Nicholas C. Hope Director Stanford Center for International Development

Approaches to Economic Development and International Development Assistance Nicholas C. Hope Director Stanford Center for International Development CDDRL Lecture, November 28, 2011

Approaches to Economic Development and International Development Assistance Outline: • Growth and the development experience • The (not so?) elusive quest for development • Approaches to development • How much consensus is there? • Have bilateral and multilateral aid agencies helped? • The continuing debate

Growth and the development experience Assertion: We live in an extraordinary period – present some figures/charts to justify that statement, which has probably been made for centuries, if not millennia Acknowledge our debt to Angus Maddison, who died early in 2011, for a life spent illuminating humankind’s economic progress – in the tradition of Kuznets and Clark, but with a canvas incomparably broader

Growth and the development experience • Worldwide Growth in Real GDP/Capita, 1000- Present (%) Source: Reproduced from Economic Growth in the 1990s: Learning from a Decade of Reform, Page 1; Original source: DeLong 2000.

Growth and the development experience A vast literature on growth theory, economic development, political economy, the evolution of institutions, technological change and knowledge creation that endeavors to explain the phenomenon illustrated in the previous slide (See bibliography to Economic Growth in the 1990s). Impossible to do justice to all of the explanatory factors here: my sense is that invention and innovation have played a major role, especially in medical care, agriculture, and costs of communication. Recognize that causality is elusive; very hard to substantiate. Greater prosperity closely associated with the expansion of the market through the opportunity to trade and invest beyond a local community. Advances in knowledge about economic policy-making also contributed in important ways. All the more striking due to increases in population that accompanied economic growth; further questions about cause and effect.

Growth and the development experience Emphasize growth since World War II, with reference to earlier periods to explain the motivation for policy and institutional changes that have marked the post-war period Progress in the past 60 years (only 50 shown in the next chart) uneven, but essentially universal Different countries/regions associated with periods of exceptional growth: Germany and Japan; East Asian NICs; China, now India; more recently, several African economies The Commission on Growth and Development singled out 13 individual countries that have sustained fast growth for exceptionally long periods in the post-WWII era; concludes “they defy generalization”

Growth and the development experience PER CAPITA INCOMES, BY REGION, 1950-2000 (1990 Geary Khamis [version of PPP] dollars) Source: Angus Maddison, The World Economy Historical Statistics, OECD Development Centre Studies, OECD, Paris, 2003. P. 234

Growth and the development experience: • GDP of major economies: 1960-2010 Source: World Development Report

Growth and the development experience: • major OECD economies’ GDP per capita: 1970-2010 Source: World Development Report

Growth and the development experience: • GDP per capita of BRICI: 1970-2010 Source: World Development Report

Growth and the development experience: • major traders’ international trade in goods Sources: IMF (1990-2008), World Bank (2009-2010)

1. Growth and the development experience: Chinese and Indian growth: 1990-2010 Sources: World Development Report, World Bank (2009), IMF(2010)

Growth and the development experience: • Chinese and Indian growth: 1990-2010 (% per year) Source: World Development Report

Growth and the development experience • Greater post-WWII prosperity has been almost universal, but with the US far and away the dominant economy. The US share in global GDP finally seems to be trending down, but to exceed the US in nominal dollar terms still requires combining the economies of China, Japan, Germany and another major European country • Past 20 years, the most exciting in my professional career, with the emergence of China and India. With close to two-fifths of the global population, hope now exists for continuing major reductions in global poverty • The challenges are obvious, including countries’ ability to sustain policy reform, and the resource and environmental implications of continuing fast growth • A hopeful sign, recently, and into the sharp economic down-turn of 2008-10, developing countries are out-performing richer ones Note the significance of 2004.

2. The quest for development Although many definitions might be proposed, one that serves my needs is: Economic development is the process that transforms a country’s capacity to provide for the material well-being of its people – narrow; neglects much of what people value, especially as they move beyond the boundaries of subsistence. • associated with (requires?) economic growth; which needs to be sustained over time for successful development • success of process usually judged also by distributional effects (and, more recently, by broader considerations of sustainability – environmental impact; resource depletion)

2. The quest for development Concern for development an outgrowth of the determination post-WWII to avoid a recurrence of the 1930s Initial focus on recovery of war-ravaged economies; from mid-1950s, emphasis shifted to growth prospects of poorer countries – “LDCs” or (more politely) “developing economies.” Immediately after WWII, most of the load carried by the US – Marshall Plan, but an important role also for the “Bretton Woods” institutions – IMF, World Bank (IBRD, initially), and GATT (now WTO). Soon joined by many more bi- and multilateral aid-giving agencies.

2. The quest for development Probably fair to say that, despite the evidence to the contrary presented in earlier slides, the popular view of the international efforts to promote growth of poor countries would be negative: • many countries still poor, and some of them dysfunctional “failed states” • IFIs and bilaterals seen as wasteful and ineffective – Peter Bauer on official development assistance (ODA) “taking from the poor in rich countries to give to the rich in poor countries.” • my view: opposition to aid-giving is often mean-spirited; an excuse to disregard the suffering of much of humanity. Where aid has failed, imagination has also failed, in the sense that the delivery mechanism has been inappropriate to the recipient’s circumstances. • a potentially legitimate concern, however: whenever aid is available, governance suffers. One can argue that aid inevitably creates incentives for rent-seeking and fosters corrupt practice.

2. The quest for development A host of highly complex issues to consider in arriving at an objective judgment. Beyond the scope of this lecture to endeavor to resolve the issue, except to note that there are examples of spectacular successes in both post-war reconstruction and development in which aid giving has played its part. Which leaves a key question: Why have some countries been able to develop successfully and rapidly, while others cannot? From the viewpoint of the international aid-givers, after years of experience, untold billions of dollars spent, and unending analysis of the problem, why have so many developing countries been unable to sustain growth?

3. Approaches to development The development literature is replete with a host of reasons for the differential success of developing countries – Latin American disappointments; East Asian success stories; lagging Africa. Many embarrassments, historically, in scholarly comparisons of countries’ prospects and predictions of comparative success. An important consideration, often neglected, is the need for persistence over time. A country growing at 7% a year needs ten years to double its GDP; if population is growing fast as well, then doubling per capita GDP takes even longer. The implication is that even potentially successful strategies take time to make significant progress; more time than the tenure of most governments, and beyond the limits of the patience of many donors.

3. Approaches to development Since WWII, many development strategies have been promoted as “solutions” to the development problem. Some assumed the aura of the “silver bullet” and disillusionment quickly followed when desired results were long in coming. One can identify a list of “vogues” in advancing policies to promote development that have appealed to policy makers in the post-WWII era. The list presented here is neither exhaustive nor authoritative, but does give a flavor of the many approaches that have influenced strategies for aid giving during the period. In the 1950s and 1960s: • central planning (aid for infrastructure; industry. Issues: • industrialization (project v. program aid; tied or untied aid; • import substitution (multilateral v. bilateral aid Note that the early 1950s was a period in which the World Bank was still engaged in supporting the recovery of war-ravaged economies

3. Approaches to development This was an era of the Harrod-Domar and Solow growth models; the surplus labor model (Lewis, and debates about the productivity of rural labor); the merits of balanced or unbalanced growth and the big push (Rosenstein-Rodan); the low-level equilibrium trap (Leibenstein and Nelson) ; and the foreign exchange constraint (Chenery, Bruno and friends). A common theme was that development relied on augmented savings/investment and adequate supplies of foreign exchange (for imports of capital goods). Also “stages of growth” (Rostow, and others; “flying geese”) approaches emphasized a natural progression as economies advanced; data were tortured to make stages credible, if not persuasive.

3. Approaches to development In the 1970s, a shift in emphasis: • basic needs and poverty reduction – McNamara, Nairobi 1973 • integrated area development • investment in social sectors – human capital Concerns for the distributional consequences of growth; sharing benefits of development more equally (Ahluwalia and Chenery) Increasing influence of the success of the NICs in East Asia; trade, capital flows, and engagement with the global economy. A step away from import substitution and export pessimism. Context included the first OPEC oil shock, a commodities boom, and wide-spread surge in inflation. Developing countries begin to attract substantial flows of international debt capital; mainly from banks for the more credit-worthy, but export credit agencies ensured that even the least credit-worthy importers were able to secure external finance.

3. Approaches to development In the 1980s: The debt build-up from the 1970s became burdensome as the developed countries (especially the US under Federal Reserve Board Chairman, Paul Volcker) took steps to eliminate inflation. Interest rates rose sharply, trade growth slowed, and further oil price increases all contributed to a debt crisis that engulfed much of the developing world. Of necessity, the emphasis of aid givers shifted: • to structural adjustment – fundamental changes in the nature of support from the IMF and MDBs. The policy advice/requirements of the IFIs became increasingly controversial as conditions for programmatic support from them were perceived as unacceptably onerous • true to an extent, as the limited funding available to the IFIs led to adjustment programs that required implausibly sharp changes in policy direction

3. Approaches to development In the 1980s : (Cont’) • implementation of the adjustment programs proved politically difficult for most governments, many of which chose to make no serious attempt to meet the programs’ conditions. Not surprisingly, many adjustment programs were judged to have failed. (Note: Stanley Fischer – WB Chief Economist, 1988-90 – recommended a return to an emphasis on project lending) • later in the decade, environmental issues began to take center stage and the activities of the aid agencies came under the close scrutiny of activist NGOs The sustained growth of East Asia and the indifferent results of policies recommended under structural reform programs led to renewed investigations into appropriate growth-promoting policies for developing economies.

3. Approaches to development In the 1990s: Spurred to a large extent by the collapse of communism, which caused analysts to seek appropriate policies for transition from central planning (command) to market, the early years of the decade witnessed: • the East Asian Miracle; • John Williamson’s summary of the policy conclusions from the turbulent 1980s (reflecting experience with the policy requirements of IMF/WB adjustment programs), termed the Washington Consensus; and • with the collapse of communism, numerous recipe books on policy advice directed at the transition economies – the merits of the “big bang” were debated.

3. Approaches to development In the 1990s: (Cont.) By the mid-1990s, the aid agencies were entreated to support a range of new “solutions” to the problems of development: • private provision of traditional development investments in infrastructure as part of a generally enhanced role for the private sector • enhanced design of development projects and programs, to be • focused on agreed (“comprehensive”) strategies for poverty reduction • more far-reaching in scope: in addition to the accepted financial, economic and technical analyses, project preparation should include detailed social assessments, environmental impact assessments, etc.

3. Approaches to development In the 1990s: (Cont.) • curtailment of corrupt practices that were considered to undermine the effectiveness of foreign assistance as well as domestic growth policies. The result has been to hold aid agencies to higher standards of financial rectitude in both implementing projects in their client countries, and their internal management practices. Under James Wolfensohn as its President, the World Bank became even more introspective, subjecting its activities to ever-greater scrutiny and introducing a host of additional safeguards to ensure member countries that the Bank’s projects were untainted by corruption. Increasingly, knowledge began to be emphasized as a means for lagging countries to catch up; the IT revolution gave substance to the contention in the “digital divide.”

3. Approaches to development Since 2000: Detailed reassessment of the impact of policies on growth prospects: see the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform (2005), which led to the formation of the Growth Commission headed by Michael Spence (former Stanford GSB Dean) and The Growth Report: Strategies for Sustained Growth and Inclusive Development (2008). Much wisdom in these reports; three broad conclusions: • most economists would see the Washington Consensus prescriptions as necessary, but not sufficient, to sustain growth; • growth is essential for substantial, sustained reductions in poverty; and • desirable reforms of both policies and institutions are largely country specific. One size decidedly doesn’t fit all.

3. Approaches to development Much attention in this decade also to other “solutions” to under-development, including: • establishment of appropriate institutions (“more important than policy”) • promotion of better governance: • anti-corruption ( Issue: a cause of • democracy ( development or a • bureaucratic competence ( consequence? • corporate oversight ( “ generation issues” And more proposed remedies that have something of the “silver bullet” about them: micro-credit; social entrepreneurship Finally, renewed emphasis on human capital – partly a result of the focus on knowledge; distributional issues; and growing concern about environmental impacts of growth.

4. How much consensus is there? So what have we learned, and how much agreement is there on the factors that promote growth? Almost all probably would agree that: • Policies matter • Institutions matter • Human capital matters – education; health, too • Capital accumulation matters • Acquisition of technology matters Are these conclusions too uncontroversial to be of much use?

4. How much consensus is there? My view: persistence also matters. Development is a time-consuming process. Policies can be changed reasonably quickly (part of the problem, if frequent changes in government?), though their full impact is likely to take many years to be realized. Building institutional capacity, physical infrastructure, human skills, and technological expertise takes at least a generation, or two, or more. Countries that maintain continuity of approach over lengthy periods tend to enjoy greater success ( Assumes they are trying to grow!!) than those that lack commitment. In that regard, almost all of the “solutions” presented earlier can contribute to the success of the development process in most countries. Can’t be expected to carry an unrealistic load; require that the effort to implement them is sustained.

4. How much consensus is there? What I take from the Washington Consensus is that development needs: • an effective capacity for macro-economic management – sufficient stability in the economy that investors and consumers can have confidence in their ability to predict outcomes of their actions • in a market economy, alignment of prices with real economic costs – implies integration with the international economy and prices that reflect those in world markets • appropriate balance between the public and private sectors – neither should be expected to do everything; attempting to do so virtually guarantees that things are done badly. • Governments should concentrate on policies, institutional architecture and the supply of public goods • Private agents can handle most directly productive activities Still leaves plenty of areas where mixed approaches may achieve better results.

5. Have bilateral and multilateral aid agencies helped? Having spent nearly a quarter century in one, I can hardly present myself as unbiased in judging how much these agencies have contributed to international development. I feel strongly that the Bretton Woods institutions have contributed in an important way to post-WWII prosperity, and to the orderly conduct of international commerce. (See Anne Krueger paper) The role of the US undoubtedly very important in this regard, directly and through its influence on the operational priorities and policies of the IFIs.

5. Have bilateral and multilateral aid agencies helped? The restoration of confidence, once lost, in a country’s capacity for effective economic management is a difficult task; the IMF is unappreciated until needed, then criticized. The MDBs have tried. Could be taken to task for lack of persistence; continuing changes in priorities stemming from pressure from their Boards, as well as transition of senior managers. A great contribution is collecting and analyzing data on all aspects of development. Tireless in analyzing progress: what works; what doesn’t. In the WB, great effort expended in self-evaluation; its internal criticism should be an object lesson for other agencies, especially most NGOs. The UNDP and other UN agencies, too – Human Development Reports. Are there too many agencies; too many reports?

5. Have bilateral and multilateral aid agencies helped? World Bank Funding By Sector (US$ Billions; FY05-11) Source: The World Bank Group, 2011 Annual Report

5. Have bilateral and multilateral aid agencies helped? World Bank funding, sectoral shares (%, 2008, 10, 11) Source: The World Bank Group, 2011 Annual Report

6. The continuing debate Conclude by returning to the question: Why give aid? Long ago, G. Ohlin (others) suggested: • Political influence • Economic self-interest • Humanitarian objectives As I have noted, my view is that it is moral to do so. To reiterate: criticism of aid and its failures to achieve objectives seems best directed at our inability to devise successful schemes to deliver it rather than an argument for not doing so. Note the MDGs. For me, a compelling concern is: will aid inevitably create rent-seeking behavior (corruption) in recipients and so undermine good governance? A research topic.

Nicholas C. Hope Director Stanford Center for International Development