World Bank: progress in developing world requires market-government interaction

Business America, July 15, 1991

The lessons of 40 years of development and the evolving thinking on the best policies for the future are the central themes of The World Development Report 1991 published by the World Bank July 8.

During the last four decades, many developing countries have advanced at an impressive pace, with some having raised average incomes more than fivefold during this period, with striking gains being achieved in health and education. However, in one-quarter of the developing countries, the World Bank says, living standards have fallen during the last 25 years and today, more than one billion people, one-fifth of the world's population, live on less than one dollar a day.

The challenge of development is now more important than ever before, given that nearly 95 percent of the growth in the world's labor force over the next 25 years will be in developing countries. The central issue in development, the report asserts and takes for its unifying theme, is the interaction between governments and markets.

In releasing the report, World Bank Chief Economist Lawrence Summers observed: "The tremendous divergence of country experiences over the last 40 years provides the basis for convergence in views about the way forward. More than at any time within memory, there is consensus on the key elements of what the report labels a market-friendly' approach, to development. "

"Competitive markets are the best way yet found for efficiently organizing the production and distribution of goods and services," the report states. "But markets cannot operate in a vacuum-they require a legal and regulatory framework that only governments can provide. And, at many other tasks, markets sometimes prove inadequate or fail altogether. That is why governments must, for example, invest in infrastructure and provide essential services to the poor."

The crucial question for the future is whether national and international policies will permit the potential for growth created by technological progress to become reality. Sustainable development requires peace. Rapid development requires that economic integration expand for all. Country policies, as well as global conditions, affect development.

Global Growth in the 1990s-The report includes projections for global economic growth in the 1990s. Assuming no major adverse shocks and generally good policies, per capita incomes in the industrial countries might grow, on average, about 2.5 percent a year. Assuming the continuation of policy reforms, per capita incomes in developing countries might grow by about 3 percent per year. Under more vigorous and comprehensive reforms, long-term income growth in developing countries could be improved by 1.5 to 2 percentage points on average; if recent reforms are reversed, the study warns, the outcome might easily be much worse.

Paths to Development-Economic development, the primary concern of the report, is, in itself, a broad idea.

By notion of strictly economic progress must, at a minimum, look beyond growth in per capita incomes to the reduction of poverty and greater equity, to progress in, education, health, and nutrition, and to the protection of the environment."

Growing productivity is the engine of development, the report asserts and then examines what drives productivity. Technological progress is the key element, the study says, and this in turn is influenced by history, culture, education, institutions, and policies. Evidence in the report links productivity to investments in human capital and to economic policies-in particular, the way markets and governments play their respective roles.

The report examines the relationship between markets and governments under four broad headings: human development, the domestic economy, the international economy, and macroeconomic policy. Actions in each of these areas contribute to development. In addition, these elements of development strategy interact. "One of the most striking lessons of history is the interaction between investments and good policies," says Vinod Thomas, leader of the World Bank team which prepared the study. "The key to dramatic success is the synergy between investments in human and physical capital on the one side, and ;in open and competitive policy environment on the other, according to the evidence presented in the report."

Human Development-"The evidence shows that investing heavily in people makes sense not just in human terms, but also in hard-headed economic terms," the study declares. Improving health and nutrition slowing population growth, building technical capacity by expanding education and reducing poverty are goals that most developing countries have in common.

Many governments invest less than 5 percent of GDP on education and health combined-far too little in human development, the report states. In Brazil and Pakistan, for example, rapid growth alone was ?insufficient to improve social indicators while in Chile and Jamaica, these indicators improved even in periods of slow growth. Among low-income countries, Guinea and Sri Lanka have the same per capita income but average life expectancy is some two-thirds longer in Sri Lanka.