2 0 0 3 anP dle s Sk to ernvic A B C D E 2 0 0 3 Annual World Bank Conference on The Annual World Bank Conference on Development Economics (ABCDE) brings together the world’s leading scholars and development practitioners for a lively debate on state-of-the-art thinking in development policy and the A Development Economics n implications for the global economy. n u a l The 14th conference addressed four timely and important themes in development: W trade and poverty, Africa’s future in terms of industrial and/or agricultural develop- o ment, education and empowerment, and investment climate and productivity, with r l d Andrew Berg and Anne Krueger; Paul Collier; Simeon Djankov, Rafael La Porta, B Florencio Lopez-De-Silanes, and Andrei Shleifer; Ravi Kanbur; Carmen M. Reinhart a and Kenneth S. Rogoff; L. Alan Winters; and Adrian Wood. James D. Wolfensohn, n k Nicholas Stern, and John B. Taylor also addressed the conference. C o n f ALSO IN THIS VOLUME: e The New Reform Agenda r e COMMENTS BY n c e Daniel Kaufmann, Emmanuel Tumusiime-Mutebile, Julio J. Nogués, T. Ademola o Oyejide, Howard Pack, Christina Paxson, Charles C. Soludo, and Jungyoll Yun. n D e v e l o p m e n t E c o n o m i c s Edited by Boris Pleskovic and Nicholas Stern ISBN 0-8213-5386-1 Annual World Bank Conference on Development Economics 2003 The New Reform Agenda Edited by Boris Pleskovic and Nicholas Stern A copublication of the World Bank and Oxford University Press © 2003 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail [email protected] All rights reserved. 1 2 3 4 05 04 03 A co-publication of the World Bank and Oxford University Press. Oxford University Press 165 Madison Avenue New York, NY 10016 The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission promptly. 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ISBN 0-8213-5386-1 ISSN 1020-4407 Contents ABOUT THIS BOOK v INTRODUCTION 1 Boris Pleskovic and Nicholas Stern OPENING ADDRESS 9 James D. Wolfensohn KEYNOTE ADDRESSES Scale, Results, and Development 15 Nicholas Stern New Policies for Economic Development 39 John B. Taylor Trade and Poverty Trade, Growth, and Poverty—A Selective Survey 47 Andrew Berg and Anne Krueger Doha and the World Poverty Targets 91 L. Alan Winters COMMENTS T. Ademola Oyejide 122 Julio J. Nogués 127 Africa’s Future: Industrial or Agricultural Development Primary Commodity Dependence and Africa’s Future 139 Paul Collier IV | CONTENTS Could Africa Be Like America? 163 Adrian Wood COMMENTS Emmanuel Tumusiime-Mutebile 201 Charles C. Soludo 209 Education and Empowerment Education, Empowerment, and Gender Inequalities 217 Ravi Kanbur COMMENTS Jungyoll Yun 234 Christina Paxson 238 Investment Climate and Productivity Foreign Direct Investment to Africa: The Role of Price Stability and 247 Currency Instability Carmen M. Reinhart and Kenneth S. Rogoff Appropriate Institutions 283 Simeon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes, and Andrei Shleifer COMMENTS Howard Pack 299 Institutions Matter—Daniel Kaufmann 302 About this Book The Annual World Bank Conference on Development Economics is a forum for dis- cussion and debate of important policy issues facing developing countries. The con- ferences emphasize the contribution that empirical and basic economic research can make to understanding development processes and to formulating sound develop- ment policies. Conference papers are written by researchers in and outside the World Bank. The conference series was started in 1989. Conference papers are reviewed by the editors and are also subject to internal and external peer review. Some papers were revised after the conference, sometimes to reflect the comments by discussants or from the floor. Most discussants’ comments were not revised. As a result, discus- sants’ comments may refer to elements of the paper that no longer exist in their orig- inal form. Participants’ affiliations identified in this volume are as of the time of the conference, April 29-30, 2002. Boris Pleskovic and Nicholas Stern edited this volume. Developmental and copyedit- ing services were provided by Christine Cotting of UpperCase Publication Services. The book was designed by Naylor Design, Inc. Book production and dissemination were coordinated by the World Bank Publications team. Introduction BORIS PLESKOVIC AND NICHOLAS STERN The Annual World Bank Conference on Development Economics seeks to expand the flow of ideas among development policy researchers, academics, and practitioners from around the world. It is a premier forum for World Bank and other experts to exchange ideas, challenge one another’s findings, and expand theoretical and practi- cal knowledge of development. Each year the topics selected for the conference rep- resent new matters of concern or areas that will benefit from a review of what we know and from the identification of what still needs to be explored and expanded. The 14th conference, held at the World Bank on April 29–30, 2002, addressed four themes: trade and poverty; Africa’s future: industrial or agricultural develop- ment; education and empowerment; and investment climate and productivity. The first day of the conference opened with remarks by James D. Wolfensohn and a keynote address by Nicholas Stern. Those remarks were followed by four papers on poverty and Africa’s future. The second day began with a keynote address by John B. Taylor, which was followed by three papers on education and the investment climate. In his opening remarks, James D. Wolfensohn speaks about the World Bank’s cur- rent development agenda within the context of the New Partnership for Africa’s Development (NEPAD) and the Monterrey International Conference on Financing for Development. Mr. Wolfensohn stresses that NEPAD, a precursor to the Monterrey conference, fundamentally restates the position of African leaders by establishing a framework in which a bargain would be struck between developing countries in Africa and indus- trial countries. Of critical importance is the recognition that leaders of developing countries should be in charge of the development of their countries and that efforts should be made to render development equitable. The NEPAD initiative also acknowledges conditions that must be established for the development process to Boris Pleskovic is research administrator at the World Bank. Nicholas Stern is senior vice president, Development Eco- nomics, and chief economist at the World Bank. Annual World Bank Conference on Development Economics 2003 © 2003 The International Bank for Reconstruction and Development / The World Bank 1 2 | BORIS PLESKOVIC AND NICHOLAS STERN progress, namely, conditions in the areas of government capacity building, reformed judicial systems, transparent financial systems, and eradication of corruption. NEPAD’s assertions carried through to Monterrey, where the framework was recognized as essential to the development process. Wolfensohn notes that without the framework, work can be accomplished at the humanitarian level but not in the realm of basic structural reform, and therefore the development process would not be effective. Three initiatives emerged from Monterrey: (1) capacity building at every level—governmental, civil society, and private sector; (2) a focus on the cen- trality of trade; and (3) increased development assistance apart from capacity build- ing and trade. With NEPAD and Monterrey setting precedents for Johannesburg, Wolfensohn sees the issue of sustainable development being more clearly accentuated, particularly as it is set within the context of poverty-reduction strategies and integrated in the compre- hensive development framework. But the critical question is implementation—will industrial countries be able to deliver on their promise to reform trade practices and support developing countries’ capacity-building efforts? Will developing countries be able to deliver on their promises to attack corruption, reform their judicial and finan- cial systems, and earnestly tackle active poverty reduction among their populace? Wolfensohn emphasizes that there is a critical need to take three essential steps in order to implement this framework—coherence and coordination of aid, effective- ness, and leverage and scale—which are unattainable without economic growth. He then concludes that the issues discussed in the Monterrey Consensus and the global development framework fall into two dimensions: public-private partnership and capacity building. Yet a third dimension—time—will ultimately play a critical role in how development is carried out and its effectiveness assessed. Nicholas Stern, in his keynote address, discusses how the World Bank and the international community can scale up assistance to developing countries toward achieving the Millennium Development Goals (MDGs). Although the magnitude of the poverty and the MDG challenge are daunting, much more is known today about how to make development assistance effective through good country-owned policies, governance, and institutions. He notes that the international community is more united in its commitment to development, as represented by the landmark Monter- rey meeting in 2002, which presented a unique opportunity to advance the MDG agenda. Bank lending is small relative to the financing needs of developing countries, however, and the additional aid pledged at Monterrey is only a fraction of the esti- mated US$50 billion needed annually for meeting the MDGs. Stern argues that reaching those goals requires understanding the scale of the chal- lenge relative to the goals and building on international partnerships. Where aid flows are small, the key role of the World Bank is to support the formulation of good policy, sound institutions, and capacity building. The Bank has a comparative advan- tage in generating analysis, drawing evidence together from international experience, and creating partnerships around good country strategies. Stern emphasizes that advice is taken more seriously when backed by financial involvement, but that finan- cial support must be for change rather than for covering the costs of not changing. INTRODUCTION | 3 Scaling up support should exploit increasingreturns to scale, in the sense of leverag- ing big responses from modest resources. In recalling his 2001 ABCDE speech, which set out the elements of development strategy, Stern notes that policy changes that improve the investment climate and empower poor people can create and support momentum for change. The Bank’s instruments for bringing this type of change include (i) analytical work, (ii) a programmatic approach, (iii) demonstration proj- ects, and (iv) conditions or “necessary steps” on which assistance is predicated. Each of these instruments shows how real ideas can be put into practice and can generate reform momentum for scaling up support. Stern also emphasizes that collaborative relationships with other development partners to coordinate activities are essential to scaling up financial assistance. Increasing support requires that international organizations play different roles. The Bank should play an integratingrole across sectors and institutions, a conveningrole to bring development partners together, and an advocacy role on key global issues. Stern notes that the Bank’s research efforts are also of great importance, building on the Bank’s unique position to create and disseminate ideas. As development practi- tioners we should recognize the power of a good practical idea in shaping events. Finally, Stern points out the crucial role of evaluation to assess results and analyze how development processes influence outcomes. Such evaluation requires good data- bases on outcomes and processes—household surveys, investment climate surveys, and service delivery surveys—to build a better understanding of how to establish a healthy investment climate and empower poor people and how to assess results. In his keynote address, John B. Taylor outlines the Bush administration’s eco- nomic development agenda relative to the problem of global poverty. Taylor states that low productivity is the proximate reason why so many countries are impover- ished and that increasing productivity is the only way to achieve substantial and sus- tained reductions in poverty. What impedes productivity in so many areas of the world? Basic economic growth theory posits that productivity growth depends on capital per worker and on the level of technology, and that capital and technology flow to the places where they are needed if there are no impediments. Taylor therefore notes that, in theory, poor coun- tries and regions should be catching up to their richer counterparts. Evidence indi- cates, however, that there are significant impediments to investment and to the adop- tion of technology. These impediments—poor governance, poor education, and restrictions on economic transactions—will continue to depress productivity until they are removed or resolved. The Bush administration’s economic development agenda calls for a greater emphasis on policies that reduce impediments to productivity growth and for an increase in funding for economic development. Taylor says that Bush’s proposed 18 percent increase in the U.S. contribution to the African Development Fund and the International Development Association (IDA), and a challenge to the IDA to provide grant assistance rather than loans to the poorest countries, demonstrate the adminis- tration’s commitment to reducing global poverty. The creation of the Millennium Challenge Account also provides a new, separate account for development assistance.