RAÚ PREBISCH LECTURE October 1998 TOWARDS NEW PARADIGM FOR DEVELOPMENT BY Dr. Joseph . Stiglitz Senior Vice President Chief Economist World Bank 9th Raul Prebisch Lecture Delivered Palais des Nations Geneva, 19 October 1998 Prebisch Lectures instituted 1982 . Gamani Corea, Secretary-General UNCTAD, honour Dr. Raú Prebisch, UNCTAD= founding father Secretary-General. lst lecture, 1982: Dr. Raú Prebisch 2nd lecture, 1983: . Indira Gandhi, Prime Minister India, UNCTAD VI Belgrade 3rd lecture, 1987: Dr. Saburo Okita, Japan, UNCTAD VII Geneva 4th lecture, 1989: Academician Abel . Aganbegyan, principal economic adviser USSR, occasion twenty- anniversary UNCTAD Geneva 5th lecture, 1992: Delivered jointly Dr. Bernard . Chidzero, Senior Minister Finance, Economic Planning Development Zimbabwe, . Michel Rocard, Prime Minister France, . Enrique Iglesias, President Inter- American Development Bank, UNCTAD VIII Cartagena de Indias 6th lecture, 1994 Professor John . Dunning, Professor International Business State University Jersey, occasion UNCTAD= thirtieth anniversary, Geneva 7th lecture, 1996 Professor Jagdish Bhagwati, Arthur Lehman Professor Economics Columbia University, York, UNCTAD IX Midrand, South Africa 8th lecture, 1997 Professor Dani Rodrik, Rafiq Hariri Professor International Political Economy, John . Kennedy School Government, Harvard University, Geneva - ii - CONTENTS Page Welcoming address . Rubens Ricupero .....................................................1 9th Raú Prebisch lecture paradigm development: .........................................................2 strategies, policies processes . Development transformation society...............................4 II. development strategy...................................5 III. principles development strategy.......................14 IV. components development strategy......................21 . Learning openness: trade, foreign capital ..................30 development strategy VI. Concluding comments................................................................36 3 Welcoming address . Rubens Ricupero, Secretary-General UNCTAD Today= delivery 9th Prebisch Lecture Dr. Joseph Stiglitz holds unusual promise , author. Dr. Stiglitz Senior Vice-President Development Economics Chief Economist World Bank. sensitive moment world economy, outspoken advocate, expounder, thinking problems development. Evidence landmark lecture delivered World Institute Development Economics Research Helsinki January, entitled AMoving post-Washington consensus. , Dr. Stiglitz= record World Bank justice distinguished curriculum vitae, public academic life. active member President Bill Clinton= economic team 1993, served Chairman Council Economic Advisers President. achievements academia illustrious. instance, helped create branch economics economics information widespread application; revived interest economics technical change factors contribute increases productivity living standards; leading scholar economics public sector. Recognition achievements fellowships prestigious American academies societies, receipt 1979 John Bates Clark Award, American Economic Association. reason today= lecture title ATowards paradigm development: strategies, policies processes@. anticipate lecture build Dr. Stiglitz left Helsinki, mapping clear coherent vision concerned burning issue development heading. Dr. Stiglitz calling move current assumptions. lay vision , understand, core belief development involves transformation society broad movement traditional relations, ways thinking problem-solving scientifically-based approach. policy recommendations hope provide. Prebisch Lecture occasion delivery important policy statements major issues day development. UNCTAD today, filling hall, await Dr. Stiglitz= address attention. months , day= newspapers brought grave news state world economy, Asian financial crisis began Thailand spread parts world, severely affecting growth North plunging tens millions developing world hunger poverty. world burning, time waste. 4 TOWARDS NEW PARADIGM FOR DEVELOPMENT: STRATEGIES, POLICIES AND PROCESSES address World Institute Development Economics Research (WIDER) Helsinki beginning year,1 argued needed Washington consensus:2 broader objectives development embodied consensus, set policy recommendations focused sufficient development, successful developers paid heed dictums. consensus confused means ends: privatization trade liberalization ends , means sustainable, equitable democratic growth. talked ways Washington consensus astray. focused price stability, growth stability output. failed recognize strengthening financial institutions bit important economic stability controlling budget deficits increasing money supply. focused privatization, paid attention institutional infrastructure required markets work, importance competition. today’ lecture, -documented failures Washington consensus providing foundations alternative paradigm, relevant developing countries. based broad conception development, noncomitantly broader vision development strategies perspective role international assistance ways delivered. remainder lecture organized parts. , describe broader vision. , explain Washington consensus earlier development paradigms failed: viewed development narrowly. outline briefly key factors including events East Asia Russian Federation helped realize inadequacies approaches. , outline refer key principles development strategy based broader vision development. Fourth, outline major components development strategies. , conclude general observations, focusing importance trade work UNCTAD furthering development based paradigm. 1 Stiglitz (1998). 2 speech, mind conception Washington consensus originally outlined colleague John Williamson (1990), coined term. Williamson (1997) notes, term evolved time signify set Aneoliberal@ policy prescriptions, descriptive usage originally intended discussing reforms undertaken Latin American economies 1980s. policies fall AWashington consensus@ rubric , argued WIDER lecture, incorrectly sufficient substantial development. 5 . Development transformation society Development represents transformation society, movement traditional relations, traditional ways thinking, traditional ways dealing health education, traditional methods production, ‘modern’ ways. instance, characteristic traditional societies acceptance world ; modern perspective recognizes change, recognizes , individuals societies, actions , instance, reduce infant mortality, extend lifespans increase productivity. Key movement ‘scientific’ ways thinking, identifying critical variables affect outcomes, attempting inferences based data, recognizing . societies blend. ‘advanced’ societies sectors regions remain wedded traditional modes operation, people wedded traditional ways thinking. advanced societies constitute small proportion, advanced societies predominate. , characteristic developed countries failure advanced sectors penetrate deeply society, resulting called ‘dual’ economies advanced production methods -exist primitive technologies. Change , means objectives. development provide individuals societies control destiny. Development enriches lives individuals widening horizons reducing sense isolation. reduces afflictions brought disease poverty, increasing lifespans, improving vitality life. definition development, clear development strategy aimed facilitating transformation society, identifying barriers , potential catalysts , change. notes outline ingredients development strategy. Approaching development perspective transforming society profound implications Governments aid agencies , proceed engage, instance, participation partnership. , paper providing analytic framework rethinking occurring years promote development. II. development strategy experience 50 years demonstrated development , inevitable. countries succeeded rapid economic growth, narrowing gap advanced countries, bringing millions citizens poverty, countries gap grow poverty increase. Today number people living poverty measured minimal standard 6 dollar day 1.3 billion.3 Strategies , assiduously , guaranteed success. , successful countries (representing largest part growth -income countries) recommended strategies, carved paths . development : critique previous conceptions previous development strategies focused pieces transformation, failed broader context, failed, miserably. focused narrowly economics. Economics important: , features distinguishes developed developed countries higher gross domestic product (GDP) capita. focus economics confused means ends, effect. confused means ends, higher GDP , means improved living standards society, poverty, health, improved education. Contrary Kuznets’ contention, large, increases GDP capita accompanied reductions poverty.4 confused effect, extent, society called ‘modernization’ increases GDP result. decades, development ( mainstream) matter economics increasing capital stock ( transfers higher savings rates home) improving allocation resources. lead higher incomes higher sustained growth rates.5 developed countries portrayed identical developed countries extent inefficiencies resource allocations (, turn, related greater incidence missing malfunctioning markets). Economists left differed improve resource allocation, role government play. Economists left attributed underlying problems market failures. thrust development programming models popular 1960s government, models, replace absent imperfect markets, guide economy efficient 3 fraction world’ population absolute poverty living $1 day declined estimated 30.1 cent 1987 29.4 cent 1993, total number poor increased, 1.23 billion 1.31 billion (World Bank, 1996). soaring population poorest countries battle poverty uphill fight. 4 instance, Deininger Squire (1996) find 77 88 decade-long periods growth accompanied reductions poverty. today= vantage point surprising, odds conventional wisdom Kuznets curve. Kuznets argued early stages development, growth increases inequality; fact, Deininger Squire find inequality fell rose periods growth. Kuznets, , lacked extensive cross- country datasets today, conclusion based data handful countries. 5 Ironically, growth theory literature helped give rise conception development emphasized higher savings rates lead higher growth rates temporarily. 7 allocation resources. Economists assumed, contrast, government problem: government step , markets lead efficient resource allocation. problem development improving resource allocation; simply strategies improving resource allocation. sought government complement markets, sought reduce role government, part problem development, part solution. argued Governments claimed role intrinsically unsuited. , claimed large role. lack capabilities undertake major role resource allocation, incentives political process ensured capabilities directed increasing national production, diverting rents politically powerful. solution, perspective, reliance markets, , elimination government-imposed distortions protectionism, government subsidies government ownership. 1980s, focus shifted macroeconomic problems, adjustment fiscal imbalances misguided monetary policies. macroeconomic imbalances, impossible markets function, function . Notice development strategies development technical problem requiring technical solutions planning algorithms, trade pricing policies, macroeconomic frameworks. reach deep society, participatory approach . laws economics universal: demand supply curves fundamental theorems welfare economies applied Africa Asia Europe North America. scientific laws bound time space. lessons history remarkable narrow focus approaches lack historic context. failed recognize : () successful development efforts United States countries involved active role government; () societies decades active government involvement interference, doctrines put failed develop; , development exception world, rule; () worse , capitalist economies era greater government involvement characterized high levels economic instability, widespread social economic problems; large groups, aged unskilled, left progress left destitute economic crashes occurred regularity. , puzzles narrow approaches ignore failure regions seemingly developed countries develop, south Italy. trade barriers separated north south; macroeconomic framework regions ; south benefited economic policies specifically designed encourage . north boomed, south stagnated. suggested development acknowledged technical 8 approaches; instance, trade liberalization, valuable , solve problem Italy’ south. Defining Events events quarter-century played central role helping shape views development strategies. Collapse socialist/communist economies cold war event collapse socialist/communist economies cold war. observers focused single lesson emerges inefficacy ( dangers) large government role economy. , jump conclusion: reliance markets. failure communist system failure political social order based economic system . economic models showed equivalence market socialism capitalist economies fundamentally misguided,6 partly grasp role institutions ( abstract markets) economy, partly grasp importance interface economy, narrowly defined, society generally.7 broader implications cold war: ideological debates ; agreement markets centre economy, Governments play important role. issue balance, balance depend country, capacity Government, institutional development markets. words, development advice adapted circumstances country. limitations Washington consensus defining event countries dictums liberalization, stabilization privatization, central premises -called Washington consensus, grow. technical solutions prescriptions Washington consensus evidently . surprise; noted , history encouraging. , developments theoretical economics, 6 Stiglitz (1994). 7 inadequacy traditional perspectives apparent experience decade Soviet Union (discussed ), contrast successful experiences China, managed find strategies adapted situation. measure China' success devising strategy: separate provinces China treated separate data points, 20 fastest-growing economies world 1978 1995 Chinese (World Bank, 1997). 9 emphasized limitations market, served provide insights historical ‘market failures’ Russian Federation East Asia. ways, problems Russian Federation nature East Asia, discuss greater detail moment: Russian Federation, economy transition facing huge government deficits severe political problems. common threads. cases, Washington consensus failed, similar reasons: failure understand subtleties market economy, understand private property ‘ prices ’ ( , liberalization) sufficient market economy work. economy institutional infrastructure. fair, failures Russian Federation order magnitude greater East Asia, remarkable growth, stability reductions poverty span quarter-century. banks East Asia lacked adequate supervision, banks Russian Federation lacked supervision, perform core function providing capital growing enterprises. standard theorems economics emphasize economy private property competition. Washington consensus, occasionally paying lip service , emphasis , thinking private property, owners incentive increase efficiency. Worries distribution competition concerns democratic processes undermined excessive concentration wealth addressed ! Russian Federation succeeded turning ordinary economic laws head, managed reverse usual trade-offs equity efficiency. Reforms moving inefficient central planning decentralized pricing mechanism, inefficient State ownership private property profit motive, increased output, price slight increase inequality. , Russian Federation achieved huge increase inequality, time managed shrink economy, estimates. Living standards collapsed GDP statistics, life spans shortened health worsened. late, recognized institutional infrastructure, profit motive combined full capital market liberalization fail provide incentives wealth creation spark drive strip assets ship wealth . East Asian miracle defining event East Asian miracle: rapid growth countries East Asia showed development , successful development accompanied reduction poverty, widespread improvements living standards, process democratization. advocating technical solutions, East Asian miracle countries deeply disturbing, countries follow standard prescriptions. cases, Government played large role. standard technical prescriptions, ( large) stable macroeconomic policies, . , privatizing, Governments started highly productive steel mills, generally pursued industrial policies promote sectors. Governments intervened trade, promote exports inhibit imports. Governments regulated financial markets, engaging mild financial restraint, lowering interest rates increasing profitability banks firms ( opposed financial repression, results negative real interest rates). policies 10 Governments focused simply areas ; included, , heavy emphasis education technology, closing knowledge gap advanced countries.8 impact individual policies remains subject dispute, mix policies worked . countries dictums liberalization privatization, grown faster, evidence proposition. cases, financial restraint, evidence considerable body theory suggests policies enhance growth. important lesson East Asia , large extent, countries succeeded transformation societies, fact evident visitor region. , transformation complete: witness sectors countries exhibit rigidities failed adopt modern technologies modes business. crisis facing East Asia today raised questions circles East Asian miracle fact transformation remains. countries face years negative growth, capita GDP enter twenty- century multiple -century , higher countries pursued alternative development strategies. Equally importantly, poverty rates fraction -century , undoubtedly higher beginning decade. Literacy remain universal, health standards remain high. careful reading East Asian experience decades strategies led remarkable achievements reveal views reflected incorporated development strategies fastest developers.9 East Asian crisis place extended exegesis crisis depth, spoken extensively matters .10 , important lessons learned crisis design development strategies. lessons completely lost world year, times , view, muddled. show views development begun change crisis, worth thinking 1997. world changed short year! year , Hong Kong, China, debate extending charter International Monetary Fund (IMF) include mandate capital market liberalization. Critics hedge funds financial Luddites wished reverse history inevitable domination free markets. 8 , , important components United States development strategy nineteenth century. 9 World Bank (1993) Stiglitz (1996). 10 , instance, Furman Stiglitz (1998) Stiglitz (1998b) (1998c). 11 Today, widespread recognition countries pursue good economic policies suffer volatility short-term capital flows. risks market failures (including externalities contagion systemic failures11) short-term capital flows apparent, benefits, countries East Asia high savings rates, remain unproven.12 East Asian crisis raised questions Washington consensus : sources problems items simply emphasized earlier policy prescriptions. Ironically, identifying sources potential problems, popular discussion shifted attention set problems financial capital market liberalization central part Washington consensus. , countries East Asia encountered economic problems widely chastised weak financial institutions, Washington consensus failed stress weak financial institutions important source macro-instability excessive government deficits. discussions failed note role financial market liberalization pressure outsiders played contributing weaknesses financial institutions.13 easier strip regulations create requisite institutional infrastructure financial markets function. reminder difficulties regulating financial institutions (including banks) developed economies bailout Long-Term Capital Management, huge hedge fund based United States reportedly exposure trillion dollars crash.14 , argued excessively risky lending inadequate financial-sector supervision developed countries contributed crisis. realize borrower lender, lender blame borrower. , borrowers East Asia blame, lenders developed countries. 11 arguments bailouts, existence bailouts, provide overwhelming support view marked discrepancies private social net returns short-term capital movements. discrepancies call review feasible government actions redress market failure, imposed huge costs millions millions people ( , costs reduced crisis-response policies designed). 12 Furman Stiglitz (1998) discussion evidence theory explaining result liberalization yield higher growth (, .., Rodrik, 1998) surprise. 13 Research Demirgüç-Kunt Detragiache (1998) fact shows systematic relationship financial market liberalization economic crises. 14 bailout raised lot questions put perspective charges East Asia: bailout represent crony capitalism, partners hedge fund vice-chairman Federal Reserve Board regulators realize size threat , supervisory capacity supposedly sophisticated regulators world, longest tradition regulation, extending centrury , understanding financial markets defence government role threat contagion cover- Federal funds allegedly involved, discretionary regulatory powers provide implicit threats ( tighter supervision case -cooperation) promises ( regulatory forbearance bailout proved costly) deliberate attempt participants restrict transparency, revealing market relevant information 12 extent foreign banks marginal lenders, deserve blame: foreign lenders Republic Korea’ highly leveraged firms ( banks extensive loans highly leveraged firms) knew enterprises’ debt-equity ratios higher financial analyst called prudent. supposedly managed banks, supervised supposedly sophisticated regulatory authorities, loans. , loans driven government pressure. suggestion countries bad loans result crony capitalism, result natural working market processes15 East Asian crisis put sharper spotlight financial institutions, broader aspects political economic life. instance, lack transparency widely identified contributed crisis. econometric evidence support conclusion16 skepticism reinforced remember previous major crises occurred Scandinavian countries, transparent world. emphasis transparency , raises importance broader societal issues. Transparency effective participation decision-making, participation, argue, essential part successful development transformation society. III. principles development strategy development strategy takes core objective development, transformation society. recognizes integral part successful development increase GDP capita. part story, achieved country adopts broader development focus. successful, development strategy raise GDP capita, living standards, evidenced standards health literacy. reduce poverty goal elimination, goal successful economies attained ( absolute poverty standard). sustainable, strengthening environment. real societal transformations enhance likelihood underlying policies durable, withstanding vicissitudes accompanying democratic processes. discussion principles divided sections: development strategies , differ plans; catalyze society-wide change; participation ownership crucial. 15 instance, evidence government pressures caused excessive real estate lending Thailand. 16 , , Furman Stiglitz (1998), show transparency East Asia average ( gauged standard measures) countries experience crisis; crisis countries East Asia decades remarkable growth, , , transparency increased decreased prior crisis. 13 concept development strategies Corporations increasingly corporate strategies guiding thinking longer-term investments. Development strategies thought light, detailed programming models development plans , originally grew attempt central planning work. Development strategies, ways detailed planning documents, ways ambitious, set strategy accumulation capital deployment resources, transformation society. development strategy set vision transformation, society 10 20 years . vision embrace quantitative goals, reduction poverty , universal primary education, elements targets transformation process, vision transformation . vision include view transformation institutions, creation social capital capacities, cases replace traditional institutions inevitably weakened process development. cases, institutions elements ; process evolution adaptation. transitions difficult, articulate implement: societies traditionally discriminated women achieve higher degree equality, time maintain traditional values development strategy likened blueprint, map society . metaphor misleading, understanding helps difference plans development strategies future. development process difficult write today blueprint map economy ten years, quarter century. requires information, knowledge . , planning documents failed account virtually major uncertainties facing development process. principle development plan map economy respond myriad contingencies occur coming years, practice seldom . contrast, development strategy living document: set created, revised adopted, process participation, means ownership consensus obtained, details fleshed . development strategy fulfils functions sets vision future. Development strategies priorities societies resource-constrained; poor countries . general resource constraints constraints capacity government, limitations number issues pursue. pressing , imperative 14 development strategy set priorities. key aspect prioritization awareness sequencing: tasks tasks. , instance, essential establish competition regulatory framework privatization; essential establish financial regulatory framework capital market financial sector liberalization. Development strategies coordination traditional economic theory, prices perform coordination required economy. requires full set markets assumption patently satisfied developed countries. sense economy essential: , instance, economy move stage development, infrastructure, human capital institutions place. essential ingredients missing, chances success greatly reduced. coordination agencies levels government, coordination private sector public, parts private sector. kind coordination development strategy markedly , spirit detail, kind envisioned ( achieved) indicative planning. indicative planning substitute missing markets, attempting provide detailed coordination input output decisions industries, development strategies focus broader vision, including entry technologies industries. Development strategies consensus-builders process constructing development strategy serve function, helping build consensus broad vision country’ future, key short- medium-term objectives, essential ingredients achieving goals. Consensus-building important part achieving political social stability ( avoiding economic disruption claims society’ resources exceed amount available17); leads ‘ownership’ policies institutions, turn enhances likelihood success. Catalysing society-wide change: enclaves projects transformation society heart development, question bring . major roles development strategy serve catalyst, identifying areas country’ dynamic comparative advantage. Identifying areas publicizing information public good, responsibility government. 17 analysis effects hyperinflation, caused imbalance resources objectives, Bruno Easterly (1998). 15 Transforming societies effective, attempt serve catalyst embrace ambitious goal encouraging society-wide transformation. Earlier, noted , development efforts succeeded transferring technology transforming societies, process creating dual societies pockets advanced technology . sense, duality isolated enclaves developed represents failure development process. goal understand part wrong, enclaves serve ‘growth poles’, catalysts development narrow confines. development projects. project good sense yields high project returns, development impact. , high returns , benefits spread broader society, project judged true success. cases, lack development impact result fungibility: country range projects wishes undertake, high social returns , negative, returns ( designed primarily enrich ruling elites). country ‘sells’ good projects aid donors, shift resources projects social returns. Ascertaining additionality project occurred happened difficult impossible. , case, aware marginal contribution appears blush. Part Government’ role catalyst undertake projects lead social learning , projects country draw widely applicable lessons, instance viability industry. benefit investment direct returns project, learned projects success failure. learning benefits appropriated fully private agents, kind experimentation private sector. critical aspect, , Government’ decision undertake project scaled . project succeeds massive investment resources mobilized generally, requires input, generally , good candidate scaling . point concrete, suggest couple examples. project textbooks school , instance, increase effectiveness school, resources provide similar textbooks schools, project limited developmental impact. contrast, project develops curriculum suited conditions country motivates children parents effectively, nationwide impact. project demonstrates local participation education local control rural schools increases school accountability ( El Salvador18) student performance ( Nicaragua19) replicated nationwide ( 18 Jimenez Sawada (1998). 16 , worldwide), limited additional resources. , local involvement catalyst community-based development efforts education. strong externalities projects. learn project performs, process learning interact address educational problems, community learns deal issues , engage process consensus formation. concern scaling- core Governments’ involvement projects, involvement desired transformative effect. Participation, ownership role outsiders development transformation society clear implications locus development efforts , process assistance organized, explain section. imposing change work clear: effective change imposed . , attempt impose change engender resistance give rise barriers change, facilitate change. heart development change ways thinking, individuals forced change . forced actions. forced utter words. forced change hearts minds. point brought home forcefully meeting finance ministers central bank governors countries Soviet Union. articulate perfectly requirements sound macro-policy, announced subscribed totally policies including practices deviated markedly professed beliefs. , interactions donors recipients impede transformation. encouraging recipients develop analytic capacities, process imposing conditionalities undermines incentives acquire capacities recipients’ confidence ability . involving large segments society process discussing change changing ways thinking excessive conditionality reinforces traditional hierarchical relationships. empowering serve catalysts change society, demonstrates impotence. promoting kind open dialogue central democracy, argues dialogue unnecessary, worst counterproductive. 19 King Ozler (1998). 17 Ownership participation , key ingredients successful development strategy ownership participation. ownership essential successful transformation: policies imposed grudgingly accepted superficial basis, rarely implemented intended. achieve desired ownership transformation, process leads strategy participatory. Development matter negotiations donor Government. Development reach deeper. involve support groups civil society; groups part social capital strengthened, give voice - excluded members society, facilitating participation increasing ownership development process.20 involving groups, process strategy formulation elicit commitment long-term involvement development sustainable. Ownership participation development strategy adapted circumstances country; research shows projects higher levels participation fact successful, part projects erroneous assumptions capabilities beneficiaries.21 agents, including donors, encourage ownership persuasion , presenting evidence, theoretical empirical, strategies policies bring success approaches. degree ownership greater strategies policies developed country , country driver’ seat. , enthusiasm ownership participation, implied participatory processes suffice. individuals community actively participate discourse , process simple discourse. , participation fully meaningful, based knowledge; crucial role education capacity-building. , calling participation resolve issue incentives: individuals ( groups individuals organizations) motivated involved. , difficult sustain participation participants sense listened , views account decision-making. sense process decision-making fair , turn requires participation process constructs institutional arrangements decision-making. full representative participation, individual incentives desired actions. , reasons participation policy makers understanding incentives . Institutions, incentives, participation ownership viewed complementary; sufficient. Participation ownership crucial, , clear involvement 20 groups representative borne mind, , assess weight accorded voice expression development strategies. 21 World Bank (1995, 1998) Isham, Narayan Pritchett (1995). 18 outsiders place local ownership. , discuss , outsiders role facilitating process, assisting provision resources knowledge. inclusion consensus-building obstacles successful development limited ability countries resolve conflicts. ability resolve disputes important part social organizational capital. Reforms bring advantage groups disadvantaging . greater acceptance reforms greater participation transformation process sense equity fairness development process, sense ownership derived participation, effort consensus formation. Numerous examples ( Ghana) shown importance instance consensus formation achieving macroeconomic stability. contrast, decision , , eliminate food subsidies imposed , agreement ruling elite international agency, helpful achieving consensus , , promoting successful transformation. IV. components development strategy details development strategy differ country country, constant development strategy outlines approach transformation society, address components society. Loci development , strategy include components aimed developing private sector, State ( public sector), community, family individual. components development strategy intricately interrelated. instance, centre strategy development individual education; enhancing skills critical private sector strategy, increase wages women results improved female education strong bearing family. () Private sector development. , development strategies focused government; natural, large extent, ‘plan’ plan public action, blueprint Government. broader role development strategies, natural discussion private sector, , , typically centre stage. key objective creation strong, competitive, stable efficient private sector. elements strategies advance objective : • legal infrastructure, providing ( enforcing) competition laws, bankruptcy laws , broadly, commercial law; • regulatory framework encourages private provision infrastructure , maximizes extent feasible competition ensures 19 competition abuse market power; • government provision infrastructure, private provision infrastructure occur; • stable macroeconomic framework; • stable effective financial system, requires regulatory framework ensures safety soundness, enhances competition, protects depositors, creates confidence ‘level playing field’ securities markets protecting investors abuses, identifies underserved groups society; • adjustment strategy elimination distortions economy interfere efficient deployment resources. failure establish key institutional predictions market economy factors contributing failures transition market economy countries Soviet Union. failure establish sound legal regulatory environment banks, securities markets financial sector broadly recognized played large role East Asian crisis. , importance financial sector development reflected World Bank’ research, Strategic Compact formulated East Asian crisis occurred.22 private sector flourish, environment conducive private-sector development. key part environment quality labour force educated, healthy workforce essential. () Public sector development. development strategy pay attention public sector. , Government manage affairs, expected manage ( affect ) affairs key question strategy public sector identify role Government Government . question activity carried public private sector, complement , acting partners development effort. Related issues include tasks undertaken level government, Governments effectively interact civil society, creating conditions conducive transformation society. Central ingredients public sector strategy23 : () focus public sector unique functions perform, creating enabling environment private sector (discussed previous paragraphs), ensuring health education widely , spearheading drive eliminate poverty; (ii) strengthening capabilities public sector, including development effective civil service, restructuring public sector, effective incentives market market- mechanisms; (iii) matching responsibilities modes operation 22 description Strategic Compact, http://www.worldbank.org/html/extpb/annrep97/overview.htm. 23 World Bank (1997b). 20 capabilities State. () Community development. activities effectively undertaken national international level, life centres communities, communities effective vehicle bringing transformation society. National Governments simply remote, opportunities meaningful participation limited. -designed development projects ( financed social funds) catalyst community development. Participation community level choice project reflect preferences community, project design reflect local information, ensuring local conditions, preferences circumstances account. Equally importantly, local participation engenders commitment, project sustainability long run, participation project part transformation process. growing evidence relationship participation development effectiveness. () Family development. major determinant success raising income capita population growth, stems decisions family. major determinant female education, decision family; impact female education reflective key role women play educating generation. key formative years child, family responsible education, nutrition health. broadly, increasingly aware importance family development, household. aware power family instrument development, aware parts world frequent instances dysfunctional behaviours, including - family violence. () Individual development. , transformation society entails transformation individuals behave. Development entails empowerment individuals, control forces affect lives, richer, healthier life. Education health centre efforts achieve individual development. Resources, knowledge institutions framework thinking development strategies focuses levels private sector, Government, community, household individual. cut development strategy approach emphasizes levels operates, provide. () Resources. noted earlier, development entails resources: returns capital, defined broadly include human capital, depend heavily availability complementary inputs -managed economic environment -functioning institutions. , clear resources important ingredient development. development strategy outline : plans developing physical capital human capital, preserving natural resources; plans encouraging saving investment, filling gap ; plans schools financing ; 21 plans renewing natural resources. () Economic management. defining characteristics developed countries paucity resources, important resources deployed. Comprehensive development strategies set identify important distortions economy, addressed, full account social costs distributional impacts policies. , ingredients economic management broader traditional lists, focused largely liberalization, privatization macro-stability. () Knowledge management. Development requires closing gap ‘objects’, human physical capital, knowledge. Knowledge capital fact complements: improved knowledge enhances return capital, additional capital opportunity acquired knowledge. Incorporating knowledge development strategy requires creating capacities absorb adapt knowledge ( investments human capital research institutions), investing technologies facilitate dissemination knowledge creating knowledge locally. , development strategy outline strategy knowledge management. World Bank increasingly thinks lines, conceiving ‘knowledge bank’, central tasks countries close knowledge gap24. provide cross-country experience , melded local knowledge, effective choices development policies, programmes projects. () Sector -national strategies. cases, narrow ’ focus economy sector, industry ( health care sector agriculture), region, cities ( urban strategy) rural areas. cities represent arena cluster concerns jostle forcefully infrastructure, environment, health finances. ways, cities microcosms economy , integrated solutions city’ problems provide insights integrated solutions economy . , cities successful achieving modernization rural areas, natural focus cities achieve societal transformation. () Social organizational capital. form capital, physical capital, human capital knowledge, essential successful transformation: social organizational capital, includes institutions relations mediate transactions resolve disputes. elaborate bit point, short shrift policy discussions. Traditional societies high level organizational social capital, capital form facilitates change. process development, organizational social capital destroyed. transformation weaken traditional authority relationships, patterns migration sever community ties. problem process destruction occur organizational 24 Wolfensohn (1998) World Bank (1998). 22 social capital created, leaving society bereft institutional structure function .25 Social organizational capital handed country . developed , knowledge key ingredients facilitate creation social organizational capital. pace change pattern reforms adapted country’ ability create social organizational capital. factor , fact, important constraint speed transformation. earlier development literature, days thought main factor separating developed developed countries physical capital, considerable discussion countries’ absorptive capacities.26 perspective paper, issue pace absorbing capital, pace societal transformation. China demonstrated country absorb enormous amounts physical capital quickly. early stages development, roads, schools, energy, telecommunications elements infrastructure huge, hard resources productively . simply providing ingredients constitute development. talk late capacity-building. easy part capacity-building providing human capacity, education, skills knowledge required development. hard part capacity-building development organizational social capital, including institutions enable society function . dimensions : • enabling environment private sector, includes markets legal infrastructure markets function ; • knowledge environment, enables knowledge absorbed, adapted circumstances country, put ; • policy environment, includes capacity key decisions development strategies. Consistency, coherence completeness 25 Russian Federation= experience offers excellent, sobering, . decade process transition market economy began inefficient system central planning replaced decentralized, market-oriented system, distortionary pricing patterns , large, eliminated, private property supposed restore incentives lacking previous regime output remains transition started. underlying resources deteriorated slightly, human capital knowledge base remains. explanation destruction organizational social capital, process fact begun previous regime, continued. Policy makers inadequate efforts develop bases, provide legal infrastructure markets, including bankruptcy, competition contract laws effective enforcement. 26 Rostow (1960, pp. 143-44). 23 pieces constitute effective development strategy, points view: levels operate building blocks provide. sum parts, parts consistent , fit set ‘road map’ vision future combined framework realizing vision. development strategy envisioned -year plan, -year plan. fruits enhancing nutrition education pre-school child fully felt decade . vision long-term, time pointing actions today. meaningful, vision actions set coherent framework, requires setting priorities, encouraging partnership account global regional environment. () Priorities. needed successful development, including actions listed . Earlier, emphasized , limitations resources including developing country’ administrative capacities set priorities. argued earlier purposes development strategy establish priorities. flesh greater detail principles setting priorities priorities developing countries share. , developing country Governments, focus leveraging identifying areas limited actions large-scale effects, absence requisite action part disastrous effects. priorities differ country country, common elements: • important education, education country develop, attract build modern industries, adopt growing technologies rapidly rural sector. fundamentally, development represents transformation society, education enables people learn, accept engender transformation. Education core development. • Infrastructure communications transportation vital conduct business modern world. reduce sense isolation developing countries, crippling aspects underdevelopment. today realize infrastructure privately, Government establishes regulatory legal environment. high priority. • Health unhealthy population productive labour force, basic standard health viewed fundamental human , unconscionable diseases eradicated controlled continue afflict millions developed , robbing human dignity. Today, , recognize actions important provision medical services maintaining health including warning dangerous behaviours ( smoking) encouraging behaviours ( good diets). • Knowledge , education, enriches human spirit , education health, leads productive society. power knowledge enormous: increased knowledge, output produced limited 24 amounts resources multiplied orders magnitude. • Capacity-building , successful development, successful transformation, country , accomplish institutions leadership catalyse, absorb manage process change changed society. () Partnership country assistance strategies. country’ development strategy , , framework thinking country’ plan change. framework, donors, including World Bank, act partners development effort identifying effective. roles include transferring capital, providing knowledge essential development capacity building. partnership country aid donors. Recall development entails transformation society; society engaged. development strategy outline engagement occur. set , instance, view role government, , public sector, framework decentralization: describe areas private sector civil society lead, broadly ‘terms partnership’ government, private sector civil society. () Consistency global regional environments. emphasized components development strategy interrelated: instance, strategies private sector complemented strategies public sector; strategies national level complemented strategies community level. level, strategy consistent environment embedded, levels . strategies embedded -changing global environment. global environment opened opportunities vast international markets goods, countries limited growth domestic demand, possibility vast flows international capital complement domestic resources. opportunities accompanied challenges. , heavy dependence exports goods imports capital exposes country vicissitudes markets , foreign economic downturn close opportunities exports sudden change investor sentiment reduce sharply capital inflows . magnitude risks depend country manages economy. takes strong government actions strong economic institutions, weather storms large costs economy. developed countries, impacts experience shown frequently disastrous. essential part development strategies advantage global environment time reducing country’ vulnerability inevitable shocks global engagement. countries, developed developed, share planet, husband globe’ scarce resources, including atmosphere. preservation atmosphere avoiding build- greenhouse gases international 25 public good, benefits accrue people.27 development strategy set vision international collective addressed. aspect global development, important sees development lens societal transformation. countries remarkable success making transformation, early stages transition learn experiences. successes ( failures) occur, successes ( failures) impacts , extracts lessons learned experiences. spreading experiences doubt played role successive development countries East Asia. time, countries’ strategies set context developments region. true small countries, landlocked countries, access markets critical. transportation issues dealt regional level. , instance, myriads environmental natural resource issues ( notably dealing water) addressed regional level. . Learning openness: trade, foreign capital development strategy openness world fit vision development strategy understanding development transformation society accumulation physical human capital lens examine question. reveals trade play crucial role, mechanisms economists traditionally stressed. Trade development transformation moment explain . standard textbook model international trade, openness foreign goods supposed bring benefits primarily effects market price imported goods. Indonesia produces mid-size automobiles domestically cost $40,000 import $20,000 apiece, opening auto imports yields net gain welfare: increase consumer surplus offsets fall profits enjoyed Indonesian manufacturers. Indonesia move resources employed producing cars idle labour, human physical capital, land shift industry country comparative advantage (textiles, classic story). Barring terms--trade effects, resulting increase efficiency Indonesia result trade liberalization, don’ assume foreign countries respond market-opening . magic comparative advantage poor country benefits trade , absolute terms, productivity trade partners’ 27 discussion concept international public good, , instance, Stiglitz (1995). 26 range goods. standard model tells important tale, story. , ways contribute transformation society. gaps standard Hecksher-Ohlin trade model practice. , rigorous empirical research country experience suggest growth effects engagement global market place larger predicted standard model.28 specifications empirical growth regressions find indicator external openness trade ratios indices price distortions average tariff level strongly capita income growth.29 countries ( small, poor ) autarky typically lagging development, reasons apparently stem part closed borders. standard Hecksher- Ohlin model predicts gains trade small, consisting - Harberger triangles supply-demand diagrams. , missing standard story.30 problem industry-level evidence inconsistent standard model. Recall model, trade economies shift intersectorally, moving production frontier. reality, main gains trade outward shift production frontier, intersectoral movement. essence, trade economy consume basket goods cost, produce pre-opening set goods cost. ( increase quantities explained producers’ Harberger triangles). evidence suggests strongly opening world leads improvement technology production. ‘technology’, mind broader important technical blueprints lie production good. Technology means affects inputs transformed outputs blueprints, market -market institutions modes organizing production. major difference developed developed countries difference efficiency inputs transformed outputs;31 trade reduces discrepancy. 28 , , Romer (1994). 29 , , Sachs Warner (1995). 30 important gains trade increased variety goods goods inputs production processes open trading system offers access (Rodriguez- Clare, 1996, Stiglitz, 1997b). , reducing price goods domestically, trade offers access goods ( semiconductors numerically controlled machine tools) simply price autarky. inputs bring costs spur innovation importing economy. 31 World Development Report 1998/1999 (World Bank, 1998) focuses issues, emphasizing knowledge (broadly defined) inputs physical human capital matters. standard economic models, 27 concerned transformation society, adopt policies ensure openness leads broad transformation. crucial trade foreign direct investment (FDI) confined small enclaves, enclaves give temporary boost statistical measures national output. , wealth gold resources area country’ population base successful attracting FDI increasing mineral exports, spur development long term. designing policies spur openness capture potential benefits, focus realizing transformative power interaction world. put succinctly, goal dual economy, developed economy. trade FDI important roles . understanding roles work remains incomplete, growing. spoken bit trade. FDI similar importance, capital enters country direct investment, typically package management expertise, technical human capital, product process technologies, overseas marketing channels scarce supply typical developing country. Evidence suggests society puts place complementary policies structures, FDI give boost technological level growth host country. fears FDI 1960s 1970s based largely notion FDI enclave phenomenon; modern incarnation, typically integrated surrounding society, FDI attract, fear. International competition multinationals robust, foreign corporation receives monopoly rents host country larger share benefits investment. Implications international architecture financial flows months, rethinking soul-searching global financial crisis led discussion redesign international financial architecture. development strategy outlined important implications design process. , , short-term capital , note short-term capital volatile, experience year reminded repeatedly. FDI flows largely continued unabated, short-term capital flows completely reversed crisis countries. , short-term capital added benefits brought FDI benefits ancillary view development accumulation capital, recognized central view lens development strategy. today’ volatility short-term capital, good long- term investments based short-term capital. equally importantly, short-term capital bring development transformation. (Similarly, hedge funds bring = (, ), output, measure efficiency, vector factor inputs, vector traded inputs. standard theory argues , vector traded inputs, function market prices ; distortions caused autarky lead . contrast, newer perspective discussed , trade play important role increasing . 28 development, bankrupt.) , societies high domestic saving rates quality marginal investments, short-term capital retard transformation. high development costs exacted abrupt capital-flow reversals lost years education, rise infant mortality, job losses easily swamp marginal benefit derived flows, happened East Asia. Implications developed countries: responsibilities interest developing countries engage fully world trade attracting FDI. trade policy agenda developing world agenda advocated developing countries West years suffered single-minded focus liberalization reduction trade barriers countries. complement argument, important , responsibilities developed world area trade policy. lay responsibilities , suggest developments helped delay progress transformative development openness: • , Uruguay trade agreements benefits brought world’ consumers, producers taxpayers ensure opening markets developing-country exports. empirical estimates net benefits region, calculated agreement signed: estimates, -Saharan Africa net loser result Uruguay .32 , Africa failed gain largely liberalize barriers trade, depriving opportunity costs spur efficiency innovation domestically. Uruguay offered market access products Africa export. suggested experiences East Asian economies, learning opportunity offered trade takes place export markets, developing-country firms build relations sophisticated customers compete head-- head producers world. Success export markets requires learning, export champions bring lessons home apply domestic market. Note claiming lack market access , important, barrier African exports. African countries life easier exporters, improving communications infrastructure, revamping transportation facilities reducing unnecessary bureaucratic obstacles exports. market access area developed world uniquely positioned give boost development transformation called . • , related point, continue working stem tide protectionism West. decades rise creative measures block imports. Examples include nuisance anti-dumping claims, lodged laws economic sense; countervailing duties similarly lack objective justification;33 barriers genetically altered products, steadily 32 Harrison, Rutherford Tarr (1995). 33 discussion barriers, Finger (1993) Stiglitz (1997). 29 important developing-country exports greater products. Developed countries luxury large -paid legal lobbying industries capitals, industries innovative devising means restricting competition. equity standpoint, essential stamp innovations energetically work developing-country barriers trade. • , international protection intellectual property rights strike balance interests producers users. users include firms consumers developing world technological adapters users innovators academic community world (developed developing). , important give incentives innovators ensuring return investment research development. remember knowledge crucial input production processes, agriculture high-tech industry, physical inputs production, knowledge shared ad infinitum additional cost. Thomas Jefferson likened creation knowledge lighting candle darkness: candles draw light candle diminishing power brilliance. Excessive protection intellectual property rights virtuous cycle knowledge transmission regeneration developing world. easy answer, stop questions. reason devoted section year’ World Development Report issue intellectual property rights.34 cases, seek construct good policies, sense process policies devised fair open. sense fairness, developing world retreat reforms decades. Worse , perception hypocrisy reinforces sense unfairness: developed countries preach doctrines openness, engage restrictive practices. preach countries undertake painful measures liberalization entail losses jobs industries developed countries anti-dumping safeguard measures protect industries adversely affected. , economies full employment, risks extended unemployment minimal, marked contrast situation developed countries, unemployment high safety nets inadequate. developed countries dismiss political problems facing developed countries, justify resort protectionist measures overcome worse protectionist sentiments countries. Fiesole speech earlier week, pendulum opinion swung , risks swinging opposition openness.35 task lessen momentum pendulum swing, increasing equity international architecture trade finance. Retreat openness developing world unacceptably delay development transformation sorely . 34 World Bank (1998). 35 Stiglitz (1998). 30 VI. Concluding comments learned -century development , development inevitable. learned development matter technical adjustments, transformation society. opening remarks, referred disillusionment Washington consensus, set prescriptions failed foster development transformation. consensus narrow objectives instruments. lecture set foundations alternative paradigm Washington consensus. , revolutionary: World Bank development community broadly, increasing attention decades issues health education, moved measures GDP lifespans literacy rates. recognized importance economic security stressed creation safety nets. growing consensus objectives democratic, equitable sustainable development. , argue greater sum parts, successful development focus transformation society. prepared task, precisely increasingly ambit broader range issues underemphasized important components, role competition financial markets institutional infrastructure broadly. argue successful development transformation affects , . , broader perspective affects strategies policies, affects processes. argues openness, partnership participation, words sound appeals politically correct nostrums day. argue lies words theory development, evidence processes lead successful development efforts. Honesty, , requires add word. calling transformation societies, elided central issue: transformation kind society, ends , worried development destroy traditional values. cases, clash science traditional beliefs. development today focuses preservation cultural values, partly values serve cohesive force time forces weakening. Maintaining social organization enhancing social capital part key successful development transformations. , important note progress successful development mothers children die infancy, opening minds knowledge increased opportunities reflect universally held values. reason openness, openness process: contribute open, democratic society. , values . References 31 Bruno, . . Easterly, 1998. ‘Inflation crises long-run growth,’ Journal Monetary Economics 41(1), February, pp.3-26. Deininger, ., . Squire. 1996. ‘ data set measuring income inequality.’ World Bank Economic Review 10(3), pp.565-591. Demirgüç-Kunt, . . 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