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F O R EWO RD

1 997, and technical inputs. It is also about the underlying, insti­

W eth in this annual series, is devoted to the role and
ORLD DEVELOPMENT REPORT THE TWENTI­

tutional environment: the rules and customs that deter­

effectiveness of the state: what the state should do, how it mine how those inputs are used. As this Report shows,
should do it, and how it can do it better in a rapidly understanding the role the state plays in this environ­
changing world. ment-for example, its ability to enforce the rule of law to
These issues are high on the agenda in developing and underpin market transactions-will be essential to mak­
industrial countries alike. For many, the lesson of recent ing the state contribute more effectively to development.
years has been that the state could not deliver on its The pathways to an effective state are many and varied.
promises: transition economies have had to make a wrench­ The Report makes no attempt to offer a single recipe for
ing shift toward the market economy, and much of state reforms worldwide. It does, however, provide a
the developing world has had to face up to the failure of framework for guiding these efforts, in the form of a twO­
state-dominated development strategies. Even the mixed part strategy:
economies of the industrialized world, in response to the
failures of government intervention, have opted for a de­ • First, focus the state's activities to match its capability.
cided shift in the mix in favor of market mechanisms. Many states try to do too much with few resources and
Many have felt that the logical end point of all these little capability. Getting governments better focused on
reforms was a minimalist state. Such a state would do no the core public activities that are crucial to develop­
harm, but neither could it do much good. ment will enhance their effectiveness.
The Report explains why this extreme view is at odds • Second, over time, look for ways to improve the state's
with the evidence of the world's development success capability by reinvigorating public institutions. The
stories, be it the development of today's industrial eco­ Report puts particular emphasis on mechanisms that
nomies in the nineteenth century or the postwar growth give public officials the incentive to do their jobs better
"miracles" of East Asia. Far from supporting a minimalist and to be more flexible, but that also provide restraints
approach to the state, these examples have shown that to check arbitrary and corrupt behavior.
development requires an effective state, one that plays a
catalytic, facilitating role, encouraging and complement­ Drawing from examples of successful and unsuccessful
ing the activities of private businesses and individuals. states, and of state reform around the world, the Report
Certainly, state-dominated development has failed. But so elaborates this two-part strategy and shows how it can be
has stateless development-a message that comes through implemented from a number of starting positions. Signif­
all too clearly in the agonies of people in collapsed states icantly, although there is an enormous diversity of settings
such as Liberia and Somalia. History has repeatedly and contexts, effective states clearly do have some com­
shown that good government is not a luxury but a vital mon features. One is in the way government has set rules
necessiry. Without an effective state, sustainable develop­ underpinning private transactions, and civil society more
ment, both economic and social, is impossible. broadly. Another is in the way government has played by
History and recent experience have also taught us that the rules itself, acting reliably and predictably and con­
development is not just about getting the right economic trolling corruption.
 Building a more effective state to support sustainable the challenge for states is neither to shrink into insignifi­
development and the reduction of poverty will not be cance, nor to dominate markets, but to start taking those
easy. In any situation many people will have a vested small steps.
interest in keeping the state as it is, however costly the
results for the well-being of the country as a whole. Over­
coming their opposition will take time and political effort.
But the Report shows how opportunities for reform can
open, and widen, with the help of careful sequencing of
reforms and mechanisms to compensate losers. Even in James D. Wolfensohn
the worst of situations, very small steps toward a more President
effective state can have a large impact on economic and The World Bank
social welfare. As we approach the twenty-first century, May 30, 1997

This Report has been prepared by a team led by Ajay Chhibber and comprising Simon Commander, Alison
Evans, Harald Fuhr, Cheikh Kane, Chad Leechor, Brian Levy, Sanjay Pradhan, and Beatrice Weder. Valuable
contributions were made by Jean-Paul Azam, Ed Campos, Hamid Davoodi, Kathleen Newland, Kenichi Ohno,
Dani Rodrik, Susan Rose-Ackerman, Astri Suhrke, and Douglas Webb. The team was assisted by Rim Basu,
Gregory Kisunko, Une Lee, Claudia Sepulveda, and Adam Michael Smith. Stephanie Flanders was the principal
editor. The work was carried out under the general direction of the late Michael Bruno, Lyn Squire, and
Joseph Stiglitz.
The team received useful advice from a distinguished panel of external experts comprising Masahiko Aoki,
Ela Bhatt, Kwesi Botchwey, Peter Evans, Ami Kohli, Klaus Konig, Seymour Martin Lipset, Douglass North,
Emma Rothschild, Graham Scott, and Vito Tanzi.
Many others inside and outside the World Bank provided helpful comments, wrote background papers and
other contributions, and participated in consultation meetings. These contributors and participants are listed in
the Bibliographical Note. The International Economics Department contributed to the data appendix and was
responsible for the Selected World Development Indicators.
The production staff of the Report included Amy Brooks, Valerie Chisholm, Kathryn Kline Dahl, Joyce
Gates, Stephanie Gerard, Jeffrey N. Lecksell, and Michael Treadway. Rebecca Sugui served as executive assistant
to the team, and Daniel Atchison, Elizabete de Lima, Michael Geller, and Thomas Zorab as staff assistants. Maria
Ameal served as administrative officer.

This Report is dedicated to the memory of Michael Bruno, Senior Vice President and Chief Economist of the
World Bank from 1 993 to 1 996, whose life's work, including his contributions to this and past editions of World
Development Report, immeasurably advanced our understanding of development.

IV
 C O N T E N T S

OVERViEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART ONE RE THINKING THE STATE- THE WORLD OVER

1 The Evolving Role of the State .. . . . . . . . . ... . . . . . . . . . .. . . . . . . . . . . .. ... . . . . . . ... . . . . 19

2 Refocusing on the Effectiveness of the State . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 29

PART TWO M ATCHING ROLE TO CAPABILITY

3 Securing the Economic and Social Fundamentals . . . . . . . . ... . . . . . . . .... .

. . . . . .. . .... . . . 41
4 Fostering Markets: Liberalization, Regulation, andIndustrial Policy . . . . .. . .. . .. . .. . .. . . .. . . . 61

PART THREE REINVIGORATING INSTI TUTIONAL CAPABILITY

5 BuildingInstitutions for a Capable Public Sector . . . . . . . . . .. . . . . . . . . . ... . . . . . . . . .... . . . 79

6 Restraining Arbitrary State Action and Corruption . . . . .. . . . . . . . . . .. .. . . . . . . . . ... . . . . . . . 99
7 Bringing the State Closer to People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
8 FacilitatingInternational Collective Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . 131

PART FOUR REMOVING OBSTACLES TO CH ANGE

9 The Challenge ofInitiating and Sustaining Reforms . . . .. . .. . .. .. . .. . .. . .. . .. . .. . . .. . ... 145

10 The Agenda for Change . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . 157

TechnicaI Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 168

Bibliographical Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Appendix: Selected Indicators on Public Finance . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . .. . . . . . 195

SELECTED WORLD DEVELOPMENT INDiCATORS ................................... 203

BOXES

1 The pathway to a more effective state . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . .... ...... 3

2 Credibility, investment, and growth . . .. . . . . . . . .. . . .
. . . . . . . ..... . . . . . . .... . . . . . . .... . . . . . 5
3 The regional agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
VI WORLD D EV E L O P M E N T R E PORT 1 997

1.1 State and government: Some concepts ...................................................... 2 0

1.2 U.S.government action to support market development: Some examples ... . . .......... . ........... . 21
1.3 Evolution of the role of the state in India: The past fifty years ......................... ........... 24 .

1.4 The economic rationale for state intervention and some definitions ...................... ........... 26
2.1 Building the Internet: A contemporary example of fruitful public-private interaction ....................3 1
2.2 Measuring the state-its size, its policies, and its institutional capability ..... . .......... . ............ 33
3. 1 Weaknesses in fundamentals constrain firms the world over ......................................42
3.2 Standing up to crime in Cali, Colombia .............................. ....................... 44
3.3 Contracting and the judicial system in Brazil . . ........ . . . . ........ . . . ........ . . . . ........ . . . . 46
3.4 International track records on fiscal deficits and inflation .... . ........... . ...................... . 4 7
3.5 Commitment versus flexibility in the CFA zone ................................... ........... 5 2 .

3.6 Private provision of social services: A historical perspective ....................................... 5 4

3.7 The new Chilean unemployment insurance scheme ..... . . . . ........ . . . ........ . . . . ........ . . . . 58
3.8 Reducing poverty in Indonesia-how social assistance complements broad-based growth ..... ........... . 6 0
4.1 Mexico's deregulation czar ............................................................... 63
4.2 Six objections to privatization-and how to address them ... ......................... ...........64
.

4.3 How government supervision averred financial disaster in Malaysia ..... . . . . . ....... . . . . ......... . . . 67
4.4 Telecommunications regulation in Jamaica ... . ........... . .......... . ............ ........... . 7 0
4.5 Environmental activism in Yokohama, Japan ......................... .......................71 .

4.6 Japan's postwar big push in metals industries .................................................7 3

5.1 Laying bureaucratic foundations: The Northcote-Trevelyan reforms in the United Kingdom ....... ......8 0 .

5.2 Australia's mechanisms for transparent, competitive, and results-oriented policymaking ..... . .......... . . 8 2
5.3 The mushrooming of Bangladesh's government ....................... .......................86 .

5.4 Vouchers and school choice ..............................................................8 9

5.5 Contracting with NGOs for better schooling in Bolivia .. . . .............. ..... ................. 90
.

5.6 Cultivating the best and the brightest: Mandarin versus open systems ..... . . . ......... . . .......... . . 94
5.7 Building worker dedication: Good government in Brazil's Ceara State ............................... 97
6.1 How popular participation improved property rights and dispute resolution in Peru ................... 101
6.2 Urban political machines in the United States and their reform ............. ...................... 105
6.3 Fighting corruption in Uganda .......... . . ......... . . . .......... . ........... . ......... . . 106
6.4 Hong Kong's independent commission against corruption ... . . . .......... ............ . . . . ...... 107
7.1 Public opinion and the state ............................................................ III
7.2 Managing multiethnic societies in Malaysia and Mauritius ... ............ .......... ........... 113
. .

7.3 Does social capital matter? ......................................................... ..... 115

7.4 Client surveys to motivate service improvements in India, Uganda, and Nicaragua ..................... 118
7.5 Does participation improve project performance? ................... ... ...................... 119
.

7.6 Pitfalls in intergovernmental relations: The experiences of Brazil and China .......................... 12 5
7.7 Calculating fiscal equalization grants .... . . . . ........ . . . ..... . ... . . . ......... . . . ......... . . 127
8.1 The World Trade Organization-an international mechanism for bringing credibility to national policy .... 13 4
8.2 How international agricultural research benefits donors as well .. . . ......... ...................... 137
8.3 The challenges of global climate change for international cooperation ........ ...................... 138
8.4 Sharing the burden of environmental protection ........ . . . . ......... . . ......... . . . ........ . . . 139
8.5 How large the global peace dividend? ........ ............ .......... ........... . ........... 14 0
.
 CONTENTS VII

9.1 Weighing the political costs and benefits of reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

9. 2 The predatory state under the Duvalier dynasty in Haiti . .... ............ . . . . . . . . . . ...... ....... 1 49
9.3 Reform under external threat: The Meiji restoration in Japan . ............ . . . . . . . . . . ...... ....... 150
9.4 The Moncloa Pacts in Spain . . . . . . . . . . . . . . . . . . . . . . .
. . ............ . . . . . . . . . . .....
. ....... 155
9.5 Venezuela's 1 989 reform program and its reversal . . . . . . . . . . . ........... . . . . . . . . . . . ...
. . ....... 15 6
10. 1 State collapse and beyond in Somalia . . . . . . . . . . . . . . . . . . . . . . .......
. . . . . . . . . . . . . . . . . . ....... 15 9
1 0. 2 The economic underpinnings of conflict: The case of Liberia . . . . . . . . . . .. . . . . . . . . . . . .. . ... . ..... . 1 60

TEXT FIGURES

1 The state has grown everywhere . ..................................... ...................2 . . .

2 A range of mechanisms can enhance state capability ....................... ...................7 . . .
3 Factors associated with corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. .... ..............8 . . . .

4 Higher government employment often means lower government wages . . . . . . . . . . . .

. . . . . . . . . . . . . . . . 10 . .

5 Countries with good economic policies and stronger institutional capability grow faster . . . . . . . . . . . . . 13 . . . . .

1.1 One world, many more states .... . .. . . . . . . . . . . . . . .... .

. . . . . . . . . . . . . . . . ... .
. . . . . . . 21 . . . . . . . .

1.2 Governments the world over have expanded since 1 960 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

1 .3 Transfers and interest payments have grown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3
2.1 The state, institutions, and economic outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2 Good government helps explain the income gap between East Asia and Africa . . . . . . . . . . . . . . . . . . . . . . . . 3 2 .

2.3 Reliable institutions make for credible states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

. .

2.4 Perceived credibility and economic performance go hand in hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 . . .

3. 1 The lawlessness syndrome . ....................

. . . . . ..................
. . . . . . . . . . . . . . 43 . . . . .

3. 2 Negotiating with government officials can be arduous . . . . . . . ...............

. . . . . . . . . . . . . 43 . . . . . . . .

3.3 Countries are discovering the advantages of the value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3. 4 Unlike Nigeria, Indonesia managed its recent oil windfall prudently . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.5 Well-designed budgetary institutions help avoid large deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1
3.6 In Vietnam, the benefits of hospital care are skewed toward the better-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3
3.7 The balance of private and public education differs enormously worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . 55 .

3.8 Pensions and other transfers have crept upward in the industrial countries . . . . . . . . . . . . . . . . . . . . . . . . . . 57 . .

3.9 Housing subsidies in developing countries mostly fail to reach the needy . . . . . . . . . . . . . . . . . . . . . . . . . 59 . . . .

4. 1 Bank crises are all too common and carry enormous fiscal cost .............. ..
. . . . . . . . . . . . . 68
. . . . . . .

5.1 Guinea's policy goals and spending allocations do not add up ... . . . . . . . . . . . . . ....
. . . . . . . . . 84 . . . . . . . .

5.2 Decisionmaking in Ukraine is bogged down by overlapping responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

5 .3 Most firms rate government services poorly, but some services score higher than others . . . . . . . . . . . . . . . . . . 86
5.4 Three strategies for improving government service delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5 .5 Recruiting and promoting on merit improve bureaucratic capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2
5 .6 Lack of meritocracy and poor pay in the Philippines' civil service have lowered capability . . . . . . . . . . . . . . . . 93 .

5 .7 In Africa, as public employment has risen, wages have fallen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

. . . .

6. 1 High and unpredictable corruption hurts investment . . . . . ...................

. . . . . . . . . . . . . 103 . . . . .

6. 2 Some factors associated with corruption . . . . . . . . . . . . . . . . . ...............

. . . . . . . . . . . . 104 . . . . . . . .

7.1 The world has become much more democratic since 1 980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
7.2 Organizations at the interface of state, markets, and civil society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 6
7 .3 Vertical rules and horizontal incentives shape local government's capability . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3
8. 1 Many countries are loosening restraints on international capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 35
VII I WORLD D EV E L O P M E NT R E P O RT 1 997

8.2 Refugees have been flooding Mrica, Asia, and Europe ..... . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 141
. . .

8.3 Poor policies nullify the effect of aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ . . . . . . . 14 2

9. 1 Older workers will lose from reforming pensions, but the young will gain . . . . ................ . . . . . . . 14 7
9.2 Multiple veto points help countries resist pressure to expand welfare . . . . . . . . ................ . . . . . . . 148

TEXT TABLES

1. 1 Functions of the state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

3.1 Social insurance, social assistance, and poverty-targeted programs in developing countries:
Characteristics and lessons .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3 . 2 Implicit pension debt in selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7
4. 1 Estimates of welfare gains from deregulation in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2
4 . 2 The variety of regulatoty experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7
5 . 1 Mechanisms to improve service delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
7 . 1 Changes in subnational finance in selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
7 . 2 Demand and supply characteristics of local and national public goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2
7 .3 Possible tax and expenditure assignments by level of government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8
7 .4 Principles and best practices in grant design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9
7 .5 Matching decentralization strategy to government capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
9. 1 Alignment of interest groups, political costs, and tactical sequencing of reform by reform type . . . . . . . . . . . . 145
9 . 2 Estimated efficiency gains from privatizing utilities in Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7
9.3 First- and second-generation reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2

Definitions and data notes

The countries included in regional and income Dollar figures are current U.S. dollars except
groupings used in this Report (except those for the where otherwise specified.
private sector survey) are listed in the Classification of Billion means 1 ,000 million; trillion means 1 ,000
Economies tables at the end of the Selected World billion.
Development Indicators. Income classifications are
based on GNP per capita; thresholds for income clas­ The following abbreviations are used:
sifications in this edition may be found in the Intro­
duction to Selected World Development Indicators. CEE Central and Eastern Europe
Group averages reponed in the figures and tables are CIS Commonwealth of Independent States
unweighted averages of the countries in the group GDP Gross domestic product
except where noted to the contrary. GNP Gross national product
The use of the term "countries" to refer to eco­ IMF International Monetary Fund
nomies implies no judgment by the World Bank NGO Nongovernmental organization
about the legal or other status of a territory.Statistics OECD Organization for Economic Cooperation
reported for "developing countries" include eco­ and Development
nomies in transition from central planning except PPP Purchasing power parity
where noted to the contrary.
A
ROUND THE GLOBE, THE STATE IS IN THE SPOT­ of experience since then is rather different: that the state is
light.Far-reaching developments in the global eco­ central to economic and social development, not as a
nomy have us revisiting basic questions about government: direct provider of growth but as a partner, catalyst, and
what its role should be, what it can and cannot do, and facilitator.
how best to do it. What makes for an effective state differs enormously
The last fifty years have shown clearly both the benefits across countries at different stages of development.What
and the limitations of state action, especially in the pro­ works in the Netherlands or New Zealand, say, may not
motion of development. Governments have helped to work in Nepal.Even among countries at the same level of
deliver substantial improvements in education and health income, differences in size, ethnic makeup, culture, and
and reductions in social inequality. But government political systems make every state unique. But this very
actions have also led to some very poor outcomes. And diversity enriches this Report's inquiry into why and how
even where governments have done a good job in the past, some states do better than others at sustaining develop­
many worry that they will not be able to adapt to the ment, eradicating poverty, and responding to change.
demands of a globalizing world economy.
Rethinking the state-the world over
The new worries and questions about the state's role
are many and various, but four recent developments have The world is changing, and with it our ideas about the
given them particular impetus: state's role in economic and social development.Today's
intense focus on the state's role is reminiscent of an earlier
• The collapse of command-and-control economies in the era, when the world was emerging from the ravages of
former Soviet Union and Central and Eastern Europe World War II, and much of the developing world was just
• The fiscal crisis of the welfare state in most of the estab­ gaining its independence. Then development seemed a
lished industrial countries more easily surmountable-and largely technical-chal­
• The important role of the state in the "miracle" eco­ lenge.Good advisers and technical experts would formu­
nomies of East Asia late good policies, which good governments would then
• The collapse of states and the explosion in humanitar­ implement for the good of society.State-led intervention
ian emergencies in several parts of the world. emphasized market failures and accorded the state a cen­
tral role in correcting them.But the institutional assump­
This Report shows that the determining factor behind tions implicit in this world view were, as we all realize
these contrasting developments is the effectiveness of the today, too simplistic.Flexibility to implement the policies
state. An effective state is vital for the provision of the devised by technocrats was accorded pride of place.
goods and services-and the rules and institutions-that Accountabiliry through checks and balances was regarded
allow markets to flourish and people to lead healthier, as an encumbrance.
happier lives. Without it, sustainable development, both In a few countries things have indeed worked out more
economic and social, is impossible. Many said much the or less as the technocrats expected.But in many countries
same thing fifry years ago, but then they tended to mean outcomes were very different.Governments embarked on
that development had to be state-provided.The message fanciful schemes. Private investors, lacking confidence in
2 W O R LD D E VE L O P M E NT R E P O RT 1 9 97

public policies or in the steadfastness ofleaders, held back. veloping world embraced state-dominated development
Powerful rulers acted arbitrarily. Corruption became strategies. The result was a tremendous expansion in the
endemic.Development faltered, and poverty endured. size and reach of government worldwide. State spending
Over the last century the size and scope of government now constitutes almost half of total income in the estab­
have expanded enormously, particularly in the industrial lished industrial countries, and around a quarter in devel­
countries (Figure O. The pre-World War II expansion was oping countries. But this very increase in the state's influ­
driven by, among other factors, the need to address the ence has also shifted the emphasis from the quantitative to
heavy toll on economic and social systems brought on by the qualitative, from the sheer size of the state and the
the Great Depression.The postwar confidence in govern­ scope of its interventions to its effectiveness in meeting
ment bred demands for it to do more. Industrial eco­ people's needs.
nomies expanded the welfare state, and much of the de- As in the 194 0s, today's renewed focus on the state's
role has been inspired by dramatic events in the global
economy, which have fundamentally changed the environ­
ment in which states operate. The global integration of
Figure 1 The state has grown everywhere
economies and the spread of democracy have narrowed the
Total government expenditure scope for arbitrary and capricious behavior.Taxes, invest­
(percentage of GOP) ment rules, and economic policies must be ever more
50 ,- responsive to the parameters of a globalized world econ­
----��

omy.Technological change has opened new opportunities

40 for unbundling services and allowing a larger role for mar­
kets.These changes have meant new and different roles for
30 government-no longer as sole provider but as facilitator
and regulator.States have come under pressure even where
20 , governments have previously seemed to perform well.
Many industrial countries find themselves grappling with a
welfare state that has grown unwieldy, and having to make
10
difficult choices about the services and benefits that people
should expect government to provide.Markets-domestic
o
About 1913 1920 1937 1960 1980 1990 1995
and global-and citizens vexed by state weaknesses have
1870 come to insist, often through grassroots and other non­
OECD countries governmental organizations, on transparency in the con­
duct of government, and on other changes to strengthen
Central government expenditure the ability of the state to meet its assigned objectives.
(percentage of GOP)
The clamor for greater government effectiveness has
50 ,-----�����==-=�
reached crisis proportions in many developing countries
where the state has failed to deliver even such fundamental
40
public goods as property rights, roads, and basic health and
education. There a vicious circle has taken hold: people
30 and businesses respond to deteriorating public services by
avoiding taxation, which leads to further deterioration in
20 services.In the former Soviet Union and Central and East­
ern Europe it was the state's long-term failure to deliver on
10 its promises that led, finally, to its overthrow.But the col­
lapse of central planning has created problems of its own.
o In the resulting vacuum, citizens are sometimes deprived
1960 1965 1970 1975 1980 1985 1990 of basic public goods such as law and order.At the limit,
Developing countries
as in Afghanistan, Liberia, and Somalia, the state has some­
times crumbled entirely, leaving individuals and interna­
tional agencies trying desperately to pick up the pieces.
Note: Data for the OECD countries are for central and local
government. including social security expenditures. See the
A two-part strategy
Technical Note for details. Source: Tanzi and Schuknecht 1995;
OECD. various years; IMF. various years (b). How can we cut through the maze of questions and pres­
sures now facing the world's states? No one-size-fits-all
 O V E RV I E W 3

recipe for an effective state is suggested here.The range of

differences among states is too enormous, as are their start­ Box 1 The pathway to a more effective state
ing points.Rather this Report provides a broad framework
for addressing the issue of the state's effectiveness world­ A more capable state can be a more effective state,
wide. It points to a number of ways to narrow the grow­ but effectiveness and capability are not the same
ing gap between the demands on states and their capabil­ thing. Capability, as applied to states, is the ability
ity to meet those demands. Getting societies to accept a to undertake and promote collective actions effi­
redefinition of the state's responsibilities will be one part ciently-such as law and order, public health, and
of the solution.This will include strategic selection of the basic infrastructure; effectiveness is a result of using
collective actions that states will try to promote, coupled that capability to meet society's demand for those
with greater efforts to take the burden off the state, by goods. A state may be capable but not very effective
involving citizens and communities in the delivery of core if its capability is not used in society's interest.
collective goods. The path to a more effective state, although not
But reducing or diluting the state's role cannot be the linear, is likely to be a two-stage process. First, the
end of the reform story. Even with more selectivity and state must focus what capability it has on those tasks
greater reliance on the citizenry and on private firms, that it can and should undertake.As it does this, it
meeting a broad range of collective needs more effectively can then focus on building additional capability. As
will still mean making the state's central institutions work the figure illustrates, countries in Zone I pursue a
better. For human welfare to be advanced, the state's broad range of activities in an unfocused manner
capability-defined as the ability to undertake andpromote despite little state capability, and their efforts prove
collective actions efficientfrmust be increased. ineffective. Blit countries cannot move to Zone III
This basic message translates into a two-part strategy to overnight-building capability takes time.The path­
make every state a more credible, effective partner in its way to greater effectiveness leads, first, to focusing on
country's development: fundamental tasks and leveraging the state's limited
capability through partnerships with the business
• Matching the state's role to its capability is the first ele­ community and civil society (Zone II). Countries
ment in this strategy. Where state capability is weak, then can move gradually to Zone III by strengthen­
how the state intervenes-and where-should be care­ ing their capability over time.
fully assessed.Many states try to do too much with few
resources and little capability, and often do more harm
than good.A sharper focus on the fundamentals would
improve effectiveness (Box 1 ) . But here it is a matter
not just of choosing what to do and what not to do­ More
effective
but of how to do it as well.
• But capability is not destiny.Therefore the second ele­
ment of the strategy is to raise state capability by rein­
vigorating public institutions. This means designing
effective rules and restraints, to check arbitrary state
actions and combat entrenched corruption. It means
subjecting state institutions to greater competition, to
increase their efficiency.It means increasing the perfor­
mance of state institutions, improving pay and incen­
Less
tives.And it means making the state more responsive to effective
people's needs, bringing government closer to the peo­
ple through broader participation and decentralization.
Thus, the Report not only directs attention to refocus­
ing the state's role, but also shows how countries might
begin a process of rebuilding the state's capability.

Matching role to capability do and what not to do is critical. But this also involves
Matching role to capability is not a simple message of dis­ choosing how to do things-how to deliver basic ser­
mantling the state. In some areas much greater focus is vices, provide infrastructure, regulate the economy-and
badly needed to improve effectiveness: choosing what to not just whether to do them at all. The choices here are
4 WORLD D EV E L O P M E NT R E PO RT 1 9 97

many and must be tailored to the circumstances of each graphic areas. Marginalized from public discussion and
country. excluded from the broader economy and society, such
groups are fertile ground for violence and instability, as
Thefirstjob ofstates: Getting the fundamentals right many parts of the world are increasingly learning.
Five fundamental tasks lie at the core of every govern­ Public policies and programs must aim not merely to
ment's mission, without which sustainable, shared, deliver growth but to ensure that the benefits of market­
poverty-reducing development is impossible: led growth are shared, particularly through investments in
basic education and health. They must also ensure that
• Establishing a foundation of law people are protected against material and personal insecu­
• Maintaining a nondistortionary policy environment, rity. Where poverty and economic marginalization stem
including macroeconomic stability from ethnic and social differences, policies must be care­
• Investing in basic social services and infrastructure fully crafted to manage these differences, as Malaysia and
• Protecting the vulnerable Mauritius have done.
• Protecting the environment. Government regulation is not the only answer to pollu­
tion. An expanding toolkit of innovative and flexible
Although the importance of these fundamentals has long incentives is now available to get polluters to clean up their
been widely accepted, some new insights are emerging as to act. Although there is no substitute for meaningful regula­
the appropriate mix of market and govemment activities in tory frameworks and information about the environment,
achieving them. Most important, we now see that markets these new tools, which rely on persuasion, social pressure,
and governments are complementary: the state is essential and market forces to help push for improved environmen­
for putting in place the appropriate institutional founda­ tal performance, can often succeed where regulation can­
tions for markets. And government's credibility-the pre­ not. Countries are using some of these tools, with promis­
dictability of its rules and policies and the consistency with ing results, in four areas:
which they are applied-can be as important for attracting
private investment as the content of those rules and policies. • Harnessing the power of public opinion
A survey, specially commissioned for this Report, of • Making regulation more flexible
domestic entrepreneurs (formal and informal) in sixty­ • Applying self-regulatory mechanisms
nine countries confirms what was already known anecdo­ • Choosing effective market-based instruments.
tally: that many countries lack the basic institutional
foundations for market development (Box 2). High levels Going beyond the basics: The state need not be the
of crime and personal violence and an unpredictable judi­ sole provider
ciary combine to produce what this Report defines as the There is a growing recognition that in many countries
"lawlessness syndrome." Weak and arbitrary state institu­ monopoly public providers of infrastructure, social services,
tions often compound the problem with unpredictable, and other goods and services are unlikely to do a good job.
inconsistent behavior. Far from assisting the growth of At the same time, technological and organizational innova­
markets, such actions squander the state's credibility and tions have created new opportunities for competitive, pri­
hurt market development. vate providers in activities hitherto confined to the public
To make development stable and sustainable, the state sector. To take advantage of these new opportunities-and
has to keep its eye on the social fundamentals. Lawlessness better allocate scarce public capability-governments are
is often related to a sense of marginalization: indeed, beginning to separate the financing of infrastructure and
breaking the law can seem the only way for the marginal­ services from its delivery, and to unbundle the competitive
ized to get their voices heard. Public policies can ensure segments of utility markets from the monopoly segments.
that growth is shared and that it contributes to reducing Reformers are also moving to separate programs of social
poverty and inequality, but only if governments put the insurance, designed to address the problems of health and
social fundamentals high on their list of priorities. employment insecurity for all, from programs of social
Too often, policies and programs divert resources and assistance, intended to help only the poorest in society.
services from the people who need them most. The polit­ COPING WITH HOUSEHOLD INSECURITY. It is now well
ical clout of the more affluent in society sometimes leads established that the state can help households cope with
governments to spend many times more on rich and mid­ certain risks to their economic security: it can insure against
dle-class students in universities than on basic education destitution in old age through pensions, against devastating
for the majority and scholarships for the less well off. In illness through health insurance, and against job loss
many regions poverty and inequality are often biased through unemployment insurance. But the idea that the
against ethnic minorities or women, or disfavored geo- state alone must carry this burden is changing. Even in
 O V E RV I E W 5

Box 2 Credibility, investment, and growth

A survey of local entrepreneurs in sixty-nine countries reliability of the institutional framework (normalized
shows that many states are performing their core func­ here to the high-income OECD countries) as per­
tions poorly: they are failing to ensure law and order, ceived by private entrepreneurs-we call it credibility.
protect property, and apply rules and policies pre­ The other two panels show that, once differences in in­
dictably.Investors do not consider such states credible, come and education and policy distortions have been
and growth and investment suffer as a consequence. controlled for, there is a strong correlation between
Firms were asked to rank each of several indicators countries' credibility rating and their record of growth
on a scale from one (extreme problem) to six (no prob­ and investment. The credibility ratings are based on
lem).Averaging the answers, as the left panel does for investors' perceptions. But it is these perceptions that
each world region, yields an overall indicator of the determine investment behavior.

Growth of GOP per capita ( percent per year)

Credibility index 2.0

High-income OECO = 1.0 1.5

1.0

0.5
1.0
0.0

-0.5

0 .8 -1.0

-1.5
High Medium Low
Level of credibility
0.6

Gross investment (percentage of GOP)

18
0.4 16
14
12
0.2 10
8
6

0.0 4
High- South Middle CEE Latin Sub- CIS 2
income and East and America Saharan
DECO South- North and Africa o
east Asia Africa Caribbean High Medium Low
Level of credibility

Note: The credibility index (left panel) is a summary indicator that combines the measures in Figure 2 . 3 . Each bar in the two right panels is
the average for a group of countries. The graphs are based on regressions for the period 1984-93 of GOP growth (thirty-two countries) and
Investment (thirty-three countries) on the index, controlling for income, education, and policy distortion. South and Southeast Asia and Middle
East and North Africa are each represented by only three economies. Source: World 8ank staff calculations using data from the private sector
survey conducted for this Report and Brunetti, Kisunko, and Weder, background papers.

many industrial countries the welfare state is being re­ Innovative solutions that involve businesses, labor, house­
formed.Emerging economies from Brazil to China will be holds, and community groups are needed to achieve greater
unable to afford even pared-down versions of the European security at lower cost.This is especially important for those
system, especially with their rapidly aging populations. developing countries not yet locked into costly solutions.
6 WORLD D EV E L O P M E NT R E PO RT 1 9 97

EFFECTIVE REGULATION. Well-designed regulatory sys­ Experience has shown that the way privatization is
tems can help societies influence market outcomes for managed is terribly important to the end result. The key
public ends.Regulation can help protect consumers, work­ factors are transparency of process, winning the acquies­
ers, and the environment.It can foster competition and in­ cence of employees, generating broad-based ownership,
novation while constraining the abuse of monopoly power. and instituting the appropriate regulatory reform.Where
Thanks to regulatory reforms initiated in the early 1 98 0s, privatization has been managed carefully, it is already
Chile's telecommunications industry has enjoyed sustained showing positive results: in Chile, for example, and the
private investment, increasing service quality and com­ Czech Republic. Its importance in the strategy to foster
petition, and declining prices. By contrast, until some markets may vary, but for many developing countries
recent reform initiatives, dysfunctional regulation led the seeking to scale back an overextended state, privatization
Philippine telecommunications industry-long privately must be kept on the front burner. A carefully managed
owned-to underinvest. The result was poor and often privatization process brings very positive economic and
high-priced service, imposing a high cost on citizens and fiscal benefits.
other firms. Making the best use of the new options emerg­
ing for private provision of infrastructute and social ser­ Knowing the state's limits
vices will also rely, often, on a good regulatory framework. The key to predictable and consistent implementation of
INDUSTRIAL POLICY. When markets are underdevel­ policy is a good fit between the state's institutional capa­
oped, the state can sometimes reduce coordination prob­ bilities and its actions. In well-developed states, adminis­
lems and gaps in information and encourage market devel­ trative capability is normally strong, and institutionalized
opment.Many of today's oldest industrial economies used checks and balances restrain arbitrary action, even as they
various mechanisms to spur the growth of markets in their provide government organizations the flexibility to pursue
early stages of development. More recently, Japan, the their mandates. By contrast, states with weaker institu­
Republic of Korea, and other countries in East Asia used a tions may need to err on the side of less flexibility and
variety of mechanisms for market enhancement, in addi­ more restraint.This can be done in two ways:
tion to securing the economic, social, and institutional fun­
damentals. Sometimes these interventions were quite elab­ • Through self-restricting rules, which precisely specify the
orate: the highly strategic use of subsidies, for example. content of policy and lock it into mechanisms that are
Other times they were less intrusive, taking the form of costly to reverse. Regional common-currency arrange­
export promotion and special infrastructure incentives.But ments, such as the CFA currency zone in francophone
the ability to choose wisely among these interventions and Africa or quasi currency boards as in Argentina, are
use them effectively is critical; ill-considered trade, credit, examples of such mechanisms in the field of monetary
and industrial policies can and have cost countries dearly. policy."Take-or-pay" contracts with independent power
Many developing countries pursued ill-thought-out activ­ producers serve a similar function in utilities regulation.
ist industrial policies, with poor results. Countries that • Through working in partnership with firms and citi­
have pursued an activist industrial policy successfully could zens. In industrial policy, for example, states can foster
not have done so without strong institutional capability. private-to-private collaboration.In financial regulation
MANAGING PRIVATIZATION. Carefully designed regula­ they can give bankers an incentive to operate prudently.
tions and other active government initiatives can enhance And in environmental regulation they can use the
the growth of markets. But in many countries this can spread of information to encourage "bottom-up" citi­
take time, as private initiative is held hostage to a legacy of zen initiatives.
antagonistic state-market relations. And poorly perform­
ing state enterprises are often a big drain on the state's Countries in transition face a special challenge: not
finances. Privatization provides an obvious solution. In only are roles changing as a result of the adoption of
general it is easier to sell off state assets once a supportive market-based systems; so are capabilities. Some transition
environment for private sector development is in place. countries retain inherent capabilities in the form of quali­
Economies such as China, Korea, and Taiwan (China) fied people and usable equipment, but they are not orga­
have therefore opted not to give top priority to privatiza­ nized to perform in their new roles.Sometimes islands of
tion, but to allow the private sector to develop around the excellence are found in countries where overall effective­
state sector. This option, however, may not be available ness has suffered.The task of improving effectiveness here
where the fiscal burden is very high, and where the pres­ is in some ways easier and in some ways more difficult:
ence of poorly performing state enterprises impedes easier because capability does not start from a low base,
much-needed overall restructuring of the economy. more difficult because rebuilding capability means chang-
 OVERVI EW 7

ing a((irudes. Reform is not a matter of simply assigning that distort incentives and ultimately lead to poor out­
people new responsibilities. comes.Three basic incentive mechanisms can be used, in
a variety of settings, to combat these deeper problems and
Reinvigorating state institutions
improve capability (Figure 2):
Acknowledging the state's existing, possibly meager capa­
bilities does not mean accepting them for all time. The • Effective rules and restraints
second key task of state reform is to reinvigorate the state's • Greater competitive pressure
institutional capability, by providing incentives for public • Increased citizen voice and partnership.
officials to perform better while keeping arbitrary action
in check. Effective rules and restraints
Countries struggle to build the institutions for an Over the long term, building accountability generally calls
effective public sector.One reason the task is so difficult for formal mechanisms of restraint, anchored in core state
is political. Strong interests may develop, for example, to institutions. Power can be divided, whether among the
maintain an inequitable and inefficient status quo, judicial, legislative, and executive branches of government
whereas those who lose out from this arrangement may be or among central, provincial, and local authorities. The
unable to exert effective pressure for change. broader the separation of powers, the greater the number
But the problem of continued ineffectiveness, or of of veto points that can check arbitrary state action. But
corruption, is not entirely political.Often politicians and multiple veto points are a double-edged sword: they can
other public officials have strong incentives and a sincere make it as hard to change the harmful rules as the benefi­
interest in improving public sector performance. But cial ones.
managing a public bureaucracy is a complex business that In many developing countries legislative and judicial
does not lend itself to clear, unambiguous solutions. In oversight of the executive is weak.The setting of goals and
fact, building institutions for an effective public sector the links to the policies needed to achieve them are some­
requires addressing a host of underlying behavioral factors times diffuse, legislatures suffer from limited information

Figure 2 A range of mechanisms can enhance state capability

8 W O R LD D EV E L O P M E N T R E P O RT 1 997

and capability, and judicial independence is compro­ guarantees from international agencies, can serve as a
mised.An independent judiciary is vital to ensure that the short-term substitute.
legislative and executive authorities remain fully account­ A major thrust of any effective strategy to reinvigorate
able under the law, and to interpret and enforce the terms the public sector will be to reduce the opportunities for
of a constitution.Writing laws is the easy part; they need corruption by cutting back on discretionary authority.
to be enforced if a country is to enjoy the benefits of a Policies that lower controls on foreign trade, remove entry
credible rule of law. These institutions of restraint take barriers for private industry, and privatize state firms in a
time to establish themselves, but international commit­ way that ensures competition-all of these will fight cor­
ment mechanisms such as international adjudication, or ruption (Figure 3). Such reforms should not be half-

Figure 3 Factors associated with corruption

I ndex of corruption Index of corruption

5 ,-------, 5 ,------,

4 4

3 3

2 2

1 1
Low Medium High Low Medium H igh

Policy distortion index Predictability of Judiciary index

Index of corruption Index of corruption

5 .------�--. 5 .--�-�--�----'-�-

4 4

3 3

2 2

1 1
Low Medium High Low Medium High

Merit-based recruitment index Ratio of civil service wages to

manufacturing wages

Note: Each index score is the average for a group of countries. See the Technical Note for details and definitions of the indexes. Higher values
of the corruption index mean more corruption, and similarly for the other variables. The top left panel i s based on a simple correlation for thirty­
nine industrial and developing countries during 1984-93 (for the poliCy distortion index! and 1996 (for the corruption index). The top right panel
is based on a regression using data from fifty-nine industrial and developing countries during 1996. The bottom left panel is based on a
regression using data for thirty-five developing countries during 1970-90. The bottom right panel is based on a simple correlation for twenty
industrial and developing countries in the late 1980s to the early 1990s; wage data are means. Source: World Bank staff calculations.
 OVERVI EW 9

hearted: reforms that open opportunities for private entry effectively and retain their competence even when all
into closed sectors of the economy, but leave that entry to other institutions have declined. These agencies work well
the discretion of public officials rather than establish open for all the reasons listed above. They are less subject to
and competitive processes, also create enormous scope for political interference. They have limited but clear objec­
corruption. Formal checks and balances can also help re­ tives. They are given adequate resources and training. And
duce official corruption, but they are seldom enough. their staff are usually better paid than their counterparts in
Reforming the civil service, restraining political patron­ other parts of government.
age, and improving civil service pay have also been shown Cross-country evidence reveals that bureaucracies with
to reduce corruption by giving public officials more more competitive, merit-based recruitment and promo­
incentive to play by the rules. tion practices and better pay are more capable. In several
Where corruption is deeply entrenched, more dramatic countries (Kenya, the Philippines) political appointments
efforts will be needed to uproot it. These efforts should be run quite deep, whereas countries such as Korea have ben­
focused on better monitoring of official action-both by efited from reliance on highly competitive recruitment
formal institutions and by individual citizens-and pun­ and a promotion system that explicitly rewards merit.
ishment of wrongdoing in the courts. In Hong Kong Ongoing reforms in the Philippines are examining these
(China, as of July 1 , 1 997 ), an independent commission issues in an effort to improve bureaucratic capability. By
against corruption is one successful example of such an and large, countries in which broader checks and balances
approach. Likewise, recent reforms in Uganda have incor­ are weak need to rely more heavily on more transparent
porated several elements of the anticorruption strategy and competitive systems. The experience of certain high­
outlined here, with some encouraging results. The same performing East Asian economies also shows that meri­
mechanisms could be applied around the globe: corrup­ tocracy and long-term career rewards help build an esprit
tion, despite claims to the contrary, is not culture specific. de corps, or a shared commitment to collective goals. This
Reducing it will require a multipronged approach, which reduces the transactions costs of enforcing internal con­
must include the private sector and civil society more straints and builds internal partnerships and loyalty.
broadly. The briber has as much responsibility as the In many countries civil servants' wages have eroded as
bribed; effective penalties on domestic and international a result of expanding public employment at lower skill
business must be part of the solution. levels and fiscal constraints on the total wage bill (Figure
4). The result has been a significant compression of the
Subjecting the state to more competition salary structure and highly uncompetitive pay for senior
Governments can improve their capability and effective­ officials, making it difficult to recruit and retain capable
ness by introducing much greater competition in a variety staff. Some countries, such as Uganda, are undertaking
of areas: in hiring and promotion, in policymaking, and far-reaching reforms to reduce overstaffing dramatically,
in the way services are delivered. increase average pay, and decompress the salary structure.
BOOSTING COMPETITION WITHIN THE CIVIL SERVICE. But in many countries these problems have yet to be
Whether making policy, delivering services, or adminis­ addressed.
tering contracts, a capable, motivated staff is the lifeblood MORE COMPETITION IN THE PROVISION OF PUBLIC
of an effective state. Civil servants can be motivated to GOODS AND SERVICES. In many developing countries ser­
perform effectively through a combination of mechanisms vices are delivered badly or not at all. Politicians often
to encourage internal competition: intervene in the day-to-day operations of public agencies,
and managers have limited flexibility. There is limited
• A recruitment system based on merit, not favoritism accountability for results. And in many countries the pub­
• A merit-based internal promotion system lic sector has assumed a monopoly in delivery, eliminating
• Adequate compensation. pressures for better performance.
Building an effective public sector in these circum­
Starting in the nineteenth century, all of today's estab­ stances will mean opening up core government institu­
lished industrial countries used these principles to build tions, to improve incentives in areas that the public sector
modern professional bureaucracies. More recently these has long monopolized. Dozens of countries through­
principles have been applied in many countries in East out the Americas, Europe, and Asia have capitalized on
Asia, which have transformed weak, corrupt, patronage­ changes in technology and introduced competition in
based bureaucracies into reasonably well functioning sys­ telecommunications and electric power generation. This
tems. But many developing countries do not even need to has resulted in lower unit costs and a rapid expansion of
look overseas or to history for role models: they exist at service. Competition is also being enhanced by contract­
home. Central banks, for example, often continue to work ing out services through competitive bids and auctions.
1 0 WORLD D EV E L O P M E NT R E P O RT 1 997

ing public managers more flexibility will merely increase

Figure 4 H igher government employment
arbitrariness and corruption with no commensurate im­
often means lower government wages
provement in performance. And writing and enforcing
contracts, particularly for complex outputs, require special­
Average annual central government wages
ized skills that are scarce in many developing countries.
as a multiple of GDP per capita
These countries need first to strengthen rule-based compli­
12
ance and financial accountability (as Argentina and Bolivia
have done) within the public sector, provide greater clarity
10
• of purpose and task, and introduce performance measure­
ment (as in Colombia, Mexico, and Uganda). As output
measurement and ex post controls on inputs are strength­
8
ened, agencies can be provided more flexibility in exchange
for their greater accountability for results.
6
•
• Bringing the state closer to people
' . . .
... ... Governments are more effective when they listen to busi­
4
..
• nesses and citizens and work in partnership with them in
. . • ..• •
�
deciding and implementing policy. Where governments
2
•,.. • II • • -= . lack mechanisms to listen, they are not responsive to peo­
• •• ·

• •. • •
ple's interests, especially those of minorities and the poor,
• • . • who usually strain to get their voices heard in the corridors
.:
o of power. And even the best-intentioned government is
1 2 3 4
unlikely to meet collective needs efficiently if it does not
Government employment as a share know what many of those needs are.
of population (percent) GMNG PEOPLE A VOICE. Partnership involves bringing
the voice of the poor and of marginalized groups into the
Note: Data are for ninety-six industrial and developing countries
during various years in the early 1990s. See the Technical
very center of the policymaking process. In many countries,
Note. Source: Schiavo-Campo, de Tommaso, and Mukherjee, voice is distributed as unequally as income. Greater infor­
background paper. mation and transparency are vital for informed public
debate and for increasing popular trust and confidence in
the state-whether in discussing expenditure priorities,
This is a significant trend in industrial countries (the designing social assistance programs, or managing forests
United Kingdom, Victoria State in Australia) , but such and other resources. Client surveys (in India, Nicaragua,
mechanisms are also being used to improve efficiency in and Tanzania) and citizen charters (in Malaysia) are pro­
developing countries (for example, that of road mainte­ viding new options for making voices heard.
nance in Brazil). Faced with weak administrative capac­ The best-established mechanism for giving citizens
ity, some countries (Bolivia, Uganda) are also contracting voice is the ballot box. In 197 4 only thirty-nine coun­
out the delivery of social services to nongovernmental tries-one in every four worldwide-were independent
organizations. democracies. Today, 117 countries-nearly rwo of every
There is a growing trend to set up focused, perfor­ three-use open elections to choose their leaders. But
mance-based public agencies with more clariry of purpose periodic voting does not always mean the state is more
and greater managerial accountability for outputs or out­ responsive. Other mechanisms are needed to ensure that
comes. New Zealand provides the most dramatic example the concerns of minorities and the poor are reflected in
among the high-income countries. It broke up its con­ public policies. Getting genuine intermediary organiza­
glomerate ministries into focused business units, headed tions represented on policymaking councils is an impor­
by chief executives on fixed-term, output-based contracts tant first step in articulating citizen interests in public
with the authority to hire and fire and to bargain col­ policymaking. Even more effective in local and provincial
lectively. Singapore has long followed a broadly similar government, these organizations have recently become
approach with its performance-based statutory boards. very active in developing countries-especially where the
Other developing countries are following suit, with state has performed poorly and where such organizations
Jamaica, for example, establishing executive agencies are not suppressed.
along the lines of the British model. B ROADENING PARTICIPATION. Evidence is mounting
But countries with inadequate controls and weak capac­ that government programs work better when they seek the
iry need to proceed with caution. For these countries, giv- participation of potential users, and when they tap the
 OVE RVI E W 1 1

community's reservoir of social capital rather than work ment. The challenge is to find the right division of labor
against it. The benefits show up in smoother implemen­ between the center and the other tiers of government.
tation, greater sustainability, and better feedback to gov­
ernment agencies. Higher returns from water-borne sani­ Strategic options for reform
tation systems in Recife, Brazil; housing schemes for the Building a more responsive state requires working on
poor in Port Elizabeth, South Africa; forest management mechanisms that increase openness and transparency,
efforts in Gujarat State, India; and health care in Khar­ increase incentives for participation in public affairs, and
toum, Sudan, are all testament to the power of partner­ where appropriate, lessen the distance between govern­
ship-the participation of local people. This is in contrast ment and the citizens and communities it is intended to
with top-down approaches, which often fail. serve. This yields four broad imperatives for policymakers:
In successful countries policymaking has been embed­
ded in consultative processes, which provide civil society, • Where appropriate, ensure broad-based public discus­
labor unions, and private firms opportunities for input sion of key policy directions and priorities. At a mini­
and oversight. In East Asia public-private deliberation mum this includes making available information in the
councils-such as Korea's monthly export promotion public interest and establishing consultative mecha­
meetings, Thailand's National Joint Public and Private nisms-such as deliberation councils and citizen com­
Consultative Committee, and the Malaysian Business mittees-to gather the views and make known the pref­
Council-have provided mechanisms for feedback, infor­ erences of affected groups.
mation sharing, and coordination. • Encourage, where feasible, the direct participation of
DEVOLVING POWER, CAREFULLY. The typical developing users and other beneficiaries in the design, implementa­
country has a more centralized government than the typical tion, and monitoring of local public goods and services.
industrial country. But with some significant exceptions, • Where decentralization is considered desirable, adopt a
the past thirty years have seen a small shift in public spend­ carefully staged and/or sectoral approach in priority
ing power in developing countries from the national to areas. Introduce strong monitoring mechanisms and
lower levels. The industrial economies have seen an oppo­ make sure sound intergovernmental rules are in place to
site trend, with spending power moving to the center. Nei­ restrain arbitrary action at the central and the local level.
ther of these observations, of course, takes into account the • At the local level, focus on mechanisms-and hori­
decentralization implicit in recent market reforms, which zontal incentives in government's relations with the
have clearly reduced the direct power and resources of cen­ rest of the community-that build accountability and
tral government in a broad range of countries. competition.
Decentralization is bringing many benefits in China,
India, much of Latin America, and many other parts of Of course, a strategy of more openness and greater
the world. It can improve the quality of government and decentralization has its dangers. The more numerous the
the representation of local business and citizens' interests. opportunities for participation, the greater the demands
And competition among provinces, cities, and localities that will be made on the state. This can increase the risk '
can spur the development of more-effective policies and of capture by vocal interest groups, or of gridlock. Bring­
programs. But there are three big pitfalls to watch out for: ing government closer to some people must not result in
taking it even further away from others. Equally, without
• Rising inequality. The gap between regions can widen­ clear-cut rules to impose restraints on different tiers of
an issue of considerable concern in China, Russia, and government, and incentives to encourage local account­
Brazil. Labor mobility provides a partial solution, but it ability, the crisis of governance that afflicts many central­
is seldom easy, especially in ethnically diverse countries ized governments will simply be passed down to lower
where migrants are not always welcome. levels. But there are some safe ways to start the ball rolling,
• Macroeconomic instability. Governments can lose con­ including the use of communication and consensus build­
trol of macroeconomic policy if local and regional fiscal ing to render reform intelligible to citizens and firms and
indiscipline leads to frequent bailouts from the center, enhance its chances of success.
as occurred in Brazil.
Beyond national borders: FaCilitating global
• Risk of local capture. A serious danger is that of local
collective action
governments falling under the sway of special interests,
leading to misuse of resources and of the coercive Globalization is a threat to weak or capriciously governed
power of the state. states. But it also opens the way for effective, disciplined
states to foster development and economic well-being,
These dangers show, once again, how central govern­ and it sharpens the need for effective international coop­
ment will always play a vital role in sustaining develop- eration in pursuit of global collective action.
1 2 WO R LD D EVE L O P M E NT R E PO RT 1 997

Embracing external competition how state policies (and international assistance) help
The state still defines the policies and rules for those manage nascent conflict is needed in designing eco­
within its j urisdiction, but global events and international nomic and social policy.
agreements are increasingly affecting its choices. People • Promoting global economic stability. Concern has been
are now more mobile, more educated, and better in­ growing about the potentially destabilizing effects of
formed about conditions elsewhere. And involvement in large and rapid flows of portfolio capital, particularly
the global economy tightens constraints on arbitrary state when a crisis in one country can spill over into other
action, reduces the state's ability to tax capital, and brings markets. A variety of international mechanisms have
much closer financial market scrutiny of monetary and been suggested to guard against such problems, and the
fiscal policies. International Monetary Fund has recently created a
"Globalization" is not yet truly global-it has yet to new facility to help members cope with sudden finan­
touch a large chunk of the world economy. Roughly half cial crises. But prudent and responsive economic poli­
of the developing world's people have been left out of the cies at home will be countries' best protection. Grow­
much-discussed rise in the volume of international trade ing international labor mobility is also raising a host of
and capital flows since the early 1980s. Governments' hes­ issues requiring international collective action.
itance to open up to the world economy is partly under­ • Protecting the environment. Urgent global environmen­
standable. Joining the global economy, like devolving tal issues include climate change, loss of biodiversity,
power from the center, carries risks as well as opportuni­ and protection of international waters. International
ties. For example, it can make countries more vulnerable collective action can help through better coordination,
to external price shocks or to large, destabilizing shifts in greater public awareness, more effective technological
capital flows. This makes the state's role all the more crit­ transfer, and better national and local practices.
ical, both in handling such shocks and in helping people Progress has been slow, however, raising the worry that
and firms grasp the opportunities of the global market­ it will take a major environmental catastrophe to goad
place. But the difficulties should not be exaggerated, par­ countries into concerted action.
ticularly when laid against the risks of being left out of the • Fostering basic research and the production of knowledge.
globalization process altogether. Now being revitalized to meet renewed challenges in
The cOSt of not opening up will be a widening gap in food production, the Consultative Group on Interna­
living standards between those countries that have inte­ tional Agricultural Research has shown how technology
grated and those that remain outside. For lagging coun­ can be developed and disseminated through interna­
tries the route to higher incomes will lie in pursuing tional collective action. Similar consultative mecha­
sound domestic policies and building the capability of the nisms need to be developed to tackle other pressing
state. Integration gives powerful support to such poli­ research problems in the domains of environmental
cies-and increases the benefits from them-but it can­ protection and health.
not substitute for them. In that sense, globalization begins • Making international development assistance more effec­
at home. But multilateral institutions such as the World tive. To become more effective, foreign aid needs to be
Trade Organization have an important role to play in pro­ tied more closely to the policies of the recipient coun­
viding countries with the incentive to make the leap. tries. A high priority for aid agencies is to systemati­
cally channel resources to poor countries with good
Promoting global collective action policies and a strong commitment to institutional rein­
Global integration also gives rise to demands for states to vigoration.
cooperate to combat international threats such as global
Removing obstacles to state reform
warming. Economic, cultural, and other differences be­
tween countries can make such cooperation difficult­ The history of state reform in today's established indus­
even, at times, impossible. But stronger cooperation is trial countries offers hope-and gives pause-to today's
clearly needed for at least five major concerns that tran­ developing countries. Until the last century many of the
scend national borders: problems that now appear to have reduced the effective­
ness of the state in the developing world were in plain
• Managing regional crises. The threat of nuclear war evidence in Europe, North America, and Japan. But the
between the superpowers has given way to a mush­ problems were addressed, and modern states with profes­
rooming of smaller conflicts, entailing costly problems sional systems emerged. This gives us hope. But it also
of refugee relief and rehabilitation. No solid interna­ gives us pause, because institutional strengthening takes
tional framework exists for managing these conflicts or time. The reforms of the Meiji restoration, which
helping avoid them. A more integrated assessment of launched Japan onto the path of development, took al-
 O V E RV I E W 1 3

most twenty-five years to take root. A more capable state

can be built, but the process will be slow and will require
Figure 5 Countries with good economic
immense political commitment. It is urgent to act now. policies and stronger institutional capability
Over the past fifteen years many governments have grow faster
responded to internal and external pressure by launching
far-reaching reforms to improve their performance. Typi­
cally, changes in macroeconomic policy-dealing with
exchange rates, fiscal policy, and trade policy-have come
fastest. These reforms have political implications but do 3.0
not require the overhaul of institutions. They can be
undertaken quickly, often through decree, by a small
group of competent technocrats. All it takes is the politi­
cal decision to make the change.
But other state reforms, dealing with regulation, social
services, finance, infrastructure, and public works, cannot
be accomplished so rapidly because they involve changing
institutional structures established for different purposes,
to fit different rules of the game. This kind of institutional
reform involves wrenching changes in the way govern­
ment agencies think and act, and often a complete over­ Low policy
distortion
haul of long-established systems of patronage and corrup­
Low capability High policy
tion. But such change is absolutely essential if the distortion
capability of the state is ever to improve. The two to­
gether-good policies and more capable state institutions
Note: Each growth rate is the average for a group of countries.
to implement them-produce much faster economic j Results are based on a regreSSion using panel data from ninety­
development (Figure 5 ) . four industrial and developing countries for the period 1964-93,
Comprehensive reform along these lines will take a controlling for education, income, and other variables. See the
Technical Note for details. Source: Commander, Davoodi, and
great deal of time and effort in many developing coun­ Lee, background paper.
tries, and the agenda varies considerably from region to
region (Box 3). Reform will also encounter considerable
political opposition. But reformers can make a good start
by strengthening central agencies for strategic policy for­ Neighbors, too, can be a powerfUl motivator for change.
mulation, introducing more transparency and competi­ There is a clear domino effect at work in the wave of
tion, hiving off activities and agencies with easily specified reform sweeping East Asia, Latin America, and much of
outputs, seeking more feedback from users about the Eastern Europe and the former Soviet Union. The threat
delivery of services, and working with labor unions on of being left behind can goad countries to improve the
programs that will enable workers to seek security III functioning of their bureaucracies. But research has yet to
change rather than seek security against change. explain why some countries respond to crises and others
do not. Why, for example, does popular tolerance of infla­
When do reforms occur? tion seem to be much lower in Asia than in parts of Latin
Deep distributional conflicts and constraints embedded in America? And why can some countries endure a long
state institutions are at the heart of the explanation for so period of economic decline before responding, while oth­
many countries' failure to reform. But they are not im­ ers take action much sooner?
mutable. Ultimately, change comes when the incentives Often the analysis of winners and losers yields a predic­
to throw out the old policies and old institutional arrange­ tion of when-or at least whether-reforms will be
ments become stronger than the incentives to keep them. undertaken. Reforms have little appeal if the winners can­
An economic crisis or an external threat, or the arrival of not compensate the losers. Even when the potential gains
a new government with fewer vested interests in the old are enough to allow for compensation, reform can be
system, may provide the impetus for reform. But reform hard to achieve because the gains are spread over many
can be delayed if those in power stick with outdated poli­ people, whereas the losers, although smaller in number, are
cies because it is in their (or their allies') interest to do so. powerful and articulate. A fUrther problem is that the ben­
And the delay can sometimes be painfully long, as in Haiti efits are often realized in the fUture, whereas the losses are
under the Duvaliers, or Zaire today. immediate. Yet sometimes conditions have deteriorated so
1 4 WO R LD D EVE L O P M E N T R E PO RT 1 997

Box 3 The regional agenda

The key features and challenges of improving the effec­ • The job of reorienting the state toward the task of
tiveness of the state in the various developing regions "steering, not rowing" is far from complete in Cen­
are summarized below. These are of necessity broad tral and Eastern Europe. But most countries have
generalizations, and each region includes several coun­ made progress and are on the way to improving
tries whose experiences are very different. capability and accountability.
• Low state capability in many countries of the Com­
• Many countries in Sub-Saharan Africa are suffering monwealth of Independent States is a serious and
from a crisis of statehood-a crisis of capability. An mounting obstacle to further progress in most areas
urgent priority is to rebuild state effectiveness of economic and social policy. Reorientation of the
through an overhaul of public institutions, reasser­ state is still at an early stage, and a host of severe
tion of the rule of law, and credible checks on abuse problems have emerged from a general lack of ac­
of state power. Where the links between the state, countability and transparency.
the private sector, and civil society are fragile and • In Latin America, decentralization of power and of
underdeveloped, improving the delivery of public spending, coupled with democratization, has dra­
and collective services will require closer partner­ matically transformed the local political landscape, in
ships with the private sector and civil society. what some have called a "quiet revolution." A new
• The capability of the state in most East Asian coun­ model of government is emerging in the region. But
tries cannot be considered a problem. But states' greater emphasis is also needed on reform of the legal
ability to change in response to the new challenges system, the civil service, and social policies.
facing the region will play a critical role in their con­ • In the Middle East and North Africa, unemployment is
tinued economic success. by far the greatest economic and social problem and
• The main issue in South Asia is overregulation, both makes government downsizing especially difficult. Be­
a cause and an effect of bloated public employment cause the political and social difficulties of reform are
and the surest route to corruption. Regulatory sim­ considerable, although not insurmountable, a promis­
plification and public enterprise reform, and the ing approach might be to begin decentralizing selected
resulting contraction of the role of the state, will be services, and focus on reforming state enterprises,
complex and politically difficult. while preparing the ground for wider-ranging reforms.

far that the winners far outnumber the losers. Then reform fected by reform (which may not always be the poorest in
can produce immediate economic and political gains. society) can help secure their support. Although compen­
sation may be costly in the short run, it will pay off in the
How can reforms be sustained? long run. Deep-seated differences and mutual suspicions
Reform-oriented political leaders and elites can speed re­ among groups can also delay reform. There are no quick
form by making decisions that widen people's options, fixes for removing age-old enmities, but social pacts, such
articulate the benefits clearly, and ensure that policies as Spain's Moncloa Pacts and Benin's National Economic
are more inclusive. In recent years farsighted political Conference, can help.
leaders have transformed the options for their people International agencies can encourage and help sustain
through decisive reform. They were successful because reform in four ways. First, they can provide important
they made the benefits of change clear to all, and built technical advice on what to do and what not to do. This
coalitions that gave greater voice to often-silent beneficia­ assistance is often invaluable, especially for smaller states
ries. They also succeeded-and this is crucial-because that lack the resources to handle all the technical issues
they spelled out a longer-term vision for their society, internally. But it must be complemented by local ex­
allowing people to see beyond the immediate pain of pertise, to adapt reforms to local conditions and institu­
adjustment. Effective leaders give their people a sense of tions. The World Trade Organization plays a major role
owning the reforms-a sense that reform is not something in trade reform, the World Health Organization on health
imposed from without. issues, and the International Labour Organisation on
Reforming the state requires cooperation from all labor legislation and employment policy. Second, interna­
groups in society. Compensation of groups adversely af- tional agencies can provide a wealth of cross-country
 OVERVI EW 1 5

experience on a wide range of issues. Often staffed by peo­ Instances of state collapse are both extreme and
ple from all over the world, they can bring in experts from unique, but they are growing. As the Report elaborates,
different backgrounds. Third, the financial assistance no simple generalizations about their causes or effects can
these agencies provide can help countries endure the early, be made, nor, for that matter, are there any easy solutions
painful period of reform until the benefits kick in. Fourth, to their reconstruction; each case brings its own challenges
they can provide a mechanism for countries to make for countries, their neighbors, and the international sys­
external commitments, making it more difficult to back­ tem. The consequences, however, are almost uniformly
track on reforms. If the history of development assistance borne by ordinary people, illustrating once again how
teaches anything, however, it is that external support can fundamental an effective, responsive state is to the long­
achieve little where the domestic will to reform is lacking. term health and wealth of society.
The quest for a more effective state even in the estab­
Good government is not a luxury-it is a vital
lished industrial countries suggests that the returns to in­
necessity for development
cremental improvements are high. This is especially true
The approach of the twenty-first century brings great in countries where the effectiveness of the state is low.
promise of change and reason for hope. In a world of Over time, even the smallest increases in the capability of
dizzying changes in markets, civil societies, and global the state have been shown to make a vast difference to
forces, the state is under pressure to become more effec­ the quality of people's lives, not least because reforms
tive, but it is not yet adapting rapidly enough to keep tend to produce their own virtuous circle. Small improve­
pace. Not surprisingly, there is no unique model for ments in the state's effectiveness lead to higher standards
change, and reforms will often come slowly because they of living, in turn paving the way for more reforms and fur­
involve a fundamental rethinking of the roles of institu­ ther development.
tions and the interactions between citizens and govern­ A tour of the world's economies in 1 997 would turn
ment. But the issues raised in this Report are now an inte­ up countless examples of these virtuous circles in action.
gral part of the rethinking of the state in many parts of the But it would provide equally plentiful evidence of the
world and are on the agenda of the international organi­ reverse: countries and regions caught in vicious cycles of
zations that assist them. poverty and underdevelopment set in train by the chronic
People living with ineffective states have long suffered ineffectiveness of the state. Such cycles can all too easily
the consequences in terms of postponed growth and social lead to social violence, crime, corruption, and instability,
development. But an even bigger cost may now threaten all of which undermine the state's capacity to support
states that postpone reforms: political and social unrest development-or even to function at all. The crucial chal­
and, in some cases, disintegration, exacting a tremendous lenge facing states is to take those steps, both small and
toll on stability, productive capacity, and human life. large, toward better government that set economies on the
The enormous cost of state collapse has naturally turned upward path, using the two-part framework suggested in
attention to prevention as a preferable and potentially this Report. Reform of state institutions is long, difficult,
less costly course of action-but there are no shortcuts. and politically sensitive. But if we now have a better sense
Once the spiral into collapse has occurred, there are no of the size of the reform challenge, we are also much more
quick fixes. aware of the costs of leaving things as they are.
1 8 WO RLD D EVE LO P M E NT R E P O RT 1 997

been more effective than others at playing a catalytic and sustainable role in

economic development and the eradication of poverty. This part of the Report

provides a broad historical and conceptual introduction to the issues (in Chap­

ter 1) and examines the empirical evidence of the impact of state policies and
institutions on development (in Chapter 2) . It conveys three principal messages:

• Development-economic, social, and sustainable-without an effective state

is impossible. It is increasingly recognized that an effective state-not a min­

imal one-is central to economic and social development, but more as part­

ner and facilitator than as director. States should work to complement mar­

kets, not replace them.

II A rich body of evidence shows the importance of good economic policies

( including the promotion of macroeconomic stability) , well-developed

human capital, and openness to the world economy for broad-based,

sustainable growth and the reduction of poverty. But as our understanding

of the ingredients of development improves, a deeper set of questions

emerges: why have some societies pursued these actions with greater success

than others, and how, precisely, did the state contribute to these differing

outcomes?

• The historical record suggests the importance of building on the relative

strengths of the market, the state, and civil society to improve the state's

effectiveness. This suggests a two-part strategy of matching the role of the

state to its capability, and then improving that capability. These are the sub­

ject, respectively, of Parts Two and Three.

T H E E V O LV I N G R O L E

O F T H E S TAT E

A Ivorian probably felt little connection with their

CENTURY AGO, A CANADIAN FARMER AND AN recall Thomas Hobbes' insight, in his 165 1 treatise
Leviathan, that life without an effective state to preserve
governments, and none at all to each other. Government order is "solitary, poor, nasty, brutish and short."
affected their lives only to the extent that it provided a This Report aims to show how every state, regardless of
handful of classic public goods, such as law and order and its point of departure, can improve its effectiveness and
basic infrastructure, and collected taxes from them. move ever further away from this doomsday scenario.
Today the state has expanded dramatically-and the Toward that end, this chapter begins with a reminder of
world has shrunk. The same farmers' descendants send how we got here. Surveying the history of the state from
their children to government-run schools, receive medical its early beginnings, it shows how notions of the state's
treatment from publicly supported clinics, rely on an role have evolved to produce, in both industrial and devel­
array of publicly provided services, and may benefit from oping countries, a dramatic expansion of the state and,
government price controls on the seed and fertilizer they more recently, a change of emphasis from the quantity of
buy, or the wheat or coffee they sell. These later genera­ government to the quality. The chapter then lays out a
tions of Canadians and Ivorians are therefore likely to be simple framework for rethinking the state, introducing a
much more concerned than their ancestors were about the rwo-part strategy for greater state effectiveness that the
effectiveness of government and the checks and balances rest of the Report explores. The message is that the state
on its decisions. And they are likely to be much more can rise to the challenges it faces, but only by, first, match­
aware of how their own government's performance com­ ing what it tries to do to what it can do, and second,
pares with others'. Vastly expanded communications, working to increase the number of things it can do capa­
trade and investment, radio and television, friends and rel­ bly by reinvigorating public institutions.
atives traveling to foreign lands as tourists or migrant
Where the state began
laborers-all of these give Canadians and Ivorians today a
much better idea of how the government services they From earliest times human beings have banded together
receive measure up to those in other countries. The state's into larger associations, starting with household and kin­
behavior, and the consequences of that behavior, are being ship groups and extending through to the modern state.
scrutinized like never before. For states to exist, individuals and groups have to cede
This scrutiny might lead to better government. But if authority in key areas, such as defense, to a public agency.
states are unable to respond constructively to the chal­ That agency has to possess coercive power over all other
lenges they face, the result could simply be further erosion organizational forms within a designated territory.
of the state's credibility, as the gap berween what the state States have come in all shapes and sizes, depending
can do, and what people ask it to do, widens even further. on a mix of factors including culture, natural endow­
The terminal phase of this process is visible in the recent ments, opportunities for trade, and distribution of power.
agonies of Angola, Somalia, and Zaire. The state collapses The ancient Athenian state, for example, was under­
from within, leaving citizens bereft of even the most basic pinned by slavery and colonial spoils. Further east, elabo­
conditions of a stable existence: law and security, trust in rate state structures were built from early times on the
contracts, and a sound medium of exchange. These crises basis of state ownership of land or, in Mughal India and
20 WORLD D EVE L O P M E NT R E P O RT 1 997

Box 1.1 State and government: Some concepts

State, in its wider sense, refers to a set of institutions that of offices, which is more narrow in conception, and the
possess the means of legitimate coercion, exercised over relationship between government and the governed.
a defined territory and its population, referred to as soci­ The first classification is based on the relationship be­
ety. The state monopolizes rulemaking within its terri­ tween the executive and the legislature. In a parliamen­
tory through the medium of an organized government. tary system the executive's continuance in office de­
The term government is often used differently in dif­ pends on its maintaining the support of the legislature.
ferent contexts. It can refer to the process of governing, Members of the executive are commonly also members
to the exercise of power. It can also refer to the existence of the legislature. A prime minister may be the most
of that process, to a condition of "ordered rule." "Gov­ powerful member of the executive, but important deci­
ernment" often means the people who fill the positions sions within the executive are usually made collectively
of authority in a state. Finally, the term may refer to the by a group of ministers. In a presidential system the
manner, method, or system of governing in a society: to executive's position is independent of the legislature.
the structure and arrangement of offices and how they Members of the executive are not normally also mem­
relate to the governed. While keeping these distinctions bers of the legislature, and ultimate decision making
in mind, we also use the terms state and government col­ authority within the executive lies with one person, the
loquially and sometimes interchangeably-as they are president.
often used in discussion and writing around the world. The second classification concentrates on the distri­
Government is normally regarded as consisting of bution of power between levels of government. In a
three distinct sets of powers, each with its assigned unitary state, all authority to make laws is vested in one
role. One is the legislature, whose role is to make the supreme legislature whose jurisdiction covers the whole
law. The second is the executive (sometimes referred country. Local legislatures may exist, but only with the
to as "the government"), which is responsible for im­ sufferance of the national legislature. In a federal state,
plementing the law. The third is the judiciary, which is local legislatures are guaranteed at least a measure of
responsible for interpreting and applying the law. autonomous decisionmaking authority. In a confedera­
Classifications of government are many but have tion, a group of sovereign states combine for specified
tended to concentrate on two criteria: the arrangement purposes, but each state retains its sovereignty.

imperial China, highly developed systems of administra­ of the public and private spheres have not. Whether in
tion and tax collection. The combination of public own­ Niccoli> Machiavelli's The Prince, Kautiliya's Arthashastra,
ership of land and a complex bureaucracy long impeded Confucius' writings, or Ibn Khaldoun's The Muqad­
the emergence of modern, market-based economies in dimah, the discussion has revolved around the mutual
these regions. rights and obligations of states and citizens. Almost all
Yet despite this diversity of origins, states over time came these traditions have included a role for the state in pro­
to acquire several common and defining features world­ viding basic public goods (although the weight accorded
wide. Modern states have a consolidated territory and pop­ to public, as opposed to private, goals has varied consid­
ulation, and within these they play a centralizing and coor­ erably). Using public resources to provide critical public
dinating role. Sovereign authority commonly encompasses goods and to raise private productivity is nothing new.
separate judicial, legislative, and executive functions (Box Beyond these minimal functions, however, there has
1 . 1). Since the eighteenth century, through conquest and been much less agreement on the appropriate role of the
colonization, nation-states have incorporated most of the state in promoting development. Seventeenth-century
world into their own mutually exclusive territories. As em­ mercantilists saw a major role for the state in guiding
pires disintegrated and minority groups established claims trade. Not until Adam Smith wrote The Wealth ofNations
to statehood, the number of nations increased sharply. in the late eighteenth century was it generally recognized
Membership in the United Nations jumped from 5 0 inde­ that the market was the best instrument for realizing
pendent countries in 1 945 to 1 85 in 1 996 (Figure 1.1). growth and improving welfare. The state, on this view,
was best held to certain core functions-providing public
Modest beginnings goods such as defense, ensuring the security of persons
The configuration of states has varied widely across conti­ and property, educating the citizenry, and enforcing con­
nents and centuries, but arguments over the proper roles tracts-deemed essential for the market to flourish.
 THE E V O LV I N G R O LE O F THE STATE 2 1

Figure 1.1 One world, many more states Box 1.2 U .S. government action to support
market development: Some examples
Number of United Nations member countries
200 ,-
---,
The United States is the country that produced and
believes in the dictum that ''That government is
1 80
best that governs least." Whereas in many parts of
160
the world the role of the government has evolved
gradually, the United S tates was founded on a rev­
140 olution. The framers of the Constitution explicitly
asked, What should be the role of the government?
120 Yet even in the United States, where laissez-faire
and distrust of government are central to the fram­
100,
ing of the state's role in society, government action
80 has often proved critical to the growth and devel­
opment of markets. For example:
60
• The global telecommunications industry has its
40
roots in U.S. government suppOrt for the first
20 telegraph line between Washington and Balti­
more in the early 1 840s.
o • The enormous increase in agricultural productiv­
1945 1949 1959 1969 1979 19 89 1996 ity in the nineteenth and twentieth centuries can
be traced to the federally supported program of
Note: Data are as of the end of the year. Source: United Nations research and extension services dating from the
fl1lta.
Morrill Act of 1 863.
• The Northwest Ordinances of 1 785 and 1 7 87
committed the government to supporting educa­
tion, and to devoting the revenues from the sale of
But even then, state intervention went on to play a certain lands to that purpose. And in 1 863 the
vital, catalytic role in the development and growth of mar­ federal government helped establish the public
kets in Europe, Japan, and North America. In the United university system.
States, where state involvement in the economy has histor­ • In 1 863, in the midst of the Civil War, the Con­
ically been more limited than in Europe or Japan, govern­ gress recognized the need for a national financial
ment was instrumental in constructing the first telegraph system and passed the National Banking Act,
line, which spurred development of the telecommunica­ establishing the first nationwide bank supervi­
tions industry, and in agricultural research and extension, sory agency. In later years the government cre­
which stimulated productivity gains (Box l .2). ated the Federal Reserve System (the U.S. central
In the nineteenth century the state's role in redistribut­ bank) as well as a series of public financial inter­
ing income was still quite limited. Redistribution in mediaries.
Europe came mainly through private charity and other • The interstate highway system and federal support
voluntary action. Tax systems were usually restricted to for the establishment of railroads are cases of vital
customs, excise, monopoly, and commodity taxes. Income public involvement in transport infrastructure
taxation, which had been introduced in France and Britain that helped the development of markets in the
by the end of the eighteenth century, was not a major United States.
source of revenue. The first faint stirrings of the modern
welfare state were seen in Germany, at the end of the nine­
teenth century, where Chancellor Otto von Bismarck in­
troduced the first nationwide systems of social insurance. the Russian Revolution of 1 9 1 7 , which led to the aboli­
tion there of most private property and put the state in
The expanding state in industrial countries . . . control, through central planning, of all economic activ­
States remained small by modern standards until well into ity. The second was the Great Depression of the 1 930s,
this century. A series of dramatic events in the aftermath which caused such economic devastation in the noncom­
of World War I marked the turning point. The first was munist world that states were spurred to experiment with
22 W O R L D D EV E L O P M E N T R E P O R T 1 997

countercyclical policies to restore economic activity. The half decades between 1 960 and 1 995, governments in the
third event, unleashed by World War II, was the rapid industrial countries swelled to twice their starting size
breakup of European empires. That geopolitical change­ (Figure 1 .2), with much of the expansion driven by
as well as the clamor for social insurance in the industrial increases in transfers and subsidies.
economies-ushered in fifty years of policy debate focused Indeed, by the early 1 990s it was fair to say that most
around a more activist role for government. industrial-country governments spent more time moving
The postwar paradigm coalesced around three basic money around the economy in the form of transfers and
themes, all of which commanded broad, if not uniform, subsidies than they spent providing traditional public
agreement. This three-pillared consensus remained largely goods. Spending on defense and on law and order had
undisturbed until the first oil price shock of 1 973. First was shrunk to some 1 0 percent of general-government outlays,
the need to provide welfare benefits to those suffering from while over half of all tax revenues were transferred to indi­
transitory loss of income or other deprivation. Second was vidual beneficiaries (Figure 1 .3). Demographics accounted
the desirability of a mixed public-private economy, which for some of the shift, as aging populations forced an
would often mean nationalizing a range of strategic indus­ increase in outlays for pensions and health care. But
tries. Third was the need for a coordinated macroeconomic national preferences also made a difference. Thus, from a
policy, on the grounds that the market alone could not point of rough equivalence in 1 960, the Swedish state
deliver stable macroeconomic outcomes that were consis­ grew to nearly twice the size of that in the United States
tent with individuals' objectives. In time, the goals of by 1 995, in terms of both spending as a share of income
macroeconomic policy were made explicit: full employ­ and public employment as a share of the population.
ment, price stability, and balance of payments equilibrium.
States thus took on new roles and expanded existing . . . And in developing countries
ones. By mid-century the range of tasks performed by Governments in developing countries were also reaching
public institutions included not only wider provision of into new areas. They, toO, grew dramatically in the second
infrastructure and utilities, but also much more extensive half of the twentieth century (Figure 1 .2). Initially, much
support for education and health care. In the three-and-a- of the growth came from state and nation building after

Figure 1.2 Governments the world over have expanded since 1960

Central government spending (percentage of GDP)

40 ,----,

35

30

25

20

15

10

o
OECD countries All developing Sub-Saharan East Asia and South Asia Latin America Middle East and
countries Africa Pacific and Caribbean North Africa

Note: Data are in current national prices. Data for Middle East and North Africa for 1960-64 a re unavailable. Source: IMF. various years (a) and
(b); World Bank data.
 THE E V O LV I N G R O LE O F THE STATE 23

Figure 1.3 Transfers and interest payments have grown

Composition of central government spending (percentage of total)

OECD Sub-Saharan East Asia and South Asia Latin America Middle East
countries Africa Pacific and Caribbean and North Africa
100

80

60
Consumption
Investment
40
Interest. transfers .
and subsidies
20

Note: Data are averages for the years indicated. Source: IMF. various years (a).

the collapse of colonialism. The ups and downs in in­ the state a central role in correcting them. Centralized
ternational commodity markets also had an impact. planning, corrective interventions in resource allocation,
Resource-rich economies such as Mexico, Nigeria, and and a heavy state hand in infant-industry development
Venezuela tended to use the revenue bonanzas from the were part and parcel of this strategy. Economic national­
oil price rises of the 1 970s and other commodity booms ism was added to the mix, to be promoted through state
to expand their public sectors, sometimes with reckless enterprises and encouragement of the indigenous private
abandon. Oil-importing countries, under the imperative sector. By the 1960s states had become involved in virtu­
of fiscal austerity, were less able to expand their spending. ally every aspect of the economy, administering prices and
Perhaps more significant than these forces has been the increasingly regulating labor, foreign exchange, and finan­
shift in thinking about the role of the state over the past cial markets.
fifty years. Most developing countries in Asia, the Middle By the 1970s the costs of this strategy were coming
East, and Africa came out of the colonial period with a home to roost. The oil price shocks were a last gasp for
strong belief in state-dominated economic development. state expansion. For the oil exporters they created a
The state would mobilize resources and people and direct bonanza, which many threw into even greater expansion
them toward rapid growth and the eradication of social of state programs. As long as resources were flowing in,
injustice. State control of the economy, following the the institutional weaknesses stayed hidden. The oil­
example of the Soviet Union, was central to this strategy. importing countries, for their part, got caught on a tread­
(How it was followed in one country, India, is described mill of heavy borrowing of recycled petrodollars to keep
in Box 1 .3.) Many Latin American, Middle Eastern, and the state growing. The COSts of this development strategy
African countries also followed this posrwar pattern of were suddenly exposed when the debt crisis hit in the
state-dominated, import-substituring industrialization. 1980s and oil prices plunged.
This belief was reinforced by the popularity of state The collapse of the Soviet Union-by then no longer
activism worldwide. The Great Depression was seen as a an attractive model-sounded the death knell for a devel­
failure of capitalism and markets, while state interven­ opmental era. Suddenly, government failure, including
tions-the Marshall Plan, Keynesian demand manage­ the failure of publicly owned firms, seemed everywhere
ment, and the welfare state-seemed to record one success glaringly evident. Governments began to adopt policies
after another. The new interventionist credo had its coun­ designed to reduce the scope of the state's interven­
terpart in the development strategy of the day, adopted by tion in the economy. States curbed their involvement in
many developing countries at independence, which em­ production, prices, and trade. Market-friendly strategies
phasized the prevalence of market failures and accorded took hold in large pans of the developing world. The
24 W O R LO D EV E L O P M E NT R E P O RT 1 997

Box 1.3 Evolution of the role of the state in India: The past fifty years

When India became independent in 1947, income per ment schemes, but only a small fraction of the rising
capita had been stagnating for half a century, and mod­ subsidies actually reached the poor. Competition
ern industry was minimal. between political parties drove subsidies up at every
The Nehnt years, 1947-64. India's first prime min­ election. The resulting large fiscal deficits (8.4 percent
ister, Jawaharlal Nehru, saw industrialization as the key of GOP in 1985) contributed to a rising current
to alleviating poverry, and a powerful state with a account deficit. India's foreign exchange reserves were
planned economy as essential if the country was to virtually exhausted by mid- 199 1, when a new govern­
industrialize rapidly, accelerate public saving and in­ ment headed by Narasimha Rao came to power.
vestment, and reduce the role of foreign trade and The reform phase, 1991 to theprmnt. Rising interest
achieve self-sufficiency. Unlike many East Asian coun­ payments on India's foreign debt meant that neither
tries, which used state intervention to build strong pri­ the central government nor the state governments
vate sector industries, India opted for state control over could continue to finance both subsidies and heavy
key industries. Believing the potential of agriculture public investment. The former won out, and the gov­
and exports to be limited, Indian governments taxed ernment began to woo private and foreign investment.
agriculture by skewing the terms of trade against it and Thus, impending bankruptcy drove the reform process
emphasizing import substitution. They saw technical and changed the state's role from that of principal
education as vital for industrialization. investor to that of facilitator of entrepreneurship. This
Garibi hatao, 1966-77. Under Prime Minister shift was expected to free up government finances for
Indira Gandhi, two major shifts took place in the role more social spending, but in practice the fiscal crunch
of the state. First, the neglect of agriculture was re­ prevented a significant increase.
versed through state activism in subsidizing new seeds Rao's government abolished most industrial and
and fertilizers, agricultural credit, and rural electrifica­ import licensing, devalued the rupee, drastically re­
tion. The green revolution took off, and by the mid- duced import tariffs, liberalized the financial sector
197 0s India was self-sufficient in grain. The second and foreign investment, and allowed private invest­
shift was the tightening of state control over every ment in areas previously reserved for the government.
aspect of the economy. Under the slogan of garibi The new coalition government that came to power
hatao ("abolish poverry"), banks were nationalized, in 1996 has by and large sustained these reforms.
trade was increasingly restricted, price controls were And the 1997 budget takes very positive steps in that
imposed on a wide range of products, and foreign direction.
investment was squeezed. The state achieved a stran­ Thus the old national consensus on socialism has
glehold on the economy. Yet growth of gross domestic given way over the course of a few years to a new
product (GOP) failed to accelerate, remaining during consensus on liberalization. But formidable challenges
this period at 3.5 percent a year. remain . Most parties agree on the need for reform,
The spending boom and risingfiscal deficits, 1977-91. yet no parry is eager to retrench surplus labor, close
Between 1977 and 199 1, most stringent controls on unviable factories, or reduce subsidies. The reforms
imports and industrial licensing were gradually relaxed, so far are a positive step but must be extended
stimulating industrial growth. The government and accelerated if India is to catch up with the East
expanded antipoverry schemes, especially rural employ- Asian tigers.

pendulum had swung from the state-dominated develop­ health, and infrastructure as often as-or more than­
ment model of the 196 0s and 197 0s to the minimalist they cut low-priority programs, bloated civil service rolls,
state of the 198 0s. and money-losing enterprises. Cuts came primarily in cap­
As often happens with such radical shifts in perspective, ital budgets and, in Africa, in operating and maintenance
countries sometimes tended to overshoot the mark. Efforts outlays, further reducing the efficiency of investment. The
to rebalance government spending and borrowing were result, seen most starkly in Africa, the former Soviet
uncoordinated, and the good was as often cut as the bad. Union, and even parts of Latin America, was neglect of the
To meet their interest obligations, countries mired in debt state's vital functions, threatening social welfare and erod­
squeezed critically important programs in education, ing the foundations for market development.
 TH E EVO LVI N G ROLE O F" T H E S TA T E 2 5

The consequences of an overzealous rejection of gov­ power can help resolve problems of collective action that
ernment have shifted attention from the sterile debate of would otherwise reduce the social benefits of insurance
state versus market to a more fundamental crisis in state markets, or prevent mutually complementary private
effectiveness. In some countries the crisis has led to out­ investments from being made, to take just two examples.
right collapse of the state. In others the erosion of the state's At the same time, however, the state confronts unique
capability has led nongovernmental and people's organiza­ challenges both in clarifYing its objectives and in ensuring
tions-civil society more broadly-to try to take its place. that its employees pursue them. First, even though elec­
In their embrace of markets and rejection of state activism, tions and other political mechanisms help mediate
many have wondered whether the market and civil society between citizens and the state, citizens' mandates can
could ultimately supplant the state. But the lesson of a half­ remain vague-and powerful special interests continually
century's thinking and rethinking of the state's role in try to direct the focus of government in their favor. Sec­
development is more nuanced. State-dominated develop­ ond, monitoring performance is difficult in many govern­
ment has failed, but so will stateless development. Devel­ ment activities such as primary education, environmental
opment without an effective state is impossible. protection, and preventive health care. This can make it
hard to set standards or put other mechanisms in place to
Rethinking the state: A framework
ensure accountability. Both problems can lead to state
A central difficulty in redefining the state's role is that the bureaucracies being granted enormous room for discre­
ground beneath governments' feet is always changing. If tion. When that happens, state officials at all levels may
we consider how global economic and social forces have pursue their own agendas rather than the society's. Haiti
changed prevailing notions of the state, it is clear that it under the Duvaliers provides a vivid example of where the
retains a distinctive role in providing the public goods that use of arbitrary public power for personal profit, rather
promote economic and social development. And market than for the social good, can lead.
failures continue to offer powerful economic arguments In many countries the voluntary sector has stepped in
for state intervention (Box 1 .4). But changes in technol­ to address some of the gaps in collective goods and ser­
ogy are transforming the nature of market failure: in infra­ vices left by market and by government failure. The vol­
structure, for example, technology has created new scope untary sector brings its own strengths to the table, but also
for competition in telecommunications and electric power its own weaknesses. It does a lot of good in increasing
generation. And many of the most successful examples of public awareness, voicing citizens' concerns, and deliver­
development, recent and historical, entail states working ing services. Local self-help organizations are sometimes
in partnership with markets to correct their failures, not the preferred providers of local public goods and services,
replacing them. because of their closeness to local concerns. But their con­
Equity also remains a central concern of the state. New cern is often for certain religious or ethnic groups and not
evidence, especially from East Asia, shows that the famil­ society as a whole, their accountability is limited, and
iar tradeoff between growth and equity is not inevitable, as their resources are often constrained. The challenge, then,
was once thought. Appropriately designed policies in basic for the state is to build on the relative strengths of private
education and health care can reduce poverty and increase markets and the voluntary sector while taking into
equity while promoting economic growth. Neglecting account and improving its own institutional capability.
these social fundamentals of development can be fatal. But All these considerations point to a two-part strategy to
the mere fact of market failure, and other problems of improve the state's ability to enhance economic and social
inequality and insecurity, does not mean that only the welfare. The first task is to match the state's role to its
state can-or should-resolve these problems. The state's existing capability-to establish the institutional rules and
coercive authority within its boundaries gives it unique norms that will enable the state to provide collective goods
strengths in seeking to address these concerns, but also and services efficiently. The second is to reinvigorate the
unique weaknesses. Governments must keep a firm eye on state's capability through rules, partnerships, and compet­
both in deciding whether, and how, to respond. itive pressures outside and within the state.
The state's unique strengths are its powers to tax, to
prohibit, to punish, and to require participation. The Matching role to capability: What states do and
state's power to tax enables it to finance the provision of how they do it
public goods. Its power to prohibit and punish enables it Part Two of this Report discusses the first part of the strat­
to protect personal safety and property rights. And its egy: matching the state's role to its capability, to improve
power to require participation enables it to minimize free the effectiveness and efficiency of public resource use. It
riding: those who would reap the benefits of public goods advocates ways in which states can provide the fundamen­
can be made to pay their share of the costs. The same tals for development, especially where capability is low
26 WO R LD D EV E L O P M E NT R E P O RT 1 997

Box 1.4 The economic rationale for state intervention and some definitions

Market failure and the concern for equity provide the crease prices and profits. Governments have addressed
economic rationale for government intervention. But this problem by regulating private monopolists or
there is no guarantee that any such intervention will providing the good or service themselves. Changes in
benefit society. Government failure may be as com­ technology have created new scope for competition in
mon as market failure. The challenge is to see that the services once considered natural monopolies, such as
political process and institutional structures get the telecommunications and power generation.
incentives right, so that their interventions actually Incomplete markets and imperfictor asymmetric infor­
improve social welfare. mation are pervasive problems and can result in ineffi­
Market failure refers to the set of conditions under cient outcomes. Markets are incomplete whenever
which a market economy fails to allocate resources effi­ they fail to provide a good or service even though the
ciently. There are many sources of market failure and cost would be less than what individuals are willing to
many degrees of failure. The implications for the role pay. Imperfect information on the part of consumers
of the state and the form of public intervention can be can lead to systematic undervaluation of some ser­
quite different in each case. vices, such as primary education or preventive health
Public goods are goods that are non rival (consump­ care. Asymmetry of information-when suppliers
tion by one user does not reduce the supply available know more than consumers, or vice versa-can lead to
for others) and nonexcludable (users cannot be pre­ excessive or supplier-induced demand, for example in
vented from consuming the good). These characteris­ the provision of medical care. Problems of adverse
tics make it infeasible to charge for the consumption of selection and moral hazard can lead to the failure of
public goods, and therefore private suppliers will lack insurance markets. Adverse selection occurs when buyers
the incentive to supply them. National public goods, of a service tend to impose higher-than-average costs on
such as defense, benefit an entire country; local public the service provider, or when sellers are able to exclude
goods, such as rural roads, benefit a smaller area. Pri­ such high-cost customers. Health insurance provides
vate goods are those that are both rival and excludable, an example: those who are more likely to need care are
common property goods are nonexcludable but rival (an more likely to buy insurance, and more likely to be
example is groundwater irrigation), and club goods are turned down by insurers. Moral hazard is present when
nonrival but excludable (examples are interurban high­ persons carrying insurance have an incentive to cause or
ways and toll roads). allow the insured-against event to happen. An example
Externalities arise when the actions of one person or is the tendency of health care consumers to seek, as well
firm hurt or benefit others without that person or as providers to provide, more treatment than they need
firm paying or receiving compensation. Pollution is an when a third party, the insurer, is paying most of the
example of a negative externality, which imposes un­ cost. Governments have sought to address these prob­
compensated costs on society; the broader benefit to lems by ensuring widespread coverage and holding
society at large of a literate population is a positive ex­ down costs. They have done this by either regulating
ternality of primary education. Governments can curb private insurance, financing or mandating social insur­
negative and promote positive externalities through ance, or providing health care themselves.
regulation, taxation or subsidy, or outright provision. Equity may prompt state intervention even in the
A natural monopoly occurs when the unit cost of absence of market failure. Competitive markets may
providing a good or service to an additional user distribute income in socially unacceptable ways. Persons
declines over a wide range of output, reducing or elim­ with few assets may be left with insufficient resources to
inating the scope for competition. But left to operate achieve acceptable living standards. Government action
freely, monopoly providers can restrict output to in- may be required to protect the vulnerable.

(Chapter 3). Chapter 4 looks at more demanding state from activities that will not be undertaken at all without
functions, such as regulation and industrial policy, and state intervention to activities in which the state plays an
shows how getting the right fit berween roles and capabili­ activist role in coordinating markets or redistributing assets:
ties is vital for improving the state's effectiveness. Table 1 . 1
presents a framework for thinking about these issues. It • Countries with low state capability need to focus first on
classifies the functions of government along a continuum, basic functions: the provision of pure public goods such
 TH E EVO LVI N G ROLE O F TH E STATE 27

Table 1.1 Functions of the state

Addressing market failure Improving equity

0& " . . . . " ,

Minimal • , , ': ' ;" .
functions

Intermediate ' . .
functions

. .. . .. . ..
. .
• •

Activist
:
�-

Coordinating pnvate act,v,ty: RedIstributIOn: � :l

�
functions
I Fostenng m arkets Asset redlstnbution
c l uster Inlti at lve s
___ _ _
il
____
_ ___
____
____
-_
- _- _
- �

as property rights, macroeconomic stability, control of olies. The design of regulation needs to fit the capabil­
infectious diseases, safe water, roads, and protection of ity of state regulatory agencies and the sophistication of
the destitute. In many countries the state is not even pro­ markets, and give greater emphasis to personal respon­
viding these. Recent reforms have emphasized economic sibility.
fundamentals. But social and institutional (including • Although the state still has a central role in ensuring the
legal) fundamentals are equally important to avoid social provision of basic services-education, health, infra­
disruption and ensure sustained development. structure-it is not obvious that the state must be the
• Going beyond these basic services are the intermediate only provider, or a provider at all. The state's choices
functions, such as management of externalities (pollu­ about provision, financing, and regulation of these ser­
tion, for example), regulation of monopolies, and the vices must build on the relative strengths of markets,
provision of social insurance (pensions, unemployment civil society, and state agencies.
benefits). Here, too, the government cannot choose • In protecting the vulnerable, countries need to distin­
whether, but only how best to intervene, and govern­ guish more clearly between insurance and assistance.
ment can work in partnership with markets and civil Insurance, against cyclical unemployment for example,
society to ensure that these public goods are provided. aims to help smooth households' income and con­
• States with strong capability can take on more-activist sumption through a market economy's inevitable ups
functions, dealing with the problem of missing markets and downs. Assistance, such as food-for-work programs
by helping coordination. East Asia's experience has or bread subsidies, seeks to provide some mmlmum
renewed interest in the state's role in promoting mar­ level of support to the poorest in society.
kets through active industrial and financial policy.
Reinvigorating the state's capability
Matching role to capability involves not only what the Reinvigorating the state's capability-the second, equally
state does but also how it does it. Rethinking the state also vital part of the reform strategy-is the subject of Part
means exploring alternative instruments, existing or new, Three. Its theme is that such improvements are possible
that can enhance state effectiveness. For example: only if the incentives under which states and state institu­
tions operate are changed. Improving capability is not
• In most modern economies the state's regulatory role is easy. The modest successes, and many failures, of techni­
now broader and more complex than ever before, cov­ cal assistance efforts over the decades underscore that it is
ering such areas as the environment and the financial a matter of changing the incentives that determine behav­
sector, as well as more traditional areas such as monop- ior as much as it is one of training and resources. The key
28 WO R LD D EV E L O P M E N T R E PO RT 1 997

is to find rules and norms that create incentives for state A remote, imperious state, whose deliberations are not
agencies and officials to act in the collective interest, while transparent, is much more likely to fall into the downward
restraining arbitrary action. This can be achieved through: spiral of arbitrary rule and decreasing effectiveness. Chap­
ter 7 looks at the benefits of making government reach
• Rules and restraints. Mechanisms for enforcing the rule out to people and grant them a greater role in deciding
of law, such as an independent j udiciary, are critical and implementing policy. And it shows how, carefully
foundations for sustainable development. Along with pursued, decentralization-the transfer of powers and
appropriate separation of powers and the presence of resources to lower levels of government-can support this
watchdog bodies, they also restrain arbitrary behavior. effort. Finally, Chapter 8 provides a reminder that collec­
• Competitive pressure. Competitive pressure can come tive action increasingly involves looking across national
from within the state bureaucracy, through recruitment borders. The chapter examines the various ways in which
of civil servants on the basis of merit. It can come from national governments can and must cooperate to meet
the domestic private sector, through contracting out demands that, although felt at home, can only be
for services and allowing private providers to compete addressed effectively at the international level.
directly with public agencies. Or it can come from the
Strategic options: Initiating and sustaining reforms
international marketplace, through trade and through
the influence of global bond markets on fiscal decisions. This two-part strategy for improving state effectiveness
• Voice and partnership. The means to achieve trans­ is far easier said than accomplished. The difficult job for
parency and openness in modern society are many and reformers will be not only devising the right kind of
varied-business councils, interaction groups, and con­ reforms but combating the deep-seated opposition of
sumer groups, to name a few. Institutional working those with a vested interest in the old ways. Matching
arrangements with community groups can contribute role to capability means shedding some roles, including
to greater state effectiveness by giving citizens a greater some that benefit powerful constituencies. Proponents of
voice in the formulation of government's policies. And a more capable state will quickly discover that it is in
partnerships between levels of government and with many people's interest to keep it weak. Nevertheless,
international bodies can help in the provision of local politicians have an incentive to undertake reforms if they
and global public goods. result in net gains to important constituencies. Windows
of opportunity occasionally open in response to crisis or
All three mechanisms are a recurrent theme of Part external threat, and effective political leadership is skilled
Three, which starts (in Chapter 5) by looking at the basic at devising strategies for building consensus or compen­
building blocks of a more effective public sector. The sating losers.
emphasis there is on rules and forms of competition to Part Four explores the challenge of initiating and sus­
enhance the three basics: policymaking, service delivery, taining reforms of the state (Chapter 9). Its central argu­
and the lifeblood of the public sector, the civil service. But ment is that constraints on reform are largely political and
history tells us that rebuilding public trust in govern­ institutional. Hence fundamental institutional reform is
ment-and therefore its capability-will involve putting likely to be long term, but reform opportunities arise, or
restraints on arbitrary action. These issues are taken up in can be created, and these must be seized. Finally, Chapter
Chapter 6, which analyzes the checks and balances in the 10 lays out the prospects for change and the reform
constitutional structure of the state and the best ways to agenda for each developing region. The message is that
control arbitrary behavior and corruption. reform will be difficult and must be tailored to its cir­
A third layer, which supports the other two, is efforts cumstances, but the special challenge of collapsed states
to open up the government and make it more responsive. provides a salutary reminder of the risks of failure.
R E F O C U S I N G O N T H E

E F F E C T I V E N E S S O F T H E S TAT E

Men are powerless to secure thefUture; institutions alonefix the destinies of nations.
-Napoleon I, Imperial seance Oune 7, 1 8 1 5)

F edge and ideas and increases the speed with which they are
1FTI' YEARS AGO, WORLD WAR II HAD ENDED AND

reconstruction was under way in much of Europe, absorbed, disseminated, and used. Since the 1 980s the
the Soviet Union, and Japan. Many developing countries focus has shifted to the role of sound policies in explain­
were starting to emerge from colonialism, and the future ing why countries accumulate human and physical capital
seemed full of promise. The difficulties of economic de­ at different rates. This, in turn, has led to yet another shift
velopment were not yet haunting us. Improving people's of focus, to the quality of a country's institutions. New,
lives looked so achievable, a simple matter of applying the more complex questions have emerged. What institu­
right ideas, technical expertise, and resources. And so it tional arrangements best allow markets to flourish? What
proved-in some cases. But in others progress was mea­ is the role of the state both as a direct agent (mostly in the
ger. Despite five decades of effort, enormous disparities provision of services) and as a shaper of the institutional
remain in the quality of life of people around the world. context in which markets function? How do policies and
Indeed, by some measures the gap between rich and poor institutions interact in development?
has widened. The answers to these questions are central to our
Explanations for these huge international differences in understanding of the deeper sources of differences in
living standards have changed over the years. For cen­ development outcomes-and of why the response to eco­
turies, access to natural resources-land and minerals­ nomic reform often varies so widely from one country to
was considered the prerequisite for development. Much of another. They help explain, for example, why investment
Africa, Asia, and the Americas was colonized to acquire and economic activity have revived more strongly follow­
these resources, and countries went to war over them. ing the embrace of the market in Poland than in Russia.
Gradually, however, the thinking changed, and physical They also help explain why many countries in Africa and
capital-machines and equipment-was held to be the Latin America have yet to see much of the improvement
key to development. "Industrialized" became synonymous in the quality of life they were promised when they
with "developed." But around the middle of this century embarked on their economic reforms a decade ago.
economic theorists realized that even this was too simplis­ The state has much to do with whether countries
tic. Embodied in machines and equipment was technol­ adopt the institutional arrangements under which markets
ogy-knowledge and ideas. But no one could explain in can flourish. Not only is the state the arbiter of rules;
simple terms why technology developed better and faster through its own economic activity it shapes the environ­
in some parts of the world than others. ment for business and the rest of the economy. For good
Other factors, such as human capital, have since at­ or ill, the state sets the tone.
tracted much attention as possible solutions to the puzzle. This chapter makes the empirical case for shifting the
Investment in human capital both leads to new knowl- focus of our thinking about development toward the
3D WORLD D EV E L O P M E N T R E P O RT 1 997

quality of a country's institutions and the capability of the explain much of the difference between countries in
state-for bringing institutions into the mainstream of rates of return on development projects.
our dialogue about development. That case is supported
The state, institutions, and economic outcomes
by three new sets of findings:
What does the state do? For one thing, it sets the formal
• First, panel data analyzed for this Report, covering rules-laws and regulations-that are part and parcel of a
thirty years and ninety-four industrial and developing country's institutional environment (Figure 2 . 1 ) . These
countries, show that policies and institutional capabil­ formal rules, along with the informal rules of the broader
ity matter for economic growth and for other indicators society, are the institutions that mediate human behavior.
of the quality of life, such as infant mortality. But the state is not merely a referee, making and enforc­
• Second, and taking the analysis a step further, are the ing the rules from the sidelines; it is also a player, indeed
results of a survey, specially commissioned for this often a dominant player, in the economic game. Every
Report, of over 3,600 domestic firms in sixty-nine day, state agencies invest resources, direct credit, procure
countries (including local affiliates of international goods and services, and negotiate contracts; these actions
firms). These results, too, provide strong evidence that have profound effects on transactions costs and on eco­
institutional capability-or the lack of it-has a major nomic activity and economic outcomes, especially in de­
impact on growth and investment. veloping economies. Played well, the state's activities can
• The third set of findings explores how institutional accelerate development. Played badly, they will produce
capability affects not just the environment for business, stagnation or, in the extreme, economic and social dis­
but also the overall setting for a countty's development. integration. The state, then, is in a unique position: not
Using the results from the survey on institutional capa­ only must it establish, through a social and political
bility, we show that these cross-country differences help process, the formal rules by which all other organizations

Figure 2.1 The state, institutions, and economic outcomes

--
------------------
--.---
--

, ,"
, I

�
'Y 'Y
I nformal rules
and norms Formal rules

� IC�� ==--=� � I�:fl!m'!l!

11 Behavior of
I :
V state agencies

-
Incentive structure 1 � Technology
'j
Transactions
(including � I costs
property fights)
:---�I

V
Contracts

V
Economic outcomes
 R E F" O C U S I N G ON TH E E F" F" E C T I V E N E S S O F" T H E S TA T E 3 1

must abide; as an organization itself, it, too, must abide by • By providing the institutional infrastructure-property
those rules. rights, peace, law and order, and rules-that encour­
Examples of the power of the state to improve the ages efficient long-term investment, and
quality of people's lives are not hard to find. From the • By ensuring the provision of basic education, health care,
clean water and sanitation systems of ancient Rome to the and the physical infrastructure required for economic
elimination of smallpox in this century, public actions in activity, and by protecting the natural environment.
the areas of health and sanitation have achieved repeated
breakthroughs in public health. And states have long Yet history also teaches that the state can do enormous
played a vital role in stimulating lasting development harm:
gains by providing infrastructure, security, and a stable
macroeconomy. The Internet is only the latest in a long • The wrong kind of rules can actively discourage the
line of remarkable scientific and technical advances made creation of wealth. For example, the state may penalize
possible by early and significant public support (Box 2. 1 ) . private wealth by distorting prices-through an overval­
Distilling the lessons o f centuries, we see that the state ued currency, for example, or by creating agricultural
can improve development outcomes in a number of ways: marketing boards that tax farmers' output and give
them little in return.
• By providing a macroeconomic and a microeconomic • Even if the rules themselves are benign, they may be
environment that sets the right incentives for efficient applied by public organizations-and their employees­
economic activity in harmful fashion. They may, for example, impose

Box 2 . 1 Building the Internet: A contemporary example of fruitful public-private interaction

The precursor of what we today call the Internet was finance for a high-speed backbone infrastructure for
launched in the United States in 1 969. Then called the system, the NSF made grants available to universi­
ARPANET, the system comprised juSt four intercon­ ties to encourage them to form regional networks that
nected computers. By mid- 1 996, however, the Inter­ would feed into the system. But the networks were also
net was accessible in 1 74 countries and on all seven told that they would have to become self-sustaining.
continents, linking together nearly 13 million host The private sector's involvement has deepened over
computer systems. By 2000 that number could well be time. The NSF encouraged commercial carriers of
1 00 million. electronic mail to link to the Internet. Companies also
ARPANET owed its existence to the economics of began to create their own backbone facilities, and the
defense research in the 1 960s. Its original purpose was number of firms supplying access to the Internet mul­
to link government computers in far-flung locations tiplied. These trends were accelerated by the creation
and so avoid duplication of what were then quite costly and rapid growth of the multimedia part of the Inter­
. computing resources. In 1 968 the U.S. Department of net-the World Wide Web. Developed at the labora­
Defense invited proposals from 140 private companies tories of the European Organization for Nuclear
to design and build the first four interface message Research in Switzerland-another publicly supported
processors, or routers. With these in place, public con­ agency-the Web drew in talent from universities and
tracts with leading universities then led to develop­ firms, leading to yet another explosion in use: from
ment of the crucial set of protocols that could link 1 30 sites in July 1 993 to over 230,000 in June 1 996.
diverse computer networks. It was these protocols that In 1 995 NSFNET was replaced by a fully commer­
later made the Internet possible. cial system. Major telephone companies now provide
Complementary to this public financial support not only backbone facilities but also Internet access to
has been the partnership of academia, business, and their customers. Cable and direct broadcast satellite
government led by the U.S. National Science Founda­ companies are also entering the market. The public
tion (NSF). Initially this partnership primed the con­ sector is still involved in some advanced research, but irs
nection of university computer science departments, focus has shifted to such questions as how to ensure equi­
but its influence soon expanded. NSFNET replaced table access (for example, through pricing rules), fteedom
ARPANET in 1 990. Besides providing the critical of expression, protection from fraud, and privacy.
3 2 W O R LD D EV E L O P M E N T R E P O RT 1 997

huge transactions costs, m the form of red tape or

bribery, on entrepreneurs setting up new businesses or Figure 2.2 Good government helps explain the
restructuring old ones. income gap between East Asia and Africa
• But potentially the largest source of state-inflicted dam­ GDP per capita
age is uncertainry. If the state changes the rules often, (thousands of 1985 international dollars)
or does not clarifY the rules by which the state itself will 4 r---��--�---��
Contributors
behave, businesses and individuals cannot be sure today to East Asia's
what will be profitable or unprofitable, legal or illegal, additional

1
growth:
tomorrow. They will then adopt costly strategies to in­
3
sure against an uncertain future-by entering the infor­
mal economy, for example, or sending capital abroad­ Po';""
East Asia
all of which impede development.

Economic growth and the state

2 ] State size and
capability
Government's enormous impact on development is well
illustrated by the contrasting economic performance of
] Unexplained

developing countries in Sub-Saharan Africa and East Asia. 1 ] I n itial income

L---��--�--==��I gap
In 1 960 incomes per capita in much of East Asia were
only a little higher than in Africa. Governments in the two Sub-Saharan Africa
regions were also similar in size, although not in compo­ o L- __---------------- �

sition: African governments were already spending more 1964 1992

on consumption, primarily on public employment. By the
mid-1 990s, however, incomes in East Asia were more Note: Results are based on an i nstrumental variable regression
than five times those in Africa. And government con­ for the period 1964-93, controlling for initial income, education,
and other variables. 'Policies' includes the effects of openness
sumption in Africa, relative to GDP, had ballooned to to trade and investment, lack of price distortions, rel ative
one-and-a-half times that in East Asia. The sources of this absence of black market exchange rate premiums, and high

divergence are complex, but it is widely believed that the levels of education and investment. See the Technical N ote.
Source: World Bank staff calculations based on data in
superior performance of the state in East Asia-the limits Commander, Davoodi, and lee, background paper.
it set on its own growth, the soundness of the policies it
adopted, and the effectiveness with which it delivered ser­
vices-made a powerful contribution to the growing gap
in the quality of life experienced by the average citizen institutional environment for behavior: the incentive
between these two parts of the world (Figure 2 . 2). structure to which economic agents respond. The private
I n considering the effect of government size on growth, sector's ability to function will depend critically on the
it is useful to distinguish between public consumption and reliability and effectiveness of institutions such as the rule
public investment (Box 2 . 2). Where government con­ of law and the protection of property rights. None of
sumption spending is very high, it has generally been these benefits-and costs-()f the quality of government
found to be a drag on growth: a net tax on society with few are ever likely to appear in the national accounts.
corresponding benefits. Conversely, certain types of pub­ The analysis in this section tries to show this distinc­
lic investment spending, particularly investment in infra­ tion between what the state does and how well it does it,
structure, have tended to exert a positive effect on growth, by reporting on both policy content and institutional
in part by raising the returns to private investment. Com­ capability. Figure 5 in the Overview showed the effect of
plicating the picture is the fact that some public con­ both factors on income growth over the last three decades
sumption-teachers' salaries, for example, or purchases of across a large sample of industrial and developing coun­
medicine-can affect people's lives for the better, and even tries. In countries with weak state capability and poor
raise the efficiency of investment. Cutting consumption policies, income per capita grew only about half a percent
indiscriminately to boost equally indiscriminate invest­ per year. In contrast, in countries with strong capability
ment is clearly not the answer. and good policies, income per capita grew at an average
But even sophisticated measures of the size of the rate of about 3 percent per year. Over a thirty-year period,
government only tell part of the story. As noted above, these differences in income growth have made a huge dif­
governments also play a leading role in setting the broader ference to the quality of people's lives. A country with an
 R E F" O C U S I N G ON TH E E F" F" E C T I V E N E S S O F" T H E STATE 3 3

Box 2 . 2 Measuring the state-its size, its policies, and its institutional capability

A common measure of government size is the ratio of available only as an aggregate of public and private
government expenditure to the economy's total expen­ investment. To facilitate cross-country comparisons
diture or total output. But such data are generally not over time, these ratios are translated into international
comprehensive, and coverage of public enterprises is or purchasing-power-parity (PPP) values-a not en­
especially sketchy in many developing countries. This tirely innocuous transformation, particularly for low­
measure of size also tends to ignore important off­ income countries where much of government con­
budget items. Government expenditure itself can be sumption is labor intensive. For these countries, using
broken down into consumption and investment. Gov­ international prices markedly increases the government
ernment consumption-which mostly consists of the consumption ratio.
public wage bill-gives a narrow but more precise A more inclusive picture of the economic presence
indicator of consumers' current benefits from govern­ of government requires a measure that captures key
ment spending. Transfers, such as pensions or disabil­ government interventions through policy and institu­
ity benefits, can be included in government expendi­ tions, in addition to fiscal interventions. We summa­
ture, but transfers only redistribute resources. Further rize a government's policy stance over time through an
complicating matters, nominal and real ratios for index that combines three key indicators: the openness
expenditure will vaty significantly over time. An alter­ of the economy (the share of trade in GOP), overvalu­
native measure of government size that avoids these ation of the currency (the black market exchange rate),
problems is government employment, but this, too, and the gap between local and international prices. We
has its drawbacks. For example, it ignores changes in also attempt to evaluate the quality of a key compo­
the productivity of government workers. nent of government, its bureaucracy. This evaluation is
The results reported in this chapter use data on real drawn from survey responses by foreign investors (in
government consumption, because the concern is the next section we evaluate the responses of local
mainly with how the division of output across public investors) that focus on the amount of red tape in­
and private goods affects performance. Information on volved in any transaction, the regulatory environment,
physical investment is also used, but this is normally and the degree of autonomy from political pressure.

average income per capita of $600 in 1 965 (in interna­ ers cannot afford to focus solely on improving policies;
tional PPP dollars), with distorted policies and weak insti­ they must also look for ways to strengthen the institu­
tutional capability, would after thirty years have reached tional environment those policies have to work within.
an average income of only about $678 at 1 965 prices. On Important though income growth is, it is only one
the other hand, a country with strong institutional capa­ of several measures of well-being. Our interest in the
bility and good policies would have more than doubled its wide range of factors that make people better or worse
average income, to $ 1 ,456 at 1 965 prices. Many countries off suggests that countries' performance should also be
in East Asia have done even better than that. judged by other standards of well-being, such as infant
Good policies by themselves can improve results. But mortality. High-quality government institutions lower
the benefits are magnified where institutional capability is infant mortality by improving outcomes for a given
also higher-where policies and programs are imple­ amount of social spending. Thus, the capability of the
mented more efficiently and where citizens and investors state has an important role in the quality of human life
have greater certainty about government's future actions. generally-not simply the pace of income growth. This
Thus, good policies such as those being pursued more explains why countries at the same income level can have
recently by many countries in Latin America and Africa widely disparate quality-of-life indicators-why Sri
would increase growth in income per capita by around 1 .4 Lanka, for example, had an infant mortality rate of only
percent per year. Such a countty starting with an average 1 8 per 1 ,000 live births, whereas some countries with
income of $600 in 1 965 would see it rise to around $900 higher incomes per capita had substantially higher rates:
after thirty years. But it would rise even higher with good 67 per 1 ,000 live births in Egypt, and 68 per 1 , 000 in
policies and strong institutions. The lesson is that reform- Morocco, for example. The amount of social spending as
34 WORLD D EV E L O P M E N T R E PO RT 1 997

well as the care with which services are delivered makes a To this end a large-scale survey of the private sector
huge difference. Was conducted for this Report. The aim was to capture
the full array of uncertainties that entrepreneurs face and
Understanding institutional capability better:
to build an overall measure of the credibility of rules in a
The private investor's view
given country. The responses showed that in many coun­
k this chapter has already stressed, the mark of a capable tries private investors give the state very poor marks for
state-besides its ability to facilitate collective actions-is credibility indeed.
its ability to set the rules that underpin markets and permit
them to function. Although private arrangements can Credibility: How private investors perceive the state
sometimes supplement formal property and contract rights, The private sector survey covered sixty-nine countries and
they can only take the development of markets so far. Gov­ over 3,600 firms. Entrepreneurs were asked for their sub­
ernments, of course, have to do more than establish sound jective evaluation of different aspects of the institutional
rules of the game; they also have to make sure those rules framework in their country, including security of property
are enforced consistently and that private actors-business, rights, predictability of rules and policies, reliability of the
labor, trade associations-can have confidence that the judiciary, problems with corruption and discretionary
rules will not be changed overnight. States that change the power in the bureaucracy, and disruptions due to changes
rules frequently and unpredictably, announce changes but in government.
fail to implement them, or enforce rules arbitrarily will lack Sometimes the source of uncertainty is the instability
credibility, and markets will suffer accordingly. of the rules to which firms are subject. Two key indicators
How good are governments at providing credible rules included in the survey were:
that will nurture the development of markets? Hard evi­
dence is difficult to come by. To begin with, credibility is Predictability ofrulemaking: the extent to which entrepre­
tricky to measure: it depends as much on perceptions as neurs have to cope with unexpected changes in rules and
on hard facts. At first glance, for example, one would policies about which they have had no say.
think that the number of times a country has changed its
government might be a good indicator of the degree of • The survey showed that entrepreneurs in some parts of
uncertainty about market rules, and therefore of the gov­ the world live in constant fear of policy surprises. In the
ernment's credibility. Yet businesses in Thailand generally Commonwealth of Independent States (CIS) almost
considered their environment to be relatively stable, de­ 80 percent of entrepreneurs reported that unpredict­
spite numerous coups and changes in government. By the able changes in rules and policies seriously affected
same token, the environment for business can be highly their business. In Central and Eastern Europe (CEE),
volatile and unpredictable even if the government does Latin America, and Sub-Saharan Africa around 60 per­
not change. Peruvian entrepreneurs reported severe credi­ cent of entrepreneurs voiced the same complaint. By
bility problems in the 1 980s because rules were being contrast, in the industrial countries and in South and
drawn up hastily, implemented by presidential decree, Southeast kia, only about 30 percent of respondents
and often overturned soon thereafter. considered this a problem for their business (top left
Measures of corruption might seem another good sig­ panel of Figure 2.3) . A large part of the unpredict­
nal ofgovernment credibility. But simple estimates of cor­ ability of rule changes came from companies' having
ruption, like measures of political instability, may not little or no role in the state's decisionmaking process;
capture entrepreneurs' concerns. Some forms of corrup­ indeed, they may not even be informed of important
tion entail large uncertainties and risks, whereas others rule changes before they take place. This problem
may be more predictable and act more like speed money. appeared to be particularly severe in the CIS, CEE, and
In the words of one entrepreneur, "There are two kinds of Sub-Saharan Africa, whereas Asian entrepreneurs (even
corruption. The first is one where you pay the regular small ones) considered themselves well informed-even
price and you get what you want. The second is one where better informed, in fact, than their industrial-country
you pay what you have agreed to pay and you go home counterparts did. Unsurprisingly, perhaps, the survey
and lie awake every night worrying whether you will get it also revealed that small companies tend to have less
or if somebody is going to blackmail you instead." The knowledge of, and involvement in, the drafting of new
best way to understand the problems holding back private regulations and were therefore more subject to policy
sector development is to ask entrepreneurs directly. surprises.
 R E FO C U S I N G O N TH E E FFECTIVE N E S S O F TH E STATE 3 S

Figure 2.3 Reliable institutions make for credible states

Survey respondents reporting dissatisfaction with:

Unpredictable changes In laws and policies Unstable government

Percent Percent
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20
10
0
HIC SSEA MENA CEE LAC SSA CIS
20
10
0
HIC SSEA M ENA C EE
JJLAC SSA CIS

Insecurity o f property Unreliable judiciary

Percent Percent
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
HIC SSEA MENA CEE LAC SSA CIS HIC SSEA M ENA CEE LAC SSA CIS

Corruption

Percent
90
80 HIC High-income OECD
70 SSEA South and Sout�east Asia
60 M ENA Middle East and North Africa
50 CEE Central and Eastern Europe
40 LAC Latin America and Caribbean
30 SSA Sub-Saharan Africa
20 CIS Commonwealth of
10 Independent States
0
HIC SSEA MENA CEE LAC SSA CIS

Note: Results are from a survey of over 3,600 firms in sixty-nine industrial and developing countries conducted In 1996. Regions are listed from
left to right according to their overal l credibility index (see Box 2 in the Overview). SSEA and MENA are represented by only three countries each.
See the Technical Note on the private sector survey for details. Source: Brunetti. Kisunko, and Weder, background paper (b) .

Perceptions ofpolitical stability: whether changes in gov­ • Entrepreneurs in many regions felt that the institu­
ernment (constitutional or unconstitutional) are usually tional framework was not well enough entrenched to
accompanied by far-reaching policy surprises that could withstand changes in government without serious dis­
have serious effects on the private sector. ruption. In the CIS, Africa, and the Middle East over
36 WORLD D EV E L O P M E NT R E P O RT 1 997

60 percent of entrepreneurs said that they constantly cent, in Asia about 30 percent, and in the CIS over 60
feared government changes and the painful policy sur­ percent (bottom panel of Figure 2.3) . Furthermore,
prises that tended to go with them (top right panel of over half the respondents worldwide did not regard a
Figure 2.3) . bribe as a guarantee that the promised service would be
delivered, and many lived in fear that they would sim­
Uncertainty may relate less to the rules themselves ply be asked for more by another official.
than to the way they are enforced. The relevant indicators
here were: Lack ofcredibility reduces investment, growth,
and the return on development projects
Crime against persons andproperty. whether entrepreneurs When the private sector does not believe that the state
felt confident that the authorities would protect them will enforce the rules of the game, it responds in a variety
and their property from criminal actions, and whether of ways, all of which worsen economic performance. An
theft and other forms of crime represented serious prob­ unreliable judiciary forces entrepreneurs to rely on infor­
lems for business. mal agreements and enforcement mechanisms. A corrupt
bureaucracy that is allowed too much discretion creates
• Private entrepreneurs in many countries complained of incentives to seek economic rents rather than in produc­
the lack of even the most basic institutional infrastruc­ tive activity. A generalized environment of crime and
ture for a market economy. Across the globe, crime insecurity of property rights prompts entrepreneurs to
and theft were listed as serious problems, which sub­ enlist the help of private security agents, or forces them to
stantially increased the cost of doing business. A com­ pay organized crime for "protection"-if it does not put
plete institutional vacuum seems to prevail in some them off going into business altogether.
countries, leading to crime, violence, and a generalized Investment suffers because entrepreneurs choose not to
insecurity of property rights. In Latin America, Sub­ commit resources in highly uncertain and volatile environ­
Saharan Mrica, the CIS, and CEE almost 80 percent of ments, especially if those resources will be difficult to
entrepreneurs reported a lack of confidence that the recover should the business environment turn unfavorable.
authorities would protect their person and property Where even the most basic types of property are not pro­
from criminals (middle left panel of Figure 2.3). tected, investors move their resources to other countries, or
invest them in projects that offer lower returns but require
Reliability ofjudicial enforcement: whether the judiciary less capital commitment. Thus, trade and services may sur­
enforces rules arbitrarily, and whether such unpre­ vive even in low-credibility environments, but manufac­
dictability presents a problem for doing business. turing and, especially, high-technology projects are un­
likely to flourish. A similar distortion occurs when highly
• A well-functioning judiciary is a central pillar of the talented people choose to become tax inspectors or cus­
rule of law. Unfortunately, in many countries it seems toms officials rather than train to become engineers.
to be the exception rather than the rule. In developing Therefore, credibility affects not only the level of invest­
countries over 70 percent of entrepreneurs said that ment in physical and human capital but also its quality. As
judicial unpredictability was a major problem in their a consequence, in a low-credibility environment, growth
business operations (middle right panel of Figure 2.3). suffers.
Disturbingly, in most regions entrepreneurs felt that The top two panels of Figure 2.4 show how credibility
these problems had increased over the last ten years. relates to investment and growth in the countries surveyed
for the period 1 985-95. After controlling for other eco­
Freedom from corruption: whether it is common for pri­ nomic variables, countries with high credibility had invest­
vate entrepreneurs to have to make irregular additional ment rates significantly higher than countries with low
payments to get things done, and whether, after paying a credibility; a shift from a low- to a high-credibility envi­
bribe, they have to fear blackmail by another official. ronment makes a substantial difference in growth as well.
Low credibility may also help explain why many countries
• The survey confirmed that corruption is an impor­ do not see the expected private sector response after imple­
tant-and widespread-problem for investors. Over­ menting stabilization and structural adjustment programs.
all, more than 40 percent of entrepreneurs reported Finally, the credibility of rules affects not only the
having to pay bribes to get things done as a matter of business environment, but also the environment for the
course. In industrial countries the figure was 1 5 per- implementation of development projects. The same fac-
 R E F" O C U S I N G ON THE E F" F" E C T I V E N E S S O F" T H E S TA T E 37

Figure 2.4 Perceived credibility and economic performance go hand In hand

Gross investment (percentage of GDP) Growth of GDP per capita (percent per year)
35 8 ,------,
,----.
•
30 6

25 •
••
• • 4
• ,
20 2
�
.
• ••
• •
15 0
�•
..
10
•
, -2 - •
•
• • ••
•
5 -4
• .. •
• •
••
-6
1 2 3 4 5 6 1 2 3 4 5 6

Index of credibility Index of credibility

Average rate of return on World Bank·

financed projects (percent per year)
40 r-
----��---,

, •
30 •
,
•
• •
• Note: The top two panels are based on regressions, for thirty·
20 , • • •
• three (top left panel) or thirty·two (top right panel) of the
• countries examined in Figure 2.3 for the period 1984-93,
• • controlling for income, education, and policy distortion. The
...
• bottom panel is based on a regression, for 312 World Bank·
10
. • financed projects in thirty countries over varying periods,
• I
controlling for terms-of-trade changes and policy distortion.
See the Technical Note for details. Source: World Bank staff
• calculations using data from Brunetti, Kisunko, and Weder •
Q background paper (a).
2 3 4 Q

Index of credibility

tors-crime, corruption, uncertainty about policy, and even more widespread in many public projects than in the
judicial behavior-affect the outcome for all such proj­ private sector. As a result, many projects are delayed be­
ects. One reason is that these concerns are part and parcel cause of cost overruns.
of any contractual environment. If corruption affects the The bottom panel of Figure 2.4 shows the correlation
private sector, it is likely to affect the outcome of devel­ between government credibility and rates of return for 3 1 2
opment projects as well. A second reason is that many development projects i n thirty countries. On average, in
public projects are implemented by private contractors countries with a low-credibility environment rates of re­
who, in an environment of weak institutions, are subject turn are substantially higher than in countries with a high­
to the same behavioral problems that affect private firms. credibility environment. These results take account of
The contractor is awarded a project, pays off corrupt offi­ differences in economic policies and other project- and
cials, and gets more projects regardless of how the first countty-specific factors. The lesson, once again, is that
turns out. Pilfering, theft, and enforcement problems are institutions make an enormous difference to development
38 WORLD D EV E L O P M E NT R E P O RT 1 997

outcomes. Napoleon's insight, cited at the beginning of tainties that have kept markets weak and underdeveloped.
this chapter, is as true today as it was in 1 8 1 5. Countries suffering from such an institutional vacuum
risk postponing economic and social development indefi­
Strategic options: Refocusing on the state's
nitely. There is also a danger that dissatisfaction with the
institutional capability
state-whether expressed through social protest, capital
A clearer understanding of the institutions and norms flight, or the ballot box-will undermine economic pros­
embedded in markets shows the folly of thinking that pects even further.
development strategy is a matter of choosing between the The state's capability-its ability to deliver collective
state and the market. As this brief review of the evidence goods efficiently-is central to providing a viable institu­
on the relationship between institutions and development tional framework for development. As we have seen, many
has confirmed, the two are inextricably linked. Countries developing countries are starting out from a very low base
need markets to grow, but they need capable state institu­ indeed in this regard. But the state's ability to provide the
tions to grow markets. institutional support that development requires can be
Reformers the world over need to apply this lesson by improved over time, through matching the state's role to
refocusing attention on institutional capability. The task its capability, and then rebuilding that capability by focus­
is particularly urgent in many developing countries, where ing on the incentives that drive the behavior of the state.
weak and arbitrary governments are feeding the uncer- We turn to these issues in Parts Two and Three.
40 WORLD D EV E L O P M E N T R E PO RT 1 997

industrial policies designed to foster markets. Markets and society need and ben­

efit from effective regulation of certain activities. But many states are stifling pri­

vate sector development by overregulating or, often, monopolizing large chunks

of the economy by attempting complex strategic interventions in industry that

are beyond their institutional capabilities. Deregulation, privatization, and less

demanding approaches to regulation and industrial support in these circum­

stances will deliver large and immediate payoffs.

These chapters carry four basic messages for policymakers:

• States at all levels of institutional capability should respect, nurture, and take

advantage of private and voluntary initiative and competitive markets .

• States with weak institutional capabilities should focus on providing the

pure public goods and services that markets cannot provide (and that vol­

untary collective initiatives underprovide) , as well as goods and services with

large positive externalities, such as property rights, safe water, roads, and

basic education.

• Credibility is vital for success. States with weak institutional capabilities

should also focus on the tools for policymaking and implementation that

give firms and citizens confidence that state officials and organizations will

not act arbitrarily and will live within their fiscal means.

• Matching role to capability is a dynamic process. As institutional capability

develops, 'states can take on more difficult collective initiatives (initiatives to

foster markets, for example) , and use efficient but difficult-to-manage tools

for collective action, such as sophisticated regulatory instruments.

S E C U R I N G T H E E C O N O M I C A N D

S O C I A L F U N D A M E N TA L S

EAK
W their capability, yet some tasks are inescapable.
STATES MUST TAILOR THEIR AMBITIONS TO do much to put long-stagnant economies back on track.
We address the various approaches to government's role
The challenge, addressed in this chapter, is to find ways for in effective environmental protection in Chapter 4.
states-even states with relatively weak capability-to get
Establishing a foundation of law and property rights
those basic government tasks right. Sustainable, shared,
poverty-reducing development has five crucial ingredients: Markets rest on a foundation of institutions. Like the air
we breathe, some of the public goods these institutions
• A foundation of law provide are so basic to daily economic life as to go unno­
• A benign policy environment, including macroeco- ticed. Only when these goods are absent, as in many
nomic stability developing countries today, do we see their importance
• Investment in people and infrastructure for development. Without the rudiments of social order,
• Protection of the vulnerable underpinned by institutions, markets cannot function.
• Protection of the natural environment.
The lawlessness syndrome
The importance of these fundamentals for develop­ Markets cannot develop far without effective property
ment has long been widely accepted. But as is shown rights. And property rights are only effective when three
below, new insights are emerging on the appropriate mix conditions are fulfilled. The first is protection from theft,
of market and government activities for achieving them. It violence, and other acts of predation. The second is pro­
is now much clearer that markets and governments are tection from arbitrary government actions-ranging from
complementaty, that government action can be vital in unpredictable, ad hoc regulations and taxes to outright
laying the institutional foundations for markets. Also corruption-that disrupt business activity. These two are
much clearer is that faith in governments' ability to sus­ the most important. Unhappily, as Figure 3 . 1 makes evi­
tain good policies can be as important for attracting pri­ dent, and as the regional patterns in Figure 3.2 highlight,
vate investment as the policies themselves. in many countries neither is in place. The third condition
The track record of developing countries in managing is a reasonably fair and predictable judiciaty. This is a tall
the fundamentals has been mixed. Many countries in East order indeed for countries in the earliest stages of devel­
Asia-plus others elsewhere such as Botswana, Chile, and opment, yet firms in more than half the countries sur­
Mauritius-have done a good job. But others have not. As veyed considered it a major problem.
Box 3 . 1 reveals, private firms in many developing regions The absence of these critical supports for property
are seriously constrained by the absence of such basic state rights gives rise to what this Report terms the lawlessness
functions as the protection of private property. Institu­ syndrome. Firms in twenty-seven of sixty-nine countries
tional impediments are largely to blame and will be hard surveyed-including more than three-fourths of those in
to overcome. Yet windows of opportunity for reform can the CIS, and about half in Latin America and Africa (but
open and widen even in the most inhospitable of settings. none in the OECD)-are subjeCt to this triple curse on
And a major theme of this chapter is that even a modest markets: corruption, crime, and an unpredictable judi­
shift in policy priorities in favor of the bare essentials can ciary that offers little prospect of recourse.
42 WORLD D EV E L O P M E N T R E P O RT 1 997

" Box 3.1 Weaknesses In fundamentals constrain firms the world over

In many countries the fundamentals needed to allow • Policy-related problems-notably regarding taxa­
firms to go about creating wealth are not in place. tion and the operation of financial markets-also
The survey of businesspeople described in Chapter 2 tend to rank high (except in Latin America) . But it
asked firms to rank the relative importance of eight dis­ is impossible to tell from the survey results alone
tinct obstacles to economic activity, to identifY which whether these widespread perceptions reflect the
aspects of government action most need improving. As universal desire of firms to pay lower taxes and to
the table below shows: borrow more at lower interest rates, or whether they
are symptomatic of fundamental policy shortcom­
• Obstacles associated with uncertain property rights ings. More telling is the perception in countries of
and dealing with arbitrariness-corruption and the CIS that policy instability is a major constraint.
crime-rank among the top three everywhere except • Poor infrastructure emerges as the leading constraint
among the high-income countries ofthe Organization in South Asia and the Middle East and North
for Economic Cooperation and Development. Regu­ Africa, and as one of the top three constraints in
lation does not emerge directly as a major obstacle. Latin America and Sub-Saharan Africa.

Firms' rankings of obstacles to doing business

(Worst = 1)

Sub-Saharan Latin America East and Middle East and High-income

Obstacle Africa and Caribbean South Asia North Africa CIS CEE OECD

Property rights
Corruption 1 1 3 2 3 3 5
Crime and theft 5 3 8 8 4 6 6
Regulation 8 8 7 7 8 8 4
Policy
Taxes 2 5 2 3 1 1 1
Financing 6 4 5 4 5 2 2
Inflation 4 7 4 6 6 4 8
Policy instability 7 6 6 5 2 7 7
Public investment
Poor infrastructure 3 2 1 1 7 5 3
Source: Private sector survey conducted for this Report.

Corruption emerged from the survey as a major prob­ America, for example, between 1 980 and 1 99 1 the mur­
lem. Its consequences often do not end with paying off der rate rose from 1 2. 8 per 1 00,000 people in 1 980 to
officials and getting on with business. Arbitraty govern­ 2 1 .4 per 1 00,000 in 1 99 1 , with increases evident in vir­
ment entangles firms in a web of time-consuming and tually all countries and subregions.
economically unproductive relations. More than half of Much remains to be learned about how to reverse law­
senior managers in firms surveyed in the CIS-but only lessness among private citizens. But the solution is likely
about 1 0 percent of those in the OECD countries­ to embrace many of the reform priorities highlighted by
reported spending more than 1 5 percent of their time this Report, including better protection of the vulnerable
negotiating with government officials over laws and regu­ and stronger overall capability of state institutions. A
lations (Figure 3.2). The burden of red tape is less in other community's descent into lawlessness can evoke a sense of
developing countries, but still consistently worse than in helplessness among the law-abiding. But as Box 3.2 de­
the OECD countries. Chapter 6 examines in some detail scribes, a recent initiative in Cali, Colombia, has shown
how the scourge of corruption can be tamed. that, even under the most difficult of circumstances, civic
The high ranking by CIS firms of the two other ele­ action can start a reversal from despair to hope.
ments of the lawlessness syndrome-crime and judicial
unpredictability-partly reflects the unique institutional More complex institutional underpinnings
vacuum created by the rejection of central planning in the Containing lawlessness is necessary to secure property
transition economies. Yet indicators from other regions rights, but it may not be sufficient. Information and coor­
suggest that institutional decay is widespread. In Latin dination problems can also impede development by under-
 S E C U R I N G THE E C O N O M I C AND SOC IAL FU N DA M E NTALS 43

mllllllg markets and property rights, a problem often

found in low-income countries. Figure 3.1 The lawlessness syndrome
Information problems occur because people and firms
inevitably have limited information and understanding, Number of countries where one or more aspects of
lawlessness are serious obstacles to doing business
or because the rules of the game are unclear. The scope of
property rights-including the right to use an asset, to
permit or exclude its use by others, to collect the income
generated by the asset, and to sell or otherwise dispose of
it-may not be well defined. People and firms may lack o
knowledge of profit opportunities, or of the probity of
potential business partners. The costs of seeking out such
information decline as markets thicken and their support­
ing institutions develop, making economies more infor­
mation intensive. In developing countries, however, the
costs of learning can be high.
Coordination of economic activity is difficult because
self-interested people and firms behave strategically-they the three
generally are willing to share information only when they 21
do not lose by doing so. The presence of moral hazard­
the risk that other parties might opportunistically renege
Note: A country falls within a circle if half or more of its
on agreements-hinders firms from taking advantage of responding firms scored the problem as 1 or 2 (on a scale of
opportunities for mutual gain. As markets develop, insti­ 1 to 6, with lower values indicating greater severity), and within
tutional arrangements evolve to facilitate cooperation an intersection if at least 40 percent of firms scored both
problems as 1 or 2 and the average of the two percentages
among firms. Again, however, in developing countries
exceeded 50 percent. Source: Private sector survey conducted
where those institutions are underdeveloped, such cooper­ for this Report.
ation can be difficult to achieve.
Spot markets can emerge even when information and
enforcement mechanisms are weak, since the fact that the
exchange is simultaneous makes it more difficult to cheat. symbiotic development of markets and institutions: new
But for other transactions the costs of providing adequate industries create demand for more-complex institu­
information and enforcement mechanisms to enable busi­ tions, which in turn enable the industry to develop fur­
ness to proceed can be formidable. ther. Consider the example of mining in the "Wild
Well-functioning institutions can reduce these trans­ West" Nevada territory of the nineteenth-century United
actions costs. History provides abundant examples of the States.

Figure 3.2 Negotiating with government officials can be arduous

Percentage of firms devoting more than 15 percent

of managers' time to negotiating with officials
".

CIS ..� 5 2

Latin America and Caribbean '� y", J38

Middle East and North Africa 38

Sub·Saharan Africa . " :·.,. 37

CEE 31

South and Southeast Asia 25

High-income O ECD , 10
�-

o 10 20 30 40 50 60

"Source: Private sector survey conducted for this Report,

44 WORLD D EV E L O P M E N T R E P O RT 1 997

Box 3.2 Standing up to crime in Cali, Colombia

One of the centers of the illegal world trade in cocaine, • Public education campaigns promoted tolerance
Cali saw its homicide rate leap from 23 per 1 00,000 and respect for the rights of others. Community
citizens in 1 983 to over 1 00 per 1 00,000 in the early leaders were trained in peaceful dispute settlement;
1 990s. Many murders could be directly amibuted to children were encouraged to join a Friends of Peace
drug trafficking, but many more seemed due to a program; humorous TV commercials aimed to re­
spreading culture of violence. Fed up with the growing educate citizens to follow the rules of everyday life,
lawlessness, in 1 992 the city elected as mayor a re­ such as obeying traffic signals, or waiting in line to
spected physician who put combating violent crime at board a bus.
the center of his political platform. • Public services were directed at reducing inequities.
Within months the new mayor had mounted a Primary and secondary schools were expanded in
major anticrime initiative, the Program for the Devel­ depressed areas of the city; water, light, and sewer­
opment of Safety and Peace. Starting from the princi­ age services were introduced into squatter areas; and
ple that prevention should take precedence over repres­ youth centers and enterprise development programs
sion-and after an exhaustive analysis of the patterns worked to bring teenage gang members back into
of crime-the program worked to combat crime across
. ,s mamstream.
soclerv
.
a variety of fronts: • Catal)'sts of violent crime were directly confronted.
The city banned the carrying of handguns on certain
• Organizations of civic order were upgraded. Special high-risk weekends, and sales of alcohol were re­
education and housing programs were established for stricted late at night and during holidays.
police officers, and improvements were made in the
quality ofservices (including legal aid and conciliation In 1 995, after seven consecutive years of increase (to a
services) available in the frontline inspectorate offices peak of over 1 20 murders per 1 00,000 people), Cali's
where citizens file complaints of criminal action. murder rate finally began to decline.

In the 1 850s a few hundred miners worked a forty­ The progress of land titling in Thailand is a more con­
square-mile area of seemingly marginal value. Only loosely temporary illustration of how the formal specification of
tied to the U.S. polity, they operated under entirely property rights can unleash "locked-up" assets and accel­
unwritten and informal ownership agreements. The dis­ erate private sector-led development. Thailand has issued
covery of the gold- and silver-bearing Comstock Lode in more than 4 million title deeds since 1 985, in two land
the late 1 850s precipitated a flood of prospectors. Within titling projects. A third project to title another 3.4 million
five months the new miners had established a formal min­ parcels is under way. Land is an ideal form of collateral, so
ing camp government, which enacted written rules on pri­ possession of secure tirle has improved access to formal
vate holdings and enforced them through a permanent credit. Three years after the first titles were issued, Thai
claim recorder and an ad hoc miners' court. farmers who had received titles had increased their bor­
By 1 86 1 the surface ore was exhausted and miners rowing from the formal sector by 2 7 percent. By enhanc­
resorted to subsurface mining-a substantially more ex­ ing security of tenure, title to land can boost investment
pensive and capital-intensive undertaking. With more at in land improvements (irrigation, fencing, destumping).
stake financially and with disputes over underground min­ Newly titled Thai farmers increased their use of inputs by
ing rights increasing in complexity, the miners pressured 1 0 to 30 percent, their rate of capital formation by 30 to
for, and won, creation of a formal territorial government 67 percent, and their investment in land improvements by
with a more extensive judiciaty-subsidized in part by the 37 to 1 00 percent. Even after adjusting for other factors,
U.S. Congress. productivity on titled land was between 1 2 and 2 7 percent
By 1 864, with mining production still expanding, the higher than on untirled land.
territorial judicial system was overwhelmed by a massive Not every country is in a position to achieve such
case load, which could have taken up to four years to results. In Thailand certain background conditions played
clear. At the end of that year Nevada was admitted to the an important role. First, formal credit markets were
union as a state, and within a year some important judi­ already well developed, and lack of formal title (and hence
cial rulings resolved disputes over subsurface rights. Prop­ of collateral) was the only reason why many farmers could
erty rights stabilized, and legal uncertainty ended. not get loans. By contrast, in a number of African coun-
 S E C U R I N G THE E C O N O M I C AND S O C IAL FU N DA M E NTALS 45

tries with weak credit markets, no measurable impact of pribumi) business community used its extended Southeast
titling on borrowing and investment could be discerned. Asian network to kickstart exports of garments and furni­
Second, the Thai titling projects took place against a back­ ture. A World Bank survey showed that over 90 percent
drop of land disputes that threatened security of tenure of the initial export marketing contacts of non-pribumi
but could no longer be adequately resolved through tradi­ firms were made through private business connections.
tional mechanisms. This is not always the case. Indeed, Indonesia's non-Chinese exporters relied much more on
where land is cultivated individually but owned commu­ initial support from public agencies.
nally, strengthening traditional, community-based systems Even when parties cannot rely on social enforcement,
of land administration could increase security at a fraction mechanisms of information sharing can allow quite com­
of the coSt of establishing individual titles. This is a par­ plex transactions to take place. Box 3.3 shows how in
ticularly attractive option where communities can switch Brazil, for example, sophisticated credit information sys­
to individual titles once the efficiency gains from allowing tems have developed to enable firms to bypass some of the
sales to outsiders, and from being able to collateralize land problems created by a predictable, but cumbersome, judi­
for borrowing, outweigh the benefits associated with com­ cial system.
munal tenure.
But some complex transactions can proceed even with Focus on the foundations
simple judicial systems. A well-functioning judiciary is an Taken together, the evidence presented here offers reasons
important asset, which developing countries would do for hope-and a major challenge. The hope comes from
well to build up. As Chapter 6 details, creating a workable the fact that simple institutions can do much to facili­
formal judicial system from scratch can be slow and diffi­ tate market-based economic development. The challenge
cult. But the best should not become an enemy of the comes from the recognition that so many countries
better. Even less-than-perfect judicial systems that are presently lack even the most basic underpinnings of mar­
cumbersome and costly can help sustain credibility. What kets. The first priority in such economies must be to lay
matters is not so much that judicial decision making be the initial building blocks of lawfulness: protection of life
fast but that it be fair and predictable. And for that to hap­ and property from criminal acts, restraints on arbitrary
pen, judges must be reasonably competent, the judicial action by government officials, and a judicial system that
system must keep judges from behaving arbitrarily, and is fair and predictable.
legislatures and executives need to respect the indepen­ Once a foundation of lawfulness is in sight, the focus
dence and enforcement capability of judiciaries. can turn to the ways in which specific parts of the legal
Without a well-developed judicial system, firms and cit­ system can buttress property rights. The legal terrain is
izens tend to find other ways of monitoring contracts and vast, ranging from land titling and the collateralization of
enforcing disputes. These can often make quite complex movable property to laws governing securities markets,
private transactions possible. In the early Middle Ages, for the protection of intellectual property, and competition
example, European merchants devised their own sophisti­ law. However, reforms in these areas-especially the more
cated legal code, the lex mercatoria, to govern commercial sophisticated ones-will yield fruit only where instiru­
transactions; the code helped revive long-distance trade. A tional capabilities are strong. In many countries, more
widespread alternative to legal mechanisms is social basic challenges remain to be met first.
enforcement, based on long-term personal relationships.
Sustaining a benign policy environment
Cheating is deterred, not by the law, but by the "long
shadow of the future": both parties pass up the one-time Property rights are the foundation for market-led growth
gains from cheating in expectation of the larger gains from and poverty reduction. But much more is needed. Firms
a long-term business relationship. The extended family need an environment that induces them to allocate re­
plays just this role in supporting business transactions in sources efficiently, to improve productivity, and to inno­
many Latin American countries. Although family size lim­ vate. And unless firms are confident that policies will re­
its the number and variety of possible transactions, families main reasonably stable over time, they will fail to invest,
find ways to, in effect, expand their membership, for exam­ and growth will lag.
ple through marriage among business families or "adop­ This section reviews international experience with
tion" of trading partners as godfathers, uncles, and aunts. some key policies that support development. It highlights
The extensive business networks created by Chinese some institutional reasons why countries find it so diffi­
clans, some of which have global reach, are another exam­ cult to put good policies in place-and the increasing
ple of social enforcement at work. Against the backdrop risks, in a more integrated world, of pursuing bad policies.
of sound economic policies in large parts of East Asia, The emphasis throughout is on finding ways in which
these networks have been very successful in generating countries with different institutional capabilities can lock
wealth for their members. Indonesia's Chinese (non- in good policies.
46 WORLD D EV E LO P M E NT R E P O RT 1 997

Box 3.3 Contracting and the judicial system In Brazil

The Brazilian judicial system is exceedingly cumber­ ers and buyers of garments finds its way into court­
some from a firm's perspective. A complex maze of laws only one in every 2,600 does so in Chile, and one in
may apply to an otherwise simple business transaction. every 20,000 in Peru.
In 1 9 8 1 , for example, getting an export license took A second reason why firms shrug off the slowness of
1 ,470 separate legal actions involving thirteen govern­ the judicial system is that (as in all private market
ment ministries and fifty agencies. The legal process is economies) private institutional arrangements have
also exceedingly slow, primarily because of a complex evolved to restrain opportunism in business dealings,
appeals procedure. Yet surprisingly, when asked to while bypassing court proceedings. We cite three
evaluate the relative importance of a diverse array of examples. First, Brazilian firms readily provide short­
constraints on doing business, firms assigned a low term credit even to new customers with whom they
ranking to problems associated with the legal system. have had no prior dealings; they base their confidence
One reason is that, cumbersome though it is, on a well-developed credit information system (back­
Brazil's judicial system nonetheless seems to provide a stopped by a juridically sanctioned mechanism for
secure backdrop of judicial recourse for business trans­ publicizing information on people who fail to pay their
actions. Most firms report that the judiciary is reason­ debts) . Second, although it is difficult to claim pledged
ably fair and predictable, and they do on occasion turn property when loans are not repaid, under Brazilian
to it: two-thirds of a sample of Brazilian firms have dis­ law leased property can be reclaimed much more read­
agreed with a government official and sought to have a ily-so Brazilians make liberal use of leasing arrange­
ruling changed; 60 percent have taken the government ments. Third, for some simple financial transactions,
to court, and over 80 percent would do so again. Sim­ special judicial mechanisms allow the usual proceed­
ilarly, one in every 1 ,000 transactions among produc- ings to be bypassed.

Good policies promote growth signals and incentives for economic agents to accumulate
The past few decades have yielded a rich crop of lessons resources, use them efficiently, and innovate. Over time,
about the kinds of economic policies that suppOrt develop­ as we saw in Chapter 2, getting these basics right can have
ment. The East Asian miracle shows how government and a dramatic effect on living standards.
the private sector can cooperate to achieve rapid growth The relationship between growth and macroeconomic
and shared development. The recent recovery of some stability is well known. Empirical work has shown that
Latin American economies, breaking out of a long history high rates of inflation (above single digits) adversely affect
of inflation and into renewed growth, has further con­ growth. High inflation creates uncertainty about the re­
firmed the power of market liberalization, budget restraint, turns on saving and investment, thus creating a disincen­
and credibility-enhancing institutions. Africa, especially tive for capital accumulation. Inflation also makes it diffi­
south of the Sahara, has been slower in joining this move­ cult to maintain a stable but competitive exchange rate,
ment, with the exception of a few countries such as Mauri­ impeding the country's ability to exploit the benefits of
tius and Botswana. But several more-Cote d'Ivoire since openness and creating wage volatility.
the devaluation of the CFA franc, Uganda more recently­ As Box 3.4 shows, governments around the world find
have embarked on promising new development paths. it difficult to achieve the strong fiscal and monetary disci­
Analyses of these and other experiences consistently pline required for economic stability. Maintaining such
find a core set of policies that appear to be essential for policies is harder still. But reforming governments will not
growth: inspire the confidence necessary to generate growth unless
people believe the new discipline will be sustained. We
• Providing macroeconomic stability discuss below a range of institutional arrangements that
• Avoiding price distortions can help inspire such confidence.
• Liberalizing trade and investment. Limitingprice distortions is an essential element of good
policies, because price distortions impede growth. They
These policies help position an economy to benefit from can discourage necessary investment, divert effort into un­
competitive market forces. These forces provide the right productive activity, and encourage inefficient use of re-
 S E C U R I N G TH E E C O N O M I C AN D S O C IAL FU N DA M E NTALS 47

Box 3.4 International track records on fiscal deficits and inflation

As the figure shows, fiscal deficits in the industrial contrast, in the first half of the 1 990s neither the
countries as a whole rose progressively for two decades Mrican nor the Middle Eastern countries have been
starting in the early 1 960s, stabilized briefly in the late able to follow through on deficit reductions achieved
1980s, and then began to grow again. Persistently high in the second half of the 1 980s.
deficits have boosted public debt (even before un­ Inflation rates have varied across regions even more
funded pension liabilities are included) from about 40 than have fiscal deficits. The inflationary episode of the
percent of GOP in 1 980 to 70 percent in 1 995. De­ 1 970s and early 1 980s spread quickly around the
veloping countries in the aggregate have shown con­ world. The cooldown of inflation that started in the
siderable improvement in fiscal discipline, although industrial countries in the early 1 980s has begun to
with substantial variation. Fiscal deficits started falling take hold, but with a lag. In the developing countries
in the early 1 980s, mainly because of expenditure cuts. inflation began to moderate in the early 1 990s, but not
However, this aggregate picture reflects mainly suc­ everywhere. In some developing regions, inflation rates
cesses in Asia and Latin America, where sustained and are showing signs of convergence toward those of the
dramatic deficit reductions have been achieved. By industrial countries.

Fiscal deficits Inflation

Percentage of GDP Percent per year

6 ,------, 120 ,------,

5 100

4 80

3 60

2 40

1 20
Industria l
countries

o L-
� ________L-______�_________L� o L-_L-______�______�_______L�
1961-65 197 1-75 1981-85 1991-95 1961-65 1971-75 1981-85 1991-95

Percentage of GDP Percent per year

8 r-------�L�a�tin�Am-e�n�ca�an�d�C�a�rib�b�ea�n--� --, 300 ,------,

7
250
6

5 200

4
150 Europe and
3 Central Asia

2 100 Middle East

and N. Africa
1
50 E. and S. Asia
0

-1 o ����u
1961-65 1971-75 1981-85 1991-95 1961-65 1971-75 1981-85 1991-95

Source: IMF, various years (a).

48 WO RLD D EVE L O P M E NT R E PO RT 1 997

distortion by cutting explicit taxes and, often, correcting

Figure 3.3 Countries are discovering the overvaluations. The 1 994 devaluation of the CFA franc
advantages of the value added tax (see Box 3.5) significantly reduced the bias against agri­
culture among virtually all the franc zone countries that
Number of countries using the value added tax
had not reformed earlier.
90 Harder to detect, but also widespread, are price distor­
80
tions in labor and capital markets. Legal minimum wages,
for instance, may be set too high, unintentionally making
70 it more difficult for unskilled and low-wage workers to
60
find jobs in the formal economy. Similarly, the price of
capital-the interest rate-is sometimes kept falsely high
50 through heavy taxation of financial transactions or high
40
reserve requirements. When the authorities respond to
borrowers' complaints by clamping a lid on lending rates,
30 or by handing out subsidies to investors, yet another layer
20
of distortion is added to the price system.
Maintaining liberal trade, capital market, and invest­
10 ment regimes is also essential for growth. As Chapter 8
o
details, many countries have recently moved toward
19605 19705 19805 19905
greater openness. Open markets offer opportunities for
citizens and businesses by increasing access to supplies,
equipment, technology, and finance. Trade linkages with
Source: Tanzi 1995b.
the world economy also help domestic prices adjust to
global market conditions, so that prices reflect the scarcity
values of goods and services. And improved incentives
sources. Price distortions come in different forms, de­ and opportunities allow entrepreneurs to use resources
pending on their historical origins. The most common, more efficiently.
however, involve discrimination against agriculture, over­ Recent changes in the way developing countries raise
valuation of currencies, unrealistic wages, and hidden taxes tax revenues show how increased global integration can
or subsidies on the use of capital. affect domestic policies. Internationalization of business
African agriculture illustrates vividly how price distor­ and relentless competition for foreign investment-plus
tions can undermine economic development. Agriculture the presence of tax havens and low-tax jurisdictions­
accounts for about 35 percent of Africa's GDP, 40 percent imply that countries cannot hope to tax corporate or per­
of exports, and 70 percent of employment. Yet histori­ sonal income at rates much higher than global norms and
cally, African farmers have faced high rates of both explicit still attract investment. And a growing worldwide consen­
and implicit agricultural taxation. Explicit taxes (notably sus for lower national trade barriers has put pressure on
on agricultural exports) were high because administrative the collection of border taxes, historically a major source
weaknesses precluded raising adequate revenue from other of tax revenue for developing countries. (As a group,
sources. Implicit taxes were high because pro-urban and developing countries still derive about 30 percent of their
pro-industry policies combined with high levels of import revenue from trade taxes.) With increasing integration,
protection resulted in currencies being seriously overval­ the share of trade taxes in the total revenue of developing
ued in real effective terms. In addition, in some countries countries may be expected to fall further.
public sector monopolies raised border prices well above With these new constraints on traditional sources of
those at the farm gate, absorbing much of the difference in revenue, many countries are turning toward consumption­
in-house expenditures. The combination of high explicit based taxes such as the value added tax (VAT) . Indeed, the
taxes and overvalued currencies contributed to alarming combination of its revenue potential and pressures on
declines in Sub-Saharan Africa's agricultural growth rates: other sources of revenue has led to dramatic growth in the
from an annual average of 2.2 percent in 1 965-73 to 1 . 0 number of countries using the VAT (Figure 3.3).
percent i n 1 974-80 and 0.6 percent i n 1 98 1-85. A liberal and open trade regime is also a powerful dis­
Since the mid- 1 980s many African countries have cipline on the other elements of economic policy. More­
made great strides in reversing the long-standing bias open economies are more exposed to external risks, mak­
against agriculture. By the early 1 990s two-thirds of a sam­ ing it more costly for governments to pursue inconsistent
ple of twenty-seven countries had reduced the degree of policies. Consequently, economies in which trade looms
 S EC U R I N G THE E C O N O M I C AND SOCIAL F U N D A M E N TA L S 49

relatively large tend to have lower fiscal deficits than those Favorable surprises can cause as much trouble as
where it does not. The need to comply with the rules and adverse ones. The prudent response to a positive eco­
conventions of international treaties will be another spur nomic shock is to set aside part of the windfall for future
to good behavior. use. When the 1 990-9 1 Gulf War pushed up oil prices,
An economy without sound policies is unable to Nigeria used its windfall oil revenue to expand spending
engage fully in international trade and investment. But (Figure 3.4). So in spite of the large increases in revenue,
being part of an integrating world economy also carries Nigeria's fiscal deficit actually rose in 1 990. When oil
new risks. Where markets for goods and capital are open, prices and revenue fell in 1 9 9 1 , spending remained at the
the state has a hard time suppressing the consequences of new higher levels. By contrast, Indonesia responded to its
monetary indiscipline. If it prints too much money, the oil windfall with fiscal discipline, explicitly budgeting a
foreign exchange market will quickly expect higher infla­ reserve fund to keep the increase in expenditure below the
tion, and the local currency will depreciate. This market increase in revenue and maintain budget balance.
feedback causes domestic interest rates to rise, and with
them the government's financing costs. Good policies are Good policies are hard to achieve
needed to cope with the risks of capital flight, volatile Although the recipe for good policies is well known, too
arbitrage activity, and sharp movements in commodity many countries still fail to take it to heart, and poor per­
prices. Box 3.4 summarized some differences in how formance persists. This often signals the presence of polit­
countries have responded to the new global environment. ical and institutional incentives for maintaining "bad"
Foreign capital inflows also impose discipline on poli­ policies.
cymakers. Inflows tend to make the currency appreciate in Policies that are bad from a development perspective
real terms, and they can affect competitiveness and are often highly effective at channeling benefits to politi­
domestic saving. They can also be seriously destabilizing cally influential groups. Many macroeconomic prob­
because they respond quickly to short-run financial tur­ lems-inflation, exchange rate misalignment-are in fact
bulence. Recent experience suggests that this turbulence covert ways of levying unexpected taxes on the private sec­
can be contagious, spilling over to other countries and tor or of redistributing economic benefits. Similarly, a
even other regions in ways not necessarily commensurate broad array of microeconomic restrictions on the opera­
with the change in risk. Countries experiencing sizable tion of markets-import restrictions, local monopoly
capital inflows may need to run positive fiscal balances,
using these precautionary savings as a hedge against the
possibility of sudden capital outflows. Capital inflows also
have major implications for exchange rate policy; fixed
exchange rates, for example, are unlikely to be a workable Figure 3.4 Unlike Nigeria, Indonesia managed
option if a country is vulnerable in financial markets. In its recent oil windfall prudently

short, the quality of a government's management of the

Percentage of 1989 revenue
economy is critical.
450
The risk of capital flight and financial turmoil is vividly Indonesia
illustrated by Mexico's experience in 1994-95. An impor­ 400
tant reason for the loss of confidence there was an over­
valued peso, maintained despite very large current account
deficits. A5 foreign exchange reserves fell below the domes­
350

300
�
r "r;�
tic monetary base late in 1 994, the authorities failed to 250
bring about the necessary monetary contraction. More­
consistent policies could have limited the loss ofconfidence. 200
An open economy is also exposed to price shocks aris­ 150
ing from world markets. Energy and food prices are par­
ticularly volatile and can affect a country's external pay­ 100 �enue
ments and fiscal positions. Exchange rates and interest 50 -;..- O il shock ...;.- Oil shock
rates are also volatile. Prudence calls for anticipating ad­
verse shocks (a sharp price increase for importers, a price
1989 1990 1991 1992 1989 1990 1991 1992
drop for exporters) by not borrowing excessively and
maintaining scope for new borrowing and by holding ade­ Source: IMF. various years (b).
quate foreign exchange reserves, and in the medium term
by establishing a more diversified economic base.
50 WORLD D EV E L O P M E N T R E P O RT 1 997

privileges, regulatory red tape-serve to shelter powerful suggests that long-run goals are better served by sticking
incumbent firms or other favored segments of society. to self-imposed restraints and living with the rigidities
The political system in some countries has a built-in they inflict. The examples here concern fiscal and mone­
tendency toward chronic budget deficits. Legislators tary policy; further examples in the field of regulation are
exchange favors, each promising to vote for benefits to the discussed in Chapter 4.
other's constituents, without specifYing how these bene­ FISCAL POLlCY. Many macroeconomic disturbances
fits will be paid for. So fiscal deficits rise. start life as fiscal imbalances. Recent research suggests that
When revenues fall short and politicians have little changing the institutional features of the budgeting process
stomach for cutting spending, governments have to choose can improve fiscal performance significantly.
either to levy or raise taxes that are desirable from an effi­ Increasing the transparency of budgeting is particularly
ciency standpoint, or impose hidden taxes such as the so­ important. Although society as a whole will lose from bud­
called inflation tax-the tax on real incomes that comes getary ambiguity, it can be a boon for politicians, blurring
from financing government spending with debased cur­ the cost of favors to special interests, for example, or
rency. The latter course is often the easier. Increasing for­ understating the long-run costs of short-term profligacy.
mal tax collection requires an efficient and honest tax When budgets are not transparent, "creative accounting"
administration. Achieving that may first require deep practices, such as off-budget spending and overoptimistic
structural reform of fiscal administration. A change in the revenue and growth projections, become all too easy.
VAT rate might take a vote of parliament, implying delays Needless to say, all of these gimmicks make it harder to
and political compromise. But an increase in the inflation control spending.
tax might involve no more than a ministerial order to the How budgets are formulated and approved is also
central bank. important. The evidence suggests, for example, that it
Even when intentions are good, governments may matterS whether a country takes a hierarchical approach to
sometimes be forced to use hidden taxes like the inflation budgeting-giving considerable power over departmental
tax-although they recognize that in the long run this spending totals to the finance ministry-or one that is
brings huge costs and undermines credibility. How does a more collegial. In principle, the hierarchical approach
government with a history of inflationary financing con­ ought to foster greater fiscal discipline by enabling more
vince potential bondholders that it will not inflate its way "top-down" control of spending and limiting the scope
out of its obligations this time, or simply default? How for legislators to expand the budget piecemeal.
can it convince trade union members that it will not cut A recent study of twenty Latin American countries
their real income by raising the cost of living? If it cannot, suggests that moves toward more transparent, hierarchical
investors will protect themselves by demanding a higher budgeting could deliver improved restraint (Figure 3.5).
interest rate on government debt, and workers will protect It found that budget deficits tended to be higher among
themselves by demanding bigger raises. Their doubts may countries that used collegial and nontransparent ap­
then become self-fulfilling: the government could be proaches to budget preparation. Countries with the least
forced to bring about the inflation that these private transparent and least hierarchical systems ran public
agents expect, by loosening monetary policy and allowing deficits averaging 1 . 8 percent of GDP. The middle third
real wages or interest rates to rise. ran an average budget surplus of 1 . 1 percent, while those
These perverse but powerful institutional incentives with the highest combined hierarchy-transparency scores
can make policy reform very difficult. And even if reforms had budget surpluses, on average, of 1 .7 percent. These
are initiated, the skepticism of businesses, workers, and results highlight that countries looking to improve their
consumers may be borne out by events, unless the gov­ aggregate fiscal management need to scrutinize not just
ernment can communicate the seriousness of its intent. their balance sheets, but also the institutional environ­
ment that shapes the incentives to spend.
Locking in goodpolicies MONETARY POLlCY. A well-functioning, independent
Once reforms are announced, their lasting success may central bank can effectively reduce the threat of politically
depend on designing and implementing policies in ways motivated monetary expansion while maintaining some
that credibly signal that the government will not renege flexibility to accommodate unavoidable outside shocks.
on its promises. A number of possible lock-in mechanisms Many countries seeking credibility for their monetary pol­
are available, all with the same basic logic: to provide icy have chosen the model of central bank independence.
checks that restrain any impulse to depart from an­ In many cases this enthusiasm sprang from evidence
nounced commitments. If institutional capabilities are that OECD countries with independent central banks
strong enough to allow some flexibility to adapt rapidly to generally had lower rates of inflation than others-with
unexpected events, so much the better. If not, experience no slowdown in growth. But attempts to find a similar
 S E C U R I N G THE ECO N O M I C A N D S O C IA L F U N D A M E N TA L S 5 1

pattern in developing countries have yielded mixed

results, depending on how central bank independence is Figure 3 . 5 Well-deslgned budgetary
defined. Russia's move to central bank independence in institutions help avoid large deficits
the early 1 990s, for example, did not seem to restrain that
Primary deficit (percentage of GDP)
country's inflation. This more complex story for develop­
ing countries suggests that monetary restraint through 6

central bank independence cannot simply be manufac­

tured by fiat. It may require a prior foundation of checks Bolivia .
• Honduras
and balances on arbitrary action by public officials. 4
Choosing a conservative central bank governor, one
EI Salvador Trinidad anp Tobago
who is more opposed to inflation than society in general, .
Argentina /
may be one way for developing countries to reap the ben­ •
2 -'Guatemala
efits of central bank independence while containing the Costa R ica Uruguay
•
risks. Another way is to assign the bank only instrument Peru . \... • Colombia
.---
... Paraguay
independence-the day-to-day setting of policy to achieve o ....'-Barbados
.
a certain goal-while leaving the choice of the goal itself Dominican .
Republic
to the political authorities. A third option is to establish a
contract for the central bank governor that provides for -2
some penalty for deviating from an announced inflation
target. This mimics the effect of employing a conservative
central banker without relying on subjective judgments Brazil .
-4 Jamaica
about the person holding the position. Chile • •
The mixed success of independent central banks in
restraining inflation raises the possibility that some devel­
oping countries may simply be unable to put in place -6
Low -------�.�
mechanisms that credibly signal monetary restraint and
Index of the quality of budget institutions
at the same time maintain the capacity to respond flexibly
to outside shocks. For these countries the choice may Note: Budget deficits are averages over the period 1980-92.
The index of budgetary institutions is constructed from
be between commitment through rigid mechanisms and responses to a survey of country budget directors and has ten
no commitment whatsoever. A variety of inflexible ap­ components. Source: Aleslna, background paper.
proaches have been tried:

• Argentina, in breaking away from a long tradition of These hard-line approaches represent a high-stakes
inflation, enacted a currency convertibility law in April race against time. By raising the cost of policy reversal,
1 99 1 that essentially turns the central bank into a quasi such policies contribute to a belief that the government
currency board. The money stock must be fully backed will hold fast. In time, however, some exogenous shock
by foreign exchange. will be strong enough-or, perhaps, political opposition
• Many Latin American countries switched to a fixed to some side effect of the policy will be strong enough­
nominal exchange rate to anchor prices and coordinate to demand a reconsideration. At that point, countries that
private sector expectations. A fixed rate precludes the have won the race against time will already have put in
use of devaluation to accommodate short-run external place more flexible approaches to monetary restraint, or
shocks. But as Mexico discovered to its dismay in 1 994, will have won enough credibility that adapting the strat­
a fixed nominal exchange rate can become dangerously egy will not be interpreted as a reversal.
destabilizing when capital inflows or domestic policies
Investing In people and infrastructure
pull the real exchange rate out of line.
• Most of the francophone countries of Mrica affiliated Well-functioning markets are usually the most efficient
themselves with the CFA franc zone and its suprana­ means of providing the goods and services an economy
tional central bank. Central bank advances to a member needs-but not always. In particular, markets undersup­
government are limited to 20 percent of tax revenues ply a range of collective goods-public goods, and private
collected the previous year. This prevents countries from goods that have important spillover benefits for society at
substituting the inflation tax for conventional taxes (Box large. Generally these are goods that have a significant
3.5). But the same mechanism can also provoke defla­ impact on the quality oflife: clean air and safe water, basic
tion if growth turns negative, as happened in the 1 980s. literacy and public health, and low-cost transportation
52 W O R LD D EV E LO PM E N T R E PO RT 1 997

Box 3 . 5 Commitment versus flexibility in the CFA zone

The CFA franc zone of West and Central Africa is hit by a pair of external shocks: a real appreciation of the
both a currency union and a monetary standard: the French franc against the dollar, which led directly to a
CFA franc is convertible to French francs at a fixed real appreciation of the CFA franc; and a dramatic drop
nominal exchange rate. France established the zone in the prices of some members' major exports. The fixed
after World War II to oversee monetary and financial exchange rate ruled out adjustment through a nominal
policies in its African colonies, and France continues to devaluation. Inflation remained low in this period, but
play a central role in its operation. at the cost of stagnant growth. The very factors that had
In exchange for France's guarantee of convertibiliry, contributed to the credibility and stability of the CFA
member countries surrender the right to print new cur­ zone now made it extremely difficult to devalue the
rency. Policy changes require multilateral negotiations CFA franc. By the early 1 990s, however, a consensus
among the member states and France. Short of with­ was finally reached that a devaluation was necessary.
drawing completely from the zone, a single country A 50 percent devaluation was announced in Janu­
cannot unilaterally renege on its commitment. ary 1 994. Its dramatic size signaled that the devalua­
Compared with similarly endowed neighbors, zone tion was a once-and-for-all measure. Thus its benefits
members experienced lower average inflation and faster could be reaped without undermining the future cred­
growth throughout the 1 970s and early 1 980s. By the ibility of the fixed exchange rate. Indications to date
second half of the 1 980s, however, certain costs of zone suggest that the devaluation has proved largely success­
membership had become apparent. The CFA wne was ful on both counts.

and communications. They are also goods whose provi­ As World Development Report 1994 highlighted, pub­
sion can dramatically affect the welfare and life prospects lic investment in infrastructure boosts private activity in
of the poorest in sociery. developing and industrial countries alike. A study of
eighty-five districts in thirteen Indian states found that
Public investments in health, education, and infrastructure lower transport costs led to considerable agricultural
yield high returns expansion by making it easier for farmers to get their
Access to safe water and the control of infectious disease goods to market. More broadly, competing for new export
are public goods and services with large externalities that markets requires high-quality infrastructure, to transport
will be underprovided, or not provided at all, by the pri­ goods large distances at lowest cost.
vate sector. Infectious diseases still account for a large pro­
portion of deaths in developing countries, and the poor Yet public resources often do not go to these
suffer the most. Nearly 1 billion people in the developing high-return investments
world lack access to clean water, and 1 . 7 billion have no The world over, too few resources are devoted to vital
sanitation. Water-borne diseases such as cholera, typhoid, basic services. Governments spend roughly $ 1 per capita
and paratyphoid remain a pervasive threat in many devel­ on public health, against a minimum requirement of
oping countries, especially for the poor. Evidence from $4 per capita. About 1 30 million primaty-school-age chil­
Malaysia shows that traditional public health interven­ dren-60 percent of them girls-were not enrolled in
tions, such as immunizations and provision of safe water, schools in 1 990. Half the children in Africa do not go to
can make a significant difference in rates of illness and school. Girls, the rural poor, and children from linguistic
death, especially in infant mortality. and ethnic minorities are less likely to be in school than
Returns to education are especially high at the primaty others.
level, because universal basic literacy yields large external­ Part of the problem is misallocation of resources across
ities to society. Educating girls, for example, is linked to sectors-among defense, state enterprises, and social ser­
better health for women and their children and to lower vices, for example. In many developing collntries, state
fertility rates. Many attribute a good part of the East Asian enterprises produce goods that private markets could sup­
countries' economic success to their unwavering commit­ ply; the funds these enterprises absorb could be better
ment to public funding for basic education as the corner­ spent on public goods. Turkey's state-owned coal-mining
stone of economic development. company lost $3.5 billion between 1 990 and 1 996. Tan-
 S E C U R I N G THE E C O N O M I C AND S OCIAL F U N D A M E N TA L S 53

zania's central government spent one-and-a-half times

what it spent on public health to subsidize money-losing Figure 3.6 In Vietnam, the benefits of hospital
state enterprises. In low-income countries state enter­ care are skewed toward the better-off
prises' losses averaged 2.3 percent of GDP between 1 978
and 1 99 1 . Share of total spending

Another part of the problem is the misallocation of Second-richest quintile

resources within sectors. Spending on infrastructure and 22%

social services tends to be concentrated in areas where

markets and private spending can meet most needs­
urban hospitals, clinics, universities, and transport­
Richest
rather than on essential public goods. These expenditures quintile
often benefit the rich disproportionately, while the poor 30%

receive only a small fraction.

For example, governments often try to finance the
poorest Poorest
entire range of health care services. Yet public health inter­
quintile quintile
ventions directed at improving the health status of large 1 6% 1 1%
sections of the population, including the poor, warrant a
Note: Each slice represents the share of total spending directed
higher priority. Most curative health care is a (nearly) pure toward that quintile in 1993. Source: World Bank 1995f.
private good-if government does not foot the bill, all but
the poorest will find ways to pay for care themselves. This
may explain why the public provision of clinical care ser­
vices had no effect on health status in Malaysia, where Making better use ofpublic resources
people have the option of using private clinical services. To focus public resources more efficiently on providing
Although some governments are beginning to spend collective goods and services, countries will need to reallo­
more on primary and secondary education, higher edu­ cate expenditures and learn to use their resources more
cation is still heavily subsidized relative to other tiers. efficiently. In many countries this will take both political
Whereas the Republic of Korea, for example, allocates 84 and institutional change. The vital first step in institu­
percent of its education budget to basic schooling, tional change is a readiness to embrace a pluralistic
Venezuela allocates just 3 1 percent. Thirty-five percent approach to delivery: to permit private parricipation while
of Bolivia's education budget-but only 1 1 percent of focusing direct public involvement on genuinely collective
Indonesia's-is allocated to higher education. The tilt goods and services (although, as discussed below, govern­
toward higher education is most acute in Africa, where ments might also choose to subsidize needy groups' con­
public spending is about forty-four times greater per sumption of goods even when the returns are wholly pri­
student in higher education than in primary schools. At vate). Viewed against the common postwar presumption
the extreme-in Tanzania-the ratio was 238 to 1 . that infrastructure and social services are the exclusive
This emphasis on clinical health services and higher domain of public monopolies, pluralistic approaches
education entrenches social inequities. Evidence from might seem radical and untested. In fact, private and com­
Vietnam confirms that wealthier groups benefit dispro­ munity participation in infrastructure and social services
portionately from hospital care: the richest fifth of the has a long historical pedigree (Box 3 .6) .
population are estimated to enjoy some 30 percent of the Only in the twentieth century did governments, first in
benefits of hospital spending, while the poorest fifth get Europe and later elsewhere, become important providers
only 1 1 percent (Figure 3.6). of services, in extreme cases excluding the private sector
Government decisions about what kind of services to altogether. This transition to a more pervasive govern­
supply are not the only reason why the benefits of public ment role evolved differently for different services and in
spending are unequally distributed. Differences in different countries, giving rise to wide variation in pat­
demand, especially those related to gender, are also impor­ terns of financing and delivery within and across income
tant. In Cote d'Ivoire, for instance, almost two-thirds of groups. Among low-income countries, for example, the
public spending on education goes to boys. In Pakistan, private share of total education expenditure ranges from
boys benefit from about one-and-a-half times as much around 20 percent in Sri Lanka to around 60 percent in
public spending on their education as do girls. Often the Uganda and Vietnam (Figure 3.7). The breakdown of
relative disadvantage of girls is even greater in poorer health spending shows similar variation. In Latin America
households, reflecting differences in demand in these the private share ranges widely: from one-third of total
households for education for girls and boys. health expenditures in Ecuador to 43 percent in Mexico
54 WORLD D EV E L O P M E NT R E P O RT 1 997

Box 3.6 Private provision of social services: A historical perspective

Only in the twentieth century did the state assume an borhood doctors. Not until the first antibiotics were
important role in providing social services such as edu­ mass-produced after World War II did Western medi­
cation and health care. The ability of the state to pro­ cine begin to benefit large groups of people. In devel­
vide these services has varied, however, resulting in dif­ oping countries, increased urbanization and industrial­
ferent public-private mixes. ization led to the formation of labor groups, which
Today's modern education systems were founded on organized themselves to provide health insurance
private-often religious-initiatives. From the Islamic through "sickness funds" or pressed for publicly
schools in Indonesia and West Africa to the Hindu gurus financed social insurance systems. By 1 950 sixteen Latin
in India, the Christian churches in most of Europe, and American countries had enacted laws to provide health
the village teachers of China, private religious schools insurance to selected groups, but only two African and
have been teaching children for centuries. In general, four Asian nations had done so.
however, education was a privilege of the elites. Mass The International Conference on Primary Health
public education is a nineteenth-century invention, orig­ Care, held in Alma-Ata, Kazakstan, in 1 979, pro­
inating in Europe and Nonh America and spreading to claimed health a "basic human right" and urged gov­
former colonies after independence. Significant public ernments to take "responsibility for the health of their
investment led to expanding public sector enrollments, people. " Several governments in developing countries
accompanied in several countries by a shrinking role for created national health systems that purport to provide
private schools. In Malawi, for example, enrollment in free medical care to the entire population. These efforts
private primary schools went ftom 77 percent of the total met with mixed success, and the private sector ex­
in 1 965 to 1 0 percent in 1 979. Elsewhere the inability of panded to fill the void. In Malaysia, for example, physi­
govemments to keep up with demand or overcome dis­ cians in private practice rose from 43 percent of the
satisfaction with public school quality led to an increase total in 1 975 to 90 percent of the total in 1 990. But
in private school enrollments. large pans of the population still lack access to basic ser­
Historically, most medical services were privately vices, while others rely chiefly on private providers paid
provided by midwives, traditional healers, and neigh- out of pocket.

and 57 percent in Brazil. Eighty percent of health expen­ be delivered privately (sometimes, as we see in Chapter
ditures in Thailand are private. 4 for utilities, taking advantage of these new opportuni­
In many settings unbundling the delivery of infrastruc­ ties may require new regulatory arrangements)
ture and social services can help achieve a better match • To increase the transparency of the uses to which pub­
between roles and capabilities. In bundled systems of deliv­ lic money is being put (much harder when many diverse
ery a diverse array of activities-private and collective, sub­ activities are bundled together within a monopoly pub­
sidized and unsubsidized, competitive and monopolistic­ lic provider) .
are all undertaken by a single public provider. When
services are unbundled, it becomes possible: Yet organizational changes will not do it all. Perhaps
the most important change in the incentive environment
• To distinguish between activities that could be financed is to empower users themselves with "voice"-not only to
and delivered entirely through private markets, and work in partnership with providers where localized infor­
those that have important collective elements-and to mation is key to efficient delivery, but also to monitor
begin to shed the former providers' performance and to enforce, through the polit­
• To distinguish between those collective activities whose ical process, a commitment to quality. How this can be
delivery should remain in public hands, and those achieved is the subject of Chapter 7.
whose financing should be public and their delivery
Protecting the vulnerable
private-with vouchers, contracting, and similar mech­
anisms providing the bridge between the public and the Over the long term, rapid growth and investment in peo­
private sector (Chapter 5 explores these options in ple will cut poverty dramatically. Yet regardless of a coun­
more detail) try's income level-and regardless of the gains accruing to
• To take advantage of new opportunities for competi­ the economy as a whole-some citizens will be left be­
tion among the array of goods and services that can now hind, and others will suffer temporary hardship. This sec-
 S E C:: U R I N G THE E C:: O N O M I C:: AN D S O c:: I A L F" UN D A M E N T A L S 5 5

Figure 3 . 7 The balance of private and public education differs enormously worldwide

Private education spending (percentage of total education spending)

Austria

Israel f--...

United States f------. High-income

Finland f----------------... economies

Switzerland r::::::�
South Africa

Iran, Islamic Rep. of

Cyprus Middle-income

economies
Colombia
Indonesia .!!!!!!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! !!!!
!! .
!!
Sri Lanka ••••••••
Kenya __111111111111111111111111..
I

Uganda ...1111111111..1111111111•••••111
I Low-income

Vietnam ••••••••••••••••••••
economies

Haiti
���������������������������� ____ �____ �
o 10 20 30 40 50 60 70 80 90 100

Note: Data are for various years between 1988 and 1993. Source: Psacharopoulos and Nguyen 1997.

tion examines how states have wrestled with the challenge vulnerable in industrial societies. These three programs,
of protecting the vulnerable. pensions especially, absorb a rapidly increasing share of
national income, and rich countries around the world are
A wide variety ofprotective measures revisiting some aspects of their welfare programs (Figure
Table 3. 1 offers a glimpse of the rich variety of initiatives 3.8). Even Sweden, where the commitment to the welfare
governments have tried to protect the vulnerable in devel­ state remains firm, and which has an unrivaled record in
oping countries. All of these initiatives fall into one of two eradicating poverty, has embarked on wide-reaching
broad categories: reforms to find a better balance between the social bene­
fits and the heavy--often invisible--economic costs.
• Pension, unemployment, and other social insurance In Central and Eastern Europe and the former Soviet
programs aim to support people who-for reasons of Union the state has traditionally provided a wide range of
age, the business cycle, or other circumstances--are social services. Before their transition to the market these
outside the wage economy for some part of their lives. states offered comprehensive benefits, but they differed
• Programs of social assistance aim to help the poorest in from those in industrial market economies in four respects.
society, those who are barely able to support themselves. First, because the system was premised on full employment
guaranteed by the state, there was no unemployment insur­
In industrial countries the universal welfare state, ance. Second, social protection focused on those (such as
which has influenced welfare programs around the world, the old and the disabled) who could not work. Third, ben­
has blurred this distinction. Most of the main transfer efits were decentralized at the firm level. And fourth, in­
programs--pensions, unemployment insurance, family kind subsidies (housing, energy) played an important role.
assistance--began during the 1 930s and 1 940s in re­ With an unprecedented economic contraction and
sponse to the Great Depression and World War II, and tight budgets accompanying transition, some countries in
following the realization that the elderly were especially Central and Eastern Europe and the former Soviet Union
56 WORLD D EVE L O P M E NT R E P O RT 1 997

Table 3.1 Social insurance, social assistance, and poverty-targeted programs in developing countries:
Characteristics and lessons

Coverage and
Program type regional patterns Design issues and lessons Positive stories

Pensions Nearly universal in transi­ Actuarial imbalances, even in some countries with Innovative schemes in
tion countries, very low in young populations, threaten macroeconomic stabil­ Argentina and Chile
Sub-Saharan Africa, ity, especially in transition countries, Brazil, and
medium to high in Latin Uruguay. Transition countries need to increase
America. Pay-as-you-go pensionable age. Separate redistribution from
schemes dominate. insurance.

Family Included in middle- to Family size correlates highly with poverty in the
assistance high-income countries as Central Asian republics but not in Eastem Europe
part of social insurance. It and the rest of the CIS. Poverty incidence deter­
is universal at the enter­ mines the degree of progressivity. Where inci­
prise level in transition dence is low, means testing is crucial to contain­
economies. ing cost.

Social Limited in transition coun­ More suitable to countries with relatively low Chile's family subsidy
assistance tries, rare in Asia, nonexis­ poverty incidence. and old-age social
(cash) tent in Latin America and assistance pension
Africa.

General price subsidies Open-ended price subsidies are fiscally unsustain­ Tunisia's price subsidy
Food dominate in Africa and the able, distortionary, and regressive. Leakages can reform, which reduced
subsidies Middle East. Quantity be prevented by innovative targeting. Nutrition pro­ costs by 2 percent of
rationing is prevalent in grams are more cost-effective than quantity rations GOP and improved tar­
South Asia. Food-for-work or general subsidies. Programs that set work geting; 1993 Food for
schemes are used in Latin requirements are more cost-effective than rations. Education Program in
America. Countries are Political economy often entails an urban bias. Bangladesh
shifting toward food stamp
and targeted programs.

Housing Prevalent in transition Often regressive. Urban poor are best protected by Chile's one-time subsi­
subsidies economies, mostly on­ increasing and encouraging low-cost housing pro­ dies for housing pur­
budget; less prevalent in duction. Community organizations and coopera­ chase on the private
other regions, mostly off­ tives have been more successful at targeting. Sub­ market
budget. sidies in the former Soviet Union complicate
functioning of housing and labor markets.

Energy Prevalent in transition In Asia, Africa, and Latin America gasoline subsi­
subsidies countries and oil-producing dies largely benefit the nonpoor. They are also
countries, such as somewhat regressive in transition countries
Venezuel a . because of their importance in the consumption
basket of the nonpoor. Elimination of subsidies
would affect the urban poor.

Public works T h e Maharashtra Employ­ Provide both insurance and assistance. They are India's Maharashtra
ment Guarantee scheme appropriate in areas where poverty is transient scheme; Korea's intro­
in India and social funds and there is scope for unskilled labor-intensive duction and cancella­
in Africa and Latin America projects. The program wage should not exceed the tion of work program
are funded domestically prevailing market wage . In-kind payments attract
and by intemational more women.
donors.

Credit-based Prevalent everywhere, Main problem is the inability to borrow in the Grameen Bank in
programs especially in Africa, South absence of collateral. Programs should subsidize Bangladesh
Asia, and Latin America. transactions costs but not interest rates, use local
groups instead of direct targeting programs, orga­
nize beneficiaries, and incorporate incentives to
both borrowers and lenders to enforce repayment.
Incorporate saving as a necessary component.

Source: Adapted from World Bank 1996e.

 S EC U RI N G TH E ECO N O M I C AND S O C IAL FU N DA M E NTALS S7

Latin America, reflects the shift to nonfood aid and greater

Figure 3.8 Pensions and other transfers have cooperation with nongovernmental organizations (NGOs)
crept upward in the industrial countries and community-based groups in the delivery of targeted
assistance. Labor-intensive public works programs have
Percentage of GDP
risen in popularity, particularly in South Asia and Africa.
12 r-------,
In many countries, social insurance and assistance pro­
grams have failed to achieve their objective of protecting
10 the vulnerable. Often they have resulted instead in trans­
fers of resources to elite groups, sometimes with fiscally
8 destabilizing consequences. New approaches are begin­
ning to emerge for both insurance and assistance. We
6 examine each in turn.

Social insurance-options and hazards

4
The generosity of social insurance programs has sometimes
wrought havoc with long-term fiscal policy. As Table 3.2
2 suggests, in many countries the liabilities implicit in indi­
viduals' accrued pension rights far outweigh any reasonable
o measure of the government's tax-raising capacity.
1965 1970 1975 1980 1985 1990 Demographic changes pardy explain these ballooning
pension liabilities. Aging populations account for more
Note: See the Technical Note for details. Source: ILO. various than half of the expansion of pension and other welfare
years; OECD 1996. benefits in the OECD countries over a recent thirty-year
period. Ukraine and Hungary, too, have older popula­
tions, which pardy account for their high implicit pension
are beginning to realize that this system of universal cov­ debt. Demographic pressures on pension programs are
erage is no longer affordable and must be replaced by likely to intensify especially rapidly in some developing
more-targeted programs. Cash transfers as a percentage of countries. China's over-60 population will double from 9
GDP are high. But adapting the welfare system to the new to 1 8 percent of the total in thirty years-a transition that
conditions is proving politically difficult. In Poland trans­ took a century in France and Britain.
fers doubled from 9 percent of GDP in 1 988 to 1 8 per­
cent in 1 993.
In contrast to the OECD countries, the vast majority Table 3.2 Implicit pension debt in selected
of developing countries have created "oasis" social insur­ countries
ance systems, which grant family benefits and pensions to (percentage of GDP)
formal sector workers and civil servants. The size of this Implicit pension debt
oasis increases with income per capita. It covers 6 percent Country of governments
of the labor force in Sub-Saharan Africa, 23 percent in Uruguay 296
Asia, and 38 percent in Latin America. Formal unem­ Hungary 213
ployment insurance is rare, but the use of the public sec­ Brazil 187
Ukraine 141
tor as employer of last resort is a form of disguised unem­ Turkey 72
ployment insurance. China 63
Developing countries have also experimented with a Cameroon 44
variety of social assistance measures for meeting the basic Peru 37
Congo 30
needs of the poorest. These have ranged from programs
Venezuela 30
that bundle cash assistance and insurance, to price subsi­ Senegal 27
dies (food, housing, energy) and labor-intensive public Mali 13
works (Table 3 . 1 ) . The design of social assistance pro­ Ghana 9
Burkina Faso 6
grams has often been heavily influenced by international
Note: Data are for various years between 1990 and 1996 and
aid. The prevalence of food aid from the United States in
are net present values calculated at a discount rate of 4
the 1 950s and 1 960s, for example, led to the adoption of percent.
many food-for-work programs, particularly in South Asia. Source: Kane and Palacios 1996.

The emergence of social funds in the 1 980s, especially in

58 WORLD D EV E L O P M E N T R E P O RT 1 997

economy (generally the targets of insurance programs).

Box 3 . 7 The new Chilean unemployment Experience suggests that failure to make this distinction is
insurance scheme virtually certain to undermine both the fiscal viability of
insurance programs (because the "insured" can lobby for
Chile has a severance pay scheme but no system unfunded benefits) and the impact of assistance programs
of unemployment insurance. The government has (because nontargeted groups are likely to capture re­
drafted a law to create one (called PROTAC). The sources intended for the poor).
design of this scheme departs from models prevail­ With insurance clearly distinguished from assistance,
ing in the OECD countries. The proposed scheme states can bring private participation and competition into
tries to circumvent the disincentives to work often insurance systems previously dominated by public
associated with unemployment insurance. It would monopolies. This can be done in several ways:
create individual accounts to which workers and
employers would jointly contribute 4.4 percent of • The redistributive component of pensions can be un­
the worker's salary. These accounts would accumu­ bundled from the saving component through a manda­
late up to five months of salary and would be pri­ tory multipillar system, with the saving pillar fully
vately managed, possibly by the same institutions funded, privately managed, and publicly regulated.
that now manage Chile's private pensions. A laid­ Redistribution can be accomplished through a flat pub­
off worker would receive severance pay of one lic pension (as in Argentina) .
month of salary per year of service, to a maximum • States can introduce mandatory savings accounts for
of five years, and could make up to five monthly unemployment insurance, as well as pensions (Box 3.7
withdrawals from his or her individual account describes a Chilean initiative along these lines).
while unemployed. Workers who became unem­ • Companies and individuals can be allowed to choose
ployed following a resignation would only be enti­ between public and private providers, as in Japan, Sri
tled to the monthly withdrawals. The state would Lanka, and the United Kingdom.
regulate these unemployment insurance accounts • Management of the assets of public insurance programs
and guarantee a minimum unemployment benefit. can be contracted out to the private sector (as in
As with pensions, this minimum guarantee would Malaysia) .
be provided only after funds in the account are • States can enlist independent professionals, rather than
exhausted. The individual account would thus act political appointees, for the boards of trustees of public
as a deductible. programs.

Of course, private provision of social insurance is only

workable if financial markers are well enough developed
But at their root the problems go beyond demograph­ so that private intermediaries can readily match these
ics. Civil servants in many countries view their pensions as long-term liabilities with long-term assets. Yet even in
an entitlement, rather than a form of savings: they make poor regions such as Sub-Saharan Africa, thin capital
limited contributions to a retirement scheme but receive a markets need not be a bar to the development of private
full salary as pension after thirty to thirty-five years of ser­ pension funds. Given an appropriate-and enforceable­
vice. More generally, influential constituencies success­ legal framework for financial sector development, coun­
fully lobby for transfers from the budget, which they are tries could set up regional equity markets. This is a par­
unwilling to see scaled back even in the face of a severe ticularly attractive option for countries of the CFA zone,
fiscal crunch. Or, as in some African countries, public which share a common currency. Already some equity
bureaucracies direct toward themselves resources intended markets in Sub-Saharan Africa compare favorably in
for social insurance or for vulnerable groups. terms of market capitalization with those in Latin Ameri­
Whatever the cause of these problems, unless social can countries that have recently privatized their pension
insurance can be put on a sounder financial footing, either systems (such as Peru).
the programs will collapse, or countries will be plunged
into deep fiscal crisis, or both. An essential first step Sustainable approaches to social assistance
toward reform is for governments to distinguish between Unlike social insurance, which can be self-financing, social
the goals of insurance and those of assistance-especially assistance requires direct expenditure of public funds. Bal­
in developing countries where the gap is often vast ancing the objectives of poverty alleviation and fiscal pru­
between the poorest citizens (generally the targets of assis­ dence is thus vital to success. (Table 3. 1 summarized the
tance programs) and those who participate in the formal wide variety of approaches that have been tried.) In the pasr
 SEC U R I N G THE ECON O M I C AND S O C IAL FU N DA M E NTALS 59

the debate was primarily over the relative merits of broad­ The challenge of sustaining programs of social assis­
based subsidies and means-tested programs. Today, the tance is political as well as fiscal: since the marginalized
limitations of both have become more apparent. poor are politically weak almost everywhere, in times of
Because means-tested programs (in which benefits are fiscal belt tightening even prudently designed programs
set according to the recipient's income) are administra­ risk losing support. Self-targeted programs-especially
tively demanding, they are likely to achieve their goal at those that impose reciprocal obligations on recipients­
reasonable cost only in countries with strong institutional seem more politically resilient than those targeted more
capability. But broad-based subsidies have also lost their narrowly, but they too are vulnerable. At its root, then,
appeal: they are expensive and relatively inefficient at the task-explored in Chapter 7-is to find ways of giv­
reducing poverty. Housing and infrastructure subsidies, ing voice to the concerns of the poor, enabling them to
for example, turn out to benefit higher-income house­ become more effective advocates of their own interests.
holds disproportionately (Figure 3.9). Food subsidies
Strategic options: Doing better on the fundamentals
can be more effective if they are targeted toward items
consumed primarily by the poor. Tunisia has effectively Each of the four sets of economic and social fundamentals
moved from a nontargeted to a targeted program by elim­ poses distinctive challenges, but all have some challenges
inating all subsidies on goods consumed disproportion­ III common.

ately by the nonpoor and, for those food products still First, prioritization is vital. As this chapter shows, in all
subsidized, by differentiating product lines through dif­ too many countries the state still does not provide the full
ferences in packaging and the use of generic ingredients. complement of core public goods and services: a founda­
These reforms have reduced the cost of food subsidies tion of lawfulness, a stable macroeconomy, the rudiments
from 4 percent of GDP in the mid-1 980s to 2 percent of public health, universal primary education, adequate
by 1 993, while still maintaining a food safety net for transport infrastructure, and a minimal safety net. At the
the poor. same time states are overproviding a wide variety of goods
With both means-tested and more broad-based assis­ and services that private markets could supply in their
tance programs increasingly in question, attention has stead. Especially in countries with weak institutional capa­
shifted to self-targeted approaches. One approach is to bilities, the need is therefore urgent to focus the state's
focus delivery on those localities, urban and rural, with role on the fundamentals.
disproportionate numbers of poor residents. Another is to Second, skillful use of private, competitive markets and
set the level of benefits low and build in some kind of quid voluntary activity can support development while sharply
pro quo. Food-for-work programs incorporate these fea­ reducing the burden on states with weak institutional
tures. So, too, do lending programs for microenterprises capabilities. Market-led growth in a supportive incentive
in poor communities. Box 3.8 illustrates how Indonesia, environment is fundamental. Additionally, markets can
which has made huge strides in reducing poverty through provide a variety of private goods and services that in
broad-based growth, is initiating a variety of self-targeted many countries have somehow wandered into the domain
programs in an effort to eliminate poverty by 2005. of public provision, such as higher education, curative

Figure 3.9 Housing subsidies in developing countries mostly fail to reach the needy

Percentage of subsidies reaching households below the median income

South Asia

Latin America and Caribbean

Sub-Saharan Africa

M iddle East and North Africa

East ASia

High-income OECD

o 10 20 30 40 50 60

Note: Data are for 1991-92. Source: World Bank 1996e.

60 WORLD D EVE L O P M E NT R E PO RT 1 997

Box 3.8 Reducing poverty In Indonesia-how social assistance complements broad·based growth

Indonesia's rapid and broad-based growth has had a 20,000 villages-the poorest one-third of all
spectacular effect on poverty reduction. Between 1 970 Indonesian villages-to be used as seed capital for
and 1 990 the proportion of the population living income-generating activities. The program is com­
below the official poverty line declined from 56 to 1 5 bined with public works programs.
percent; other indicators of welfare, such as infant • The Prosperous Family program, launched in 1996,
mortality, showed similar improvement. The govern­ aims to improve the conditions of families living in
ment has now set itself the ambitious target of eradi­ non-lOT villages, and whose living standards are
cating absolute poverty within the next decade. The below a certain level, through small grants and sub-.
challenge is that the remaining poor are concentrated sidized credit.
in isolated pockets of poverty with poor natural • Under the Transmigration Program about 750,000
resource endowments, low population densities, and families, or over 3.6 million people, have been reset­
other socioeconomic characteristics that make them tled at government expense from overpopulated Java
difficult to reach. Several targeted interventions have to less populated outer islands. The program aims to
been initiated in recent years, including the following: address landlessness as a cause of poverty and provide
new sertlers with agricultural land and other benefits.
• The Inpres Oesa Tertinggal (lOT) program, launched • The Kampung Improvement Program is targeted at
in 1 994, is directed at villages that the country's improving the provision of social services and infra­
development has left behind. The program distrib­ structure to densely populated, low-income, urban
utes grants totaling $200 million per year among neighborhoods.

health services, and pensions and other forms of insurance. Finally, states should seek ways to enhance the credibil­
In a range of other areas-using social funds for poverty ity of their actions. In the short run, while weak domestic
alleviation, enhancing the quality of primary education, institutions are being reinforced, Stronger ties with external
encouraging participation by NGOs and communities­ actors-for example, through stabilization programs with
reform can greatly improve service delivery. Countries the IMF-can help governments signal their commit­
with weak public institutions should assign high priority ment. In the long run, however, as Part Three explores in
to finding ways to use markets and involve private firms depth, the vital challenge is to build homegrown commit­
and other nongovernmental providers in service delivery. ment mechanisms, rooted in domestic institutions.
F O S T E R I N G M A R K E T S :

L I B E R A L I Z AT I O N , R E G U L AT I O N ,

A N D I N D U S T R I A L P O L I C Y

EW DISPUTE THE CENTRAL ROLE OF THE STATE IN Many countries with weak institutional capabiliry are
securing the economic and social fundamentals saddled by their history with governments whose reach is
discussed in Chapter 3. There is much less agreement, overextended; for them, privatization and market liberal­
however, about the state's precise role in regulation ization is a key part of the policy agenda. As capabiliry
and industrial policy. A counterpart to the rise of state­ develops, public organizations and officials will be able to
dominated development strategies in the early postwar take on more challenging collective initiatives, to foster
years was a dramatic expansion in government regulation markets and to make increasing use of efficient-but dif­
in many countries. As countries have liberalized, those ficult to manage-regulatory tools.
aspects of the regulatory framework that have proved
Privatizing and liberalizing markets in
counterproductive are being abandoned. But govern­
overextended states
ments are learning that market reforms and fast-changing
technology pose their own regulatory challenges. States Interest has revived in finding ways for the government to
cannot abandon regulation. The task, rather, is to adopt work with the private sector in support of economic devel­
approaches to regulation that fit not merely the shifting opment, and to provide regulatory frameworks supportive
demands of the economy and sociery but, critically, the of competitive markets. Yet in all too many countries, state
country's existing institutional capabiliry. and market remain fundamentally at odds. Private initia­
Attention to the proper match between the state's tive is still held hostage to a legacy of antagonistic relations
role and its institutional capabiliry helps reconcile some with the state. Rigid regulations inhibit private initiative.
seemingly clashing prescriptions for state action. Many, And state enterprises, often buttressed by monopoly privi­
for example, would argue that, in complex industries such leges, dominate economic terrain that could more fruit­
as telecommunications, regulators ought to have consider­ fully be given over to competitive markets. At the extreme,
able flexibiliry in devising and implementing market rules. a mass of inefficient state enterprises blocks private
Yet where institutional capabiliry remains weak, the scope dynamism entirely, even as it imposes an unmanageable
for flexible initiatives is limited; the focus should instead fiscal and administrative burden on the rest of the public
be on winning credibiliry with firms and citizens, convinc­ sector. In such countries the first step toward increasing
ing them that the state will follow through on its com­ the state's effectiveness must be to reduce its reach.
mitments and will refrain from arbitrary and capricious The recent economic performance of such countries as
action. China and Poland provides dramatic evidence of the ben­
The same applies even more forcefully to more inter­ efits of shrinking the state in former centrally planned
ventionist policies-those aimed at not merely laying the economies. But relaxing government's grip, whether that
foundations of industrial development but actively accel­ grip is maintained through public ownership or regula­
erating it. In principle, there seems to be room for gov­ tion, can also yield large dividends in more mixed eco­
ernment to play such a role. But in practice its scope for nomies. It can:
doing so turns out to rely heavily on a range of stringent
institutional conditions being fulfilled. Except where role • Free up public resources for high-priority actIVttzcs.
and capabiliry have been skillfully matched, activist indus­ Diverting subsidies away from money-losing state
trial policy has often been a recipe for disaster. enterprises and toward basic education would have
62 WO R L D DEVE LO PM E NT R E P O RT 1 997

Table 4.1 Estimates of welfare gains from deregulation i n the U n ited States
(billions of dollars)

Gains to Gains to Total Further potential

Industry consumers producers gains gains

Airlines 8.8-14.8 4.9 13.7-19.7 4.9

Railroads 7.2-9.7 3.2 10.4-12.9 0.4
Trucking 15.4 -4.8 10.6 0.0
Telecommunications 0.7-1.6 0. 7-1.6 11.8
Cable television 0.4-1.3 0.4-1. 3 0.4-0.8
Brokerage 0.1 -0.1 0.0 0.0
Natural gas 4.1
Total 32 .6-43 3.2 35.8-46.2 21.6-22.0
. . Not available.
Source: Winston 1993.

increased central government education expenditures and other objectives preferably at most secondary in
by 50 percent in Mexico, 74 percent in Tanzania, and importance
1 60 percent in Tunisia. • Clarification of the criteria to be used in assessing
• Pave the way to better, cheaper services. Divestiture of which regulations are useful, which should be dis­
state assets had positive effects in all but one of twelve carded, and which should be strengthened to com­
carefully studied cases in Chile, Malaysia, Mexico, and plement privatization
the United Kingdom. The benefits came in the form of • Preparation of financial statements and public bud­
increased productivity and investment as well as more gets (including information on borrowing from
efficient pricing. Deregulation in five hitherto tightly banks) to assess which state enterprises are money­
regulated sectors in the United States had by 1 990 losers and uncover the reasons for their losses
yielded gains of $40 billion (Table 4. 1 ) . In Argentina, • Specification of open and competitive mechanisms
liberalizing harbor terminals in Buenos Aires led to an (such as auctions) for divesting state enterprises.
80 percent reduction in fees.
• Unlock opportunities for private sector development. Such effortS have an added rationale. Often they will
Excessive regulation can inhibit market entry, fuel the show whether or not a country is truly ready for reform­
growth of informal activity, and even create new indus­ whether key political actors want reform and find it polit­
tries solely devoted to helping firms navigate the regu­ ically feasible to translate that desire into action. If politi­
latory maze. Eliminating these excesses enables markets cal will is lacking, further efforts will be wasted. Indeed,
to function more flexibly, at lower transactions costs. they may prove counterproductive if interpreted as
another in a long line of arbitrary shifts in policy.
The challenges of scaling back the overextended state With the initial preparation done, the second phase of
are as much political and institutional as they are techni­ reform is to put in place a business environment that sup­
cal. Success relies on the ability to proceed with reform in portS competitive private markets. Such an environment
the face of opposition from powerful groups who benefit includes rules of the game that facilitate entry and com­
from the status quo. Chapter 9 examines how reforms in petition, and a complementary institutional, legal, and
general can most effectively be initiated and sustained. regulatory framework that can undergird property rights
Here we focus more narrowly on programs of market lib­ and markets, including (notably) financial markets.
eralization and privatization. The economic advantages of early reform of the busi­
Initiatives to foster market liberalization and privatiza­ ness environment-even before privatization-are sub­
tion can be segmented into three overlapping phases: pre­ stantial. One advantage is that fostering external and
paring for reform, establishing an enabling business envi­ domestic competition ensures that many of the benefits of
ronment, and privatizing (or liquidating) state enterprises. privatization will be passed on to consumers, rather than
Transparency is the vital ingredient as governments begin simply result in a transfer from public coffers to private
to prepare for reform. Ideally, transparent preparation monopolies. Otherwise the latter are likely to become
includes: powerful, entrenched interests, willing and able to stifle
subsequent effortS to introduce more competition into the
• An explicit statement of the main objective-to un­ economy. A second advantage is that, if clear regulatory
leash a competitive market economy-with fiscal structures are in place, bidders will have a better idea of
 FO STE R I N G M A R K ET S : L I B E RA L I ZATI O N , R E G U LA T I O N , A N D I N D U STR I A L PO LICY 63

the economic potential of companies being privatized­ A strategy of " growing out" of state dominance appears
the risk premium will be lower-and government will to have worked in some East Asian economies. But else­
receive higher bids. where economic and political considerations will favor
More broadly, liberalization of the business environ­ keeping privatization on the front burner. Delay imposes
ment can be a powerful catalyst, setting off a virtuous three major economic costs. First, money-losing state enter­
spiral whereby each reform makes the next one easier. The prises may continue to drain money from the public coffers
stronger the business environment, the greater the range (or from banks in the form of never-to-be-repaid "loans").
of opportunities and supports available to entrepreneurs, Unless such losses can be contained, the resulting fiscal
bureaucrats, and workers-and thus the weaker the polit­ instabiliry can undermine an entire reform program. Sec­
ical opposition to dismantling dysfunctional rules and ond, anticipating privatization down the road, managers
agencies and liquidating or privatizing state enterprises. and workers in state enterprises can be tempted to steal the
The challenge is finding a way to set this virtuous spiral in company's most valuable assets while the going is good.
motion. For at the outset those who prosper under the Third, poorly performing state enterprises may obstruct
dysfunctional system will have much to lose, while the liberalization and restructuring in other sectors. In Zambia
eventual winners are unlikely to have reached the critical market liberalization created opportunities for smallholder
mass needed to lobby for their own interests. Box 4 .1 farms to expand production and exports of cotton. But
describes how Mexico was able to overcome initial resis­ before being exported, cotton must be processed, and for
tance to the rollback of regulatory controls. some years after liberalization virtually all the country's
Because it takes time for the business environment to processors were under the control of a monopoly state
become supportive-and because privatization becomes enterprise. Once the sector was restructured, the pace at
easier as the environment improves-reformers may be which farmers and businesses took advantage of new mar­
tempted to give privatization a backseat. This is precisely ket opportunities picked up dramatically.
the approach adopted by China and, in earlier years, Given the importance of keeping privatization on the
by the Republic of Korea and Taiwan (China). In the front burner, its sequencing in relation to liberalization
early 1 960s, state enterprises accounted for about half of thus poses some difficult dilemmas. On the one hand,
manufacturing production in Taiwan (China) and one­ privatization will yield greater economic benefits, and
quarter in Korea. By the mid-1 980s their share had fallen impose fewer hardships on sociery, if it is preceded by
to about 1 0 percent in both economies-not as a result of liberalization and regulatory reform. On the other hand,
privatization, but because of the rapid expansion of their the longer privatization is delayed, the more entrenched
private sectors. management of state enterprises can become. Box 4.2

Box 4.1 Mexico's deregulation czar

In 1 988 the president of Mexico appointed a "deregu­ • Unequivocal presidential support, signaling to both
lation czar." Each month this official reported directly bureaucrats and citizens the need to comply with
to the president and his economic council of ministers. the czar's decisions
Every business in Mexico, large or small, had equal • The fact that his decisions could be overruled only
access to the czar's office to complain about burden­ at the highest level of government
some rules and regulations. When the office received a • The setting of tough penalties for officials who
complaint, it was obliged to find out why the rule failed to implement the rulings
existed, how it interacted with other regulations, and • The time limit, which ensured quick and visible
whether it should continue in effect. The office oper­ results
ated under a strict timetable: if it did not act to main­ • The czar's staff, who were skilled in the economic
tain, revise, or abolish the disputed rule within forry­ consequences of regulations, their interactions with
five days, the rule was annulled automatically. other regulations, and their administrative require­
The work of the deregulation czar over his first four ments-no one person can effectively carry out a
years is widely credited with greatly accelerating Mex­ government-wide program of deregulation
ico's reforms. It provided struggling private business­ • Finally, the fact that the czar won credibiliry with
people with an effective, responsive champion at the officials and with the public by giving a fair hearing
highest level of government. The factors behind this to the powerless and the influential alike, and setting
success include: a consistent record of impartialiry.
64 W O R LD D EV E L O P M E NT R E P O RT 1 997

Box 4.2 Six objections to privatization-and how to address them

"We can 't throw public sector workers into the street. It's "Our local private sector is too weak. Without state enter­
wrong-and they won 't standfor it. " prises, our economy will grind to a halt. "

Winning the acquiescence of employees is essential Certainly, privatization is easier if a well-function­

to successful privatization. Some countries have given ing market economy, including financial markets, is
shares to employees or privatized through employee already in place. Thus, a key complement (and, if
and management buyouts. Others have offered gener­ appropriate, antecedent) to privatization is market lib­
ous severance pay. Privatization becomes easier as eralization, perhaps accompanied by the activist in itia­
countries develop programs to protect the vulnerable, tives to foster markets described later in this chapter.
of the kind described in Chapter 3. Even so, in most settings it is precisely the heavy hand
of the overextended state that is restraining private
activity-the objection confuses cause with effect.
"Privatization isjust another wayforpowerful politicians
and businessmen to scratch each other's backs, and get rich
"All that privatization will do is replace a public monop­
at the expense ofthe people. "
oly with a private monopoly. "
Process matters. Privatization must be based on Regulatory reform is another important accompani­
competitive bidding, with the criteria for selecting ment to privatization: deregulation to remove artificial
buyers carefully specified in advance. And it all should monopoly privileges, and development of a regulatory
be done in the open, in full view of the media and system that credibly restrains the abuse of economic
citizens. power in noncompetitive markets.

"Our citizens won 't accept our handing over precious "Why put ourselves through this trauma? Let's just man­
national assets to foreign (or local) fat cats.
n
age our state enterprises better. "

Broad-based ownership can help win popular sup­ True, if governments are willing to put hard budget
port for privatization. One approach, adopted in the constraints in place, to allow competition from private
Czech Republ ic, Russia, and Mongolia, is to distribute firms, and to give managers appropriate incentives,
privatization vouchers to citizens to be redeemed for the performance of state enterprises can improve. The
shares. Another approach, adopted in Argentina, Chile, sad reality is that, although some committed govern­
and the United Kingdom, is to make an initial public ments have reformed their state enterprises in the short
offering of shares to citizens at attractive prices. Both term, making these reforms stick is much harder.
approaches can be designed to make room for a strong World Development Report 1983 spotlighted a number
strategic partner with the incentive and expertise to of well-performing state enterprises around the world;
effectively restructure the enterprise. by 1 993 a majority of these had sunk into decline.

describes how reformers opting to push ahead with priva­ state needs to own less, and although there is no good eco­
tization have tried to contain the risks. nomic reason for state ownership to persist in tradable­
goods industries, there is no single "correct" stage in the
Rolling back overextended states: Two central lessons reform program to start privatizing. The appropriate timing
Experience worldwide with attempts to scale back overex­ will depend on the dynamics of reform in each country.
tended states suggests that success contains two vital ingre­
Better regulation
dients. First is a commitment to competitive markets
and an accompanying willingness to eliminate obstacles to Skillful regulation can help societies influence market out­
their operation. Market liberalization enables new entrants comes to achieve public purposes. It can protect the envi­
to create jobs and wealth. It also eases the difficulties of ronment. It can also protect consumers and workers from
privatization while increasing the potential economic the effects of information asymmetries: the fact that
gains. The second lesson is that, although the overextended banks, for example, know much more about the quality of
 F O STE R I N G M A R K ET S : L I B E R A L I Z AT I O N , R E G U LATI O N , AND I N D U ST R I A L PO LI CY 65

their portfolios than do depositors, or the fact that busi­ they can continue to attract deposits-and even aggres­
ness managers may know more about health and safety sively pursue them by offering favorable interest rates.
risks in production or consumption than do workers or Failing banks often engage in ever-more-reckless gambles
consumers. Regulation can also make markets work more to salvage their position, throwing good deposits after
efficiently by fostering competition and innovation and bad, and driving up their losses before the inevitable crash.
preventing the abuse of monopoly power. And more And third, because banks' balance sheets can be difficult
broadly, it can help win public acceptance of the fairness to interpret, especially because a rising share of their port­
and legitimacy of market outcomes. folios may now be taken up with derivatives and other
With economic liberalization, many areas of regulation new financial instruments that are hard to monitor.
have been recognized as counterproductive, and wisely This information asymmetry can be destabilizing.
abandoned. Yet in some areas the traditional rationales for Depositors, fearing for the safety of their funds, might
regulation remain, and market liberalization and privati­ rush to withdraw them when they begin to hear stories
zation have themselves brought new regulatory issues to about troubled banks. Bank failures tend to be conta­
the fore. The challenge, illustrated here with reference to gious. When one insolvent bank goes under, nervous
three important regulatory domains-banking, utilities, depositors may start runs on others. As liquidity drains
and the environment-is not to abandon regulation alto­ out of the system, even solvent banks may be forced to
gether. Instead it is to find regulatory approaches in each close. And a systemwide run can have severe macroeco­
country that match both its needs and its capabilities. nomic consequences. For all these reasons-the difficul­
ties in assessing a bank's financial health, the adverse
Some new rationales for regulation spillover and distributional effects of bank failures­
FINANCE: FROM CONTROLS TO PRUDENTIAL REGULATION. banks' behavior needs to be tempered by regulatory and
Our understanding of financial sector development has other public actions, outlined later in this section.
changed dramatically over the past decade. We now know UTILITIES: REGULATION WITH COMPETITION. For util­
that the depth of a country's financial sector is a powerful ities, too, regulation has taken on renewed prominence.
predictor and driver of development. Just as important, we Here, however, the reason is revolutionary technological
know that the control-oriented regulation widely adopted and organizational change, not just conscious shifts in
in the early postwar years-directing subsidized credit to policy. The argument for utility regulation used to be
favored activities at very negative real interest rates, limiting straightforward. Utilities were natural monopolies. Con­
the sectoral and geographic diversification of financial sequently, unless they were regulated, private utility oper­
intermediaries-may often work against financial deepen­ ators would act as monopolists, restricting output and
ing. The near-universal response has been to move away raising prices, with harmful consequences for economy­
from controls over the structure of financial markets wide efficiency and income distribution. Today, changes
and their allocation of finance, and embark on a process of in technology have created new scope for competition,
liberalization. but would-be competitors may need special reassurance
Yet liberalization. in the financial sector is not the same from regulators before entering.
as deregulation. The case for regulating banking is as com­ In telecommunications, dozens of countries through- .
pelling as ever. Only the purpose has changed, from chan­ out the Americas, Europe, and Asia-plus a few in Africa,
neling credit in preferred directions to safeguarding the including Ghana and South Africa-have introduced
health of the financial system. competition in long-distance, cellular, and value added
The banking system needs effective prudential controls (fax, data transmission, videoconferencing) services. A few
because banks are different. Without appropriate regula­ countries-Chile and EI Salvador, for example-are even
tion, outsiders will be less able to j udge for themselves a exploring options for competition in local fixed-link net­
bank's financial health than that of a nonfinancial com­ works. Electric power generation (but not transmission or
pany. Why? First, because outstanding loans are banks' distribution) is also now viewed as an arena for competi­
primary assets. So long as banks receive interest on their tion. In China, Indonesia, Malaysia, and the Philippines,
loans, outside observers may well judge their portfolios to private investors are adding generating capacity through
be healthy, even if (unknown to the observers) the bor­ independent power projects, alleviating acute shortages
rowers lack the resources to repay the principal or, worse, and enabling private finance to fill the gap left by short­
are effectively bankrupt and are only keeping up the inter­ falls in public resources.
est payments by taking Out new loans. Second, because In this new environment the degree of natural monop­
unlike many companies, banks can be hopelessly insolvent oly has been drastically reduced (although perhaps not
without running into a liquidity crisis. So long as insol­ eliminated entirely). But regulation is still crucial, for two
vent bankers can disguise their condition to outsiders, reasons. First, it can facilitate competition. Consider the
66 WO RLD D EV E L O P M E NT R E P O RT 1 9 97

problem of interconnection. By failing for more than a ambiguity and negotiated outcomes rather than pre­
decade to establish workable rules to allow different net­ dictable and consistent implementation. Poor communi­
works to connect with one another, Chile's telecommuni­ ties daily confront a dismal bargain, borrowing immediate
cations regulators seriously obstructed competition, leaving survival against long-term environmental degradation. Pri­
dominant incumbent firms in control of how the system vate firms weigh the predictable costs and the benefits of
evolved. After numerous court disputes a multicarrier sys­ complying with well-defined environmental regulations
tem was introduced in 1 994: customers can now choose against the prospect of cutting costs by avoiding regulation
their long-distance provider. Within months, six new altogether. Consequently, politicians may often conclude
providers had entered the market, and the price of long­ that environmental inaction (perhaps veiled behind the
distance calling had dropped by half. Similar interconnec­ appearance of activism) is the politically expedient course.
tion problems can arise in the electric power industry when In this climate of ambiguity, as later sections will show,
generators supply customers through common-carrier purely technocratic approaches to environmental regula­
transmission lines. This is an issue that Argentina, among tion have little hope of success. Especially in developing
others, has had to grapple with in the wake of privatization. countries where the institutional foundations for regulation
A second reason for improved regulation is that com­ are weak, the potential for successfully containing the envi­
petition may not suffice to insure private investors against ronmental hazards of unfettered private markets may be
"regulatory risk": the danger that decisions by regulators greater with approaches that rely at least as much on pub­
or other public agencies will impose new and costly lic information and citizen participation as on formal rules.
demands some time down the line. A utility's assets are
unique to its business, and nonredeployable in other uses. Where capability is strong, regulation can raise credibility
This means that utilities will be willing to operate as long and efficiency
as they can recover their working costs. That, in turn, So how should states respond to continually changing,
makes them peculiarly vulnerable to administrative expro­ and often conflicting, regulatory demands? Three princi­
priation-as when, for example, regulators set prices ples are key. First, different ways of regulating have differ­
below long-run average cost. Consequently, countries ent costs and benefits, which countries should assess ex­
without a track record of respecting property rights may plicitly before proceeding. Second, this assessment should
fail to attract private investors into utilities, regardless of also incorporate the administrative dimension: some
any commitment to competition in utility markets. As the forms of regulation are intensive in their requirements for
next sections show, a well-designed mechanism that com­ information, whereas others require much less (or much
mits the regulator to a clearly defined course of action can more easily monitorable) information; likewise, some
offer the reassurance that potential investors need. regulatory approaches depend on command-and-control,
THE ENVIRONMENT: BALANCING SCIENCE, ECONOM­ others more on market-like mechanisms. In general,
ICS, AND CITIZEN PRESSURE. Economists have long recog­ information-light and market-like approaches are easier to
nized pollution to be a negative externality. Without some implement, and often at least as efficient. Third, states dif­
form of regulatory protection, the environment can fer markedly both in their institutional capabilities and in
become an innocent victim of bad business practices. Buy­ the structure of their economies. Their approaches to reg­
ers seek goods that are attractively priced, and producers ulation should reflect these differences.
seek ways of providing these goods at lower cost to them­ We begin to show how these principles can be applied
selves than their competitors can provide them. Unless in practice by considering some "best-case" scenarios: the
there is some countervailing incentive, the temptation to range of regulatory options for banking, utilities, and the
cut corners by producing in a cheaper but environmen­ environment that only work well with strong institutions.
tally "dirtier" way can be great. These institution-intensive approaches combine three
Even countries with strong institutions find environ­ central elements (Table 4.2) :
mental regulation immensely challenging. Noxious fumes,
poisoned water, earsplitting noise-and their conse­ • Relying on public administrators to manage complex
quences-are easy to spot. But the costs of many other technical problems
forms of environmental damage are diffuse, and may be • Giving regulators considerable flexibility to respond to
invisible even to those closest to the source of pollution, changing circumstances
who may suffer serious long-term effects. Polluting emis­ • Using an array of checks and balances to restrain arbi­
sions can also be tricky to measure. And the environmen­ trary behavior by regulatory agencies and build their
tal consequences may depend heavily on the demographic credibility.
and ecological features of the surrounding area.
A further complication is that the political incentives of BANK SUPERVISION. Banking sector regulation around
community, business, and political stakeholders can foster the world tends to be institution intensive. Later sections
 FO STE R I N G M A R K ET S : L I B E RA L I ZATI O N , R E G U LATI O N , A N D I N D U ST R I A L P O L I CY 67

Table 4.2 The variety of regulatory experience

Utilities regulation Environmental regulation Financial regulation

Institution-intensive Price-cap regulation, with the Precise rules (command-and­ Detailed regulation
options regu lator setting the price control or, preferably, monitored by competent,
adjustment factor incentive based) established impartial supervisory
by the regulatory agency or authorities (possibly
Regulation by independent
legislature including some deposit
commission , with public
insurance)
hearings

Institution-light options Regulation based on simple Bottom-up regulatory Incentives structured so that
rules, embodied in approaches: public bankers and depositors have
transaction-specific legal information, local initiatives a substantial stake in
agreements and enforceable to strengthen citizens' voice, maintaining bank solvency
domestically or through an and initiatives by local
intemational mechanism authorities

discuss some new ideas for maintaining the solvency of that their owners have something to lose in the event of
banks where supervisory agencies are weak. In many failure. Authorities should also be required to consider
countries, however, formal supervision remains a vital the qualifications and track record of proposed owners
bulwark. The idea behind it is that well-designed regula­ and managers.
tion, monitored and enforced by competent supervisory • Restraints on insider lending. Restrictions on lending to
authorities, can overcome the information asymmetries bank insiders can cut down on fraudulent loans. Simi­
inherent in banking, and detect-or at least contain­ larly, many countries also limit a bank's lending to a
potentially ruinous banking crises (Box 4.3). Key ele­ single client (commonly to a maximum of 1 5 to 25
ments of such systems include: percent of the bank's capital); this prevents any one
client from becoming "too big to fail," prompting the
• Capital adequacy and entry criteria. Minimum capital bank to make unsound loans solely to keep that client
requirements impose discipline on banks by ensuring afloat.

Box 4.3 How government supervision averted financial disaster in Malaysia

In 1 985 a sudden fall in world commodity prices billion in assets, but subject to much less supervision
reversed Malaysia's decade-long boom. The Malaysian than the commercial banks-were in severe distress.
stock index, which had surged from 1 00 in 1 977 to 427 Bank supervisors at Bank Negara, Malaysia's central
in early 1 984, fell below 200 by early 1 986; the value of bank, devised a series of complex rescue packages for
prime commercial property in Kuala Lumpur fell by the three ailing commercial banks and the twenty-four
even more. Banks, which had moved heavily into real cooperatives. All told, losses as a result of the bank­
estate lending in the boom years, faced the specter of ing crisis amounted to 4.7 percent of Malaysia's 1 986
rising nonperforming loans and doubtful debts. gross national product (GNP).
Because Malaysia had maintained a fairly high Malaysia's experience underscores the value of good
degree of banking supervision, provisioning for non­ supervision. Losses in the tightly supervised banking
performing loans rose rapidly: from 3.5 percent of total sector amounted to only 2.4 percent of deposits-far
lending in 1 984 to 14.5 percent by 1 988. Even so, less than the 40 percent of deposits lost in the lightly
supervisory inspections in 1 985 identified three com­ supervised nonbank cooperatives. And macroeco­
mercial banks whose solvency was threatened by prob­ nomic disaster was averted. The economy recovered in
lem portfolios (but whose management was reluctant 1 987, and stock and property prices and bank balance
to acknowledge the full scope of the problem) . Addi­ sheets recovered with it. Prompt action had made it
tionally, twenty-four nonbank deposit-taking coopera­ possible to identifY and address problems early, while
tives-with over 522,000 depositors and about $ 1 .5 disciplined rescue was still affordable.
68 WORLD D EV E L O P M E NT R E P O RT 1 997

• Rules governing asset classification. Requiring that banks tors, without having these prerequisites in place. The con­
classifY the quality and risks of their loan portfolio sequences have often been disastrous. A recent World
according to specific criteria, and define and identifY Bank study identified over 100 major episodes of bank
nonperforming loans, can provide early warning of insolvency in ninety developing and transition economies
problems. from the late 1 970s to 1 994. In twenty-three of the thirty
• Audit requirements. Minimum auditing standards and countries for which data were available, the direct losses
disclosure requirements can make reliable and timely sustained by governments in these episodes exceeded 3
information available to bank depositors, investors, and percent of GOP (Figure 4 . 0 . In absolute terms, losses
creditors. were largest in the industrial countries: official estimates
put nonperforming loans in Japan in 1 995 at about $400
Building a robust system of prudential regulation and billion; the cost of cleaning up the 1 980s u.s. savings and
supervision is administratively demanding. It means hav­ loan debacle came to $ 1 80 billion. But in relative terms
ing reasonably reliable accounting and auditing informa­ the largest losses were in Latin America: Argentina's losses
tion on the financial health of a bank's borrowers. And it in the early 1 980s amounted to more than half of its
means having a sufficient number of supervisors, not only G OP, and Chile's exceeded 40 percent. Later sections
skilled enough to do their job but politically independent examine some ways to guard against bank failure that are
enough to do it impartially. not so heavily dependent on formal supervision.
Many countries have relied exclusively on prudential PRICE CAPS FOR REGULATING UTILITIES. The use of
regulation and supervision to undergird their banking sec- price caps in utility regulation illustrates both the scope of

Figure 4.1 Bank crises are all too common and carry enormous fiscal cost

1;;;;;;;;;;;;;;;;'11111
Direct cost of banking crisis ( percentage of GOP)

Argentina 1980-82
Chile 1981-83 •••••••,---
Uruguay 1981-84
Israel 1977-83
Cote d'lvoire 1988-91
Venezuela 1994-95
Senegal 1988-91
Benin 1988-90
Spain 1977-85
Mexico 1995
Mauritania 1984-93
Bulgaria 1995-96
Tanzania 1987-93
Hungary 1991-93
1111,
,==r
Finland 1991-93
Brazil 1994-95
Sweden 1991
Ghana 1982-89 •
Sri Lanka 1989-93
Colombia 1982-87 1.11
Malaysia 1985-88
Norway 1987-89
United States 1984-91

o 10 20 30 40 50 60

Source: CapriO 1996.

 FO STE R I N G MARKETS: L I B E RA L I ZATI O N , R E G U LA T I O N , AND I N D U ST R I A L PO LI CY 69

authority of an independent regulator and the role of The shortcomings of top-down environmental regula­
institutional checks on arbitrary action. Price-cap regula­ tion have been even more obvious in developing coun­
tion gives the utility an incentive to be efficient and can tries, many of which responded to the surge of interest
encourage innovation, but it rests substantial discre­ in environmental issues by establishing new regulatory
tionary power with the regulator. In the United Kingdom, agencies modeled on this approach. Poland's regulatory
which pioneered price-cap regulation, regulators impose agency, for example, although technically competent,
an overall ceiling on utility prices, based on the annual found it had limited leverage in negotiations with plant
rate of inflation minus an adjustment factor. The regula­ managers in communities that were heavily dependent on
tors decide the level of the adjustment factor, which they one or a few large enterprises, which funded many com­
can change at defined (usually five-year) intervals. munity services. Chile's highly regarded environmental
The u.K. regulators are constrained by carefully agency has spent four years trying, and failing, to imple­
designed checks and balances: any decisions that the util­ ment a system of tradable permits for industrial emissions,
ity opposes must be cleared by both the Monopolies and because of difficulties in setting and later measuring base­
Mergers Commission and the Secretary of State for Trade line emissions.
and Industry. These checks have been strong enough to
permit a highly flexible approach to regulation while still The regulatory "fit" when institutions are weak
attracting substantial private investment. If countries with Countries with weaker institutions face a much greater
weaker checks and balances sought to adopt this type of risk that relying on administrators' skill and discretion
regulation, private investors might reasonably expect the will result in a mass of unpredictable and inconsistent reg­
adjustment factor to increase dramatically at the first ulation. The challenge for financial and environmental
renewal of the price cap. Consequently, investors either regulation in such countries is to prevent costly oppor­
would not invest or would demand very high rates of tunism by private actors-be it banking fraud or pollu­
return to ensure a quick payback. tion-when the regulatory agencies' authority cannot be
INSTITUTION-INTENSIVE APPROACHES TO ENVIRON­ relied upon. With regard to utilities, the trick will be to
MENTAL REGULATION. A central challenge for environ­ convince potential investors that regulators will not
mental regulation has always been finding ways to com­ engage in arbitrary and expensive rule changes. Table 4.2
bine technical expertise with political legitimacy, to avoid summarized some of the regulatory options available in
the sense that scientists and technocrats are making deci­ such cases, each of which is discussed below.
sions without regard for community or broader public FOSTERING INCENTIVES FOR PRUDENT BANKING. The
concerns. In industrial countries, strong institutions have incentives and interests of bank owners, managers, and
been the key to striking this balance. In France, Ger­ depositors can themselves be a vital complement to super­
many, and the United Kingdom, for example, elected leg­ vision if they are aligned to be compatible with prudent
islators delegate the details of policy to environmental banking. The history of banking offers examples of some
authorities, who consult with affected parties and respond unusually sophisticated self-enforcing arrangements for
to direct political pressure. Decisions by the U.S. Envi­ winning credibility. More recently, the World Bank and
ronmental Protection Agency are, like many other execu­ the European Bank for Reconstruction and Development
tive agency decisions, legally binding only if the public is collaborated on a project in Russia designed to influence
given advance notice of rule changes and interested parties banks' incentives: banks were chosen to on-lend funds pro­
are able to make formal comments. The Dutch govern­ vided they agreed to submit to annual audits by interna­
ment provides more than half the funding for thirty to tional accounting firms and to adhere to prudential norms.
forty environmental NGOs and routinely consults them Using regulation to raise the stakes for bankers is
and other affected parties when preparing environmental another institution-light way to protect the health of the
legislation. banking system. It is less expensive to monitor the net
Viewed through the narrow lens of economic effi­ worth of a bank than to monitor each of its transactions.
ciency, even these mechanisms have produced imperfect A bank that has adequate net worth will have the right
outcomes. Both Germany and the United States, for exam­ incentive to behave prudently. The following measures
ple, have been strikingly successful in reducing emissions can all help raise net worth, and hence the cost of bank
of some important pollutants. Yet partly because of the failure to bankers:
need to be seen as responsive to citizen concerns, both
countries continue to rely overwhelmingly on command­ • Very strict capital requirements on banks: not the
and-control approaches to environmental regulation, even modest 8 percent of deposits recommended by the
where market- and incentive-based regulation could Basel Committee for industrial countries, but 20 per­
achieve similar gains at much lower cost. cent or more
70 WORLD D EV E L O P M E N T R E PO RT 1 997

• Tough restrictions on entry, in part to raise the fran­ sustained private investment, but only at the cost of lim­
chise value of a banking license for incumbents and iting flexibiliry. Since independence the industry has been
thereby strengthen the incentive to stay in business on a regulatory roller coaster, thriving when the country
• Ceilings on interest rates for deposits, not only to keep was willing to forgo flexibiliry, but lagging behind when
banks in business but also to create powerful incentives the mood shifted in favor of greater discretion.
for banks to extend branch networks, so as to boost Unlike Jamaica, the Philippines has until recently been
total deposits and accelerate financial deepening. unable to put in place a regulatory commitment mecha­
nism capable of convincing private investors that the rules
Another option that builds on prudential incentives is of the game would endure beyond the term of the current
punitive contingent liabiliry for bank owners, directors, president. Consequently, from the late 1 950s until the
and managers in the event of bank failure. Before the mid- early 1 990s the country's private telecommunications
1930s, U.S. authorities routinely imposed double liabili­ utility rode a political investment cycle. Investment was
ties on the shareholders of failed banks. Perhaps in part as high immediately following the inauguration of a govern­
a consequence, some 4,500 voluntary bank closures ment aligned with the group controlling the utiliry, but
occurred between 1 863 and 1 928, but only 650 bank liq­ tailed off in that government's later years, and stagnated
uidations. New Zealand today imposes stringent require­ in periods when relations with those in power were more
ments on banks for transparent reporting, coupled with distant. In the electric power industry, the government
tough sanctions on bank managers who violate them. resolved the problem of commitment by agreeing on rigid
COMMITMENT MECHANISMS TO ATTRACT PRIVATE legal "take-or-pay" agreements with private investors,
UTILITY INVESTORS. The Jamaican telecommunications sometimes enforceable offshore. Another option is to use
industry vividly shows how private investment can affect third-party guarantees-such as those offered by the
the interplay between institutional capabiliry and regula­ World Bank Group-to protect private investors and
tory roles (Box 4.4) . There the government was able to use lenders against noncommercial risks, including the risk of
regulatory commitment mechanisms capable of attracting administrative expropriation.

Box 4.4 Telecommunications regulation in Jamaica

During much of the colonial period and in the years commission decisions. The result was that price con­
immediately following independence, the terms under trols became progressively more punitive-to the point
which Jamaica's largest telecommunications utiliry that in 1 975 Jamaica's largest private telecommunica­
operated were laid out in a legally binding, precisely tions operator was relieved to sell its assets to the gov­
specified, forry-year license contract. Then as now, the ernment. In 1 987, after a decade of underinvestment,
ultimate court of appeal for Jamaica's independent Jamaica reprivatized its telecommunications utiliry, this
judiciary was the P rivy Council in the United King­ time using a precisely specified, legally binding license
dom. This system was adequate to ensure steady growth contract similar to those used prior to 1 965. In the next
of telecommunications services, and the number of sub­ three years, average annual investment was more than
scribers tripled between 1 950 and 1 962. Yet a newly three times what it had been over the previous fifteen.
independent Jamaica chafed under the apparent restric­ Private investment came at a cost, however. To
tiveness of a concession arrangement that afforded vir­ maintain long-standing (and politically difficult to
tually no opportuniry for democratic participation. eliminate) cross-subsidies between local and long­
Consequently, in 1 966 the country established the distance services, upon privatization Jamaica awarded a
Jamaica Public Utiliry Commission. Modeled on the single telecommunications provider a twenry-five-year
U.S. system, the commission held regular public hear­ concession to operate the entire system. Revenues from
ings and was afforded broad scope to base its regulatory the highly profitable long-distance network were used
decisions on inputs from a wide variery of stakeholders. to extend the unprofitable local fixed-link network.
However, Jamaica lacked the other institutions Debate continues on whether, even within its political
needed to make such a system workable. Whereas the constraints, Jamaica could have retained room for
U.S. system has a variery of constraints on regulatory competition in some value added services, thereby pre­
discretion (including well-developed rules of adminis­ serving at least a modicum of pressure for innovation
trative process and constitutional protections on prop­ and productiviry improvements in an era of rapid
erry), Jamaica had virtually no checks and balances on global technological change.
 F" O S T E R I N G M A R K ETS : L I B E RA L I ZATI O N , R E G U L AT I O N , AND I N D U ST R I A L P O L I CY 7 1

COMMUNITY PRESSURE TO HELP PROTECT THE ENVI­

RONMENT. In settings where institutions are weak, public
Box 4 . 5 Environmental activism in
information and community pressure can be powerful Yokohama, Japan
spurs to ever more credible and efficient environmental
regulation. In 1 960 local medical assoCiations in Yokohama
Experiments with transparent, information-intensive began to petition against oil refinery emissions and
initiatives can help moderate industrial pollution even the health damages they caused. Shortly thereafter
when enforceable formal rules are lacking. In Indonesia, the municipal government, which had been drag­
for example, a largely voluntaty Clean Rivers program, ging its feet on environmental issues, was ousted in
launched in 1 989, had reduced total discharges of the 1 00 elections by a reformist mayor who pledged to
participating plants by more than a third by 1 994. A pro­ implement pollution prevention policies. A flurry
gram announced in mid- 1 995 to set, and publicize, envi­ of activity followed, punctuated by the establish­
ronmental ratings for factories also seems to have induced ment of a new pollution control unit within city
many poorly rated factories to improve their performance. government (which by the end of 1 964 had a staff
In both programs the secret to success was the reputation of ten), a residents' environmental organization,
effect of making public to business peers, communities, and a joint advisory group composed of community
and consumers the extent to which individual firms were representatives, academics, and business experts.
good environmental citizens. Although the city had no legal authority to
Environmental programs built entirely around public impose controls on pollution, by December 1 964 it
information have obvious limits. Nearly half the firms had entered into a formal, voluntary agreement with
participating in the Clean Rivers program did not reduce a new coal-fired power plant to drastically reduce
the intensity of their polluting activities. Information­ emissions. This agreement offered a precedent for
driven programs do help signal where the most severe subsequent voluntary agreements with other new
problems are to be found, but often additional measures and existing large factories, which reduced emis­
are necessaty to get heavily polluting firms to clean up. sions to just 20 percent of their earlier projected lev­
And clearly, as countries develop they will need to move els. Over the next two decades Yokohama progres­
toward more institutionalized approaches that integrate sively increased the stringency of these voluntary
community pressures with more formalized mechanisms agreements-and consistently maintained higher
for enforcing compliance. environmental control standards than did Japan's
In a pattern seen throughout the world, initiatives national government (which itself was continually
from the bottom up can set the stage for formal action at raising its standards).
the national level. In the first two decades after World
War II Japan rushed headlong into industrialization,
with little concern for the environmental impact. At the
national level this period of neglect ended in 1 967, with
the landmark Basic Law for Environmental Pollution than as an automatic response to problems. Moreover,
Control. But well before then, grassroots initiatives in countries' experiences with financial, utility, and environ­
many localities had set in motion sustained environmen­ mental regulation show how competition, voice, and self­
tal reform (Box 4.5). regulation can achieve social objectives once thought to
require rule-based solutions.
Lessom: ClarifYing regulatory options Does the country have the institutional and political
The reality of imperfect markets brings regulation onto underpinnings necessary for formal rules to serve as a basis
the development policy agenda. At the same time, how­ for credible regulatory commitments? On the political
ever, the reality of imperfect government cautions against front, the relevant question is whether the country has the
hasty enactment of institution-intensive regulatoty sys­ political will to follow through on what it enacts. On the
tems in settings where institutions are weak. The key to institutional front, a critical issue is whether the country
success is to focus the regulatoty agenda and adapt the has an independent judiciaty, with a reputation for impar­
available regulatory tools to fit the country's institutional tiality, whose decisions are enforced. If not, other com­
capability. Two questions can help guide countries in the mitment mechanisms (sometimes extraterritorial) may be
search for better regulation. needed. In countries where political coalitions capable of
Are formal rules necessary to correct the market imper­ amending rules are difficult to stitch together, legislation
fections? Regulation's mixed record suggests that the use may suffice; in other countries it may be desirable to
of formal rules to regulate markets is better viewed as a embed formal rules in binding legal agreements with indi­
complement to other measures (or even as a last resort) vidual firms.
72 WORLD D EV E L O P M E N T R E P O RT 1 997

I f formal rules are called for, these must be workable forms o f competition, they will have little incentive to use
not just in theory but in practice. In an ideal world flexi­ resources efficiently or to innovate, productivity will not
ble rules are preferable to rigid ones. But what constitutes improve, and industrial expansion will not be sustained.
a good regulatory "fit" in the real world may bear little Third, a country's strategy for industrial development
relation to ideal conceptions of efficiency. In countries has to be guided by its evolving comparative advantage­
that lack appropriate checks and balances, flexibility may by its relative abundance of natural resources, skilled and
have to be sacrificed in the interests of certainty and pre­ unskilled labor, and capital for investment. Some propo­
dictability. What appears at first blush to be less than effi­ nents of activist measures have favored efforts to nurture a
cient may thus turn out to be the single best solution from nascent comparative advantage by encouraging firms to
the standpoint of matching the goals of regulation to the risk more on a new market than they might otherwise
strengths and weaknesses of existing institutions. have been willing to invest. Very few, however, would
support wholesale leapfrogging: low-income countries,
Can state activism enhance market development?
say, seeking to subsidize investments in highly technol­
Where externalities, lack of competition, or other market ogy-intensive activities. And there is broad agreement that
imperfections drive a wedge between private and social high levels of protection to promote infant industries,
goals, most people accept that states may be able to en­ without compensating pressures to encourage efficiency,
hance welfare through regulation. Much more controver­ can be fatal to a country's chances of achieving sustainable
sial is whether states should also try to accelerate market industrial development.
development through more activist forms of industrial
policy. The theoretical case for industrial policy rests on Industrialpolicy in practice
the proposition that the information and coordination The many and varied approaches to activist industrial pol­
problems identified above can be pervasive-more so in icy can be grouped under three broad headings: invest­
developing economies-and can go beyond those ad­ ment coordination, network thickening, and picking win­
.
dressed by well-functioning institutions to protect prop­ ners. In both the first two approaches the government
erty rights. In essence the argument centers on the fact attempts to enhance market signals and private activity­
that, in underdeveloped markets with few participants, although the institutional demands of investment coordi­
learning can be extremely expensive. Information, more nation are much greater than those of network thicken­
readily available in industrial countries, here becomes a ing. The third approach involves government seeking to
zealously guarded secret, impeding coordination and mar­ supersede the market altogether.
ket development more generally. INVESTMENT COORDINATION INITIATIVES. The classic,
In theory, governments in such economies can act as "big push" rationale for government activism was that
brokers of information and facilitators of mutual learning investment in an underdeveloped country posed a huge
and collaboration, and thereby play a market-enhancing collective action problem. With markets undeveloped,
role in support of industrial development. But whether firms could not perceive the demand for more and better
governments can play this role in practice will depend, as products that the very act of producing them would cre­
ever, on their institutional capability. Even aggressive pro­ ate. Thus, it was argued, countries could benefit from
ponents recognize that activism can enhance markets only coordinating such investments, which are mutually bene­
if three critical background conditions are in place. ficial to firms but which they are unlikely to undertake by
First, and perhaps most important, companies and themselves. Postwar Japan's development of its steel, coal,
officials need to be working on a basis of mutual trust. machinery, and shipbuilding industries illustrates this
Firms need to be confident, not only that additional coor­ rationale for intervention, as well as the stringent institu­
dination has merit, but that the government and the other tional prerequisites for success (Box 4.6) :
firms involved will make good on their commitments.
The participants also need confidence that a given set of • A domestic private sector capable of efficiently manag­
arrangements will be flexible enough to adapt to changing ing complex, large-scale projects
circumstances. Ordinarily this will mean a credible gov­ • A private sector willing to cooperate with government
ernment commitment to involve the private sector in in pursuit of the shared goal of competitive industrial
implementation. development
Second, initiatives to promote industrial development • Strong technical capabilities in public agencies for eval­
must be kept honest through competitive market pres­ uating private analyses of investment options and, on
sures. Competition can come from other domestic firms occasion, generating independent industrial analyses
or from imports, or take place in export markets. Unless • Sufficient mutual credibility to enable each party to
firms are systematically challenged by one or more of these base its investment decisions on the other's commit-
 FOSTE R I N G M A R K ET S : LI B E RA L I ZATI O N , R E G U LA T I O N , ANO I N D U ST R I A L P O L I CY 73

Box 4.6 Japan's postwar big push in metals Industries

A coordinated restructuring of the machinery, steel, • The coal industry committed itself to invest 40 bil­
shipbuilding, and coal industries contributed greatly to lion yen to rationalize production from domestic
Japan's economic recovery after World War II. mines, provided the steel firms agreed to purchase
Machinery companies identified the high cost of steel coal from them afterward at the new prices, which
as a major impediment to penetrating export markets. would be 1 8 percent below prevailing levels.
Steel companies, in turn, identified the high cost of • The steel and coal industries agreed on an overall tar­
coal as a principal reason for high steel prices. High get price that steel firms would pay for coal, to be
coal prices were a consequence of continued mining achieved by mixing domestic purchases and impons.
from expensive Japanese mines and the high cost of • The steel industry committed itself to invest 42 bil­
shipping imported coal to Japan. lion yen to upgrade its facilities. With this invest­
Building on institutional arrangements nurtured ment, and lower coal prices, it would be able to
during wartime, in 1 949 Japan's Ministry of Inter­ export steel at competitive prices.
national Trade and Industry (MITI) put in place a • In return for lower steel prices, the machinery and
joint public-private deliberative structure, the Coun­ shipbuilding industries were in a position to embark
cil for Industrial Rationalization . Composed of on large, export-oriented investment programs.
representatives of industrial associations, leading en­ These commitments provided the domestic market
terprises from each industry, and public officials, that the steel industry needed to embark on its
the council included twenty-nine sectoral branches investment program, and confidence that the ship­
and two central branches. Three of the council's ping cost of imported coal would decline.
branches-iron and steel, coal, and coordination­
worked closely together and agreed on the following Once the Japan Development Bank (after careful
commitments: technical analysis, and in consultation with both MITI
and the Bank of Japan) agreed to participate in these
• The steel and coordination branches identified the projects, providing financing at only moderately subsi­
price of coal that would make it possible to produce dized interest rates, Japan's largest banks took the lead
export steel competitively. in mobilizing the investment funds.

ments, and to adapt its actions in response to changing cial turmoil surrounding the fall of President Ferdinand
circumstances without undermining the overall com­ Marcos' regime intervened. By late 1 987 five of the eleven
mitment to collaborate. initial projects, accounting for almost $4 billion of the $5
billion, had been shelved as infeasible. A sixth project had
Pursuing this style of investment coordination presup­ been abandoned because its lack of economic potential
poses levels of public and private institutional capability became apparent. A fertilizer plant, completed at a cost of
that are beyond the reach of most developing countries. $550 million, was suffering losses that were being shoul­
The Philippine experience of the late 1 970s and 1980s dered by government. Only four projects, accounting for
shows what can happen when the ambitions of policy JUSt $800 million, were operating profitably.
do not match up to institutional reality, and effons to NETWORK-THICKENING INITIATIVES. Activist initia­
coordinate investment are pursued where government is tives need not be large in scale-imposing commensurably
swayed by powerful private interests. large demands on public and private institutional capabil­
Driven in part by the desire to create new business ities--{)r solely devoted to increasing investment. They can
opportunities for domestic allies, in 1 979 the Philippine also aim to strengthen the private-to-private networks that
government announced a new $5 billion program of flourish in mature market systems. Domestic, regional,
"major industrial projects," all in heavy, capital-intensive and international networks create numerous sources of
industries. Within a year of the announcement the gov­ learning and opportunity for firms: specialized buyers
ernment, responding to pressure from critics, agreed to open up new market niches and offer information on
subject the projects to another round of economic and product standards, equipment providers transfer techno­
financial scrutiny. Soon thereafter the political and finan- logical know-how, input suppliers help with product and
74 WORLD D EVE L O P M E N T R E P O RT 1 997

process innovations, and competitors are a rich source of tries as diverse as Argentina, India, Jamaica, Mauritius,
new ideas. Often, clusters of firms, buyers, equipment sup­ Uganda, and Zimbabwe.
pliers, input and service providers, industry associations, • Usingpublic procurement tofoster competitive private sec­
design centers, and other specialized cooperative organiza­ tor development. In Brazil's state of Ceara an innovative
tions come together in the same geographic region. cost- and quality-driven procurement program worked
Countries whose markets are underdeveloped may through associations of small producers to transform
need some catalyst, public or private, to set this cumula­ the economy of the town of Sao Joao do Arauru. Before
tive process of market thickening and network develop­ the program the town had four sawmills with twelve
ment in motion. There are three leading examples. employees. Five years later forty-two sawmills em­
The first is special support for exports. Participating in ployed about 350 workers; nearly 1 ,000 of the town's
export markets brings firms into contact with interna­ 9,000 inhabitants were directly or indirectly employed
tional best practice and fosters learning and productivity in the woodworking industry; and 70 percent of output
growth. It can also be a useful measure of the effective­ was going to the private sector.
ness of government efforts at industrial promotion. Many
countries have directed credit in favor of exporters and SUPERSEDING MARKETS. Sometimes information and
set up export promotion organizations. With few excep­ coordination problems are so severe-markets so under­
tions, most of them in East Asia, these bodies became developed, and private agents so lacking in resources and
expensive white elephants. Other export support measures experience-that market-enhancing initiatives are un­
have also been tried, with mixed results. World Trade likely to yield any response. As a way of kickstarting
Organization rules may well rule out future experiments industrial growth, states have been tempted to supplant
along these lines. market judgments with information and judgments gen­
A second type of effort focuses on strengthening local erated in the public sector. These efforts rarely work,
infrastructure: physical, human, and institutional. The although the success of some ventures by Korea's chaebol
history of Korea's once-lagging Cholla region illustrates (interlinked business groups), made at the initiative of
the impact local infrastructure can have. In 1 983 this government, suggests that the quest to pick winners is not
southern region opened its first large-scale industrial inevitably a fool's errand.
estate. Its success set in motion a cumulative process of What distinguished Korea's success from others' fail­
learning by local authorities about how to plan, finance, ures was that these initiatives were channeled through the
build, and operate such estates-three more followed. It private sector, whereas most such efforts (including some
also helped catalyze a transformation of the business envi­ in Korea) have been implemented by state enterprises.
ronment, from one bogged down by red tape and other When state firms are used as implementing agencies, the
bureaucratic obstacles to one of close cooperation and opportunities for venality-or fanciful romanticism-are
coordination between the local government and the pri­ virtually limitless. A number of countries have subsidized
vate sector. By 1991 Cholla accounted for 1 5 percent of money-losing state enterprises, to the severe detriment of
industrial land in Korea, up from 9 percent in 1 978, and fiscal performance. The generally sorry experience with
the rate of growth of regional manufacturing output was investment in state enterprises has convincingly demon­
above the national average. strated that the production of tradable products is best left
Third, and increasingly popular, are public-private exclusively to private firms.
partnerships, with the public partners drawn from either
local or regional governments. These can take a variety of Walking the industrialpolicy tightrope
forms, including: These experiences highlight why the debate over indus­
trial policy has been unusually heated: industrial policy is
• Initiatives directed at individualfirms or groups offirms. combustible. Economic theory and evidence suggest that
Sometimes these are focused events, such as joint par­ the possibility of successful, market-enhancing activism
ticipation in a trade fair. Others are aimed at achieving cannot be dismissed out of hand. But institutionaltheory
a broader shift in the business culture to favor increased and evidence suggest that, implemented badly, activist
cooperation. A promising approach involves giving industrial policy can be a recipe for disaster. How, then,
matching grants to firms, typically on a 50-50 cost­ might countries proceed?
sharing basis, to help penetrate new markets and Taken together, the economic and institutional per­
upgrade technologies. Easy to implement, with man­ spectives suggest drawing a sharp distinction between ini­
agement delegated to private contractors, and demand­ tiatives that require only a light touch from government
driven, with participating firms paying for half of any (for example, some network-thickening initiatives) and
initiative, such programs are now under way in co un- initiatives that require high-intensity government support
 FO STE R I N G M A R K ET S : L I B E RA L I ZATI O N , R E G U LATI O N , AND I N D U ST R I A L P O L I CY 7S

(such as coordinating investment or picking winners) . to prove ineffective at best, and at worst a recipe for cap­
High-intensity initiatives should be approached cau­ ture by powerful private interests or predation by power­
tiously, or not at all, unless countries have unusually ful and self-interested politicians and bureaucrats.
strong institutional capability: strong administrative capa­ How, then, should countries proceed if they lack the
biliry, commitment mechanisms that credibly restrain administrative and institutional wherewithal to make such
arbitrary government action, the abiliry to respond flexibly approaches work? The long-run strategy, explored in Part
to surprises, a competitive business environment, and a Three, is to strengthen and build the requisite institu­
track record of public-private partnership. tions. In the meantime this chapter has indicated two pos­
By contrast, light-touch initiatives (those that are sible pathways toward reform. One is to focus on the
inexpensive, and supportive rather than restrictive or com­ essentials and take on a lighter agenda for state action.
mand-oriented) offer more flexibiliry. The essential insti­ The second, which need not conflict with the first, is to
tutional attribute for success is an unambiguous commit­ experiment with tools for state action that are better
ment by government to public-private partnership. When aligned with the country's capabiliry. Much remains to be
this commitment exists, when countries do not overreach learned, but this chapter has highlighted two strategies
their institutional capabilities, and when the business envi­ that appear to have great potential even where institu­
ronment is reasonably supportive of private sector devel­ tional capabiliry is weak:
opment, the benefits of experimentation with light-touch
initiatives can be large, and the cost of failure low. • Specify the content of policy in precise rules, and then
lock in those rules using mechanisms that make it
Strategic options: Focusing on the workable
costly to reverse course: in utiliry regulation, for exam­
In the realm of liberalization and privatization, regulation, ple, these might include take-or-pay contracts with
and industrial policy-indeed, in the full range of state independent power producers.
actions probed in this Report-there is no one-size-fits-all • Work in partnership with firms and citizens, and, where
formula. Privatization and liberalization are the appropri­ appropriate, shift the burden of implementation entirely
ate priorities for countries whose governments have been outside government. In industrial policy this may mean
overextended. Every COUntry must also look to build and fostering private-to-private collaboration rather than
adapt its institutions, not dismantle them. This chapter building a large industrial bureaucracy. In financial reg­
has distinguished between institution-intensive and insti­ ulation it means giving bankers an incentive to operate
tution-light approaches to regulation and industrial pol­ prudently, rather than JUSt building up supervisory capa­
icy, stressing how the choice of approaches might appro­ biliry. And in environmental regulation it means using
priately vary with a country's institutional capabiliry. information to encourage citizen initiatives, rather than
Successful institution-intensive approaches generally promulgating unenforceable rules from the top down.
share two characteristics. They require strong administra­
tive capabiliry. And they delegate substantial discretion The policies that rely on these approaches may not be
for policy and implementation to a public agency, embed­ first-best policies in a textbook sense. But as state capabil­
ded in a broader system of checks and balances that pre­ iry grows, countries can switch to more flexible tools, capa­
vents that discretion from degenerating into arbitrariness. ble of squeezing out further efficiency gains. Throughout,
Ifinstitutions are strong, these state actions can contribute states must maintain the confidence of firms and citizens
to economic well-being. If they are not, the evidence and that flexibiliry will not be accompanied by arbitrary behav­
analysis of this chapter suggest that such actions are likely ior--else the foundation for development crumbles.
7 8 WORLD D EVE L O P M E NT R E P O RT 1 997

judiciary and the separation of powers. These are essential for ensuring that nei

ther state officials nor anyone else in society is above the law.

But rule-based government is not enough. State capability will also be

improved by institutional arrangements that foster partnerships with, and provide

competitive pressures from, actors both outside and within the state. Partnerships

with and participation in state activities by external stakeholders-businesses and

civil society-can build credibility and consensus and supplement low state capa­

bility. Partnerships within the state can build commitment and loyalty on the part

of government workers and reduce the costs of achieving shared goals.

The flip side of partnership is competitive pressure-from markets and civil

society and within the state itself. Such pressure can improve incentives for per­

formance and check the abuse of the state's monopoly in policymaking and service

delivery. Similarly, competitive or merit-based recruitment and promotion are

crucial for building a capable bureaucracy.

This part of the Report starts with a look at ways to reinvigorate state insti­

tutions, by building the foundations of an effective public sector (Chapter 5) and,

more broadly, by instituting formal checks and balances and controlling corrup­

tion (Chapter 6) . Chapter 7 then examines how to sharpen competitive pressure,

strengthen voice, and promote partnership by bringing the state closer to the peo­

ple-an important means of which is decentralization, or the shifting of power

and resources to lower levels of government. Finally, Chapter 8 discusses partner­

ships and competitive pressures that cross the boundaries of nation-states, and

how countries can cooperate in providing collective goods.

B U I L D I N G I N S T I T U T I O N S

F O R A C A PA B L E P U B L I C S E C T O R

Sire, a vast majority ofcivil servants are illpaid. . . . The result is that skilled and talented men shun public service.
The Government of Your Majesty is then forced to recruit mediocre personnel whose sole aim is to improve their weak
pecuniary situation . . . intelligent, hardworking, competent, and motivated individuals should direct Your Empire's
civil service. . . . It is Your Majesty's prerogative to introduce the indispensable principle ofaccountability,
without which allprogress is retarded and work inevitably destroyed.
-From The Political Testaments ofAli Pasha, Grand Vizier to Ottoman Sultan Abdulaziz, about 1 87 1
(quoted i n Andic and Andic 1 996)

HE SAME PROBLEMS THAT PLAGUED SULTAN ABDUL­ emphasis here is on the incentive framework guiding
aziz haunt today's public bureaucracies. The history behavior-what government agencies and officials do and
of development in Europe and North America in the how they perform. Few countries consciously set out to
nineteenth century, and that of East Asia in this one, have encourage bureaucratic corruption and inefficiency. But
shown the economic rewards of building an effective pub­ the mere existence of formal rules forbidding bribes, say,
lic sector. But examples of this kind of institution build­ or the abuse of patronage will rarely be enough to root
ing are all too rare. these things out. What matters is whether the actual rules
Building the institutions for a capable public sector is and incentive mechanisms embedded in the system can
essential to enhancing state effectiveness, but also im­ translate the fine words into reality.
mensely difficult. Once poor systems are in place, they
The foundations of an effective public sector
can be very difficult to dislodge. Strong interests develop
in maintaining the status quo, however inefficient or Evidence across a range of countries has shown that well­
unfair. And those who lose Out from present arrangements functioning bureaucracies can promote growth and reduce
may be unable to bring effective pressure to bear for poverty (Chapter 2). They can provide sound policy inputs
change. Even when the incentives are there to improve and deliver critical public goods and services at least cost.
public sector performance, formidable information and During the nineteenth century most industrializing states
capacity constraints often thwart the attempt. modernized their public administrations. Early leaders in­
How can governments with ineffective public insti­ cluded France, Prussia, and the United Kingdom. The suc­
tutions begin to put things right? The complex problems cess of the British civil service reforms in the last century
involved in building and managing a public bureaucracy provides an early example of the importance of nurturing
do not lend themselves to clear, unambiguous solutions. effective, rule-based bureaucracies. As Box 5 . 1 describes,
But this chapter outlines some institutional building these reforms heralded the careful cultivation of a profes­
blocks of an effective public sector and discusses promis­ sional meritocracy, which helped pave the way for a half­
ing options for putting these in place. This focus on insti­ century of English dominance over international commerce.
tutions is very different from the traditional approach of More recently, some East Asian economies have estab­
technical assistance, which emphasizes equipment and lished and nurtured the foundations of capable bureau­
skills and administrative or technical capacity. The cracies. Many low-income countries, however, have been
80 WO R LD D EV E L O P M E N T R E P O RT 1 997

Box 5.1 Laying bureaucratic foundations: The Northcote-Trevelyan reforms In the United Kingdom

Until the early nineteenth century the affairs of the ing the government's work into two classes-intellec­
state in the United Kingdom were administered by tual (policy and administration) and mechanical (cler­
public officials who owed their positions to political ical)-and creating a career civil service to carry it out.
patronage and influence. There was no common sys­ Staff capable of performing the intellectual work
tem of pay, bribes augmented official salaries, and would be recruited from the newly reformed universi­
officeholders, who viewed their positions as property ties; the best talent would be selected through tough
that could be sold, often engaged and paid their own competitive examinations supervised by a board of civil
staff. Although the system did not rule out advance service commISSIOners.
by individual ability, it was not a basis for sound Opposition was strong. Although a civil service
administration. commission was established in 1 855, many government
As the Victorian era progressed, however, the departments continued recruiting in their accustomed
United Kingdom underwent a period of intense way until 1 870, when patronage was abolished and the
reform driven by social and economic change and the two grades were made compulsory for all departments.
demands of an expanding, educated middle class. Uni­ The Northcote-Trevelyan reforms were followed by
versities, the armed forces, the judiciary, and central reforms in the armed forces, the judiciary, and, later,
and local bureaucracies were all reformed. municipal government. There were also extensive
The blueprint for civil service reform was the changes in the rules and restraints governing policy
Northcote-Trevelyan Report of 1 8 54, which advo­ formation and implementation. By the end of the nine­
cated the creation of a modern bureaucracy based on a teenth century the United Kingdom had laid the foun­
career civil service. Drawing on ideas advanced for the dations of a modern government and formally institu­
Indian civil service by Thomas Macaulay, Sir Stafford tionalized the values of honesty, economy, and political
Northcote and Sir Charles Trevelyan proposed divid- neutraliry.

unable to create even the most rudimentary underpin­ their expert counselors the flexibility they need to for­
nings of a rule-based civil service. Their formal systems mulate policies, but embed their decision making in
often resemble those of industrial countries on paper. But processes that allow for inputs and oversight from
in practice informality remains the norm. Merit-based stakeholders .
personnel rules are circumvented, and staff are recruited • Efficient and effective delivery systems. Here, too, reform
or promoted on the basis of patronage and clientelism; involves setting the right balance between flexibility
budgets are unrealistic and often set aside in any case by and accountability. For activities that are contestable
ad hoc decisions during implementation. At bottom, all (that is, where there is scope for actual or potential
these problems can be traced back to weaknesses in the competition from various suppliers) and easily speci­
underlying institutions: poor enforceability of the rule of fied, market mechanisms and contracting out of ser­
law both within and beyond the public sector; a lack of vices can often improve delivery dramatically. But for
built-in mechanisms for listening to, and forming part­ many other services there is often no substitute for
nerships with, firms and civil society; and a complete delivery by the core public sector. Here giving citizens
absence of competitive pressure in policymaking, the greater voice and allowing client feedback can exert
delivery of services, and personnel practices. pressure for better performance, but ultimately perfor­
To tackle these problems at their root and lay the foun­ mance will depend on the loyalty of civil servants and
dations of an effective public sector, countries need to their compliance with established rules.
focus on three essential building blocks: • Motivated and capable staff. These are the lifeblood of
the executive. Able and dedicated staff inject energy into
• Strong central capacity for formulating and coordinating the public sector. Uncommitted staff stifle it. Civil ser­
policy. This is the brains of the system. Politicians for­ vants can be motivated to perform well through a range
mulate visions and set goals, but for these to material­ of mechanisms, including merit-based recruitment and
ize they must be translated into strategic priorities. This promotion, adequate pay, and a strong esprit de corps.
requires mechanisms that lead to well-informed, disci­
plined, and accountable decisions. A constant challenge Effective bureaucracies take decades to develop. And in
for all countries is to set rules that give politicians and seeking to build--or rebuild-the foundations of such a
 B U I LD I N G I N STITUTI O N S FO R A C A PA B L E PUBLIC S ECTO R B 1

bureaucracy, reformers must, as always, be conscious of capacity in these countries tends to be weak and frag­
what they are building on. For example, where countries mented, with few institutionalized mechanisms for input
have been unable to establish credible controls over man­ or oversight.
agers' use of resources, giving them greater flexibility will
only encourage arbitrariness and corruption. But certain Policymaking mechanisms in industrial countries
reforms can generate early payoffs even in the worst sys­ Many OECD countries have built up well-functioning
tems. These are discussed further below. policymaking mechanisms over time. At the heart of these
systems are mechanisms for properly preparing policy
Strengthening Institutions for policymaklng
proposals, estimating the costs of alternative proposals
Politicians set goals and broad strategic directions. But within a disciplined overall budget framework, ensuring
sound institutional arrangements can determine whether their critical evaluation through consultation and debate,
the visions of political leaders get translated into effective and reaching and recording decisions and monitoring
policy priorities. They can make transparent the costs and their implementation. A vital complement to these mech­
benefits of competing policy proposals. And given that anisms is effective capacity at the center of government­
adequate information is inevitably in shorr supply, they the Cabinet Secretariat in France, the Ministry of Finance
can make sure that leaders are as well informed as possi­ in Japan, the Office of Management and Budget in the
ble, through processes that provide input and oversight United States-to facilitate consultation and coordinate
from internal and external stakeholders. All these mecha­ proposals among ministries before they are submirred.
nisms will help produce berrer-informed decisions and There is always room for improvement. Australia is a
raise the credibility of policymaking in general. good example of an industrial country that has introduced
The rules and norms embedded in the policy­ reforms explicitly aimed at making the policymaking
making process should be designed to curb the kind of process more transparent, competitive, and results­
uncoordinated political pressures that can lead to poor oriented. Several features of these reforms are of particular
decisionmaking and bad outcomes. If politicians or relevance to other countries: the emphasis on publicizing
bureaucrats pursue only their own or their constituents' the medium-term costs of competing policies; the effort
immediate interests as they are voiced, the result may be to facilitate debate and consultation on policy priorities,
collectively undesirable, even destabilizing-there is no within hard budgets, both in the cabinet and among agen­
invisible hand in statecraft, automatically shaping individ­ cies; and the attention to results (Box 5 .2) .
ual initiatives toward a common good. The aim must be The United States and some continental European
to build mechanisms to discipline and coordinate the pol­ countries have instituted other mechanisms for consulta­
icy debate and call competing policy proposals into ques­ tion and oversight in policymaking. Corresponding to
tion. In some countries politicians have delegated macro­ the cabinet in a parliamentary system, congressional com­
economic and strategic policy coordination to capable, mirrees in the U.S. presidential system are the principal
relatively autonomous central agencies, whose activities arena for policy debate and consultation. U.S. executive
are guided by consultative processes that are transparent to agencies, for their part, are governed by the Adminis­
outsiders. In others, politicians themselves collectively trative Procedures Act of 1 946, which imposes certain
restrain and challenge each other in established forums procedural requirements, enforceable in the courts, such
where decisions are made in common. But many countries as public announcement of new policies, while pre­
have none of these mechanisms, and their absence reveals serving flexibility in the substance of policymaking. This
itself in incoherent strategic policies and macroeconomic procedures-oriented approach to policy formulation
instability. allows legislators to shift the substance of policymaking to
Although the precise institutional arrangements vary, specialist agencies and other interested parties closer to
effective public sectors the world over have generally been the problem. This kind of decentralized mechanism uses
characterized by strong central capacity for macro­ citizen voice and the judiciary to ensure accountability,
economic and strategic policy formulation; by mecha­ but with the inevitable side effect of slowing decision­
nisms to delegate, discipline, and debate policies among making.
government agencies; and by institutionalized links to Many continental European countries rely on admin­
stakeholders outside the government, providing trans­ istrative law and specialized courts for judicial review of
parency and accountability and encouraging feedback. As administrative actions. Citizens can challenge administra­
discussed below, systems in many industrial countries and tive decisions on legal grounds or for factual errors. The
in much of East Asia exhibit many of these characteristics. European Union has adopted this system for the Euro­
Their absence in many developing economies is a major pean Court of Justice, allowing it to oversee decisions
obstacle to building a more effective state. Policymaking made by EU institutions.
82 WORLD D EV E L O P M E N T R E PO RT 1 997

Box 5.2 Australia's mechanisms for transparent, competitive, and results-oriented policymaking

One of the main objectives of Australia's public sector addition, the projections made resource flows to the
reforms has been to institute a process for disciplining line ministries more predictable, since the projected
and coordinating policies and exposing them to vigor­ figures were automatically rolled over into the actual
ous debate. Some of the challenges the Labor govern­ budget if no changes in policy intervened. This helped
ment faced when it came to power in the early 1 980s improve decision making and the operational efficiency
were similar to those confronting many developing of line agencies.
countries today: the new government had to manage The reforms also required that line ministries propos­
both an immediate fiscal crisis and the unsustainable ing any new policy, or any changes in existing policy
long-term fiscal commitments of previous policies. that would increase spending, also propose offsetting
To discipline policy formulation and win political savings (see figure at right). This ensured that spending
support for a resetting of national strategic priorities, stayed within the resource envelope agreed to in the cab­
the new administration decided to publish estimates inet. The cabinet focused on changes in strategic priori­
of future spending under existing policies. These pro­ ties-which new policies to adopt and which existing
jections painted a bleak picture of unsustainable real ones to cut-to stay within macroeconomic constraints.
growth in spending requirements, underscoring the Policy proposals were debated vigorously within the
need to scale back. Once the government had pub­ cabinet, and all affected ministries and agencies were
lished these estimates, however, it became incumbent required to submit written comments on the sound­
upon the government to continue to do so, to show ness of other agencies' proposals. This helped legitimize
the continuing declines in future commitments that it and build consensus on policy priorities. Finally, the
had promised. Indeed, succeeding projections fell reforms focused attention on results, through mandated
markedly, in what became called the "falling man" periodic evaluation of new and existing policies and
pattern (see figure at left) . Open financial markets through reponing on performance and outcomes.
imposed additional discipline. The results? Australia's deficit of 4 percent of GOP
The reforms also required the government to pub­ in 1 983 became a surplus by the end of the decade.
lish a reconciliation table, showing how the projections Accompanying this achievement were significant
for existing policies differed from those for the new changes in the composition of public expenditures,
policies. These measures helped make apparent the reflecting both broad strategic shifts identified by the
changes in the government's strategic priorities, as well cabinet and changes in priorities within ministries,
as in the medium-term costs of new commitments. In often identified by the line agencies themselves.

Projected growth in total spending Changes by category, 1983/84 to 1992/93

Percent (cumulative)
15 ,...-----��--..---�-���-_, ,...-----,
Billions of Australian dollars
5

10
) '<oJe<Mo ""'"
4

2
New spending
Net change

May 1985
1

0
5 -1
December 1986

C
-2
'�� 1989
-3
/" ... Savi ngs from existing policy
0 � _ If' 1 1 •
-4
1982/83 1984/85 1986/87 1988/89 Defense Education Health Social Transpor- Other
security tation
Fiscal years
Source: Adapted from Campos and Pradhan 1996; Dixon 1993.
 B U I LD I N G I N STITUTI O N S FO R A C A PA B L E PUBLIC S E CTO R B3

Elite central agencies in East Asia public-private deliberation councils, which would expose
The successful East Asian economies have adopted a pro­ costly programs to rigorous review. Such transparent and
cedural approach to policymaking that shares some key institutionalized consultation mechanisms gave those out­
aspects of systems in industrial countries. Several East side of government power to restrain or even veto its
Asian leaders have formulated long-term visions for their actions, while preserving flexibility for policymakers to
countries; examples include, in postwar Japan, the Liberal adapt to changing circumstances.
Democratic Party's declared aim to catch up with the Deliberation councils require substantial technical
West, and more recently, in Malaysia, Prime Minister capability if they are to use the information supplied by
Mahathir Mohamad's Vision 2020. They have then private participants to make coherent policy. There is also
worked to create the institutional arrangements needed the problem that such councils exclude broader segments
to translate their vision into a highly focused set of strate­ of society from their deliberations. If a country's private
gic priorities. Powerful elite central agencies have been sector is small, deliberation councils can all too easily
delegated the authority to develop policies that will achieve degenerate into well-oiled mechanisms for unproductive
the leaders' long-term objectives. Although relatively rent extraction. This probably explains why African ver­
autonomous, these agencies' deliberations have always sions of deliberative councils-such as the francophone
been embedded in processes-such as public-private coun­ countries' experiments with economic and social coun­
cils-that provide input and oversight from private firms. cils-have generally been ineffective (with the notable
These elite agencies often play an immensely important exception of Botswana's). If such councils are to support
role in setting their countries' economic course. The Min­ sustainable development, they will need to be comple­
istty of International Trade and Industty (MIT!) in Japan mented, as they were in East Asia, by attempts to win
and the Economic Planning Board in the Republic of legitimacy from society more broadly.
Korea are considered the prime movers behind their coun­
tries' industrial policies and use of administrative guidance. Weak capacity andfragmented policymaking in
In Thailand the Ministry of Finance, the budget bureau, developing countries
the central bank, and me National Economic and Social Many developing countries, especially in Africa, Central
Development Board-the so-called gang of four-act in America, and the Caribbean, lack the critical mass of
unison to cap spending and control inflation. In Indonesia effective capacity and internal coherence to formulate and
the Ministry of Finance and the planning agency Bapennas coordinate macroeconomic and strategic policies. Central
have been the guardians of the purse and the brains of the capacity is weak, stretched thinly among a handful of
civil service. These central agencies are staffed by profes­ senior officials who must attend to numerous tasks. These
sional and capable employees recruited on the basis of strains are compounded by problems in the bureaucracy:
merit, often through highly competitive examinations. low pay at senior levels, rampant political patronage, and
The delegation of macroeconomic policy to competent an absence of meritocratic recruitment and promotion.
and reputable technocrats has recently been a common One especially costly consequence of weak central
feature in several Latin American countries as well, includ­ capacity is an inability to make budget forecasts based on
ing Argentina, Colombia, Mexico, and Peru. The effects sound and realistic assumptions. This undermines trans­
on performance have been noticeable. This delegated pol­ parency and predictability in decisionmaking. For exam­
icymaking, combined with the kind of hierarchical and ple, in recent years the difference between budgeted and
transparent budget procedures described in Chapter 3, actual recurrent expenditures has averaged more than 50
was important in reducing inflation in these countries percent in Tanzania and more than 30 percent in Uganda.
during the late 1 980s and early 1 990s. Chile, in particu­ Transparency and coherence are also compromised by the
lar, appears to have developed the kind of esprit de corps use of extrabudgetary funds (equivalent to more than half
among senior officials that has long fostered partnerships of total federal expenditures in Nigeria, for example) and
in the Indonesian technocracy and Japan's MIT!, among by long lags in the production of financial accounts and
others. Most striking are the parallels between Chile's audits. Often decisionmakers will have little sense of the
group of high-level advisers-the Chicago boys-and costs or outcomes of policies. Partly as a result, budgeting
Indonesia's Berkeley mafia and Thailand's gang of four. focuses almost exclusively on the allocation of inputs
As already noted, although the central agencies in East rather than the results they are intended to achieve.
Asia had considerable flexibility in policymaking, they In aid-dependent countries donors sometimes allevi­
were embedded in a larger network of deliberation coun­ ate, but too often worsen, the problem of weak central
cils and external think tanks. In Japan, Korea, Malaysia, capacity. To the extent that their policy advice supple­
Singapore, and Thailand, information about the costs of ments weak capacity at the center, they help solve the
industrial policies was distributed through a range of short-term problem at hand. But such advice does nothing
84 WORLD D EV E L O P M E N T R E P O RT 1 997

to build long-term capacity if politicians fail to recognize would need to triple over the succeeding four years,
the need ultimately to rely on local expens.Donors may implying drastic cuts in other expenditures (left panel of
also fragment central capacity for policy formulation, Figure 5 . 1 ) . Moreover, the recurrent costs of donor-led
entering with ministries into bilateral deals on multiple investment projects were shown to be unsustainable (right
projects without determining whether their cumulative panel of Figure 5 . 1) . The same inadequacies play out
effects are collectively sustainable or mutually consistent. across the developing world, as newly built roads fall into
In many countries public investment programs have be­ disrepair, and schools find themselves without textbooks
come passive repositories of donor-driven projects, whose and health centers without drugs.
recurrent costs after completion continue to accumulate, Several initiatives have been launched to address these
contributing to an expansionary fiscal bias. Lack of coor­ problems, but all are still in their early stages.The Africa
dination between the ministry of planning and the min­ Capacity Building Initiative seeks to strengthen the capac­
istry of finance sometimes further impedes the integration ity of African governments in policy analysis through a
of capital and current expenditures. more professional civil service, improved information
All these problems seriously erode the capacity to coor­ systems, and enhanced external inputs from African uni­
dinate, challenge, and discipline decisionmaking. Guinea versities and civil society more broadly.Governments and
provides a case in point.Although the government has donors have also launched sectoral investment programs
designated primary education, public health, and road to coordinate donor assistance. The Agricultural Sector
maintenance as spending priorities, funds often end up Investment Program in Zambia replaces 1 80 individual
being allocated to other areas instead. And no system donor projects.But although they consolidate fragmented
exists for costing out policy proposals or subjecting them policies in a shared arena, such efforts can create coordina­
to rigorous scrutiny. An exercise to cost out Guinea's poli­ tion problems of their own as long as capacity remains
cies to meet the government's stated priorities revealed weak. Malawi and Uganda are among those countries
that the share of priority programs in total spending moving to the next, crucial level of reform: developing a

Figure 5.1 Guinea's policy goals and spending allocations do not add up

Government expenditure
1994
Projected costs of investment projects

Road Millions of constant Guinea francs

400 .-------,

Other
350
85 % Required
recurrent
300

250

Projected 2000
Actu al
200 recurrent
costs
Road
maintenance 150
Capital
spending
100

44%
50

Primary 1996 1997 1998 1999 2000

education

Source: Adapted from World Bank 1996d.

 B U I LD I N G I N ST I T UTI O N S FO R A C A PA B L E PUBLIC S E CTO R B S

systematic process to set strategic priorities across sectors remains highly centralized. The Apparat of the Cabinet of
and within aggregate spending constraints. Colombia is Ministers has retained responsibility for policy formula­
instituting ex post evaluation systems to assess whether tion and coordination and directs the activities of central
policies and programs already in place are achieving their government departments. The number of central govern­
intended outcomes. ment bodies remains large (over 1 1 0), their responsibili­
ties often overlap, and lines of accountability are unclear
Policy coordination in transition economies (Figure 5.2) . The cumbersome structure makes coordina­
Although the shortage of administrative expertise is not as tion difficult, delays decisionmaking, and reduces trans­
much of a problem in the transition economies of Central parency. However, efforts to reform this system are now
and Eastern Europe and the former Soviet Union, their under way following the adoption of a new constitution
experience shows the equal importance of mechanisms in July 1 996.
that can channel that expertise into coherent policy. Some Central and Eastern European countries with
When the communist regimes in these countries col­ similar although perhaps less severe problems have initi­
lapsed, so did the centralized decisionmaking apparatus ated promising reforms of their central decisionmaking
for coordinating the activities of ministries and depart­ mechanisms. Poland and Hungary have both introduced
ments. As a result, confused and overlapping responsibili­ reforms to streamline multiple and conflicting responsi­
ties and multiple rather than collective accountability bilities and speed decisionmaking. In Georgia, streamlin­
emerged-a sure-fire formula for policy disaster. ing has removed overlapping and conflicting positions,
Ukraine exemplifies such problems in the extreme. and the fate of draft laws is now decided in the presence
Following independence in 1 99 1 , a central machinety of all members of the president's economic council before
of government was established which reflects many of submission to the parliament. Such reforms have aided
the features of a former Soviet system. Decisionmaking consultation and coordination in central government

Figure 5.2 Decisionmaking in Ukraine is bogged down by overlapping responsibilities

Pnme Mr n ister

PreSident's
Administration
---- Apparat of Cabinet of Min isters

D,epartments apd ir torat

D i il

,------=-
-- �---=-
�----,
-- �� /
'---_----
- I---' I nommmm I I WD� I IL-- __ -'

---- ; --- --- -----. ---- ; ---

/,------. ---
-----�

L-__ D
_�____ t __�II
pa r me n s
�._____� : L
__�1 IL
_ D : : 1 I
e pa r me n s
___�{�__ _t
__ � __ �D
e pa
___� rr
:m
L
en s
___t�__� L
___ D
_
pa r me n s
e___t___ _
l __

Source: Adapted from World Bank 1997.

86 WO RLD D EVE LO P M E NT R E P O RT 1 997

decisionmaking. But most countries have a long way to go

to build the institutional capability needed to respond
effectively to the many demands of transition. Figure 5.3 Most firms rate government
services poorly, but some services score
Reforming Institutions for delivery
higher than others

The best-designed policy will achieve little if it is badly Percentage of respondents

implemented. Poor quality, high cost, waste, fraud, and
corruption have marred the delivery of services in many
developing countries. More often than not, the problems
can be traced back to a belief that government ought to be
the dominant-if not the sole-provider.
The expansion of the state under the state-dominated
development strategies outlined in Chapter 1 has pro­
vided countless opportunities for politicians to exploit
their positions for political gain (Box 5.3). More broadly,
governments have simply overextended themselves, with
disastrous results. Examples abound of services not being
delivered or being delivered badly. Power system losses in 20
low-income countries are more than twice those in other

0
Mail Customs R o ads Health care

Box 5.3 The mushrooming of Bangladesh's Rating H igh

government of service Moderate
effic ie ncy: Low
Since independence in 1 97 1 the government of Ban­
gladesh has effectively doubled in size. The number
of ministries increased from twenty-one to thirty­ Source: Private sector survey conducted for this Report.
five over twenty years, and between 1 990 and 1 994
the number of departments and directorates went
from 1 09 to 22 1 . Public sector employment in­ countries. In China nearly 1 million hectares of irrigated
creased from 450,000 in 1 971 to almost 1 million in land has been taken out of production since 1 980 because
1 992-a compound rate of increase of 3.6 percent a of insufficient maintenance. Only 6 percent of domestic
year, compared with population growth of 2.5 per­ businesspeople surveyed for this Report in fifty-eight de­
cent during the same period. Civil service pay has · veloping economies rated government service delivery as
fallen considerably, especially for those at the tOp. efficient, while 36 percent rated them very inefficient.
The base pay of a permanent secretaty (the most Mail delivery fared reasonably well, followed by customs
senior civil service position) has declined by 87 per­ and roads; health services scored the worst (Figure 5.3).
cent in real terms since 1 9 7 1 . These results indicate a broader pattern: the lower-rated
New ministries, divisions, and departments were services are delivered by government departments (as
created in part to meet emerging needs such as envi­ opposed to state enterprises) and produce outputs that are
ronmental protection and women's issues. But the harder to measure and monitor.
state has also spread its wings into commercial activ­ What is needed is better management of the principal­
ities. Growth has often been stimulated by political agent relationships inherent in service delivery. In many
considerations. The increase in ministries allowed countries delivery suffers because neither the principals
new ministerial positions to be handed out to more (the politicians) nor the agents (the bureaucrats) live up to
intraparty groups-and, of course, created more their side of the bargain. Politicians interfere in the day­
lower-level jobs to be dispensed. Aside from its bud­ to-day operations of public agencies; services are delivered
getaty effects, this expansion has stretched imple­ through government departments whose managers have
mentation capacity, compounded coordination little operational flexibility and whose resource flows are
problems, and made regulation more intrusive. It unpredictable. Even where managers have been able to get
has also created vested interests that have blocked around these rules, they have had few incentives to
efforts at rationalization and reform. achieve better results. In the many countries where the
 B U I LD I N G I N STITUTI O N S FO R A CAPABLE PU BLIC S E CTO R 87

public sector has assumed a monopoly role in the delivery

of many services, external pressures for better performance Figure 5.4 Three strategies for improving
are eliminated. And few countries have set credible government service delivery
restraints to hold managers accountable for their use of
inputs or for the achievement of measurable outcomes. Strengthen

Institutional mechanisms to improve delivery

Governments are experimenting with a range of institu­
tional mechanisms to improve service delivery. Greater use
of markets is creating competitive pressures and more exit
options-alternatives to public provision for users seek­
ing better quality or lower cost. Also expanding these
options is the practice of contracting out service delivery to
private firms or NGOs. Some governments are setting up
performance-based agencies in the public sector and enter­
ing into formal contracts with these agencies, providing
rove
them greater managerial flexibility while holding them ac­ com p l i ance
countable for specified outputs or outcomes. Others are and loyalty
relying on more traditional bureaucratic forms in the core
public sector, emphasizing accountability in the use of in­
puts, meritocratic recruitment and promotion, and the cul­ budget deficit equivalent to 9 percent of GDP into a sur­
tivation of an esprit de corps to build loyalty and improve plus during the 1 980s and cut the unit cost of delivery by
performance. Finally, user participation, client surveys, pub­ more than 20 percent in some agencies.
lished benchmarks, and other mechanisms for increasing cit­ Several developing countries are now emulating these
izen voice are providing external pressures for better delivery. reforms. But what is feasible in New Zealand may be
These initiatives can be classified into three broad cat­ unworkable in many developing countries. It takes con­
egories: expanding exit options, strengthening voice, and siderable capability and commitment to write and enforce
improving compliance and loyalty. Which of these apply contracts, especially for difficult-to-specify outputs in the
depends on the incentive environment through which the social services. Which mechanism will prove most effec­
service can be delivered (Figure 5.4). Markets and con­ tive in improving performance depends on both the char­
tracts with the private sector offer primarily exit options acteristics of the service and the capability of the state to
for better performance. In the broader public sector­ enforce internal and external contracts (Table 5 . 1 ) .
including corporatized state enterprises and performance­ For instance, for services that are contestable-such as
based agencies-exit options are fewer, but voice begins most commercial products and, more recently, telecom­
to become influential. For activities whose outputs are munications and electric power generation-market
difficult to specify and that are not contestable, the core mechanisms can generate powerful competitive pressures
civil service remains the agency of choice, but it provides for improved delivery. For services whose outputs the
no realistic exit options and has considerably less flexibil­ state can specify and enforce at low transactions cost, con­
ity in financial and personnel management. Here the tracting out to private firms and NGOs is an attractive
more relevant instruments switch to citizen voice, the loy­ option. Countries with strong capability and commit­
alty of the civil service, and well-specified rules for them ment are setting up performance-based agencies and for­
to follow. mal contracts even for complex activities within the core
Recently, the so-called new public management public sector, such as defense, education, and health care.
reforms in industrial countries have sought to move deliv­ But countries with little capability to enforce complex
ery away from the core public sector (the center of the cir­ contracts, and weak bureaucratic controls to restrain arbi­
cle in Figure 5 .4), primarily by using market mechanisms trary behavior under more flexible management regimes,
and formal contracting. New Zealand provides the most need to proceed with caution.
dramatic example. Beginning in the early 1 980s, com­
mercial and other contestable activities were hived off, Using competitive markets to improve delivery
corporatized, and often privatized. The remaining large, Overstretched and with budgets increasingly tight, gov­
multipurpose ministries were split up into focused busi­ ernments are relying more on market mechanisms to
ness units headed by managers on fixed-term, output­ improve the delivery of contestable services. At the same
based contracts with considerable autonomy (including time, a flood of innovation at both the technological and
the right to hire and fire). These reforms helped turn a the policy level has been pushing back the boundaries of
SS WO R LD D EV E L O P M E N T R E PO RT 1 997

Table 5.1 Mechanisms to improve service delivery

Service characteristics and state capability

Easy to specify outputs

Environment Contestable and enforce perfonnance

Private sector ?t[engthen m arkets Contract out to for-profit or

through credible regu lation non profit agencies

i C reate liiarkets8 e .g. , by

issuing vouchers

Broader public sector Enhance internal Set up pe rform ance-based

competition agencies

I Set hard budgets and Corporatize state enterprises

divest state enterprises and establish enforceable
performance contracts

Strengthen voice m echanis ms

Core public sector

what can be considered contestable. Chapter 4 showed market: governments can contract with private firms,
how deregulation and the unbundling of activities in selected through competitive bids, to provide services.
state-dominated industries such as electric power genera­ Contracting out is now a widespread practice in many
tion have led to significantly lower unit costs and a rapid industrial countries. Victoria State in Australia provides a
expansion in services. particularly dramatic example: each local council con­
Other recent innovations such as vouchers and capita­ tracts out at least half its annual budget through compet­
tion grants have even increased the scope for competition itive tender, including complex community care services.
in the provision of some social services. Experience re­ In developing countries, where both markets and state
mains limited, however, and confined largely to educa­ capacities are weak, options for contracting out are fewer.
tion. Chile's capitation grant system allows students to Still, where outputs are easily specified and direct compe­
enroll in any school, public or private; schools receive a tition is impossible, competition managed through such
payment from the state based on enrollment (Box 5.4). arrangements as service contracts, management contracts,
Private enrollments have increased, but the program's leases, and long-term concessions can yield efficiency
effects on school performance are not yet clear. Vouchers gains. In Brazil, for instance, contracting out road main­
are promising but carry a risk of increasing social polar­ tenance to private contractors led to savings of 25 percent
ization if not properly regulated. over the use of government employees. Leases have in­
Indeed, greater use of market mechanisms must be creased the technical efficiency of water supply in Guinea
accompanied by effective regulatory capacity. k discussed and of the operation of Port Kelang in Malaysia.
in Chapter 4, this is not always easy to achieve. The diffi­ Governments are also contracting out the delivery of
culties of regulation are even more daunting in social ser­ social services, especially to NGOs. Even though outputs
vices than in, say, infrastructure. For instance, the private here are difficult to specify, governments have taken this
delivery of health care services is unregulated in many de­ route where NGOs are perceived to be committed to high
veloping countries (Brazil is a notable exception) because quality or where, because of their religious or ideological
regulating the vast number of small-scale providers is orientation, they can better serve certain groups (for
beyond the government's capacity. example, the Netherlands has long contracted with NGOs
for education services) . In Bolivia an arrangement with a
Contracting out to the private sector and NGOs local church organization to manage public schools is pro­
In those areas where competition in the market is not fea­ ducing promising results (Box 5.5). And in Uganda the
sible, it may still be possible to foster competition for the government is entering into partnerships with NGOs to
 BU ILDING I N STITUTI O N S FO R A C A PA B L E PU B L I C S E CTO R B9

Box 5.4 Vouchers and school choice

Vouchers can increase the scope for competition in began providing capitation grants-fIxed payments
providing education. Students are given vouchers per student enrolled-to both public and private
funded by public tax dollars but redeemable at any schools. Because the per-student payment was based
school, private or public. Letting parents choose the on the average cost of education in the public sector,
school their children will attend should induce schools and expenditures per student were 70 percent less in
to compete for students. the private sector, private schools eagerly vied for stu­
Opponents of vouchers claim that they would lead dents. By 1 986 primary enrollment in private schools
public school students-especially the better ones-to had more than doubled, from 14 to 29 percent of total
leave in droves, gutting the public system. Such an out­ enrollment, and enrollment in private secondary
come would be wasteful and might lead to even poorer schools had increased almost fourfold. The effects on
education for those who choose to remain. Yet in a school performance are not yet clear.
1 993 pilot program in Puerto Rico, the 1 8 percent of Vouchers also present potential risks. The ones most
students who did transfer to private schools were largely commonly cited are increased stratification among ser­
offset by the 1 5 percent who transferred from private to vices and polarization among users. Some analysts have
public schools-hardly a mass exodus. Puerto Rico's criticized the unfettered rush toward school choice in
experiment was so successful that in its second year the the former Soviet republics, arguing that it will exacer­
number of applicants jumped from 1 ,600 to 1 5,500. bate social tensions in rapidly polarizing societies. The
Public funding for private schools is nothing new. underlying concern is that, in the absence of national
In the Netherlands two-thirds of students attend pub­ controls, school curriculums will become divisive and
licly funded private schools. When Chile reformed its parochial, and an essential role of the state-that of
education system in 1 980, the Ministry of Education ensuring social cohesion-will be undermined.

deliver both preventive and curative health services previ­ Improving delivery through the broader public sector
ously in the public domain. Notwithstanding the growing opportunities for private
Like regulatory contracts and vouchers, however, con­ participation, the public sector will inevitably continue to
tracting out is not a panacea. In general, contracting deliver a large number of services. Here the challenge is to
works best where outputs are easy to specify and markets create an enabling environment that provides incentives
are strong, so that the effectiveness of alternative suppliers for better performance.
can be readily judged. For activities that are complex or INTERNAL COMPETITION. Some industrial countries are
nonroutine, contracting out will inevitably incur higher experimenting with ways to increase competition within
transactions costs. Contracting is also prone to corruption the public sector, to improve delivery of services for which
and mismanagement, much as are contracts within the neither market competition nor contracting out is feasi­
public sector. The Inspector General of Uganda, to take ble. In the United Kingdom, for example, an internal
but one example, reported several instances of fraud in market has been created within the national health service
contracts with the private sector, including payments for by transforming local health authorities and groups of
roads that were never built or maintained. general practitioners into purchasers of hospital services
Finally, competition in contracting does not necessar­ on behalf of their patients. This arrangement has created
ily mean that the private sector will outperform the pub­ competition among hospitals, acting as a decentralized
lic sector. In one of the most extensive U.S. experiments mechanism for reallocating resources. Although internal
in public-private competition, the Public Works Depart­ competition can enhance efficiency, it is important to
ment of Phoenix, Arizona, developed innovative strategies ensure that equity concerns are safeguarded in the process.
and outperformed private competitors on several con­ Decentralization of delivery-moving resources and
tracts between 1 984 and 1988. Competition provided the responsibilities to lower levels of government-is another
stimulus for reform in that case, but equally important potentially powerful means of introducing internal com­
was the strong partnership forged between management petitive pressure, particularly for the provision of local
and labor through quality circles and labor-management public goods with few interjurisdictional spillovers or
productivity committees to build on workers' expertise economies of scale. Local governments get the flexibility
and jointly identify competitive solutions. to match supply to local preferences or demands, while
90 WORLD D EV E L O P M E NT R E PO RT 1 997

into executive agencies charged with specific delivery func­

tions. These changes have been accompanied by substan­
Box 5.5 Contracting with NGOs for better tial devolution of managerial authority and accountability
schooling in Bolivia for results. In Australia, Denmark, Ireland, and Sweden,
for example, detailed and itemized administrative costs
In an experimental program in Bolivia, the govern­
have been consolidated into a single budget line item,
ment contracted with the church-based Fe y Alegria making it possible for managers to reallocate resources in
to manage a certain number of mostly secondary
accordance with changing priorities and needs.
public schools. Before agreeing (0 do so, Fe y Ale­
Among developing countries, Singapore has perhaps
gria demanded (and received) the right to appoint the longest head start in creating focused business units.
principals and teachers and to allow teachers to As early as the 1 970s the Singaporean civil service was
work both the morning and afternoon shifts rather
organized around the concept of statutory boards. Else­
than the three-and-a-half hours allotted for instruc­
where, Jamaica has selected eleven pilot agencies for con­
tion in the public schools. version into executive agencies.
In all other ways Fe y Alegria schools are identi­ But countries with inadequate controls over inputs and
cal to other Bolivian public schools. Although hand­ weak capacity need to proceed with caution. The indus­
picked, teachers receive little special training and are trial countries that have now relaxed detailed control over
paid the same salary as other public school teachers. inputs did so from a position of strength, having devel­
Fe y Alegria schools receive no additional money for oped over many years a series of credible restraints on
books or supplies, and their curriculums and teach­ arbitrary behavior. For the many countries that have not
ing methods are the same as those used in other yet succeeded in instituting credible controls over the use
public schools. of inputs, greater managerial flexibility will only increase
The only comparative advantage Fe y Alegria arbitrary and corrupt behavior. Furthermore, writing and
schools have is an exceptional esprit de corps among enforcing contracts, particularly for complex outputs,
students, parents, and staff. Teachers and students require specialized skills that are often in scarce supply.
flock to Fe y Alegria schools, with many families Some of these concerns are borne out by a recent study
paying extra fees for their children to attend. On of state enterprises, which found the overall record of
the rare occasions when innovative teaching meth­ performance contracts in developing countries extremely
ods have been tried (such as a mathematics course disappointing. Yet while performance contracts have
transmitted over a public radio station), they have not succeeded in most developing countries, many have
also proved popular, both in the schools and sought to create performance-based agencies for easily
throughout the community. This public-private specified and high-priority tasks such as road maintenance
partnership between government and a religious or tax collection. These agencies are typically set up as
NGO appears to be so successful that the govern­ enclaves within the civil service, with greater managerial
ment is studying it as a possible model for national flexibility, better pay, and greater accountability for re­
education reform. sults. In Sub-Saharan Africa, for instance, performance­
based agencies have been created to achieve tax collection
targets in Ghana, Uganda, and Zambia. Other countries
local accountability and interjurisdictional competition in appear ready to follow suit.
supply provide potential restraints. But as discussed in In these instances, enclaving tax collection has been
Chapter 7, appropriate institutional preconditions need considered a prerequisite for boosting a government's
to be in place if decentralization is to improve efficiency capacity to raise revenues and improving incentives for the
and equity. rest of the civil service. The results have been impressive.
PERFORMANCE-BASED AGENCIES. The so-called new Ghana was the first country in Sub-Saharan Africa to
public management reforms in industrial countries have introduce a performance-based approach to tax and cus­
sought to break up the core public sector into a series of toms revenue collection. Total revenues nearly doubled in
distinct business groups or special-purpose agencies. In the first five years, from 6.6 percent of GDP in 1 984 to
general these agencies have greater managerial flexibility in 12.3 percent in 1 988, largely thanks to better collection.
the allocation of financial and human resources and greater But the scheme was not without its problems. The rest of
accountability for results. Sweden and some other Nordic the civil service chafed at the special treatment afforded
countries have long separated cabinet ministries from tax collectors, and the Ministry of Finance objected to its
agencies with specific purposes. In the United Kingdom loss of authority. The program could not have gone for­
nearly two-thirds of the civil service has now been moved ward without strong support from the top.
 B U I LD I N G I N STITUTI O N S FO R A C A PA B L E PUBLIC S ECTO R 9 1

More troublesome has been the establishment of devel­ tralia, Colombia, Uganda) are emphasizing outcomes­
opment project enclaves in several aid-dependent coun­ the impact of outputs on beneficiaries-combined with ex
tries, each with its own system of remuneration and ac­ post evaluation.
countability. Often, donors have created these enclaves But even with greater clarity of purpose and task, pub­
with little if any systematic consideration of the nature of lic sector managers will not perform well if the flow of
the services provided or of the optimal sequencing of insti­ budgeted resources is highly uncertain. This brings home
tutional reforms. And they have often created disparities. the downstream importance of building effective policy­
As discussed in Chapter 9, enclaves are usually de­ making mechanisms at the center, as discussed earlier in
signed as quick fixes. Although they have sometimes this chapter. A credible medium-term expenditure ITame­
accomplished shon-term goals, they can create obstacles work, such as that in Australia (see Box 5 .2), provides
to deeper institutional reform. Where output is easily greater consistency between policies and resources and
specified-tax revenues collected, for example-enclaves therefore more predictability in the flow of resources to
may be useful as an experimental stage of reform that can units downstream. Malawi and Uganda are beginning to
then be progressively extended, and as a demonstration institute such frameworks.
that reforms can be effective. But it is important to FINANCIAL AND MANAGEMENT CONTROLS. Because
employ systematic criteria in selecting which agencies to public sector outputs are often difficult to measure and
hive off. And although they are a useful first step, enclaves monitor, financial control and accountability are needed
cannot substitute for the longer-term institutional reforms to keep managers honest, prevent the poor use-or
needed to create a motivated, capable civil service. abuse-of public resources, and improve service delivery.
An expenditure tracking exercise in Uganda revealed that
Improving delivery through the core public sector a significant portion of funds allocated for basic social ser­
Contracting out, setting up performance-based agencies, vices never reach the intended health clinics or schools,
and ensuring formal accountability for results are not particularly in rural areas. In many countries public finan­
viable options for many services in countries with weak cial accounts and audits are outdated and inadequate and
capacities. The challenge is particularly acute for street­ therefore do not provide credible restraint.
level bureaucracies whose operators (police, irrigation To improve the transparency and quality of their finan­
patrollers, health workers, teachers, extension workers) cial accounting and auditing systems and reduce lags,
interact daily with the people they serve, are geographi­ countries are modernizing their financial information sys­
cally dispersed, are granted substantial discretion, and tems. Countries as diverse as Bolivia, China, Indonesia,
produce outputs that are difficult to monitor and are not and Moldova are writing sound accounting principles into
subject to competitive pressure. law, backed by strong professional associations both
Experience across a range of countries suggests that a within government and in the private sector.
combination of mechanisms can boost incentives to per­ Although systematic evidence about the effects of these
form in such areas. A study comparing irrigation agencies reforms is not available, some useful policy lessons can
in India and Korea revealed that the Indian organization nevertheless be gleaned. Modern, computer-based infor­
provided few incentives for conscientious work, whereas mation systems can both improve transparency and
the Korean agency was full of such incentives. Korean irri­ strengthen aggregate control while reducing the need for
gation patrollers had greater clarity of purpose and were controls on specific transactions. Controls on inputs can
subject to random monitoring from three separate agen­ be broadened sequentially as systems are expanded and
cies. Supervision techniques in India sought to discover trust is built up: countries can gradually move away from
grounds for punishment; in Korea they sought to solve detailed, ex ante line-item controls to broader budget cat­
problems. With staff from all parts of the organization trav­ egories, salary scales with broader bands, and greater lati­
eling frequently up and down the canals in Korea, there tude in procurement and recruitment. The shift from ex
was more external pressure from farmers, and stronger ante to ex post transaction-specific input controls should
partnerships could be built for better performance. proceed carefully and only as controls over budgetary
PERFORMANCE ORIENTATION AND PREDICTABILITI IN aggregates are improved, as agencies demonstrate that
RESOURCE FLOWS. An important starting point in raising they can be trusted with greater autonomy, and as ex post
the emphasis on performance within public sector organi­ controls build strength through improved accounting and
zations is greater clarity of purpose and task. Colombia, auditing capacities.
Mexico, and Uganda are introducing performance mea­ But experience also suggests that moving from a highly
surement to orient managers to achieving desired results. centralized, transaction-specific control regime to a more
Whereas some countries (New Zealand is one) have decentralized one can encounter resistance. For instance,
stressed outputs as performance measures, others (Aus- in Ecuador a plan to devolve payment controls, although
92 WO R LD D EV E L O P M E N T R E P O RT 1 997

and attracting capable staff, require long-term career

rewards, adequate pay, and mechanisms to instill an esprit
Figure 5.5 Recruiting and promoting o n merit de corps through, for instance, strong partnerships be­
Improve bureaucratic capability tween management and labor.
STRENGTHENING MECHANISMS OF CITIZEN VOICE.
Index of bureaucratic capability
Instituting credible bureaucratic controls takes time.
More • M eanwhile, where internal monitoring and enforcement
capable
capacity are weak, clients and beneficiaries can exert pow­
erful pressures to improve performance, and so help
• reduce monitoring costs until these capacities are built up .
Coproduction and other forms of government partnership
with the community in providing services, even if indirect,
create incentives to press for better service. Feedback
mechanisms such as the client surveys used in India,
Nicaragua, and Uganda increase transparency and im­
prove accountability by making more people aware of the
• agency's performance. Citizen charters, in which agencies
• • publicly commit themselves to minimum standards of ser­
Less • • vice provision-as applied in Belgium, Malaysia, Portugal,
capable and the United Kingdom-can be a fulcrum for increased
o 2 4 6 8 10 12 14 external and internal pressures to meet performance tar­
Index of meritocracy gets, and help focus the attention of clients and staff on
service quality. Chapter 7 puts the use of voice and partic­
Note: Results are based on a regression using data from thirty­ ipation in the broader context of raising state capability.
five developing countries during 1970-90. contrOlling for other
variables including Income and educatiOn. See the Technical Note Fostering motivated, capable staff
for details. Source: Evans and Rauch 1996.
Whether making policy, delivering services, or adminis­
tering contracts, capable and motivated staff are the
proposed in 1 995, has yet to be implemented, largely lifeblood of an effective state. Efforts to build a competent
because of central agencies' fears of fiscal indiscipline. and dedicated civil service usually focus almost exclusively
Trust needs to be built up first by strengthening systems on pay. Pay is certainly important, but so are other things,
of performance measurement and ex post input controls. such as merit-based recruitment and promotion and esprit
As these systems become more credible, resistance to the de corps. Meritocratic recruitment and promotion restrain
changeover will fade, and managers can be provided political patronage and attract and retain more capable
greater flexibility, with stronger accountability for results. staff. A healthy esprit de corps encourages closer identifi­
LOYALTY, MOTIVATION, AND COMPETENCE. Better sys­ cation with an organization's goals, reduces the costs of
tems of monitoring, accounting, and auditing alone will making people play by the rules, and nurtures internal
not suffice to improve the delivery of many services. partnerships and loyalty.
Mechanisms for enhancing the loyalty, motivation, and A recent cross-country study shows why these things
competence of the civil service are also needed. Loyalty matter. The authors found that an index representing
promotes staff identification with an organization's goals meritocratic recruitment and promotion and adequacy
and a willingness to take a longer-term view of responsi­ of pay was correlated with economic growth as well as
bilities. Loyalty is essential in the core public sector, where with investors' perceptions of bureaucratic capability, even
activities are not easily specifiable or monitorable, and exit after allowing for income and educational differences
has no meaning. (Figure 5.5). Clearly, then, finding the right institutional
The civil services of France, Germany, Japan, and recipe for recruiting and motivating capable staff can reap
Singapore all seek to ensure that the loyalties of a small sizable rewards.
group of professionals are fundamentally aligned with the
interests of the state. Job security in the civil service was Merit-based recruitment andpromotion
meant to foster this alignment of interests. It has worked Making a meritocracy of the civil service helps bring in
in some contexts but not in many others. As discussed in high-quality staff, confers prestige on civil service posi­
the next section, the experience of successful countries tions, and can do a great deal to motivate good perfor­
suggests that building this commitment, and motivating mance. In many countries Oapan and Korea, for example)
 B U I LD I N G I N STITUTI O N S FO R A C A PA B L E PUBLIC S E CTO R 9 3

a national civil setvice entrance examination uses tough rather than merit. Figure 5.6 shows that political appoint­
standards to winnow the more skilled from the less skilled ments run much deeper in the Philippines than in other
applicants. In others, academic (often college) perfor­ East Asian countries. This, combined with poor pay, has
mance is the primary filter. Pressure to perform is sus­ resulted in lower bureaucratic capability, which has also
tained after recruitment by specifYing clear objectives and worsened over time. The Philippine government is under­
criteria for upward mobility and offering rewards for mer­ taking reforms to introduce greater meritocracy in its civil
itorious long-term setvice. In Korea, for instance, promo­ setvice. Of course, political appointments can be quite
tion is based on a formula that combines seniority with extensive in industrial countries, such as the United
merit-based elements. Where instead promotions are per­ States, as well. But countries with weak institutions and
sonalized or politicized, civil setvants worry more about inadequate checks and balances are better off relying on
pleasing their superiors or influential politicians, and more transparent and competitive mechanisms.
efforts to build prestige through tough recruitment stan­ Even countries that have managed to install merit-based
dards are undercut. recruitment and limit political appointments can suffer
Meritocracy has not yet become established in many from rampant political interference in employee transfers.
countries. Instead the state has often become a massive In India, for example, senior civil setvants are transferred
source of jobs, with recruitment based on connections frequently: the average tenure of field officers in some states

Figure 5.6 Lack of meritocracy and poor pay in the Philippines' civil service have lowered capability

Depth of political appointments

Phili ppines Other East Asia

r-- -- -
IL Minister

-
Level 2
,-
� - -

Index of bureaucratic capabil ity

1.0 .-------,

0.8

0.6
0.6
Division chief

• Political appointees 0.4

Ratio of public to private wages (percent) 0.2

100 r------�

80 0.0
66 Philippines Other East Asia
60

40
Note: Other East Asia includes Indonesia, Korea, Malaysia.
Singapore, Taiwan (China). and Thailand. Pay differential is for
20 senior civil servants. Data are for 1984--88. Source: Adapted from
Campos and Root 1996; Commander, Davoodi, and Lee,
o background paper.

Phil ippines Other East Asia

94 WORLD D EV E L O P M E N T R E PO RT 1 997

can be as low as eight months. Partly as a result, the once­ more difficult to mamtam professional standards and
legendary Indian civil service is no longer perceived as a esprit de corps.
model of efficiency and effectiveness.
Merit-based recruitment and promotion systems are of Adequate compensation
two broad but not mutually exclusive types: mandarin sys­ As countries build prestige for their civil service through
tems and open recruitment systems. Mandarin systems, merit-based recruitment and promotion, government
such as those found in France, Germany, and Japan, are employment becomes more attractive. But if civil service
closed-entry, hierarchical systems with highly competitive compensation trails far behind that in the private sector,
entrance requirements (Box 5 .6). Where well-qualified prestige alone will not make up the difference.
human resources are in short supply, mandarin systems A rough benchmark for evaluating the adequacy of
may well be the preferred basis for a more selective public sector compensation is the gap between public and
approach to personnel development. Open recruitment private sector compensation, discounted somewhat to
systems, such as those in New Zealand and the United adjust for the fact that civil service employment is gener­
States, provide a more flexible, decentralized, and increas­ ally more secure. Precise comparisons are tricky, given
ingly market-driven system of civil service recruitment. differences in benefits and perquisites, job requirements,
Open systems give more flexibility to managers to match and the like. As a rule, however, civil servants nearly every­
job requirements with available skills, including hard-to­ where are paid less than their private sector counterparts.
find technical expertise, although at the cost of making it In the Philippines, for example, public pay averages 25

Box 5.6 Cultivating the best and the brightest: Mandarin versus open systems

Most countries have adopted one of two broad ap­ driven approach to civil service recruitment. The U.S.
proaches to meritocratic recruitment. The first, called system, for example, in stark contrast to the mandarin
the mandarin system, is a hierarchical system with model, permits entry at any point in the hierarchy,
entry limited to promising candidates at the outset of without age restrictions. Centralized competitive en­
their careers. "Mandarin system" traditionally referred trance examinations have been replaced with profes­
to an elite group of civil servants in certain East Asian sion-specific exams, and managers have been granted
bureaucracies; in its more modern sense it refers to a more autonomy in hiring. The United States, like Aus­
"corps-career" system that also includes lower and mid­ tralia, complements its horiwntal recruitment system
dle levels of the civil service. Recruitment is centralized with a Senior Executive Service aimed at building an
and highly selective, generally on the basis of a rigorous elite group from within the civil service.
entrance examination. The successful candidates are The boldest approach to open recruitment and
placed on a fast track into the best jobs in government. career development is found in countries pursuing the
For the most part these recruits, who are mostly gener­ "new public management" reforms. These countries
alists by educational background, are hired into a have significantly devolved recruitment responsibili­
career stream or corps rather than for specific jobs. ties. In New Zealand, for example, agency managers
France and Japan best exemplifY the mandarin sys­ can hire staff at market salaries.
tem. At France's National School of Administration, Countries with critical shortages of well-qualified
future high-level cadres are put through a one-year human resources may find mandarin systems useful for
professional internship followed by fifteen months of establishing a selective rather than a comprehensive
coursework. Japan's Tokyo University produces that approach to personnel development. Moreover, a pres­
cOUntry's administrative elite, most of whom have a tigious corps can have spillover effects, motivating other
legal or generalist education, possibly supplemented partS of the civil service to perform well. Open recruit­
with in-service technical training. Variants on the ment, on the other hand, gives managers greater flexi­
system are found in Singapore, where two-year cadet­ bility in finding candidates with needed skills, includ­
ships rotate promising recruits, and Germany, where a ing hard-to-find specialist expertise. And open systems
"practicum" system offers practical, on-the-job intern­ discourage insularity in the civil service by bringing in,
ships for outstanding candidates. at all levels, staff with fresh perspectives and new ideas.
The second system, known as open recruitment, is The downside is that professional standards are less easy
a more flexible, decentralized, and increasingly market- to maintain across the service, as is esprit de corps.
 B U I LD I N G I N ST I T U T I O N S FOR A C A PA B L E PUBLIC S E CTO R 9S

Figure 5.7 In Africa, as public employment has risen, wages have fallen

Average real central government wages relative to GDP per capita

High

. �jJ'..
•
• •
•• •

I· •
• • •

f··
." .,
r •
• .",.
•
•
•
• . ., '.
•
) • •
1\ •
•

I
• • ,•.,
•
··
I.
...
• •
l •

Low �. � ____________________________________________________ �

Low -----I�. High

Central government employment relative to population

Note: Data are panel data for twenty African countries for the period 1972-93. Both axes are scaled logarithmically. See the Technical Note for
details. Source: World Bank staff calculations based on data in Kraay and Van Rijckeghem 1995 and World Bank data.

percent of private wages; in Somalia the figure is 1 1 per­ The contrast between the size of the wage bill and the
cent. (At the other extreme, public sector salaries in Sin­ relative level of wages shows through in another major
gapore average 1 1 4 percent of those in the private sector, problem, which will not be solved by across-the-board
and in fact senior Singaporean civil servants are better increases. This is the relatively low level of remuneration
paid than their U.S. counterparts.) The gap is widening for senior officials. In many countries the wages of higher­
in some countries. In Kenya, for instance, the disparity level civil servants are allowed, often for political reasons, to
between public and private wages grew by 3 percent a year erode by more than those of the lower echelons; this wage
during 1982-92. Contributing in many countries to the compression makes it even harder to attract and retain
relative erosion of public sector wages were fiscal austerity high-quality staff at the vital senior levels. A study of ten
measures during the 1980s that tended to lower real wages Mrican countries found that, on average, the ratio of the
rather than employment. salaries of the highest- to those of the lowest-grade civil
In many Mrican countries, public employment has not servants had declined from thirteen to one to nine to one
merely been maintained in the face of rising fiscal pres­ during the 1980s.
sures-it has actually risen, especially at lower skill levels Prompted by a desire to raise public sector salaries, and
(Figure 5.7). Governments have become employers of last by the need to correct aggregate fiscal imbalances, some
resort and dispensers of political patronage, offering jobs countries have embarked on initiatives to reduce employ­
to family, friends, and supporters. As a result, individual ment, decompress the wage structure, and raise average
wages have often been low even though the overall wage pay in the civil service. These efforts have met with mixed
bill has been high. Moreover, growth in the wage bill has success. A study of civil service reform in fifteen countries
often outpaced expenditures on operations and mainte­ in various regions between 1 981 and 1991 found that
nance, leading to the familiar stories of teachers without wage bill reduction and salary decompression had been
textbooks and extension workers without bicycles. achieved in fewer than half the cases. Employment had
96 WO R LD D EVE L O P M E NT R E P O RT 1 997

been reduced in more than half, but reversals were some­ members a sense of purpose and belonging and imposes
times reponed later, and the cuts were rarely adequate to self-discipline that guides members toward achieving the
finance substantial salary increases for higher-level staff. In group's objectives. King Arthur's Knights of the Round
Peru, for instance, some 250,000 workers were cut from Table, the samurai in Japan, and even the mafiosi of past
the civil service over three years, but 1 63,000 of them were generations all embodied some form of esprit de corps. A
subsequently rehired; in addition, poor targeting of the few of today's civil services are also said to do so, includ­
cuts resulted in the departure of the most qualified staff. ing those in Chile, France, Germany, Japan, Korea, and
This mixed and often disappointing experience with the United Kingdom. Most, however, do not.
civil service reform nevertheless provides some lessons for It is not impossible to build an esprit de corps within
future efforts. First, strategies have focused exclusively on the bureaucracy from scratch. Singapore's civil service is
pay and employment and, within those issues, on reduc­ now well known for its coherence and sense of purpose,
ing numbers (the wage bill and employment). These are even though these characteristics barely existed in the
important, but so are other, complementary elements: early 1 960s. Getting there was difficult, but the steps were
merit-based recruitment and promotion, performance straightforward enough. Each year prospective recruits are
measurement and orientation, mechanisms to improve taken from the top 200 (less than 5 percent) of the grad­
accountability, and esprit de corps. uating class at the National University of Singapore (and
A more careful sequencing of reforms is called for, start­ more recently the Nanyang Technological University)
ing with wage decompression. Even within constrained and put through a one-year training program. Their edu­
overall wage bills, wages at the top of the scale can be cation and training give the recruits a common under­
raised relative to lower levels, to attract more qualified standing of what is expected of them as civil servants and
people and concentrate scarce skills in strategic areas. In help build trust among them. The country's meritocratic
governments that are considerably overstaffed, reforms promotion system gives officials a stake in achieving their
have been too modest to downsize them to sustainable agency's goals. The single-mindedness of Singapore's
levels. And they have tended to be one-shot reductions leadership and its continuous efforts to imbue the civil
rather than a steady program to redimension government service with its desired values help strengthen the bond
over the longer term. among civil servants. Some of Singapore's lessons are now
Inevitably, pay and employment reforms will face being learned in Botswana, in twinning arrangements that
political obstacles, although fears of political backlash have emphasize the two key ingredients of teamwork and
often been exaggerated. Some countries have viewed civil group performance.
servants as partners in reform and have consulted exten­ Worker dedication and commitment are not confined
sively with them to find politically acceptable solutions. to the industrial countries and East Asia. In Brazil's poor
For instance, in the province of Santa Fe, Argentina, a northeastern state of Ceara, steps to increase worker com­
close dialogue between the governor and the local civil ser­ mitment dramatically improved the quality of public
vice union helped the parties agree on measures for mod­ services delivered (Box 5 .7). The state government pro­
ernizing provincial public administration, including moted a sense of calling among workers and conferred new
expenditure cuts of some 1 0 percent. In addition, the prestige on their jobs. These feelings were reinforced by
experience with civil service reform has helped develop a innovative practices such as worker participation and self­
good set of technical tools--civil service censuses, func­ managed worker teams, multitasking, and flexibly orga­
tional reviews, better-designed severance packages-for nized or specialized production. These practices involved
managing and implementing reforms more effectively. greater worker discretion and flexibility, greater coopera­
But civil service reforms will generate losers, who can be tion between labor and management, and greater trust
important constituencies of the political leadership and between workers and customers. Such experiences also
therefore a force to be reckoned with. The political econ­ underscore the importance of nonmonetary rewards­
omy of reforms is discussed further in Chapter 9. recognition, appreciation, prestige, and awards-in moti­
vating staff, over and above the adequacy of pay and mer­
Building esprit de corps itocratic recruitment and promotion.
Effective and capable bureaucracies share a commitment
Strategic options: Steps toward an effective
to their organization's objectives. This esprit de corps
public sector
includes a common understanding about what is desirable
and undesirable behavior, manifested in formal and infor­ Some developing countries lack the most basic under­
mal norms and grounded in a set of objectives, and a pinnings of a professional, rule-based bureaucracy. Even
devotion to upholding the honor of the group, based on reform-minded leaders cannot translate their goals into
this common understanding. An esprit de corps gives reality because the machinery linking policy statements to
 B U I LD I N G I N ST IT U T I O N S FO R A C A PA B L E PUBLIC S E CTO R 97

Box 5.7 Building worker dedication: Good government in Brazil's Ceara State

In 1 987 the state government of Ceara in northeastern larger variety of tasks than usual, often voluntarily.
Brazil confronted a crippling fiscal crisis, superimposed Granted greater autonomy and discretion, workers
on a legacy of mediocre administrative performance. were able to provide more customized service. This
Yet within four years the fiscal crisis had been over­ greater discretion did not result, as it often does else­
come, and the quality of services had i mproved where, in greater opportunities for rent seeking because
dramatically. Vaccination coverage for measles and of pressures to be accountable. Workers wanted to per­
polio more than tripled, from 25 percent to 90 per­ form better in order to live up to the new trust placed
cent of the child population. The state's public works in them by their clients. This in turn was the result of
program employed more than 1 million unemployed the more customized arrangements of their work and
farmers during droughts. And its business extension the public messages of respect from the state. At the
and public procurement program for small firms was same time, the communities where these public ser­
saving more than 30 percent over its previous overall vants worked monitored them more closely. The
expenditure. state's publicity campaigns and similar messages had
Much of the credit for this success is owed to the armed citizens with new information about their rights
civil service itself. The state government contributed in to better government and about how public services
an unusual and sometimes inadvertent way to public were supposed to work. Thus government played a
workers' newfound dedication. Using rewards for good powerful role in monitoring, but it did so indirectly.
performance, public screen ing methods for new These mechanisms created a virtuous cycle in which
recruits, orientation programs, and sheer boasting workers reponed feeling more appreciated and recog­
through the media about its successes, the state created nized, not necessarily by superiors, but by their clients
a strong sense of mission around key programs and and the communities where they worked. This,
their workers. Highly motivated workers carried out a turn, reinforced their dedication to the job.

action has ceased to function. As a result, a vast gap has task and by introducing performance measurement on a
opened up between what the state says it will do and what selective, sequential basis. When output measurement is
it does-between the formal rules of public institutions strengthened and credible controls over inputs are insti­
and the real ones. The first step toward building a more tuted, managers can be granted more operational flexibil­
effective public sector in such countries must be to close ity in exchange for greater accountability for results.
these gaps: to reestablish the credibility of the government's Instituting a professional, rule-based bureaucracy will
policies and the rules it claims to live by, making sure they take time. In the meantime some other measures can be
operate in practice. This includes setting hard budget lim­ implemented more quickly, some of which can generate
its, implementing budgets and other policies as approved, early payoffs. Well-functioning policymaking mecha­
making the flow of resources predictable, instituting nisms make transparent the costs of competing policies
accountability for the use of financial resources, and curb­ and encourage debate and consultation among all stake­
ing rampant political patronage in personnel decisions. holders. Using the market to deliver contestable ser­
Where these preconditions are absent, the new public vices-too many of which are now the sole domain of
management must be introduced cautiously. If informal government-can lower costs and improve service qual­
norms have long deviated significantly from formal ones ity. Likewise, contracting out easily specified activities
(with regard to personnel practices, for example) , simply through competitive bids can reduce the burden on over­
introducing new formal rules will not change much. stretched capacity and build partnerships with markets
Where countries have been unable to establish credible and NGOs to improve efficiency. And reformers need not
controls over inputs, giving managers greater flexibility rely only on internal controls: creating more points of
will only encourage arbitrary actions and corruption. And access for feedback from firms and the people who use
where specialized skills are in short supply, performance public services can do a lot to generate external pressures
contracts and other output-based contracts for complex for better performance while internal capacity and en­
services may absorb a large share of scarce bureaucratic forcement mechanisms are still developing.
capacity to specify and enforce them. Nevertheless, coun­ As previous chapters have stressed, getting the state
tries can begin by providing greater clarity of purpose and out of the business of providing many of the goods and
98 WO R LD D EVE LO P M E NT R E P O RT 1 9 97

services it now provides will still leave it plenty to do. tiveness of salaries at the upper end can be raised, to attract
Where it is no longer a direct provider, the state must capable staff, even within constrained wage bills, in part by
become a partner and facilitator, regulating markets, reducing excess employment among the rank and file.
enforcing contracts, and pursuing all the essential roles There is bound to be opposition to these and other
outlined in Chapters 3 and 4. That means attracting and reforms from those who stand to lose. But as discussed in
keeping capable staff. Rule-based restraint on political Chapter 9, windows of opportunity for reform can open
patronage in recruitment and promotion, and more com­ and widen. Reform-minded governments should seize
petition through meritocracy, will be necessary to build these opportunities to build consensus, address the obsta­
this capability. In countries where rapid employment cles to change, and initiate and sustain reforms to build an
expansion has taken place in the lower echelons, reforms to effective public sector. The resulting reinvigoration of
reduce employment are inevitable. But the relative attrac- public institutions will generate large payoffs.
R E S T RA I N I N G A R B I T RA RY S TAT E

A C T I O N A N D C O R R U P T I O N

A the payoffs from, corruption while raising the price and

N EFFECTIVE STATE CAN CONTRIBUTE POWERFULLY

to sustainable development and the reduction of the probability of being caught.

poverty. But there is no guarantee that state intervention
Formal checks and balances
will benefit society. The state's monopoly on coercion,
which gives it the power to intervene effectively in eco­ In framing a government to be administered by men
nomic activity, also gives it the power to intervene arbi­ over men, the great difficulty lies in this: you mustfirst
trarily. This power, coupled with access to information enable the government to control the governed; and in
not available to the general public, creates opportunities the next place oblige it to control itself
for public officials to promote their own interests, or those - James Madison, Federalist No. 5 1 ( 1 788)
of friends or allies, at the expense of the general interest.
The possibilities for rent seeking and corruption are con­ Restraining the potential use and abuse of state power is
siderable. Countries must therefore work to establish and a challenge for any country. Harder still is doing it with­
nurture mechanisms that give state agencies the flexibility out depriving state agencies of the flexibility they need to
and the incentive to act for the common good, while at do their job. The misuse of state power creates serious
the same time restraining arbitrary and corrupt behavior problems of credibility, whose effects linger long after
in dealings with businesses and citizens. the event. The expropriation of property and the harass­
Chapter 5 focused on building the capability of the ment of entrepreneurial Asian minorities in Uganda
public sector. Many of the reforms discussed there will under Idi Amin left a legacy of distrust, which initially
contribute to reducing arbitrariness and corruption. Par­ posed enormous problems when the current administra­
ticularly useful toward that end are instilling a rule-based tion tried to attract private investment. But arbitrary and
culture in public institutions, and curbing patronage in capricious state action undermines more than credibility.
the civil service. This chapter broadens that discussion to It undermines the rule of law itself, by weakening the
look at mechanisms to restrain arbitrary state action and force of whatever rules the state has set in place. And it
corruption more generally. fosters conditions that encourage state officials to place
The chapter examines first the formal checks and bal­ themselves above the law and tempt the rest of society to
ances that need to be built into the structure of govern­ do the same. Development, in these circumstances, hits a
ment, including judicial independence and the separation brick wall.
of powers. These promote credibility and accountability.
But formal instruments of restraint are seldom enough, Instruments ofrestraint
particularly in countries where corruption has become Sustainable development generally calls for formal
well entrenched. Therefore this chapter also analyzes the mechanisms of restraint that hold the state and its officials
options for these states and others seeking to make a dent accountable for their actions. To be enduring and credible,
in corruption, by examining its root causes. One impor­ these mechanisms must be anchored in core state institu­
tant lesson is that anticorruption efforts must proceed tions; if these are too weak, external mechanisms such as
along many fronts, to reduce the opportunities for, and international adjudication may substitute temporarily. The
1 00 WORLD D EV E L O P M E N T R E P O RT 1 997

two principal formal mechanisms of restraint are a strong, bailiffs are not under the control of judges but are em­
independent judiciary and the separation of powers. ployed by the Ministry of Justice. Thus, although judges
JUDICIAL INDEPENDENCE AND EFFECTIVENESS. To are competent and reasonably efficient, enforcement is
prosper, economies need institutional arrangements to slow and often ineffective because the number of bailiffs
resolve disputes among firms, citizens, and governments; has not kept pace with the rising caseload.
to clarifY ambiguities in laws and regulations; and to Developing relationships among the judiciary, legisla­
enforce compliance. Societies have devised a broad array ture, and executive that ensure judicial independence and
of formal and informal mechanisms to do this, but none reliable enforcement is a gradual process. Studies show
more important than the formal judiciary. It alone has that private sector confidence in the rule of law increases
access to the coercive authority of the state to enforce with each year a stable regime remains in place. More
judgments. And it alone has the formal authority to rule broadly, as Box 6. 1 illustrates for Peru, the success of
on the legality of actions by the legislative and the execu­ third-party mechanisms for enforcement depends in large
tive branches. This special relation to the rest of the state part on citizens viewing those mechanisms as legitimate.
puts the judiciary in a unique position to support sustain­ In countries where judicial institutions are weak, it may be
able development, by holding the other two branches at least as important to demonstrate to citizens and firms
accountable for their decisions and underpinning the the potential benefits of a well-functioning judiciary, and
credibility of the overall business and political environ­ to win support for good laws and impartial enforcement,
ment. Yet judiciaries can play this role only when three as it is to proceed with wholly technocratic programs of
core conditions are met: independence, the power to judicial reform.
enforce rulings, and efficient organization. The third component of judicial effectiveness is organi­
Independence from the rest of government is the most zational efficiency, which is needed to avoid long delays in
important of these. Whatever the precise character of clearing cases. The average case takes 1 ,500 days to clear in
judicial relations with the legislature and the executive, all Brazil and Ecuador, but only 100 days in France. Long de­
industrial countries-and many developing countries­ lays raise the transactions costs for dispute resolution and
rely on the j udiciary to hold the executive accountable may block access for some potential users; however, the
under the law and to interpret and enforce the terms of internal efficiency of the judiciary is less critical than its
the constitution. independence and its enforcement authority. As discussed
Judicial independence has been repeatedly compro­ in Chapter 3, even when saddled with cumbersome and
mised in some countries, and in no country has the judi­ costly procedures, judicial systems can strengthen credibil­
ciary been immune from political efforts to override its ity in countries as long as their decisions are perceived to
decisions. Legislatures and executives have used a variety be fair. Any state beginning from a weak institutional base
of gambits to rein in their judiciaries: should consider building this aspect of judicial perfor­
mance its first priority.
• Judges of the superior court in Malta were suspended SEPARATION OF POWERS. Judiciaries may be capable of
one hour before a case challenging executive actions enforcing rules, but if the public has little faith in those
was to be heard. rules remaining stable, the state's credibility can still be
• A succession of Pakistani governments in the past compromised. The classic constitutional mechanism for
appointed temporary judges, whose lack of tenure restraining constant legislative changes is the horizontal
made them more vulnerable to political influence. and vertical separation of powers.
• Although Ukraine's constitution declares that the courts Power can be divided horizontally among the judi­
are independent of the executive, judges remain largely ciary, the legislature, and the executive, and vertically be­
dependent on local authorities for their housing. Judges tween central and local authorities. The patterns of a
who have ruled against city officials appear to be partic­ country's political party organization-which can range
ularly susceptible to long delays in getting housing. from a small number of highly disciplined parties to a
large number of parties whose members only loosely abide
The effectiveness of the judiciary also depends on its by a party line, and that can govern only by forming multi­
decisions being enforced. In practice that means that party coalitions-also influence the extent to which polit­
other branches of the government must consent to pro­ ical power is concentrated or diffused.
vide the resources needed for enforcement, including per­ The broader the separation of powers, the greater will
sonnel authorized by law to serve court documents, to be the number of veto points to be navigated to change
seize and dispose of property, and to turn the proceeds any rule-based commitments. Thus the separation of
over to the winning party. In many countries this enforce­ powers increases confidence in the stability of rules. Mul­
ment capability is constrained. In Poland, for instance, tiple veto points can be a double-edged sword, however:
 R E STRAI N I N G A R B ITRARY S TAT E ACTI O N AN 0 C O R R U PT I 0 N 1 0 1

Box 6.1 How popular participation improved property rights and dispute resolution In Peru

Until 1 989 most Peruvians living in marginal urban monopolies that held a stake in the old system, such as
settlements and rural areas did not enjoy the security lawyers' associations and notaries, strongly opposed the
provided by formal ownership of their real property proposed reforms, community-level support carried the
(70 percent of the population in urban areas and 80 day.
percent in rural areas). The traditional system of prop­ In 1 989 a new property registration system was
erty registration was run by the Ministry ofJustice, and enacted into law. The new system dramatically reduced
conflicts were resolved by the judiciary. The system transactions costs and uncertainty by reducing the
was perceived by poor urban and rural property own­ power of the professional monopolies. Instead the sys­
erS as a system for the rich, who could better afford the tem uses community norms, such as neighbors vouch­
high transactions costs. ing for a party's ownership claim, to establish property
In the early 1 980s the Institute of Liberty and rights and resolve conflicts. Subject to administrative
Democracy (ILD), an NGO, began a campaign to requirements specified by the law, any lawyer may serve
improve the property rights of poor Peruvians. The as a third-party verifier, sign the property titles, and
ILD began by holding extensive public hearings to resolve conflicts in the field. Contested or complicated
gather complaints, identifY reasons why citizens did cases are resolved by the new system's chief registrar,
not formally register their property, and publicize the who is appointed by the Ministry of Housing, not the
potential benefits and costs of registration and secure judiciary. Only after these mechanisms have failed can
property. The group coupled this panicipatory process the conflict be taken to a judge.
with a study of the laws and regulations governing By 1 994 the new system had registered nearly
property registration and enforcement. Based on the 1 20,000 entities, and between 1 994 and 1 996 it regis­
resulting diagnosis, the ILD then developed concrete tered an additional 1 70,000. Spurred by its demand­
proposals for reform. These were publicly debated and driven design, the system continues to evolve, and ini­
fine-tuned staning in 1 986. Although the professional tiatives are under way to expand it nationwide.

they make it just as hard to change harmful rules as to anchored by any domestic institution. On the trade front,
change the beneficial ones. both the European Union and the North American Free
Many developing countries, including some with for­ Trade Agreement have been able to play this role, and
mal separation of powers, have few effective checks and many countries will find it an important reason to join the
balances on the actions of political leaders. In some coun­ World Trade Organization. Clearly, sovereign countries
tries legislative oversight is weak because of poor capacity can still reverse course on, for example, trade policy by
and inadequate information. In others the executive dom­ withdrawing from such agreements. But they then have to
inates a compliant legislature. But like the development of calculate not just the benefits and costs of the policy rever­
a well-functioning judicial system, the formal elaboration sal, but also the broader costs of reneging on an interna­
of constitutional checks and balances, or their more effec­ tional commitment for which their panners will hold
tive institutionalization, is a gradual process. them accountable. The threat of international censure
EXTERNAL MECHANISMS. To some extent, extraterritor­ makes countries less likely to reverse course.
ial and international restraints can substitute for limita­ Agreements with multilateral organizations, such as the
tions on the ability of national institutions to enforce rules IMF or the World Bank, often include some degree of pol­
or to signal credibly that the rules will remain reasonably icy conditionality: in order to borrow funds, for example,
stable over time. One option is to use extraterritorial adju­ countries undertake certain reforms. This can have a simi­
dication to underpin the domestic judicial system. Confi­ lar benefit for some countries. These conditionalities can be
dence in the Jamaican judicial system is buttressed by the viewed as a sign of national commitment to the policies that
fact that the United Kingdom's Privy Council serves as its are included as conditions. Countries with weak domestic
appellate court of last resort. Because of the weaknesses of commitment mechanisms can strengthen their credibility
the Philippine judicial system, many firms, domestic as by binding themselves to pay a penalty should they violate
well as foreign, prefer to adjudicate their contracts offshore. the agreement. One of the intentions behind World Bank
As Chapter 3 noted, international agreements are a sec­ guarantees is to accelerate the flow of private finance to
ond mechanism for strengthening commitments not developing countries by underpinning such commitments.
1 02 WO RLD D EV E L O P M E N T R E P O RT 1 997

Building in flexibility 1 996 a blockbuster movie, Hindustani, expressed an ex­

Instruments of restraint are a vital foundation for sustain­ treme form of popular outrage over corruption. The
able development. But excessive restraint can lead to movie depicts horrific tales of callous politicians and
paralysis. Instruments for restraining government need to bureaucrats willing to let hospital patients die and poor
be complemented by institutional arrangements that pensioners starve unless they receive their cut.
build in flexibility for the executive branch in formulating Fiction thrives on exaggeration. But it is also a mirror
and implementing policies and adapting to new informa­ that society holds up to itself to reflect entrenched prob­
tion and changing circumstances. lems. These tales-a century and a hemisphere apart­
As discussed in Chapter 5, countries have tried a vari­ remind us that corruption is nothing new, nor is it con­
ety of institutional arrangements that combine flexibility fined to any particular corner of the world. It is a problem
with restraint. Some arrangements-such as deliberation that has deeply affected the lives and stirred the resent­
councils in East Asia and the Administrative Procedures ment of citizens and businesspeople the world over.
Act in the United States-delegate substantial autonomy Today, citizens everywhere demand greater probity of
to executive agencies to define the substance and under­ government officials, and the new transparency in domes­
take the implementation of policy. But they also require tic and global markets brings corruption more quickly to
these agencies to follow procedures that open their deci­ the public eye. In the past few years allegations of corrup­
sions to input and oversight by other arms of the state and tion have contributed to the fall of governments through­
by civil society and businesses. Other arrangements rely out the world. Two former presidents of the Republic of
on mechanisms within the executive branch to promote Korea have been prosecuted and indicted. A president of
flexibility within restraints, such as the devolution of Brazil was impeached on charges of corruption. In Octo­
managerial authority to executive agencies within set bud­ ber 1 996 more than 250,000 people protested the Belgian
gets and performance targets. government's handling of a pedophile ring and alleged
But even if bureaucracies are embedded in processes corruption in judicial appointments and enforcement.
that provide ample opportunity for outside input and And a fierce debate has erupted over the financing of
oversight, the risk remains that officials will pursue per­ political campaigns and its influence on public policy in
sonal rather than organizational goals. Self-seeking behav­ the aftermath of the 1 996 U.S. presidential election.
ior can degenerate into corruption when private interests Corruption has been defined in many ways. This
wield their influence in illegal and secret ways, circum­ Report defines it as the abuse of public power for private
venting the legal and bureaucratic rules designed to keep gain. Although corruption tends to get the most atten­
them out. Whether public institutions succumb to these tion, it is a symptom of a more general problem of per­
and other sources of corruption will depend on the verse underlying incentives in public service. Corruption
strength of their institutional defenses. How these are flourishes where distortions in the policy and regulatory
built and maintained is the subject of the next section. regime provide scope for it and where institutions of
restraint are weak. The problem of corruption lies at the
Controlling corruption
intersection of the public and the private sectors. It is a
A Congressional appropriation costs money. . . . A two-way street. Private interests, domestic and external,
majority of the House Committee, say $10, 000 wield their influence through illegal means to take advan­
apiece-$40,000; a majority of the Senate Commit­ tage of opportunities for corruption and rent seeking, and
tee, the same each-say $40, 000; a little extra to one public institutions succumb to these and other sources of
or two chairmen of one or two such committees, say corruption in the absence of credible restraints.
$10,000 each. Then seven male lobbyists at $3, 000 Corruption violates the public trust and corrodes social
each; onefemale lobbyist, $10,000; a high moral Con­ capital. A small side payment for a government service
gressman or Senator here and there-the high moral may seem a minor offense, but it is not the only cost-cor­
ones cost more. ruption can have far-reaching externalities. Unchecked,
-A U.S. railroad company owner in Mark Twain the creeping accumulation of seemingly minor infractions
and Charles Warner, The Gilded Age: can slowly erode political legitimacy to the point where
A Tale of Today ( 1 877) even noncorrupt officials and members of the public see
little point in playing by the rules.
Mark Twain's damning tale was a thinly veiled caricature Studies have shown a clear negative correlation between
of corruption in the U.S. Congress in the 1 870s. Twain's the level of corruption (as perceived by businesspeople)
novel followed closely on the heels of the infamous Credit and both investment and economic growth. This is con­
Mobilier scandal, in which two prominent businessmen firmed for investment levels by the results of the private
brazenly bought their way into the Congress. In India in sector survey conducted for this Report (Figure 6. 1 ) . As we
 R E ST RA I N I N G A R B I T RA RY S TA T E ACTI O N A N D C O R R U PT I O N 1 03

saw in Chapter 3, the survey identified corruption as one

of the major obstacles to doing business in many countries. Figure 6.1 High and unpredictable corruption
Yet it is not just a cost of doing business. Other surveys and hurts investment
anecdotal evidence suggest that the greatest victims of
petty corruption are usually the poor. Gross investment­
Despite such evidence, many parts of the developing GOP ratio
(percent)
world retain a certain ambivalence toward corruption. A
30
commonly heard view is that corruption merely greases
the wheels of commerce, and that without it there would
be no transactions and no growth. Apparent support for
this argument comes from the fact that some countries
that rank high in surveys of the level of corruption have
also excelled in economic growth. The predictability of
corruption-both that of the amount one has to pay and
that of receiving the outcome one has paid for-provides
some insights into this apparent paradox. For a given level
of corruption, countries with more predictable corruption
have higher investment rates (Figure 6. 1 ) . But even in
these countries corruption has an adverse impact on eco­
nomic performance. Figure 6. 1 also shows that, no matter High Low
how high the degree of predictability of corruption in a Level of Predictability
country, its rate of investment would be significantly corruption of payments
and outcomes
higher were there less corruption.
Countries that have so far achieved high rates of eco­ Note: Each value is an average for a group of countries. Results
nomic growth despite serious corruption may find them­ are based on a regression using data from thirty-nine Industrial
selves paying a higher price in the future. Tolerating cor­ and developing countries, controlling for income, education, and
policy distortion. See the Technical Note for details. Source:
ruption that siphons off payments of, say, 1 0 percent on World Bank staff calculations based on data from the private
average may generate pressures to increase the take to 1 5 sector survey conducted for this Report.
or 20 percent. Corruption feeds on itself, creating a
widening spiral of illegal payoffs until ultimately develop­
ment is undermined and years of progress are reversed.
And the very growth that permitted corruption in the past endemic, these officials may create additional red tape and
can produce a shift from productive activities to an unpro­ delays to induce even higher payments. Of course, corrup­
ductive struggle for the spoils. Over time corruption tion also occurs at the highest levels of government, in the
becomes entrenched, so that when governments finally do awarding of major contracts, privatization, the allocation
move to contain it, they meet powerful resistance. of import quotas, and the regulation of natural monopo­
lies. This helps explain why corruption is more prevalent
Causes ofcorruption in countries with highly distorted policies, as measured by
Incentives for corrupt behavior arise whenever public offi­ variables such as the black market exchange rate premium
cials have wide discretion and little accountability. Politi­ (top left panel in Figure 6.2). Any policy that creates an
cians, bureaucrats, and judges control access to valuable artificial gap between demand and supply creates a prof­
benefits and can impose costs on private citizens and busi­ itable opportunity for opportunistic middlemen.
nesses. Public officials may be tempted to use their posi­ The probability of being caught and punished (for the
tions for private gain by accepting bribes; for their part, person paying the bribe and for the official receiving it)
private individuals may be willing to make illegal pay­ also affects the level of corruption. Economic analysis of
ments to get what they want from government. Thus, a the law suggests that individuals weigh the expected ben­
necessary condition for corruption is that public officials efits of breaking the law against the expected costs (the
have rewards and penalties at their disposal. probability of being caught and punished multiplied by
Some corruption stems from opportunities generated the level of punishment). Corruption may be high in a
by the policy environment, at the bottom or the top of country where the government system does little to deter
the hierarchy. Payoffs are frequent to lower-level officials bribes. Lawbreakers may believe that there is litde chance
charged with collecting tariffs, providing police protec­ of being caught or, if caught, of having to pay the penalty,
tion, issuing permits, and the like. When corruption is since they believe that the system of justice itself can be
1 04 WORLD D EV E L O PM E NT R E P O RT 1 997

Figure 6.2 Some factors associated with corruption

Index of corru ption Index o f corru ption

6 .------, 6 ,------,

5 5
4 •• •

.�
•

3
2
.
� . ,. -
4

3
• • •
1 •
2 •
•
o
l L-----"----"---L.--'--'
o 1 2 3 4 5 6 7 8 1 2 3 4 5 6

Policy distortion index Predictability of judici ary index

Index of corru ption Index of corru ption

6 .------, 6 .-------�
••
5 • 5

4 4 •
• •

3 3 • •
_____--
1•
__ • I • •
2 • • ·
2
I : ""
• •
• • ••
1 1
•
• •

o L_____L_____ � ____ �____�__� o L-__-L___�L_

. _ _L_
•
__ �

0.5 1 .0 1.5 2.0 2.5 0.5 1 .0 1.5 2.0

Ratio of civil service wages Merit-based recruitment index
to manufacturing wages

Note: Data for the top left panel are from thirty·nlne industrial and developing countries during 1984-93 (for the policy distortion index) and
1996 (for the corruption index). The top right panel is based on a regression using data from fifty-nine industrial and developing countries during
1996. Data for the bottom left panel are from twenty industrial and developing countries in the late 1980s to early 1990s. The bottom right
panel is based on a regression uSing data from thirty-five developing countries during 1970-90, controlling for income. See the Technical Note
to Figure 3. Source: World Bank staff calculations (top two panels); Van Rijckeghem and Weder, background paper (bottom left panel); Evans
and Rauch 1996 (bottom nght panel).

corrupted. Corruption can even persist in countries with a serious threat if more remunerative positions are avail­
substantial press freedom and public resentment against able legally in the private sector. Hence corruption is
it, if there is little hope of independent judicial resolution often positively associated with the difference between
of important cases. This Report's private sector survey public and private salaries, or what may be termed the
found a negative correlation between reported levels of "rate of temptation" (bottom left panel in Figure 6.2). But
corruption and judicial predictability (top right panel in simply raising civil service salaries may not reduce corrupt
Figure 6.2). behavior. Pay reform must be combined with credible
Finally, corruption may thrive if the consequences of monitoring and law enforcement. Merit-based recruit­
being caught and disciplined are low relative to the bene­ ment and promotion mechanisms that restrain political
fits. Officials frequently control the allocation of benefits patronage and create a more impartial public service are
and costs whose value far exceeds their own salaries. Cor­ also associated with lower corruption (bottom right panel
ruption becomes especially likely if the wages of public in Figure 6.2).
service do not reflect the comparable private wage. Where
civil service wages are very low, officials may try to eke out Reducing corruption
a middle-class standard of living by supplementing their Several countries have managed to reduce endemic cor­
pay with illegal payoffs. The risk of being fired from a ruption over time. The struggle of the Progressive move­
low-paying civil service job because of corruption is not ment against the power of U.S. urban political machines
 R E S T R A I N I N G A R B I T R A RY S TATE A C T I O N A N D C O R R U PT I O N 1 05

of the nineteenth century is a case in point (Box 6.2). theme of Chapter 5: creating a rule-based bureaucracy
Containing corruption requires an understanding of the with a pay structure that rewards civil servants for honest
benefits and costs under public officials' control. Many efforts, a merit-based recruitment and promotion system
officials remain honest despite considerable temptation, to shield the civil service from political patronage, and
and many ordinary people and businesses refuse to pay credible financial controls to prevent the arbitrary use of
bribes despite the promise of short-term gain. But others public resources. Here we focus on the remaining two
succumb. It is unwise to deal with the possibility of cor­ parts of the strategy. The first is to reduce the opportuni­
ruption by assuming that government officials are of ties for officials to act corruptly, by cutting back on their
higher moral standing than the rest of the population. discretionary authority. The second aims at enhancing
The actual extent of bribery and other corruption accountability by strengthening mechanisms of monitor­
depends not just on the potential gains and risks, but also ing and punishment-using not only criminal law but
on the relative bargaining power of the buyer and the also oversight by formal institutions and ordinary citizens.
seller of public favors. Reformers must also consider the REDUCING OPPORTUNITIES FOR CORRUPT PRACTICE.
fact that anticorruption efforts have marginal costs as well In general, any reform that increases the competitiveness
as marginal benefits; the efficient level of bribery will sel­ of the economy will reduce incentives for corrupt behav­
dom be zero. ior. Thus policies that lower controls on foreign trade,
Corruption cannot be effectively attacked in isolation remove entry barriers to private industry, and privatize
from other problems. It is a symptom of problems at the state firms in a way that ensures competition will all
intersection of the public and the private sectors and support the fight. If the state has no authority to restrict
needs to be combated through a multipronged strategy. exports or to license businesses, there will be no opportu­
Recent reforms in Uganda illustrate such an approach nities to pay bribes in those areas. If a subsidy program is
(Box 6.3). One part of the strategy focuses on a major eliminated, any bribes that accompanied it will disappear

Box 6.2 Urban political machines in the United States and their reform

In the late nineteenth and early twentieth centuries wealthy property owners and introduced a plan to
many U.S. cities were dominated by political machines, assess property at market value. The plan increased the
defined by one scholar "as a political party in which a assessed value of real estate, lowered the tax rate, and
boss oversees a hierarchy of party regulars who provide increased revenues. The city's budget was cut by $ 1 .5
private favors to citizens in exchange for votes and million as patronage appointees were removed from
who expect government jobs in return." Machine­ office. Reform mayors in many other U.S. cities fol­
controlled cities also typically made corrupt, collusive lowed similar policies.
deals with private businesses seeking contracts, fran­ Reform also involved municipal franchises. In
chises, or protected markets. The politicians driving Philadelphia, for example, the machine-controlled city
these machines operated-and flourished-in nomi­ council regularly awarded a gas franchise in return for
nally democratic environments. contributions to the Republican Party. In 1 905 reform
Machines were costly to the communities they dom­ mayor John Weaver vetoed the franchise bill, ap­
inated. Spending per capita for general administration pointed a supporter to a key position on the city coun­
and for police and fire services-both areas with lots of cil to ensure that the veto would be upheld, and had
patronage jobs-was 34 percent and 1 7 percent higher, machine adherents arrested on charges of corruption.
respectively, in machine-controlled than in nonmachine Cities dominated by machines paid a high cost in
cities. To take one extreme case, in Boston the number the form of inflated budgets and inequitable tax and
of city clerks increased by 75 percent between 1 895 and spending systems. Although many people benefited
1 907, while the population increased by less than a from the jobs and patronage dispensed by the
quarter; meanwhile growth in productivity fell by half. machines, the losers were more numerous still. It was
The Progressive movement in the United States had they who eventually organized to elect reform candi­
as one of its main goals the reform of machine-domi­ dates in many cities. The wave of reform mayors
nated cities. Reform frequently meant property tax effected real change, which persisted even when the
reform. Seth Low, New York's reform mayor in the machines were returned to power, mainly because the
early 1 900s, was distressed by the favoritism shown to reforms were popular and hard to reverse.
1 06 WORLD D EV E L O PM E N T R E P O RT 1 997

Box 6.3 Fighting corruption In Uganda

Uganda, long plagued by systemic corruption, has civil service (including thousands of "ghost workers")
launched a multipronged battle against it. The effort and a thin and porous tax base.
enjoys support from the country's leaders, who seem Cleaning up the civil service will take years, but
committed to the goal of sound governance. Uganda is making some progress. The effort includes
In the immediate postcolonial period Uganda was a policy reform and deregulation to remove opportunities
kleptocratic state. By 1 967 the regime ruled without for rent seeking; civil service reform to streamline the
holding elections. These beginnings set the stage for public work force, improve remuneration, provide train­
Idi Amin's rise to power in 1 97 1 . Under Amin, gov­ ing, and instill a code of ethics; revival of the Public
ernment became little more than a system of organized Accounts Committee of Parliament; a strengthened
crime used to extract rents from the public. Their auditor general's office; and a public relations campaign
depredations took many forms, including support for against and prosecution of corruption, under the author­
economically irrational projects, exorbitant military ity of an inspector general with powers to investigate and
expenditures, kickbacks on state contracts, extortionate prosecute. Much remains to be done before corruption
import controls, and expropriation of the properties of can be said to be under control. The inspector general,
Asians. Upon emerging from civil war in 1 986, the however, has announced prosecutions against common
new Ugandan government under President Yoweri examples of rent seeking (such as customs and procure­
Museveni inherited a weak, underpaid, and overstaffed ment fraud), which should have a deterrent effect.

as well. If price controls are lifted, market prices will can help blunt the incentive to be corrupt. Police offi­
reflect scarcity values, not the payment of bribes. cers, for example, must have discretionary authority to
Needless to say, reducing official discretion does not make law enforcement decisions on the spot, but pub­
mean eliminating regulatory and spending programs with lic complaints will often restrain any abuses.
strong j ustifications. Such programs must be reformed, • Introduce market-based schemes that limit the discretion of
nor eliminated. Abolishing taxes is nor a sensible way to regulators. This approach also has the virtue of pro­
root out corruption among tax collectors; a corrupt police ducing an economically efficient allocation of re­
force cannot simply be closed down. Several measures sources. The sale of water and grazing rights, pollution
have proved effective in reducing official discretion in on­ rights, and import and export licenses can improve
gomg programs: the efficiency of government operations while limiting
corruption .
• Clarifj and streamline laws in ways that reduce official • Adopt administrative reforms that introduce competitive
discretion. Mexico's customs reforms cut the number of pressures into government. Open, competitive bidding
steps in the process from twelve to four; the remaining for public procurement contracts can reduce opportu­
steps were streamlined to reduce delays. nities for corrupt deals. Creating overlapping, compet­
• Contract for services with a private company, possibly a itive bureaucratic jurisdictions can greatly diminish the
foreign firm with no close ties to the country. When bargaining power of individual officials. If clients can
Indonesia contracted with a Swiss firm for customs turn to a second official when the first demands a bribe,
preinspection and valuation and for help in collecting no single official has the power to extract a large payoff
import duties, corruption declined. Contracting out so long as applicants are eligible for the service. And
monitoring functions is pointless, however, unless the if it is the applicants who are seeking something ille­
government makes use of the reports it receives-and gal, overlapping enforcement areas can help to check
that does not always happen. payoffs as well. For instance, when the state wants to
• Make rules more transparent. Simpler, nondiscretionary control illegal businesses, police officers can be given
tax, spending, and regulatory laws can limit opportuni­ overlapping enforcement areas to reduce opportunities
ties for corruption. Sometimes a certain risk of corrup­ for corruption.
tion is tolerated because the benefits of a discretionary
approach to program administration exceed the costs of STRENGTHENING MECHANISMS FOR MONITORING AND
corruption. But even then transparency and publicity PUNISHMENT. Independent watchdog institutions that are
 R E STRA I N I N G A R B ITRARY S TA T E ACTI O N A N D C O R R U PT I O N 1 D 7

part of the government structure can also curb corruption. units to root out corrupt contractors and propose ways
Countries have experimented with various approaches: to reorganize the agency to reduce corruption.
• Whistleblower statutes protect and reward public
• Some countries have independent anticorruption com­ employees who report the malfeasance of co-workers or
missions or inspectors general that can investigate alle­ government contractors. The United States, for exam­
gations and bring cases to trial. The most famous is the ple, has a statute that calls for rewarding workers who
Independent Commission against Corruption in Hong report irregularities in government contracts. Such an
Kong (China) , which reports exclusively to the highest incentive for reporting is often necessary, since people
authority and has extensive powers (Box 6.4) . Singa­ who report co-workers' misdeeds are frequently ostra­
pore and Botswana have similar institutions. cized. Such measures are hollow, however, unless pros­
• Ombudsmen hear citizen complaints and can help ecutors follow up, courts are incorruptible and effi­
increase the accountability of government agencies. ciently run, and penalties are severe enough to deter
Under the Ombudsman Act of 1 99 1 , South Africa has potential offenders.
established a public protector to investigate alleged
improprieties (malfeasance, corruption, human rights Watchdog organizations should focus not only on
abuses) by public officials and to prepare reports, which those who receive bribes, but also on those who pay them.
are usually made public. The office cannot initiate legal It takes two to tango, and penalties should be equally
actions but will refer cases to offices that can. severe on both sides-usually a multiple of the bribes
• Some public agencies, such as the School Construction received or paid. Penalties for bribe payers should also
Authority in New York City, have established internal include the prospect of being barred from contracting

Box 6.4 Hong Kong's independent commission against corruption

Corruption was endemic in Hong Kong (China) dur­ at first backed down and granted an amnesty for
ing the 1 960s. Its entrenched character is suggested by offenses committed before January 1 , 1977. This set­
expressions popular at the time: people had the choice back was harmful to the commission's prestige, but it
of "getting on the bus" (actively participating in cor­ was able to recover with a vigorous public education
ruption) or "running alongside the bus" (being a campaign. Public surveys carried out between 1977 and
bystander who did not interfere with the system). 1 994 indicate that public perceptions of corruption
"Standing in front of the bus" (reporting or resisting have fallen significantly. Indirect evidence suggests that
corruption) was not a viable option. active corruption has declined as well.
Spurred to action by a scandal involving a high­ Still, the ICAC is not without its problems. The
ranking police officer, the then-governor general estab­ main one is that it reports only to the governor. An
lished the Independent Commission Against Corrup­ anticorruption commission reporting to an autocratic
tion (ICAC) in 1 974. The commission reports only to ruler could be used as an instrument of repression
the governor and is independent of the police force. against political opponents, and the ICAC has not
ICAC officials are paid more than other government been immune to such charges. The ICAe's broad
workers and cannot be transferred to other depart­ powers could be abused in systems less committed to
ments. No one may leave the ICAC to work for senior the rule of law. A series of oversight committees and
officers who have been the subject of an investigation. an independent judiciary act as a check on the ICAC,
The ICAC has the power to investigate and prosecute but even so the occasional scandal surfaces. As a fur­
corruption cases as well as to sponsor public education ther control on its power, such an agency might re­
campaigns. The government's commitment to reform port not to the chief executive but to the legisla­
was further indicated by the appointment of a person ture, as do Uganda's Inspector General and the U.S.
of unquestioned integrity as the first head of the com­ General Accounting Office. A tough, independent
mission and by a policy of investigating and prosecut­ anticorruption agency is a potent tool and represents
ing "big tigers" from the outset. a credible long-term commitment, but there should
Early efforts to clean up corrupt syndicates within also be checks on its ability to be misused for politi­
the police force, however, met with protests. The ICAC cal ends.
1 DB WO R L D D EV E L O P M E N T R E P O RT 1 997

with the government for a period of years. Industrial their constituents. (However, if corrupt payoffs are used
countries with strong monitoring capacity can enforce to buy benefits for individual voters, knowledge of cor­
such measures on their multinational companies conduct­ ruption may do little to stop it.)
ing business overseas. But except for the United States, • If courts are independent and citizens can sue to force
which adopted the Foreign Corrupt Practices Act in the government to comply with the law, this opens
1 977, countries have been reluctant to act unilaterally for another route to control government malfeasance.
fear of subjecting their businesses to more stringent stan­ • Public exposure of corruption through the media is
dards than their foreign competitors. another option. Even undemocratic rulers are likely to be
In this context, international organizations provide a sensitive to public opinion, if only because they wish to
forum for agreeing on common standards and coordinat­ avoid being overthrown. A free press can be a vital check
ing action. Regional organizations such as the Organization on abuses of power, especially in countries that lack other
of American States have sponsored international conven­ means of constraining politicians and bureaucrats.
tions making bribery, including international bribery, a
crime. A recent initiative by the OECD encourages ending Yet even if both the necessary information and the
the tax deductibility of bribes and criminalizing the bribing means of punishing corrupt practices are available, indi­
of foreign officials. It makes recommendations to its mem­ vidual citizens are unlikely to act alone. Laws that make it
ber countries on how to deal with bribery in international easy to establish associations and nonprofits can help
business transactions. International organizations are also resolve this collective action problem. Such groups might
working to coordinate the fight against money laundering not only seek information from government, but also sup­
and, in particular, to expand the list of offenses, including ply information to government about citizens' opinions of
corruption. The forty recommendations of the Financial the quality of public services. As discussed in Chapter 7,
Action Task Force on Money Laundering include nondrug the nonprofit Public Affairs Centre in Bangalore is en­
criminal activities. This opens the way for countries to gaged in a promising experiment to publicize the per­
make illegal the use, deposit, or transfer of money acquired formance of Indian public agencies. An international
through corruption. nonprofit organization, Transparency International, is
Citizens' groups can also be an important check on the working to mobilize citizens around the world to fight
arbitrary abuse of government power-if people can orga­ corruption and to publicize countries' track records. Yet
nize, and if they can find out what is happening. Govern­ precisely because open information can be so potent in
ments should publish budgets, revenue collection data, promoting government reform, many countries limit such
statutes and rules, and the proceedings of legislative bod­ groups or make it costly for them to organize.
ies. Financial data should be audited by an independent
Strategic options: Balancing flexibility with restraints
authority like the U.S. General Accounting Office. U nau­
dited secret funds or extrabudgetary funds available to Pressures for reform are on the rise everywhere. Private en­
chief executives are an invitation to corruption. trepreneurs and firms want the credibility of state actions
Freedom-of-information acts in the United States and anchored by a well-functioning system of property rights.
a number of European countries are an important tool for Citizens are demanding more responsive and effective
public oversight. A recent directive of the European delivery of public services and greater probity in the use of
Union requires member states to pass freedom-of-infor­ public resources. At the same time, globalization is in­
mation laws covering environmental information. Such creasing demands for a more agile state, one that can
laws enable citizens to obtain government information respond quickly to changing circumstances. These pres­
without having to show how their lives are affected by it. sures have magnified the state's dilemma: how to check
The availability of information helps citizens discipline arbitrary decisionmaking without building rigidities that
public officials at the ballot box and through other inhibit innovation and change. The fundamental chal­
avenues of protest, such as legal challenges and direct peti­ lenge is to devise institutional arrangements that sustain a
tions to decisionmakers. workable balance between flexibility and restraint. Coun­
Information is of little value, however, without mech­ tries with strong institutions or track records of following
anisms for using the knowledge gained to influence gov­ through on commitments may have room to respond flex­
ernment behavior: ibly (even at the cost of some corruption), but countries
with dysfunctional and arbitrary governments may not.
• In democracies, citizens can vote officials out of office if States in many developing countries have demon­
they believe them to be corrupt. This gives politicians an strated a clear imbalance between flexibility and restraint.
incentive to stay honest and work for the interests of They have generally not been credible, accountable, re-
 R E STRA I N I N G A R B ITRARY STATE ACTI O N AND C O R R U PT I O N 1 09

sponsive, or agile. In several countries the capricious exer­ the civil service (for instance, by raising pay and restrain­
cise of state power coupled with rampant and unpre­ ing political patronage in recruitment and promotion) ,
dictable corruption has undermined development. States reducing opportunities for officials to act corruptly (for
with too much flexibility and not enough restraint will instance, by increasing competition and reducing officials'
find that their actions are not viewed as credible, and discretionary authority) , and enhancing accountability are
investment and growth will suffer. These countries need other essential steps. Strengthening mechanisms for mon­
to strengthen the formal instruments of restraint-judi­ itoring and punishment-of the people who pay bribes
cial independence, effective separation of powers-to as well as those who accept them-will require vigorous
enhance the credibility and accountability of the state. enforcement of criminal law. But it will also require over­
International commitment mechanisms can serve as a sight by formal institutions such as statutory boards and
short-term substitute while these institutions are built up. by ordinary citizens (through voice and participation).
Yet these actions will not be enough to stop the rot in These efforts can help not only in controlling corruption
countries where endemic and entrenched corruption has but also in improving many other functions of the state,
undermined key functions of the state. Strengthening such as policymaking and service delivery. The use of
formal instruments of restraint is only one element of a voice and participation to reinvigorate public institutions
multipronged strategy to control corruption. Reforming is the subject of Chapter 7.
B R I N G I N G T H E S TAT E

C LO S E R T O P E O P L E

And, teLL me, what use is the ship-ofstate ifaLL are not on board?
-From Tijan M . Sallah, The State ( 1996)

EOPLE ARE THE MEANS AND THE END OF DEVELOP­ ment, business, and civic organizations, can also enhance
ment. But they have different amounts of power their supply. But effective citizen involvement does not
and resources, and different interests, all of which the state come easily. One lesson of many such experiments is that
must try to represent and respond to if it is to act effec­ effective participation requires enlightened government
tively. In nearly all societies the needs and preferences of intervention, including improving the institutional envi­
the wealthy and powerful are well reflected in official pol­ ronment in which social and human capital is created.
icy goals and priorities. But this is rarely true of the poor There is another important lesson: bringing govern­
and the marginalized, who struggle to get their voices ment closer to some people can risk taking it even fur­
heard in the corridors of power. As a result, these and other ther away from others. Not all organizations of civil society
less vocal groups tend to be ill served by public policies and are adequately accountable, either to their own members or
services, even those that should benefit them most. to the public at large. And although some groups may be
A state that ignores the needs of large sections of the quite vocal, the interests they represent may not be widely
population in setting and implementing policy is not a shared. In reaching out to groups in civil society, govern­
capable state. And even with the best will in the world, ment must be conscious of the interests those groups rep­
government is unlikely to meet collective needs efficiently resent, but also of those they do not. Otherwise its inter­
if it does not know what many of those needs are. Rein­ vention risks creating new disparities between the newly
vigorating public institutions must, then, begin by bring­ enfranchised and those whose voices remain unheard:
ing government closer to the people. That means bringing women and ethnic groups, for example, or people whose
popular voice into policymaking: opening up ways for interests have not been adopted by an active NGO.
individual users, private sector organizations, and other Some of the same concerns arise with regard to decen­
groups in civil society to have their say. In the right set­ tralization. Carefully managed, decentralization can do
ting, it can also mean greater decentralization of govern­ much to improve state capability, creating pressures for
ment power and resources. better matching of government services to local prefer­
This chapter discusses a wide range of mechanisms to ences, strengthening local accountability, and supporting
ensure that policies and programs better reflect the full local economic development. But there are pitfalls: policy­
panoply of society's interests. Informing and responding makers in central government may lose control over the
to citizens will raise the state's effectiveness by improv­ macro economy as a result of uncoordinated local deci­
ing monitoring of public goods and services and forcing sions, and regional disparities can widen, exacerbating
greater transparency in decisionmaking. Encouraging economic and social tensions. Local governments can fall
wider participation in the design and delivery of these under the sway of particular interests, leading to abuse
goods and services, through partnerships among govern- of state power and even less responsive and accountable
 B R I N G I N G TH E STATE C L O S E R TO PEO PLE 1 1 1

government. The message, here as elsewhere, is that bring­ formance of some state institutions is falling short of ex­
ing government closer to the people will only be effective pectations (Box 7. 1) .
if it is part of a larger strategy for improving the institu­
tional capabiliry of the state. Electoralparticipation
In a democratic sociery elections are the primary manifes­
Greater accountability and responsiveness tation of citizen voice. The number of democratically
through participation elected governments has increased sharply in recent
Throughout history nearly all societies have grappled with decades, giving many citizens new opportunities to voice
how to make the state reflect the needs and interests of the their opinions through the ballot. In 1 974 only 39 coun­
population. But it is an especially relevant question today, tries-one in every four worldwide-were democratic.
with the spread of education and information and the Today 1 1 7 countries-nearly two in three-use open
growing pluralism of nations creating new pressures on elections to choose their national leadership, and two­
states to listen and respond to the voices of their citizens. thirds of the adult population in developing countries are
A sample of public opinion around the world suggests eligible to participate in national elections (Figure 7. 1) .
that belief in government remains solid, but that the per- The trend is especially striking in Central and Eastern

Box 7.1 Public opinion and the state

Views on the state vary widely, reflecting perceptions of In Latin America 69 percent of citizens believe that
wide-ranging political and economic variables. To assess the state should intervene to "reduce income differences
these perceptions and concerns, public opinion surveys between rich and poor. Latin American respondents
have been carried out in various countries and regions. also regard as critical the government's role in main­
For example, a 1 99 1-92 survey found that 49 percent taining law and order, but 65 percent have little or no
of respondents in the United Kingdom, and 44 percent confidence in the judiciary or the police force. Only 24
in the United States, felt excluded from public decision­ percent have some confidence in these institutions.
making that directly affected their lives. Even so, satis­ These results closely mirror the concerns voiced by
faction with the way their democracies are developing is the region's entrepreneurs in the survey reported in
relatively high in Western Europe and North America, Chapter 3.
ranging from 54 to 64 percent of respondents. By con­ In India a 1 996 survey found that, despite strong
trast, in Latin America and the transition economies of support for the democratic system, voter trust in their
Eastern Europe only 30 to 40 percent of respondents representatives has fallen since 197 1 . Trust in some
report being satisfied with the way their democracies are public institutions was also low, particularly the police
working. In Latin America this negative perception may (28 percent) and the bureaucracy (37 percent) . Still,
be related to the fact that 52 percent of respondents in a the poll found strong popular participation and
twelve-nation survey felt that the administration of elec­ involvement in politics: the number of respondents
tions in their country was fraudulent. who said they participated in a social organization or
In Europe public support for the state and its services political parry doubled between 1 97 1 and 1996.
has been consistently strong since the 1 970s. In 1 990 In contrast to Europe, Latin America, and to some
large majorities-more than 70 percent-in seven West­ extent Asia, where statist traditions remain strong, in
ern European nations still believed that the government the United States 80 percent of respondents in a recent
should provide health care, services to the elderly, aid to poll said they mistrusted the government because of its
the unemployed, and assistance to industry, as well as perceived inefficiency and waste. In addition, public
reduce income differences. A 1 996 poll across the fifteen support for welfare programs, particularly targeted wel­
countries of the European Union found that 5 1 percent fare spending, has declined. A 1 993 poll found that
of citizens believe their governments should maintain only one-sixth of Americans thought that the welfare
current social benefits and protection levels, compared system was working very well or fairly well, and in
with 12 percent who think they should be cut consider­ 1995 two-thirds thought that too much was being
ably to enhance EU competitiveness in world markets. spent on welfare programs.
1 1 2 WO RLD D EV E L O P M E N T R E P O RT 1 997

Figure 7.1 The world has become much more democratic since 1980

Index of democracy (most democratic = 10)

10

8
OECD
/
Eastern Eu rope
6 and Central Asia

South and East Asia

2 and Pacific
Latin America

-2

-4

-6 Sub-Saharan Africa

-8
1960 1965 1970 1975 1980 1985 1990 1994

Note: This particular index of democracy is calculated for 177 countries from scores on five component indicators: competitiveness of political
participation, regulation of political participation, competitiveness of executive recruitment, openness of executive recruitment, and constraints
on the chief executive. The World Bank does not endorse any particular democracy index. See the Technical Note for details. Source: Jaggers
and Gurr 1996.

Europe and Central Asia, where the fall of communist democracies in the 1 980s shows that women's parliamen­
regimes in 1 989 and 1 99 1 sparked a series of major polit­ tary representation and voter turnout are higher in systems
ical changes across the region. These events had repercus­ based on proportional representation than in winner-take­
sions in other regions as well, particularly in Sub-Saharan all systems. Where women are better represented in par­
Africa. In Latin America the gradual movement toward liament, their interests are better protected, through poli­
democracy started somewhat earlier. Now all but two cies relating to maternity leave, child care, and flexibility
countries in the region have democratically elected gov­ in retirement systems. This suggests caution in making
ernments, and close to 1 3,000 units of local government simple generalizations about the representativeness of for­
are electing local leaders (such as mayors), compared with mal electoral arrangements: it is important to analyze how
fewer than 3,000 in the late 1 970s. they play out in practice.
The principle of one person, one vote is fundamental
to the representative purpose of elections. Without the Diversity and representation
necessary safeguards, however, political interference and Concern about the effects of majoritarian rule has some­
electoral fraud can seriously affect representativeness and, times led to changes in electoral arrangements to ensure
thus, the legitimacy of electoral outcomes. As Box 7. 1 adequate representation of minority groups. As the num­
noted, for instance, a majority of poll respondents in ber of ethnic conflicts around the world attests, the belief
twelve Latin American countries felt that the administra­ of certain groups that they are being left behind-in terms
tion of elections was fraudulent in their country; only 30 of income, assets, or employment-can be a powerful
to 40 percent felt satisfied with the way democracy was source of frustration. This can spill over into direct con­
working. Constitutional and institutional arrangements, flict if the lagging groups lack adequate means of repre­
compounded by inadequate information, also affect the senting their concerns. Political elites who mirror ethnic
ability of minority interests to gain effective representa­ differences in competing for power and distributing
tion. For example, a study of a number of European patronage will add fuel to the fire. In the contemporary
 B R I N G I N G TH E STATE CLOSER TO PEOPLE 1 1 3

world, states play a significant part in shaping ethnic rela­

tions through two related channels: Box 7.2 Managing multiethnic societies In
Malaysia and Mauritius
• The expansion of political authority enables states to
create a competitive arena for the distribution of state Ethnic divisions in Malaysia have their roots in the
resources and access to education, employment, land, colonial period, when large numbers of ethnic Chi­
and credit. nese and Indians immigrated to take jobs and com­
• The extension of political patronage, whether for ad­ mercial opportunities that were not being filled by
ministrative convenience or for enhanced control, lets the largely agrarian native Malays (bumiputra). The
governments favor certain ethnic groups over others. 1957 constitution enshrined consociational princi­
ples, achieved through extensive negotiation among
Ethnic differences and conflicts are a part of most soci­ the major groups. In 1971, however, the new parlia­
eties, yet some societies have managed them better than ment passed a constitutional amendment that firmly
others. Techniques for alleviating such pressures have established Malay primacy. The amendment made
included dispersing the "points of power" (decentraliza­ it illegal to "question publicly or even in Parliament
tion or devolution), supporting electoral arrangements the status of Malay language, the sovereignty of the
that encourage cooperation among ethnic groups (elec­ Malay rulers, the special position of Malays or the
toral incentives and coalitions) , and giving preferences to citizenship rights of the immigrant communities."
less privileged ethnic groups in public sector employment This ruling changed the character of electoral cam­
and other areas. Box 7.2 describes how constitutional paigns, since parties could no longer gain votes by
change and preferential policies were used in Malaysia and arousing ethnic antagonisms.
Mauritius. By looking at some of the basic rules of the A second initiative, the New Economic Program
game, including elements of the political or institutional ( 1 970-90), boosted the economic position of
structure, both countries seem to have found a way to Malays. The program had twO main elements. The
manage ethnic differences effectively. first was the promotion of full, productive employ­
ment of Malays and an expansion of the supply
Alternative strategiesfor voice and participation of skilled Malay labor. Preferential university
Voting rules and electoral incentives can be reformed to admissions standards for Malays almost tripled
make them more representative, but the simple fact that their enrollment, to three-quarters of the total. The
elections and referendums are held relatively infrequently second was the gradual redistribution of asset own­
(Switzerland is an exception, with an average of five local ership. The government made it clear that it would
referendums each year since 1 945) limits their scope for not confiscate Chinese economic wealth, but that it
communicating timely information about societal prefer­ would promote Malay participation in a growing
ences. In most societies, democratic or not, citizens seek economy. Strong growth allowed non-Malays to
representation of their interests beyond the ballot: as tax­ continue to gain, while the New Economic Pro­
payers, as users of public services, and increasingly as gram ensured that the growth would be shared by
clients or members of N GOs and voluntary associations. all citizens.
Against a backdrop of competing social demands, rising Mauritius has at least three major ethnic groups:
expectations, and variable government performance, these Indo-Mauritians, Creoles, and Chinese. The de­
expressions of voice and participation are on the rise. signers of the electoral system, anxious to avoid cre­
The rapid growth of NGOs illustrates the trend most ating institutions that might exacerbate the coun­
vividly. Since the late 1 980s the number of NGOs oper­ try's ethnic divisions, structured the system to force
ating in parts of Africa and Asia has almost doubled. In the main parties to seek support from all communi­
Central and Eastern Europe and the CIS the number of ties. Moreover, Mauritian governments have gener­
NGOs may have increased three- or fourfold from its very ally chosen broad-based growth and distribution
low base of 1 989. In some countries of the OECD, oper­ policies over ethnic preferences. Formal preferences
ating expenditures in the voluntary or NGO sector now in employment and in education have never been
account for almost 4 percent of GDP. used. And all governments since independence have
NGOs have myriad organizational forms and func­ had to form multiethnic coalitions in order to
tions, from labor unions to professional associations to assume and maintain power. Growth with redistri­
neighborhood groups to philanthropic trusts. Among the bution has tended to blunt the appeal of communal
most active NGOs today are those providing services politics.
directly to individuals and communities, from health and
1 1 4 WO R LD D EV E L O P M E N T R E P O RT 1 997

education to microcredit, vocational training, and profes­ have had a direct impact on this isolated community. The
sional services. In the OECD countries many NGOs committee has an elected executive board consisting of
operate alongside public providers. In Japan and the members from each part of the village; villagers rank it as
United Kingdom, for example, a large percentage of non­ the most relevant and effective organization in the village.
profit organizations are active in education. In the United Similar locally based organizations include rotating credit
States they figure prominently in health care. But unlike associations, farmers' associations, worker cooperatives,
public providers, most NGOs are not obliged to cater to parent-teacher associations, and even religious congrega­
the general needs of the population; this makes it simpler tions. These associations are valuable not only for their
for them to provide services of a particular type and qual­ ability to meet basic needs, but also for the role they play
ity to specific groups. in building trust and a sense of public connectedness
In most developing countries NGOs engaged in ser­ among those excluded or alienated from the formal politi­
vice delivery are small in scale, working in communities cal process. But organizations such as these also face limi­
and settings where the reach of government or private tations, including narrowness of membership and repre­
providers is weak or nonexistent. In the West Bank and sentation, limited management capacity, and the risk of
Gaza, for example, an estimated 1 ,200 NGOs provide 60 co-option by traditional power holders or political factions.
percent of primary health care services, up to half of sec­
ondary and tertiary health care, and most agricultural ser­ The institutional basis ofparticipation
vices, low-cost housing schemes, and microcredit. In The depth and intensity of popular collective activity
Cambodia some thirty to forty NGOs provide micro­ obviously differ by social and institutional setting. One
credit to rural and urban entrepreneurs in the absence of explanation for these differences lies in differing endow­
alternative government programs for poverty alleviation. ments of social capital, the informal rules, norms, and
The numerical importance of these NGOs reflects their long-term relationships that facilitate coordinated action
ability to substitute for weak public sector capacity and to and enable people to undertake cooperative ventures for
mobilize funds from a range of different sources, includ­ mutual advantage. The presence of rules conducive to
ing national and international organizations. social organization can improve the collective efficiency
Yet not all NGOs are involved in the delivery of ser­ of a community, but the absence of such rules is not nec­
vices. Many others are research and civic education essarily a permanent condition. They can be generated
groups, advocacy organizations, and professional and busi­ by participation itself, and here governments and other
ness associations that represent particular interests or seek formal organizations such as labor unions can play a pos­
to educate the public about issues in their collective inter­ itive role. Government efforts to improve the manage­
est. The Socio-Ecological Union in Belarus, for example, ment of irrigation systems in Taiwan (China) and the
is actively engaged in public education about industrial Philippines, for example, have yielded numerous collec­
pollution and its consequences. The West Africa Enter­ tive responses from farmers in managing operations and
prise Network is a business-oriented network, with some maintenance and in collecting water user fees. By accept­
300 members from twelve nations, representing the inter­ ing co-management of water resources by farmers, public
ests of domestic entrepreneurs in dealings with govern­ officials achieved a substantial improvement in irrigation
ment. In many countries trade unions play an important management. In the state of Ceara in northeastern Brazil
role in generating and disseminating information on labor (see Box 5.7 in Chapter 5), community monitoring of an
and policy-related issues. The growth of these intermedi­ innovative government health program provided the basis
ary organizations reflects the larger movement toward not only for a highly successful program but also for more
democracy in many regions and, in some countries, the effective cooperation among community members on
need to bridge the "missing middle" between citizens and other mutually beneficial courses of action.
the state. Unlike the electoral process, however, where all The debate about the contribution of social capital to
votes are counted equally, not all these organizations are economic and social development is just beginning, and
equally representative, either of their clients' interests or of the early evidence is by no means unambiguous. But some
the public interest more broadly. studies are already demonstrating its potential impact on
Most intettnediary NGOs tend to be one step removed local economic development, on the provision of local
from ordinary citizens; by contrast, grassroots organiza­ public goods, and on the performance of public agencies
tions, community-based groups, and people's organizations (Box 7.3) .
engage them directly. In Umu-ltodo, a village in Enugu The social mechanisms that constitute social capital and
State, Nigeria, for instance, the Community Development the myriad fottns of more formal nongovernmental activity
Committee formed in 1 986 has been responsible for directly reflect the heterogeneity of needs and preferences in
numerous development and infrastructure projects that society. At the same time there are no guarantees that these
 B R I N G I N G TH E STATE CLOSER TO PEO PLE 1 1 5

Box 7.3 Does social capital matter?

A study of regional government in Italy during the justed incomes per capita than do households in vil­
1 970s and 1 980s found that although political and lages with low levels of social capital. When other non­
economic failures were widespread, some regional gov­ social capital determinants are controlled for, there also
ernments, particularly those in the north, had per­ appears to be a strong correlation between a village's
formed well. Northern regional governments were well-being and its level of social capital. This result
notable for developing innovative day care programs points to important spillover effects at the village level
and job training centers, promoting investment and arising from individual participation in local associa­
economic development, managing the public's busi­ tions and groups. Although no general conclusions
ness efficiently, and satisfying their constituents. could be drawn about the impact of social capital on
Regional governments in the south, by contrast, government performance, the study points to a num­
showed much weaker responsiveness and performance. ber of important linkages, including a positive associa­
The study attributed the better performance of north­ tion between social capital and the quality of local
ern governments to the external pressures created by schooling (see figure). The implication is that where
dense networks of civic associations and citizen parents can organize to monitor and pressure local gov­
involvement in local public affairs. ernment into maintaining local schools, school quality
A recent study of villages in rural Tanzania found is enhanced. Even though the direct benefits of school­
that households in villages with high levels of social ing accrue mainly to individuals, the benefits of moni­
capital (defined in terms of the degree of participation toring local government performance accrue to all as a
in village-level social organizations) have higher ad- public good.

Social capital, household expenditure, and school quality in Tanzania

Household expenditu re pe r capita

(thousands of Tanzanian shilli ngs) Index of school qual ity
250 4.0

•
•
200 .. •
3.5
• •
• •• • •
.. •
150 • •
• •
3.0

100
•• • • ..
• • •• •
•• • ..
. , 2.5 •
• •
50 •
• • •
• •

0 2.0
-2 -1 0 1 2 3 -2 -1 0 1 2 3
Index of social capital Index of social capital

Note: Data for the social capital index are from a 1995 survey of 1.376 Tanzanian households. The social capital index measureS the
prevalence of residents' participation In groups and voluntary associations. The school quality index measures households' perceptions of
school quality. See the Technical Note for details. Source: Narayan and Pritchett 1997 .
1 1 6 WORLD DEVELO PM ENT R E P O RT 1 997

organizations are adequately addressing citizens' needs or Improving institutional capability

that they are genuinely concerned with promoting the pub­ Increasing opportunities for voice and participation can
lic interest. Most NGOs provide services of high quality, improve state capability in three ways. First, when citizens
but some suffer from serious problems, including poor can express their opinions, formally or informally, and
quality of service, inadequate community participation, press their demands publicly within the framework of the
and weak accountability. Some NGOs are created oppor­ law, states acquire some of the credibility they need to
tunistically, to advance the interests of narrow and privi­ govern well. Broad-based discussion of policy goals can
leged constituencies, often at the expense of the less vocal also reduce the risk that a powerful minority will monop­
and less powerful. And the same social rules and norms that olize the direction of government. States that achieve
facilitate collective action among citizens can preserve credibility are then allowed more flexibility in policy im­
inequalities and power differences within communities. plementation and have an easier time engaging citizens in
Yet given the many obstacles facing ordinary citizens, the pursuit of collective goals. This does not mean that
especially the poor, in articulating and pressing their Western-style democracy is the only solution. Experience
needs, these associations play a vital role in channeling from partS of East Asia suggests that where there is wide­
their voice and in building capacity for participation in spread trust in public institutions, effective ground-level
public affairs. And those organizations that genuinely seek deliberation, and respect for the rule of law, the condi­
to work in the public interest can be valuable partners in tions for responsive state intervention can be met.
economic and social development. Working from this Second, where markets are absent, as is the case for
premise, many governments are searching for new institu­ most public goods, popular voice can reduce information
tional arrangements for providing public goods, which problems and lower transactions costs. Where incentive
involve both the private sector and groups in civil society problems and weak state capability lead to inefficient pub­
(Figure 7.2) . The next section sets these effortS in a lic services, user groups and citizen associations can inform
broader context, exploring the range of mechanisms for public officials of the problem and pressure them for im­
increasing popular participation in the design and imple­ provements. A recent user assessment of the water supply
mentation of public policy. system in Baku, Azerbaijan, for example, revealed not only
significant problems of water leakage and water-related
health problems, but the high costs that the city's unreli­
able water supply imposed on low-income consumers. Per­
Figure 7.2 Organizations at the interface of haps most interesting, users also revealed themselves will­
state, markets, and civil society ing to pay between two and five times more than they were
actually paying for a reliable and safe water supply.
State
Third, no matter how dedicated, hardworking, or pub­
lic spirited state officials are, they cannot anticipate all the
public goods and services that citizens desire. The emer­
gence of private and NGO alternatives to public provision
can help meet gaps in the supply of public goods, as well
as provide those goods and services that individuals are
willing to pay for out of their own pocket. NGOs can be
both partners and competitors in the delivery of public
services. And when backed by citizen voice, they can exert
useful pressure on government to improve the delivery
and quality of public services.
There is no blueprint for finding the appropriate bal­
ance of voice, participation, and bureaucratic control in
the provision of public goods. The solution depends on
Private sector the capabilities of the public agencies in question and
(profit and
competition) other providers and on the characteristics of the public
good or service being provided. As discussed below, effi­
ciency and equity dictate some degree of centralized gov­
ernment control and coordination when it comes to goods
and services that have j urisdictional spillovers, are subject
to economies of scale, or raise distributional concerns. In
the technical and often sensitive area of economic man-
 B R I N G I N G TH E STATE CLOSER TO PEO PLE 1 1 7

agement, for example, some insulation of decisionmaking legislation can also strengthen public accountability and
from the pressure of political lobbies is desirable. In set­ responsiveness by requiring agencies to announce and
ting standards, such as in the provision of basic education, enforce service norms and standards, provide public infor­
there is also an important role for centralized decision­ mation, and respond to consumer complaints.
making. But the process by which broad policy directions Specific techniques and mechanisms for consulting
and standards are set should not be insulated from public users and intended beneficiaries can also help improve the
discussion. And in the management of common-property quality of specific public services. As the cases in Box 7.4
resources, the production of basic infrastructure, and the illustrate, feedback mechanisms such as client or user sur­
delivery of essential services, there is considerable scope veys can provide valuable information about an agency's
for involving people directly, both in the formulation of performance and the type and quality of services reaching
policy and in its implementation. consumers. Simplified surveys such as the report card used
in Bangalore, India, can be particularly useful when insti­
Participatory mechanisms tutional capability is limited.
MECHANISMS FOR INFORMING AND CONSULTING. It is Besides increasing the flow of information to public
generally accepted that some areas of public decisionmak­ officials, techniques for citizen and client consultation can
ing require insulation from political pressure. In others, introduce more openness and transparency into the sys­
however, public and private interests coincide to such an tem. As more people become aware of the performance of
extent-efforts to raise agricultural production, for exam­ specific agencies or officials, they are more likely to exert
ple, or reforming the health system-that some level of collective pressure on the agency to perform better. At the
public-private deliberation is not just desirable but in same time public agencies will have less opportunity for
fact critical to success. In East Asia, by institutionalizing arbitrary action.
public-private deliberation councils comprising represen­ But no mechanism for consultation automatically
tatives of labor unions, industry, and government, policy­ reaches all the appropriate individuals and groups. There
makers were able to get broad agreement on economic are costs to acquiring and providing information, and the
policy issues and the necessary commitment to intervene low income or subordinate position of some groups in
quickly and flexibly. Other nations with very different in­ society makes them nearly invisible to public officials. In
stitutional settings, such as Botswana, Chile, Mexico, consulting with users or clients, every effort must be made
Senegal, Uganda, and the United States, have also sought to identify all relevant social groups and ensure that they
to implement deliberative mechanisms on issues ranging are represented.
from economic policy to institutional reform. MECHANISMS FOR DESIGN AND IMPLEMENTATION.
By embedding the voice of powerful interest groups in Improving government performance does not end with
mutually acceptable rules, public-private deliberation improved consultation. There is also compelling evidence
councils can reduce transactions costs by reducing the that arrangements that promote participation by stake­
scope for opportunistic behavior. But these councils do holders in the design and implementation of public ser­
not always succeed. Systematic evaluations of performance vices or programs can improve both the rate of return and
are not available, but a number of conditions and char­ the sustainability of these activities.
acteristics appear to affect success. These include broad The education sector has proved particularly fertile
enough representation and public education for the ground for this kind of experimentation. Weak monitor­
process to have widespread support, technical support and ing and supervision of local schools is a perennial problem
assistance to the councils, and an emphasis on building for governments. But several are finding that these prob­
trust and mutual monitoring among both public and pri­ lems can be addressed by increasing the involvement of
vate sector participants. parents and communities in school management. In New
Deliberative mechanisms are unlikely to enable gov­ Zealand, elected boards of trustees that manage schools are
ernments to be effective in the long run if their policies composed of parents of children at the school. Legislation
appear illegitimate or unresponsive to crucial societal de­ enacted in Sri Lanka in 1 993 established school develop­
mands. Efforts to reach out to citizens must reach all the ment boards to promote community participation in
way down. At the very least, reforms and programs must school management. Many countries have also found that
be made intelligible to the public, for example by encour­ communities that participate in school management are
aging widespread media coverage of budget debates. In more willing to assist in school financing.
Singapore the Division of Public Feedback systematically Yet effective citizen involvement in school manage­
gathers citizens' comments on a variety of national poli­ ment does not come easy, nor is it a panacea. New
cies and invites interest groups to public hearings with Zealand realized after it had embarked on its reform
ministers and senior officials. As discussed in Chapter 5 , that newly elected trustees required intensive training.
1 1 8 WO RLD D EV E L O P M E NT R E P O RT 1 997

Box 7.4 Client surveys to motivate service improvements in I ndia, Uganda, and Nicaragua

In several countries client surveys have helped motivate including Mumbai (Bombay), have started using the
better public sector performance. By tapping the expe­ report card approach.
rience of citizens and having them monitor and evalu­ Working with NGOs and communities, Uganda's
ate services, surveys have helped identifY problems and government is also surveying views on service delivery.
design and implement innovative solutions. The first survey found that just 1 1 percent of rural
In Bangalore, India, "report cards" ask citizens and households had ever been visited by an agricultural
businesses to rate the public agencies they use to solve extension worker. Several districts have incorporated
problems or get services. The report cards, adminis­ the survey findings into their district plans. One dis­
tered by the Public Affairs Centre Bangalore, an trict has instituted further training for extension work­
NGO, assess the qualiry and cost of citizens' interac­ ers and is lobbying the central government for permis­
tions with public agencies. In the first round of report sion to spend more of its budget on extension workers.
cards the Bangalore Development Authoriry, respon­ Nicaragua's surveys, like Uganda's, were initiated
sible for housing and other services, scored the lowest by the government. The first survey, in 1 995, found
in several categories, including staff behavior, qualiry that 14 percent of bus riders had at some time been
of service, and information provided. Only 1 percent assaulted on a bus. It also found that 90 percent of bus
of respondents rated the authoriry's services as satis­ drivers did not respect the official fare of 85 cordobas:
factory. Rather than viewing the results as a threat, they did not return the 1 5 cordobas in change from a
however, the authority's director took them as an op­ 1 00-cordoba note to riders. Moreover, the survey
portunity, launching a citizen-government initia­ revealed that people were willing to pay higher bus
tive to address delivery problems. Other agencies in fares. Based on these findings, the fare was raised to
Bangalore have also taken action inspired by the re­ one U.S. dollar. In a follow-up survey in 1 996, 90 per­
port cards. And groups in five other Indian cities, cent of users said that the official rate is respected.

Botswana found it difficult to anract qualified people to protecting and conserving wildlife to local communities.
lower secondary school boards of governors, especially in And across Africa, Asia, and Latin America high levels of
rural areas. In Uganda, community training for parent­ beneficiary participation in the design and management
teacher associations and school management committees of rural water supply projects have been shown to be
is being provided in two districts by an international highly correlated with project success (Box 7.5).
NGO, to ensure that the quality of schooling and of However, the same study of rural water supply also
school administration is enhanced. revealed that, among the highly participatory projects,
Citizen participation may also be crucial in programs only half adequately involved women. The explanation
for the management of natural and common-property was found in £actors specific to women's participation,
resources such as grazing lands, wildlife, forests, and water including time constraints and cultural barriers. Conse­
sources. Exclusive bureaucratic control of such resources quently, innovative participatory mechanisms are required
has proved inadequate in many different institutional set­ that explicitly seek women's involvement in the design and
tings, in some cases leading to confrontation between the implementation of projects that directly affect them. One
users of these resources and the public officials seeking to such effort can be found in the Philippines, where a series
manage them. Recognizing the importance of participa­ of measures over more than two decades has gradually led
tory natural resource management, forestry officials, to the integration of gender issues in the government's
NGOs, and local communities in India are now under­ agenda, partly through greater participation of women in
taking a variety of initiatives. The National Forestry Pol­ planning and implementing policies, and pardy through
icy embraces increased participation of local people in specific programs for women. The expected payoff to such
managing forests. In India's joint forest management pro­ measures lies not just in improvements in the process
grams, forest departments and local user groups share of public policymaking but in the economic returns to
decision making authority and control over forest lands better-designed and better-targeted public investments.
and products and revenue. The result has been reduced
conflict and increased productivity of the land. Making participation succeed will take hard work . . .
Practices are also changing elsewhere. In Zimbabwe These illustrations suggest that in the provision of certain
the CAMPFIRE program seeks to return the benefits of local public goods or shared services-where the people
 B R I N G I N G TH E STATE C LO S E R TO PEO PLE 1 1 9

who pay are also the direct and principal beneficiaries­

using the institutional capacity closest to the client can
Box 7 . 5 Does participation improve project
improve the quality and effectiveness of public action. performance?
Capable states are therefore likely ro be those that
srrengthen and increase the efficiency of local organiza­ Using data from 1 2 1 diverse rural water supply proj­
tions and associations rather than replace them. Bur ects in forcy-nine countries in Mrica, Asia, and
reaching out to citizens as co-managers or co-producers Latin America, a recent study tested the relationship
does not necessarily reduce the role of the state, nor is it between participation and project performance.
costless or quick to implement. To get users or clients to Participation was measured on a continuum ranging
become partners, public agencies often must invest con­ from simple information sharing through in-depth
siderable time and energy in building ties with communi­ consultation with beneficiaries to shared decision­
ties, in building commitment among their own staff, and making to full control over decision making. The
in ensuring that minimum standards of quality and equity authors found a strong correlation between high
are maintained. levels of beneficiary participation, especially in deci­
In a pioneering case in Recife, Brazil, where the intro­ sionmaking, and project success. Of the forty-nine
duction of low-cost condominial sewers in low-income projects with low levels of participation, only 8 per­
neighborhoods changed the relationship between the state cent were successful. But of the forcy-two projects
agency and the sewer users, it took two years for public with high levels of beneficiary participation, 64 per­
officials, working intensively and in multidisciplinary cent were successes.
teams with residents, to figure out how to make the con­ Case studies support these conclusions. The first
dominial system work. Even after the process was bener phase of the Agurhi Rural Water Supply Project in
understood, successful implementation took another four Kenya was conducted without community partici­
to six months in each neighborhood. An evaluation of the pation. The project, which involved piped water
project showed that, by fostering an active and vocal con­ systems, was so plagued with problems that it came
stituency, the scheme not only generated considerable sav­ to a standstill and had to be redesigned. Working
ings bur also pur in motion mechanisms for accountabil­ with project Staff, local leaders, organized as the
ity that were critical for good agency performance. Aguthi Water Committee, mobilized communicy
Greater responsiveness means changing not only the support for the project. Following public confer­
way state agencies work with clients, bur also the way ences with stakeholders, communicy members
those agencies are organized and reward their workers. began to contribure labor and funds. Phase II of the
Effective participation is more likely when opportunities project was completed on schedule and within bud­
for internal participation exist within the public agency. get. The communities continue to pay monthly tar­
In addition, the overall incentive environment must re­ iffs for the new water service, and operation and
ward higher-level staff for responsiveness to clients and maintenance are handled successfully in coopera­
must provide adequate support to srreet- or field-level tion with the relevant government agency.
workers in their efforts to work with clients. Without such
measures, resistance to working with clients can be high,
creating an atmosphere that is incompatible with a more ing Comminee, which gives local representatives a voice
participatory approach. in national policy.
Working closely with people also often requires
redefining tasks and responsibilities, reallocating staff . . . And a supportive environment
resources, and developing new mechanisms for learning Government can also support participation indirectly
and experimentation. In Benin the Ministry of Health through its influence on the enabling environment. States
gave local health management comminees decision­ have great power over individuals and organizations
making control over resources. Comminee members are through the information they make public and through
elected democratically; anyone may serve, provided that at the laws they enact and administer. The rule of law that
least one member is a woman. The comminee is directly protects both persons and personal property is important
involved in preparing the health center's annual budget to a healthy, vibrant civil society. Governments can facil­
for submission to the ministry. It is responsible for col­ itate participation by safeguarding the right of people to
lecting and accounting for funds paid to the health cen­ organize, to gain access to information, to engage in con­
ter for services and drugs. Representatives of local com­ tracts, and to own and manage assets. The constitutions of
minees sit on the board of the government's new drug Bolivia, Brazil, Colombia, and the Philippines explicitly
procurement agency, which is one way of keeping the encourage the development and participation ofNGOs at
agency accountable, and on the Health Sector Coordinat- all levels of decisionmaking. In Singapore the government
1 20 WO RLD D EV E LO P M E NT R E P O RT 1 997

helps NGOs recruit staff, allocates unused government the production and delivery of goods and services should
buildings to them at nominal rents, and funds up to half be rendered to the lowest unit capable of capturing the
the capital and operating costs of facilities run by NGOs associated costs and benefits. In many countries this will
for social welfare purposes. Without a credible legal en­ involve scaling back the power of central government, but
vironment that requires NGOs and public agencies to reformers must be discriminating. Depending on the
act openly and transparently, legitimate organizations are institutional environment, decentralization can improve
deprived of an opportunity to develop, or, perhaps worse, state capability by freeing it to focus on its core functions;
the door is left open for unhealthy or corrupt activities it can also, however, undermine that capability.
that taint the reputation of all NGOs. The aim must be to The demand for formal, political decentralization has
strike the right balance between regulations and reporting been driven by at least three major recent developments:
requirements that fosters growth of NGOs, while guard­
ing against corruption and malpractice. • The minimum size of self-sufficient government has
The benefits of greater consultation and partnership declined. New technological options and new demands
with civil society show up in improvements in the process from citizens, producers, and consumers mean that
of public policymaking, in the quality of service delivery, some of the advantages (security, for example) that kept
and, in some instances, in improved rates of return. They countries, regions, and provinces working together
also manifest themselves in the greater flexibility afforded under a central government have become less impor­
to public agencies and officials in the way they intervene. tant. In Europe and North America the pressure from
But without effective monitoring this flexibility can give global markets is creating strong demand for local and
rise to capricious or arbitrary action. Again, finding the regional governments that can better provide the in­
right balance between participatory mechanisms and en­ frastructure and skilled labor force that multinational
lightened government control is crucial. The next section businesses need.
examines some of these concerns in the context of the • Political changes have given voice to local demands. Cen­
debate over decentralization and the fostering of greater tralized authority in Czechoslovakia, the Soviet Union,
public accountability from below. and Yugoslavia collapsed once the unifying force of the
Communist Party disappeared. Elsewhere, regions and
Decentralization: Matching services with
subnational governments benefited from the political
local preferences
vacuum created before and during regime changes, as
Decentralizing state power and resources seems a logical in Argentina and Brazil in the late 1 980s, and South
continuation of the many recent efforts to bring govern­ Africa in the 1 990s.
ment closer to the people. Like the broad range of partici­ • Countries often turn to local and regional governments
patory mechanisms described earlier, decentralization when the central government has persistently failed to pro­
offers the chance to match public services more closely with vide essential services. In the second half of the 1980s,
local demands and preferences and to build more respon­ Colombia embarked on a path of decentralization and
sive and accountable government from below. But decen­ political reform that reversed a long tradition of central­
tralization also has its pitfalls, including the possibility of ism. A new government changed direction, transferring
increased disparity across regions, loss of macroeconomic social services delivery to the local level and opening up
stability, and institutional capture by local factions, espe­ the rigid political appointment system to local electoral
cially in highly unequal societies. This section focuses on choice. Similarly, in Venezuela and other countries in
some of the factors explaining recent trends in decentral­ South America, active local governments have made
ization, and on some areas where it has been shown to have local administration more responsive and improved the
a positive impact, including bringing citizens into public quality of services provided, often dramatically.
affairs and stimulating local economic development. The
section concludes by exploring the risks of decentralization Before assessing how governments can act to meet such
and the implications for governments of differing capabili­ demands, it is worth asking what decentralization really
ties starting out on the decentralization path. means. In fact, the term encompasses a wide range of dis­
tinct processes. The main ones are administrative decon­
The age ofdecentralization? cent ration, or the transfer of state functions from higher
The rising demand for decentralization has come as part to lower levels of government while retaining central con­
of the broader process of liberalization, privatization, and trol of budgets and policymaking; fiscal decentralization,
other market reforms in many countries. These reforms or the ceding of influence over budgets and financial deci­
are distinct from one another, but their underlying ratio­ sions from higher to lower levels; and devolution, or the
nale is similar to that for decentralization: that power over transfer of resources and political authority to lower-level
 B R I N G I N G TH E STATE C L [J S E R T [J P E [J P L E 1 2 1

authorities that are largely independent of higher levels of is as fruitless here as in other aspects of state reform. But
government. Rarely does decentralization embrace all a number of important analytical principles are available
three. This wide diversity of experience makes it difficult to guide reformers. The clearest and most important prin­
to compare trends across countries or draw many hard ciple (often referred to as subsidiarity) is that public goods
and fast conclusions. and services should be provided by the lowest level of gov­
Richer and larger countries tend to be more decentral­ ernment that can fully capture the costs and benefits.
ized, in terms of the share of sub national governments in Applying this principle is no simple matter, however.
total public expenditure and revenue. In the aggregate, Table 7.2 illustrates some of the demand and supply char­
however, industrial countries have become slightly more acteristics of goods and services that will be relevant to the
centralized since 1 974 (Table 7. 1). This is especially true decision. As already discussed, for some local goods, such
of the United Kingdom, whereas Australia, France, Spain, as those with common-property characteristics, organiza­
and the United States are continuing to decentralize cen­ tions outside of government such as forest or water user
tral government functions. Developing countries, most of associations or NGOs may be the most appropriate insti­
which went through a nation-building phase of develop­ tutional mechanism for delivery. More generally, where
ment in the aftermath of colonialism in the 1 950s and preferences or demands differ from one community to the
1 960s, have become more decentralized since the 1 970s. next, local governments can better match supply to suit
Striking examples include Argentina, Brazil, and Colom­ local tastes. Decentralized service provision can also
bia. In both groups of countries decentralization of expen­ enhance efficiency and interjurisdictional competition in
diture has gone significantly further than that of corre­ supply, providing consumers (at least in theory) with the
sponding revenue. option to exit to other j urisdictions. On the other hand,
where economies of scale or interjurisdictional spillovers
How to think about decentralization are present on the supply side-as in the construction and
As the above discussion has made clear, what constitutes maintenance of interurban highways-or where mini­
the best structure of intergovernmental arrangements will mum standards (such as for primary schooling) and other
be highly country-specific. The one-size-fits-all approach consumption externalities apply on the demand side,

Table 7.1 Changes in subnational finance in selected countries

( percentage of ex penditures or revenues for all levels of governrnent)

Subnational expenditures Subnational revenues

Country 1974 1994 Trend 1974 1994 Trend

Argentina 25 45 ,If 25 37 ,If

Australia 47 49 20 27 ,If
Brazil 30 38 ,If 23 25
Canada 61 60 39 44 ,If
Chile 2 9 ,If 2 5
Colornbia 25 33 ,If 16 18
France 18 19 6 13
Gerrnany 44 40 34 30
India 45 49 27 25
Indonesia 11 15 3 3
Iran, Islarnic Rep. of 1 5 1 6 ,If
Malaysia 18 14 13 8 "'
Rornania 16 10 "' 12 6 "'
South Africa 24 41 ,If 4 12 ,If
S pain 10 34 ,If 5 12 ,If
Sweden 44 34 "' 28 32
Thailand 17 8 "' 5 5
Un ited Kingdorn 33 28 "' 15 8 "'
Un ited States 45 44 33 36
Zirnbabwe 26 25 24 15 "'

Note: Data are for all levels of government other than central government. Data include transfers from central government to subnational
governments. Arrows indicate changes of 5 percentage points or more. Where data for 1974 or 1994 were unavailable (indicated by italics),
data for the closest available year were used. Data for Germany for 1974 refer to the preunification territory.
Source: IMF, various years (a).
1 22 WORLD D EV E L O P M E N T R E P O RT 1 997

lize resources, improve service delivery, and stimulate pri­

Table 7.2 Demand and supply characteristics vate sector development.
of local and national public goods
The benefits ofimproved local accountability and incentives
Level of
CITIZEN PARTICIPATION. In theory, decentralization can
public Demand·side Supply-side
provision factors factors strengthen and complement the measures to broaden pop­
Local Variation in local Potential for ular participation described earlier in this chapter. Like
taste (street competition be­ them, it can help guard against majoritarian tyranny by
lighting, zoning) tween jurisdictions moving government closer to people and by facilitating
(police protection. local definition of issues and problems, especially those of
Co mm on property road m aintenance) minority groups. The contrasting situations of Oaxaca and
(urban roads,
Chiapas, two of the poorest states in Mexico, provide a
waste disposal)
telling example of these effects at work. The two states
National Spatial consu m p­ Econo m ies of have similar resource endowments and development
tion externalities scale (defense) potential, and both have a high percentage of poor and
(control of
Cross-jurisdictional indigenous populations. Yet the outcomes of antipoverty
epidem ics)
externalities (inter­ programs are generally regarded as good in Oaxaca,
Equ ity concerns urban h ighways) whereas neighboring Chiapas has a bad record. The dif­
( m ini m u m stan­ ference seems to stem from the degree of popular partici­
dards for pri m ary
pation in policy decisions and implementation. Oaxaca
education)
has a long tradition of participatory mechanisms for
indigenous populations and the poor. In Chiapas, on the
other hand, the denial of such options, coupled with wide­
centralized control (whether at the national or the provin­ spread official corruption, has led to poor services and ris­
cial level) is likely to be preferable. ing tensions, including armed conflict since early 1 994.
Matching services to local preferences can lead to lower Where public office is contested and people can par­
transactions costs (particularly information costs), effi­ ticipate in elections and decide on representatives at dif­
ciency gains, and incentives to local economic develop­ ferent levels of government, the number of political
ment. But even where a service might, in principle, seem choices also increases, thus stimulating competition bet­
a candidate for local provision, the benefits and costs of ween levels of government. Local participation can also
decentralization will vary by serting. And experience sug­ mean greater confidence in and acceptance of policy deci­
gests that decentralization is unlikely to work without sions by constituents. Decentralization can therefore in­
effective institutional arrangements to foster accountabil­ crease local options for policymaking while holding local
ity at the local level, and fiscal restraint on the part of both officials accountable for what they do and how they do it.
local and national governments. This is best explained in Recent evidence from Latin America, particularly Colom­
terms of two separate but interrelated sets of relationships bia, suggests that once local policymakers are held ac­
facing local governments, both of which need to be con­ countable for their actions and made aware that their jobs
sidered in gauging the scope for decentralization. depend to a large extent on citizens' assessments of their
The first are horizontal relationships between local performance, they tend to be much more concerned with
government and citizens, NGOs, and private businesses. the quality of their staff and of the tools they have to run
Institutional arrangements, for example local elections or their offices effectively. In Porto Alegre, Brazil, an inno­
referendums, can create or influence such relationships, vative process of public investment planning and manage­
providing incentives for cooperation, accountability, and ment was launched in 1 989, to mobilize citizen groups to
improved local government performance. The second set take part in formulating the municipal budget. In 1995
of relationships is vertical, between levels of government. some 1 4,000 people were engaged in the process through
Most countries have formal institutional arrangements assemblies and meetings. Indirectly, an estimated 1 00,000
that define the role and functions of each tier of govern­ people were linked to "participatory budgeting" through
ment, particularly as they affect intergovernmental fiscal local associations and popular organizations.
relations. Both vertical rules and horizontal incentives are LOCAL SERVICE PROVISION. Many governments have
essential if local governments are to perform their func­ responded to fiscal crises, the availability of new technolo­
tions well (Figure 7.3). The next section discusses some of gies, and citizen concerns by transferring resources and
the ways in which horizontal relationships can encourage responsibility for service provision, especially in education
local governments to enhance their responsiveness, mobi- and health, to local authorities. In many cases this has
 B R I N G I N G TH E S TA T E CLOSER TO PEO PLE 1 23

given rise to new and often creative arrangements among LOCAL ECONOMIC DEVELOPMENT. The participation
local governments, NGOs, and local businesses. Although of local businesses can also play a crucial role in decentral­
relatively little comparative evidence is available with ization, shaping incentives at the local level. Entrepreneurs
which to evaluate the relationship between decentralized have for centuries strongly influenced both the pace of
government and service quality, some recent examples development and intergovernmental relationships in in­
from Latin America are illustrative. In the 1980s the pri­ dustrial countries. Property-owning classes with command
mary education system in the state of Minas Gerais, in over local resources exerted considerable pressure on pub­
southeastern Brazil, faced many of the problems common lic entities. To spur expansion, private actors and public
among education systems in developing countries: high officials were encouraged to cooperate. Much of this began
repetition rates, low graduation rates, and low achievement in local environments. Members of the business commu­
scores. Contributing to these problems were overregulated nity often participated in local legislatures. Provided that
and centralized management, inadequate funding, and rent seeking is minimized by effective competition poli­
poorly trained teachers. In the 1 990s a series of measures, cies-a function for higher levels of government-a
including the introduction of autonomy to elected boards strong local private sector may promote better administra­
in each local school (composed of teachers, parents, and tive performance. And local governments that provide and
students over 1 6), together with grants from central gov­ maintain credible frameworks for local economic develop­
ernment based on enrollment and special needs, have pro­ ment end up promoting private investment, which over
duced some encouraging early results: achievement scores time increases local government revenues.
have risen by 7 percent in science, 20 percent in Por­ The world is replete with examples of local govern­
tuguese language skills, and 4 1 percent in mathematics. ments that have stimulated economic development in
In Teocelo, a town in Mexico's state of Veracruz, their communities, and of decentralized institutional
decentralization has created opportunities to organize arrangements that have contributed to growth. The cities
resources for health more efficiently by identifYing the of Greenville and Spartanburg, South Carolina, are small,
population's needs and designing strategies to foster par­ inland, and far from major U.S. population centers. Yet
ticipation through community organization and health they have the highest foreign investment per capita of any
education. Coverage increased for both preventive and metropolitan areas in the United States. They are host to
curative care, the quality of services improved enormously, 2 1 5 companies from eighteen countries, seventy-four of
and infant mortality rates fell. In addition, users of health which are headquartered there. Visionary decisionmakers
facilities reported that the attitudes of health personnel with a strong private sector approach to local development
and the quality of services had improved greatly. have established a solid base of innovative small and

,..--- � -
Figure 7.3 Vertical rules and horizontal incentives shape local government's capability
-

I Central government
L __ _ _____

\� Vertical
accou ntabi l i �,

t .. � and
i ntergovernmental
rules

� LOCal gOVer n� Horizo ntal flexibility

a nd accountabil ity
Civil society a nd
the private sector
1 24 WO R LD D EV E LO PM E NT R E P O RT 1 997

medium-size enterprises, employing a work force whose must at any given time be clear rules specifYing the ran ge
skills are regularly upgraded. of responsibilities for each level of government.
On the other side of the world, the city government MACROECONOMIC DIMENSIONS OF INTERGOVERNMEN­
of Wuhan, in central China, decided in the early 1 990s TAL FINANCE. Macroeconomic control is universally re­
to transform the old city and build a new one on a large garded as a function of central government. Centralization,
scale. To this end it relaxed controls on foreign in­ or at least strong central guidance, in budget and financial
vestment in two development zones, opened a third, matters has proved critical in ensuring sound public
passed local regulations to supply foreign investors with a finances and a reliable framework for economic develop­
legal foundation for business operation, strengthened the ment in most industrial economies. Because decentral­
management of real estate and land rentals, and under­ ization increases the number of actors and of budgetary
took several projects to improve the infrastructure for for­ accounts, countries facing serious budgetary and inflation­
eign investment. As a result, in 1 992 alone the number of ary pressures will be confronted with additional challenges
foreign investment projects approved for the city was and risks should they embark on decentralization.
more than two-and-a-half times the total for the previous Intergovernmental fiscal relations mainly affect the
eight years, producing a threefold increase in total capital macroeconomy through three channels: the assignment
invested. Not satisfied, the city government organized a and sharing of tax bases and expenditures, the match of
huge investment promotion mission in 1 993, which gar­ tax and expenditure decisions, and levels of subnational
nered agreements worth $5 billion from Singapore and borrowing.
Hong Kong (China) . Serious macroeconomic imbalances can occur if major
Despite such encouraging cases, experience suggests tax bases are inappropriately assigned. In India, for exam­
that successful decentralization may be short-lived, or dif­ ple, important tax bases have been assigned to subnational
ficult to replicate, without effective rules for intergovern­ governments. This has left the central government,
mental collaboration. Horizontal incentives for improved despite a growing public debt and pension liabilities, with
performance tell only part of the story. In education, for a tax base, consisting mainly of income, foreign trade, and
example, involvement of higher levels of government may excise taxes, that is too small to cope comfortably with its
be needed to prevent fragmentation and to minimize dif­ expenditure responsibility. The sharing of major tax bases
ferences in the quality of education in different commu­ also has the potential to dilute the impact of deficit reduc­
nities. And in the health sector the appropriate allocation tion at the central government level. This happened in
of responsibilities across levels of government is rarely Argentina in the early 1 990s, when increased tax revenues
clear-cut. Immunizations, tuberculosis surveillance, and following a tax reform had to be shared with provincial
vaccine storage all need strong, effective management governments. Provincial governments essentially took a
from higher levels of government. In addition, localities free ride on the central government's efforts and used the
may not provide the right framework for policy formula­ extra revenue to expand their work forces.
tion and implementation. Consequently, decentralization Expenditures with national benefits and costs­
should not become a rigid, doctrinaire exercise, pushing national public goods-should be the responsibility of
functions onto communities and municipalities or artifi­ central government. These include the costs of economic
cially separating levels of government. Instead it should be stabilization and redistribution. But many local expendi­
a practical endeavor to find the right balance between the tures also affect income distribution, such as the provision
roles of different levels of government, to ensure that of health and housing subsidies in transition economies
high-quality services are provided in a timely manner. As and many developing countries. In addition, where the
the following sections describe, the quest for that balance benefits of local public expenditure are concentrated
must take place within a framework of credible rules. within the jurisdiction doing the spending, but the costs
(in the form of general taxes or negative spillovers) are
The pitfalls ofdecentralization spread more widely, subnational governments have an
In many cases decentralization is not the result of any incentive to spend beyond their means. The effect on
carefully designed sequence of reforms, but has occurred national fiscal policy can be severe.
in a politically volatile environment in which the level of SUBNATIONAL BORROWING. Borrowing by local gov­
trust is low and policymakers respond unsystematically to ernments can contribute to macroeconomic instability
emerging demands from below. Such weak policy frame­ when the central government fails to impose hard budget
works can lead to serious economic problems, including constraints and there is no effective mechanism for moni­
loss of macroeconomic control, regional disparities in ser­ toring debt obligations, particularly when there are
vice provision, and misallocation of resources as a result of multiple lenders. Another problem is asymmetric informa­
local capture. The lesson, for all governments, is that there tion on the part of borrowers (subnational governments)
 BRI N G I N G TH E STATE CLOSER TO PEO PLE 1 2 5

and lenders (central government and international capital bility (Box 7.6) . The combined indebtedness of the Brazil­
markets). In China, for example, provincial governments ian states exceeds $ 1 00 billion, close to the levels of total
are not allowed to finance budget deficits through borrow­ federal and central bank debt. Unless the growth of this
ing. But in the early 1990s all-but-uncontrolled borrowing debt is curtailed, the federal government will have to
by state enterprises at the subnational level contributed to reduce its own spending, raise taxes, or resort to inflation­
economic overheating and imperiled macroeconomic sta- ary financing to cover the states' debts.

Box 7.6 Pitfalls in Intergovernmental relations: The experiences of Brazil and China

Democratization and constitutional revisions in the • Government revenues as a share of GDP declined
1 980s increased the amount of resources under subna­ precipitously. By contributing to increased indus­
tional control in Brazil and the degree of local auton­ trial competition, decentralization helped lower the
omy in their use. Local governments now account for profits of industrial state enterprises, previously the
half of total public spending. main source of tax revenues. Increasingly autono­
Although decentralization shifted resources down­ mous local governments reduced revenues even fur­
ward, there was no corresponding clarification or ex­ ther by granting tax exemptions to improve the
pansion of local responsibilities. Subnational govern­ after-tax earnings of the state enterprises under their
ments were not prepared to assume new tasks, and control.
were neither required to perform specific functions nor • The growing autonomy of local governments also
prohibited from performing functions already per­ made it difficult for the central government's invest­
formed by other levels of government. As a result, local ment planning system to control the investments of
governments used much of their windfall to increase provincial governments and state enterprises under
staffing and launch questionable new projects. There is their control. Since tax revenues at the provincial
scant evidence that the overall efficiency of public sec­ level had declined and were inadequate to cover
tor spending improved. Decentralization also increased these investments, local branches of the state banks
the fiscal deficit, as large states used their improved were usually prevailed on to lend for these projects.
political autonomy to extract federal resources: by the • Local branches of the central bank were given discre­
mid- 1 990s nearly a third of the growing federal deficit tionary authority over 30 percent of the central
was due to subnational debt. bank's annual lending to the financial system. When
Brazil's experience shows that political and fiscal local branches of the state bank needed additional re­
decentralization does not guarantee improved public sources to support investments by local govemments
sector efficiency, and may threaten macroeconomic and state enterprises, they turned to the local branch
stabiliry. To achieve its objectives, fiscal decentraliza­ of the central bank for an infusion of liquidity.
tion must be accompanied by a corresponding de­
centralization of expenditure responsibilities; state and The resulting overheating of the Chinese economy
municipal governments' institutional capacities should in 1 992-93 posed considerable risks to stability. Infla­
be improved; and the federal government should im­ tion climbed to its highest level in several decades. Real
pose hard budgets in its fiscal and financial relation­ GDP growth reached an amazing 14.2 percent in 1 992
ships with subnational governments. and 1 3.5 percent in 1 993. Eighty percent of this
China's experience in the early 1 990s demonstrates growth came from growth in investment, most of it by
the pitfalls of decentralization that is not accompanied state enterprises under the supervision of provincial
by parallel reforms and macroeconomic safeguards. governments.
Beginning in 1 978, central authority over investment The authorities responded quickly with a combina­
and allocation decisions was gradually decentralized to tion of measures. The most important of these were
provincial governments, enterprises, financial institu­ administrative restrictions on investment by provincial
tions, and even households. This was a crucial element governments and state enterprises and a reassertion of
of China's economic liberalization and a key factor in authority by the central bank over lending to state
the economy's impressive growth over the past two banks. These measures and others helped bring the
decades. At the same time, however, three conse­ economy to a soft landing. By 1 995 inflation had
quences of decentralization undermined the central fallen below 7 percent, while GDP growth had been
government's control over macroeconomic aggregates: maintained at around 9 percent.
1 26 WORLD D EV E L O P M E N T R E P O RT 1 997

All three channels can lead to undesirable macroeco­ ernmental rules, local governments may benefit from
nomic outcomes. But some of the channels are quantita­ sources of income that have not been formally allocated to
tively more impo rtan t in some countries than in others. them under an appropriate fiscal decentralization scheme.
Whether they generate macroeconomic instability will In Poland, for example, the introduction of local self­
depend on the relative importance of each channel, the government has seen many local authorities begin to act
relative capacity of central and local government policy­ like pressure groups, eager to extract more benefits from
making and implementation, and the central government's Warsaw for local clienteles. As a consequence, inequalities
commitment to overall macroeconomic objectives, such have risen among jurisdictions, leading to new forms of
as growth and price stability. social conflict.
REGIONAL DISPARITIES AND INEQUALITIES IN SERVICE In Pakistan decentralization has been accompanied
PROVISION. Rough national equality in living standards by a subtle recentralization of functions at the provin­
and in access to public services is an overarching goal­ cial level and difficult intergovernmental relationships.
even a constitutional mandate-in many countries. Cen­ Provincial governments, which have expanded their role
tralization allows the national government more discre­ in the provision of education and other local public ser­
tion to counter regional income disparities by managing vices since the 1 960s, have increasingly adopted an intru­
regional differences in levels of public service provision sive' centralist attitude toward municipal governments.
and taxation. With decentralization, an equitable out­ Instead of being encouraged to assume new tasks and re­
come can no longer be guaranteed or, at least, may be sponsibilities, municipal governments are being denied
more difficult to achieve. And wealthier local govern­ opportunities to succeed. I ncreased provincial control has
ments and regions may benefit disproportionately from not led to any noticeable improvement in service delivery,
being given greater taxing power. however.
In China, for example, disparities in real income per InduStrial countries that have decentralized began the
capita between provinces have been growing in recent process with a strong legal framework, which ties subna­
years. Income per capita in the richest province, Guang­ tional governments to credible rules. Many of these coun­
dong, is now four times greater than that in the poorest, tries also have mechanisms in place, such as fiscal transfer
Guizhou. Some provinces on the southern coast, such as policies and equalization schemes (Box 7.7), hard budget
Fujian, Guangdong, and Hainan, have done better than constraints, and limitations on local borrowing, to coun­
the western, interior provinces largely because of their terbalance negative outcomes. Some countries have exper­
central location for transport and communications and imented with parricipatory mechanisms (blue-ribbon com­
their proximity to Hong Kong (China) . These natural missions, for example), which bring stakeholders together
advantages have been reinforced by official policies that and provide options for feasible and manageable policies
favor coastal provinces, including tax breaks to foreign within a mutually agreed time frame.
investors locating in special economic zones near the
coast, large allocations of credit (relative to population) Lessons for successful decentralization
through China's government-directed banking system, Ideally, policymakers would embark on decentralization
and registration requirements that discourage the poor by gradually phasing in the reassignment of revenue
from migrating to the booming coast. authority and of expenditure authority and responsibili­
In Russia income inequality across oblasts is high. The ties in ways that are compatible and consistent with pre­
ratio of expenditure per capita between the lowest- and viously defined needs and responsibilities. At the same
the highest-spending oblast is estimated to have risen to time, they would develop a system of intergovernmental
one to seven by 1 992, with better-off regions receiving grants to cover gaps between expenditures and revenues at
disproportionately high budgetary expenditure allocations the local level and to correct imbalances in efficiency and
and rural areas relatively ill served. Sub national taxation effectiveness, preferably with built-in incentives for local
or sharing of federal revenues from natural resources on resource mobilization. So much for the ideal. The real-life
the basis of their origin could create even greater fiscal dis­ business of designing a successful decentralization pro­
parities. Both Russia's and China's experiences highlight gram tends to be more complex.
the need to design appropriate equalization schemes to ASSIG�I�G EXPENDITURE A:'lD REVE�UE AUTHORI1Y.
deal with rising inequality during periods of accelerated This brings a host of problems. Information on the true
growth or macroeconomic stabilization. distribution of benefits and taxes both within and be­
RESOURCE MISALLOCATlO� AS A RESULT OF LOCAL CAP­ tween jurisdictions is imperfect. And economies of scale
TURE. Economic and financial distortions may also arise in revenue collection and in the production of services
from subnational governments' ability to exploit weak­ may pardy negate the efficiency advantages of a decentral­
nesses at the center. In the absence of agreed intergov- ized system. In addition, the costs of alternative options
 B R I N G I N G TH E S T AT E CLOSER TO PEOPLE 1 27

Box 7 . 7 Calculating fiscal equalization grants

Fiscal equalization programs compensate provinces the arithmetic mean of all provinces as a standard, the
whose fiscal capacities are below the average. In addi­ province's equalization entitlement for a given revenue
tion to safeguarding national objectives of providing source is determined by the difference (if positive)
minimum levels of public services nationwide, an between the average potential yield at the national
equalization program can foster the participation of average rate of taxation in all provinces in the aggre­
member provinces in a federation. Thus fiscal equaliza­ gate, and the potential yield obtained in the province
tion is often viewed as the glue that holds a federation when the national average tax rate is applied to its
together. Economists have long recognized that equal­ revenue base. In this way the fiscal capacity of below­
ization is justified on grounds of horizontal equity, and average provinces is brought up to the median, the
in recent years it has become clear that under certain arithmetic mean, or some other norm. Because the
conditions it can promote economic efficiency as well. data on tax bases and tax collections required to imple­
In Pakistan, for example, a representative tax system ment a representative tax system are published regu­
has been proposed to equalize fiscal capacity across larly by various levels of government in many coun­
regions. Designing such a system involves, first, calcu­ tries, implementing such a system does not impose
lating the revenue that could be raised if a provincial new data requirements and could be implemented as a
government used all the standard sources of revenues federal fiscal equalization program in lieu of revenue
at the nationwide average intensity of use. Then, using sharing by the population.

for service production are often unknown. Some possible arbitrary action of all partiCipants, experience suggests
tax and expenditure assignments are shown in Table 7.3. that it is difficult to force agreement and that the result
DESIGNING INTERGOVERNMENTAL GRANTS. Intergov­ may not be sustainable. This is especially true of develop­
ernmental grants are important sources of revenue for ing economies. Lessons from a variety of countries indi­
many subnational governments. In Brazil between 1 970 cate that key policy decisions are more likely to be sus­
and 1 992, grants from the federal government financed tained when they are based on a broad consensus among
64 percent of local government expenditure. In South stakeholders. Thus, the prospects of successful decentral­
Africa grants from the central government to newly ization are greater with institutional settings and processes
elected provincial governments account for about 90 per­ that allow for articulation of interests and consensual
cent of total revenues for the latter. By their nature, inter­ policymaking, as spelled out, for example, in the Euro­
governmental grants tend to divorce local spending from pean Charter of Local Government of 1 985.
local resources, and the benefits of providing local public In the absence of agreed-on guiding principles, what
services from the costs. The separation of benefits and can governments committed to decentralization do to get
costs and the limited ability ofIocal governments to mobi­ the process started? Some models already exist. In the
lize revenues for themselves can reduce the transparency early 1 990s the government of Uganda established a con­
of Iocal budgetmaking and the accountability of Iocal gov­ sultative process with different stakeholders-community
ernments to local citizens, leading to inefficient and groups, agricultural producers, and government represen­
inequitable delivery of public services. Clearly, then, any tatives-to decide on the best way to proceed with de­
system of intergovernmental grants in developing coun­ centralization. The decision was made for a staged and
tries will need to be designed extremely carefully. gradualist approach. Other countries have opted for com­
No blueprint exists for an optimal system of intergov­ missions made up of informed leaders from different lev­
ernmental grants, but a good system should have certain els of government, academia, and sometimes unions and
characteristics. Above all, it should be predictable and business associations, drawing on foreign advice where
transparent and embody the relevant principles set forth necessary. South Africa's recent experience is interesting
in Table 7.4. in this respect. The new constitution calls for a fiscal com­
AGREEING ON THE RIGHT APPROACH. Clear-cut rules mission to deal with the intergovernmental structure of
are essential for imposing restraints on actors at each level the country. The president, in charge of setting up the
of government. Equally important seems to be the process commission, provided different representatives with a
by which the rules are agreed on. Although, in principle, constitutionally guaranteed forum for articulating their
rules could be imposed from the top down to restrain the interests. Although it is too early to judge its success, the
1 28 WORLD D EV E LO P M E NT R E P O RT 1 997

Table 7.3 Possible tax and expenditure assignments by level of government

Central government State government Local or provincial government

Revenues

Value added tax Individual income tax Property taxes

Individual income tax Surcharges on national taxes Vehicle taxes
Corporate income tax Retail sales taxes User ch arges
Excise taxes Excise taxes Licenses and fees
Natural resource taxes Property taxes
Customs duties Vehicle taxes
Export taxes

Expenditures

Tertiary health care (control of infectious Secondary health care (hospitals, Pri m ary health care
diseases, research) curative care) Pri m ary and secondary education
Un iversity education U niversity and secondary education Roads and highways (intracity)
Roads and h ighways (intercity) Roads and h ighways ( intercity) Public transportation (intracity)
Public transportation (intercity) Public transportation (intercity) Air and water pollution
Natural resource m anagement Air and water pollution Solid waste disposal, water,
Defense Natural resource management sewerage, fire protection
Police protection Land use regulation and zoning
HOUSing
Cultural policy
Promotion of touris m
Police protecti on

process created a widespread sense of expectation and history tells us, paradoxically, is that unless states have
generated demands to design appropriate decentralization achieved a certain level of centralization and effective rules
measures. for overall macroeconomic control and sound policymak­
Commissions may serve short-term interests well. ing, decentralization may be difficult to implement and
Over the longer term, however, more-durable solutions may create imbalances. Decentralization , whether it
may be needed to allow for formal representation of sub­ occurs through gradual evolution or design (or both) , can
national governments' interests in national policymaking create additional momentum for development, but only if
and legislation. Second-chamber institutions, such as the these conditions are met.
German Bundesrat, have often been used in this context. Any strategy of decentralization must begin with an
Such arrangements offer an institutionalized mechanism assessment of institutional capability at the various levels
for articulating interests from below, while providing the of government (Table 7.5). Where there is weak central
means to develop widely accepted and credible rules for government capability to manage national fiscal and mon­
intergovernmental collaboration, which are essential for etary policy, to enact and enforce credible rules for inter­
sustainable decentralization. They also help different tiers governmental affairs, or to provide a framework for bring­
of government adjust to emerging needs over time. ing stakeholders together, decentralization will be hard
ENSURING THAT THE INSTITUTIONAL GROUND IS to pull off. Strongly polarized relationships between or
READY. In principle, bringing policymaking and imple­ within tiers of government and extremely weak organiza­
mentation closer to the communities they serve, and tional capacity at the subnational level will also be cause
involving citizens in shaping policies, lead to greater for concern. In these circumstances policymakers would
accountability and improved local checks and balances. do well to postpone decentralization, or eschew ambitious
But as the above discussion of the potential for macroeco­ strategies in favor of a more carefully staged or sectoral
nomic instability shows, government actions at the center approach. Decentralization might begin, for example,
can be undermined at the local level if there is no strong with certain priority areas such as education, health, or
pattern of fiscal restraint and if there are no enforceable infrastructure. Strong monitoring mechanisms could pro­
rules governing intergovernmental relations. In most fed­ vide opportunities for learning and for gradually phasing
eralized systems effective checks and balances between lev­ in new policies. Countries with greater capability at the
els of government have evolved over long periods. What central and the local levels have more options to choose
 B R I N G I N G TH E S TA T E C LO S E R TO P ·E O P L E 1 29

from-bur their preferences will vary. What may be • Where appropriate, states should work to ensure broad­
important in one country (say, decentralized service deliv­ based public discussion and evaluation of key policy
ery) may not be desired (or desirable) in others. directions and priorities. At a minimum this means
making available information in the public interest and
Strategic options: Bridging the gap between state
establishing consultative mechanisms such as delibera­
and citizen
tion councils and citizen committees to gather the
The evidence presented in this chapter has shown that views and preferences of affected groups.
improving the capability and effectiveness of the state rests • They should encourage, where feasible, the direct par­
with mechanisms to increase openness and transparency, ticipation of users and beneficiaty groups in the design,
to strengthen incentives for participation in public affairs, implementation, and monitoring of local public goods
and, where appropriate, to bring government closer to the and services. And they should enhance the capacity and
people and communities it is meant to serve. Building efficiency of accountable local organizations and insti­
capability in this way will take time and careful attention tutions rather than replace them.
to the dangers: efforts to open up government to a broader • Where decentralized service delivery is considered desir­
array of needs and interests will not improve effectiveness able, states should adopt a carefully staged or sectoral
or accountability if they shur other groups further out. approach, beginning in priority areas such as health,
But the experience of governments the world over sug­ education, or infrastructure. They should introduce
gests some clear starting points: strong monitoring mechanisms and make sure that

Table 7.4 Principles and best practices in grant design

Grant objective Principles of grant design Best practices Practices to avoid

Bridging fiscal gap Reassignment of Tax abatement in Canada Deficit grants

responsibilities between Tax base sharing in Brazil, Tax·by·tax sharing as i n
levels of government Canada, Pakistan, and I n d i a and Pakistan
Tax abatement South Africa
Tax base sharing

RedUCing regional fiscal General nonmatching Fiscal equalization General revenue sharing
disparities grants program s i n Au stra lia, using multi ple-factor
Fiscal ca pacity equal ization Canada, and Germany formulas
transfers

Compensating for benefit O pen·ended matching Transfers for teach ing

spi l lovers transfers with matching hospitals in South Africa
rate consistent with
estimated spillover

Setting national minimum Conditional nonmatching Roads and primary Conditional transfers with
standards block transfers with education grants in conditions o n spending
conditions on standards of Indonesia alone
service and access Education transfers in Ad hoc grants
Colombia and Chile

Influencing local priorities O pen·ended matching Matching transfers for Ad hoc grants
i n areas of high national transfers with matching social assistance i n
but low local priority rate varying inversely with Canada
local fiscal capacity

Stabilization Capital grants, provided Li mited use of capital Stabilization grants with no
m aintenance is possible grants with encouragement future upkeep requirements
of private sector
participation through
guarantees against political
and pOlicy risk
1 30 WORLD D EV E L O PM E N T R E P O RT 1 997

Table 7 . 5 Matching decentralization strategy to government capacity

Central government capacity

Local government
capacity Low High

Low Cautious decentralization strategy with pilot Deconcentration of some priority services
testing

Delegation of some functions to NGOs and Delegation of some functions to NGOs and
communities communities

Massive institutional strengthening at both Targeted strengthening of local entities during

levels, particularly in public finances (most Sub­ transfer of responsibilities (e.g., Hungary,
Saharan African countries) Mexico, Thailand)

H igh Separatist or secessionist tendencies Delegation or devolution of functions according

to government priorities and preferences as well
Delegation or devolution according to priorities of as articulated needs (most industrial countries)
governments (e.g., Santa Cruz Province, Bolivia;
parts of former Soviet Union)

sound intergovernmental rules are in place to restrain gridlock or of capture by vocal interest groups. And if no
arbitrary action at the central and the local levels. clear-cut rules impose restraints on the different tiers of
• At the local level, states should focus on the processes government, and no incentives encourage local account­
and incentives for building accountabiliry and compe­ ability, the crisis of governance that now afflicts many
tition. Where local governments are weakly account­ centralized governments will simply be passed down to
able and unresponsive, improving both horizontal ac­ lower levels. However, as Part Four of this Report argues,
countabiliry (to the public) and vertical accountabiliry the obstacles on the path to reform of the state are not
(to the center) will be a vital first step toward achieving insurmountable. The first step toward bringing govern­
greater state capability. ment closer to people will be to make the objectives of
reform clearly intelligible to citizens and the business
Certain dangers are inherent in any strategy aimed at community. Efforts at communication and consensus
opening and decentralizing government. Expanded building will have a double benefit, increasing the support
opportunities for voice and participation increase the for reform as well as arming the government with a better
demands made on the state, which can increase the risk of sense of how to do it right.
FA C I L I T A T I N G I N T E R N AT I O N A L

C O L L E C T I V E AC T I O N

HAPTER 7 they achieve little when countries have signed on without

C competitive pressures can enhance the state's effec­
EXPLAINED HOW NEW PARTNERSHIPS AND

fully understanding, or accepting, the likely costs.

tiveness at home. But the challenge of reforming the state
Funding and provision of international public goods
does not stop at the state's borders. In an increasingly
interdependent world, one country's actions will often Not so long ago the standard policy advice with regard to
have implications for its neighbors and for the rest of the the provision of public goods relied almost exclusively on
world. And there is a growing recognition that some state intervention. Depending on the circumstances, the
needed public goods and services can only be secured prescription might be to introduce a subsidy, a tax, a new
through international cooperation. Thus, building state liability rule, a new regulation, or a new program for direct
capability will mean building more-effective partnerships public provision of the good in question. But this approach
and institutions internationally as well as at home. usually fell flat when it carne to the provision of interna­
The need for international cooperation stems from tional public goods. In a world of sovereign nations, volun­
global and regional manifestations of the problems de­ tary cooperation becomes the only answer. But why would
scribed in earlier chapters, such as missing markets and the countries undertake cooperatively actions that they have
presence of externalities. World peace, a sustainable global little or no incentive to carry out individually?
environment, a single world marketplace for goods and Experience and a better understanding of how eco­
services, and basic knowledge are all examples of interna­ nomies work have since led us to recognize a richer set of
tional public goods. They will be underprovided without motives for collective action and to devise better institu­
conscious, concerted, and collective efforts to provide tional arrangements for carrying them out, be they
them. Development aid, although not a public good in the national or global. As previous chapters have shown, states
strict sense, also justifies international cooperation because are setting aside monopolistic, command-and-control
of global equity considerations. approaches to governing in favor of a more participatory
This chapter discusses the ways in which governments approach involving civil society, markets, and local
might hel p ensure more effective global provision of inter­ authorities. At the global level, the participatory approach
national public goods. It begins by examining the volun­ goes a step further, since it relies on international cooper­
tary mechanisms already established to coordinate inter­ ation without the use of coercive power. Today, the key
national collective action. Although the evidence is clear mechanisms for the provision of international public
that cooperation to achieve global collective goals brings goods are based entirely on voluntary action.
global benefits, not every such action will bring benefits In international markets for trade and investment,
for all. Hence it will not always be in every country's inter­ countries have collaborated to develop common rules
est to participate. Some international public goods may and norms of conduct and to institutionalize them
simply not be valued as highly by some countries as by through various formal arrangements. These have in­
others, and sometimes the domestic costs of complying cluded regional arrangements such as the Asia-Pacific Eco­
with an agreement may outweigh the benefits. A major nomic Cooperation (APEC) forum and Mercosur in
lesson of experience with voluntary agreements is that South America, as well as multilateral ones such as the
1 3 2 WORLD D EVE L O P M E NT R E P O RT 1 997

World Trade Organization (WTO) and its precursor the Collective provision of public goods generally requires
General Agreement on Tariffs and Trade (GA111 . Al­ balancing three principles: openness, diversity, and cohe­
though all these arrangements are based entirely on sion. Each has considerable merit, but pursuing any one to
voluntary participation, they have attracted growing mem­ the extreme risks compromising the others. Openness to
berships, contributing hugely to growth in world trade the global economy involves a commitment to transparency
and improvements in the participants' welfare. Organizing and clear rules, for example prohibiting discriminatory
and operating these arrangements are costly, but members trade practices. Yet openness without diversity could lead
have deemed the benefits sufficient to justifY the costs. to backsliding by countries that desire more freedom to dif­
fer, and thus to greater fragmentation of the world econ­
When Is cooperation desirable?
omy. Likewise, acceptance of diversity-for example in the
For any country, the decision to cooperate in important mutual recognition of different national standards-fosters
international endeavors will be a complex one, condi­ innovation but may be detrimental to cohesion among
tioned by the country's social values and by its assessment countries or among communities within a country. Cohe­
of the long-term national interest. The balance of the sion, of course, is also generally desirable, but not when it
costs and benefits of cooperating depends on the type of involves sacrificing too much openness and diversity.
activity, the mechanisms proposed, and the social and These considerations suggest that although there is
economic conditions the country faces. much need for collective provision of international public
There is greater recognition today not only of the exis­ goods, it is not the answer to all problems for all countries.
tence and benefits of international public goods, but also Each country has to decide, on a case-by-case basis,
of the implications of failing to provide them adequately. whether to participate. An appropriate global framework
History has shown what can happen when the commu­ for organizing collective action must therefore allow for
nity of nations is more fragmented, by war or by trade and multiple arrangements and institutions, all based on vol­
investment barriers, than it is today. Without a forum for untary participation. One possible approach to organiza­
nation-states to discuss and negotiate orderly changes in tional design is to think in terms of a series of groups, each
national policies and standards, small economies may end with a different objective:
up having to adopt the practices of the dominant eco­
nomic powers, in a process of "imperial harmonization." • Functional groups to deal with specific issues such as
And failure to provide effective foreign aid or support for macroeconomic policy, environmental protection ,
basic research to meet the needs of poor countries dimin­ labor standards, and international conflicts (for ex­
ishes the prospects of those countries ever developing into ample, the International Labour Organisation and the
vibrant economies and profitable trading partners. Inter­ Bank for International Settlements)
national cooperation is critical to making events turn out • Regional groups to deal with multiple issues of interest
significantly better. to neighboring countries (but preferably open to all
But again, not all countries will in all cases wish to that wish to join), including trade and investment
participate in the provision of international public goods. (for example, the North American Free Trade Area, or
At the very least, cooperation can restrict a country's free­ NAFTA, and APEC)
dom to act. Often the benefits will exceed the costs of ced­ • Coordinating groups to link the functional and
ing some national autonomy, but not always. In many regional groups and create a broader network for all
areas-macroeconomic policy coordination is one-there members (for example, the OECD).
is inevitably some uncertainty about what kind of joint
action to take. In others, such as environmental protec­ This framework provides for a reasonable balance
tion and climate change, there is uncertainty about the among openness, diversity, and cohesion and may well be
extent to which the key players will participate. Uncer­ adequate to prevent fragmentation and imperial harmo­
tainties such as these blunt the likely effectiveness and nization. Individual countries' interest and participation
dilute the expected benefits of cooperation. in the various arrangements at any given time will vary,
Even when the relevant facts are more certain, differ­ and groups may be relatively inactive for long periods. But
ing perceptions and priorities can still preclude coopera­ when the timing is right, with ideas and circumstances
tion. Many developing countries, for example, are reluc­ converging, groups may witness a surge of interest in their
tant to adopt the labor laws and pollution standards of the activities, as occurred, for example, in the concluding
richer countries for fear of losing their competitive advan­ stages of the Uruguay Round negotiations of the GATT.
tage and jeopardizing growth. And some countries may
Ensuring more effective cooperation
choose not to cooperate in certain activities out of a belief
that private research and experimentation will ultimately There is no guarantee that participating states will always
produce cheaper solutions. fully comply with external commitments. In the absence
 FA C I L I T A T I N G I N T E R N AT I O N A L C O L L E CT I V E A C TI O N 1 3 3

of some global authority with universal j urisdiction and implementation reports by member countries. These bod­
coercive power, enforcing international agreements and ies, however, lack enforcement power. They also have lim­
treaties is up to the states themselves. Hence mechanisms ited capacity to verify implementation unless countries
are clearly needed to ensure compliance when commit­ cooperate in providing information. More sophisticated
ments are not being honored voluntarily. Recent experi­ legal agreements, including some recent environmental
ence in international law suggests a few such mechanisms. conventions, add the element of supervision. A supervi­
Countries fail to comply with international commit­ sory body can help by following up on reporting require­
ments for different reasons. The incentives to comply may ments and by disseminating information on the impact of
be weak, because of changes in political priorities or in the convention at the domestic level.
underlying economic conditions. Or the necessary capa­ The procedure for noncompliance established under
bility, including the technical expertise and organizational the Montreal Protocol on Substances that Deplete the
skills needed to ensure timely action, may be lacking. Per­ Ozone Layer is a good example of this new approach. Any
haps most common among developing countries, the req­ party to the agreement that has doubts about the correct
uisite financial resources may not be available. application of the protocol by another party can initiate
Where its incentives have become incompatible with the procedure, as can the secretariat itself or any party hav­
fulfilling its international obligations, a country may need ing trouble meeting its commitments. NGOs and indi­
to reconsider its participation. The effectiveness of the viduals also have access to this procedure: they can trans­
agreement (or international organization) will be under­ mit information about possible noncompliance to the
mined if many members simultaneously face strong in­ secretariat. The Committee on Implementation may try
centives not to abide by its provisions. In practice, how­ to bring about an amicable settlement, or recommend
ever, states have perceived their self-interest broadly, technical or financial assistance if the failure to apply the
recognizing the impact of their actions on the community protocol is due to lack of capacity. It can also suspend the
of nations, on their own reputation, and on the possibil­ rights and privileges of parties in violation.
ity of entering into future reciprocal arrangements. Continuous cooperation among national agencies is
Lack of capacity and financial resources is often more the foundation of this process-oriented approach. The
manageable. Many international agreements take the building blocks include such facilities as permanent com­
capacity and financial constraints of some members into munication networks, periodic reporting or implementa­
account. Provisions can be included to ensure that neces­ tion, periodic review oflegal provisions, and regular meet­
sary personnel and financial resources are available to all ings of decisionmakers and staff. All these help maintain
members. Where such needs are not fully anticipated, awareness among responsible officials of the goals being
mechanisms for communication and supervision can be sought by the agreements and the means for achieving
devised to address emerging issues. Allocating responsibil­ them, and keep the public informed of emerging issues.
ities realistically and providing for necessary resource The Geneva-based International Register of Potentially
transfers in advance can improve implementation and re­ Toxic Chemicals, which is founded on national regulatory
duce violations. decisions rather than international regulatory action, is a
Traditional legal mechanisms often fail to address the good example of such a facility.
root cause of compliance problems, instead relying on
Current provision of international public goods
breach of the agreement to trigger action. This approach
highlights the violation of commitment and is confronta­ This section reviews some of challenges and opportunities
tional. Necessary remedial actions may come too late­ facing states as they seek in five selected areas to balance
the damage may have been done. Relations among mem­ self-interest and the common interest in an increasingly
bers may sour, making future cooperation more difficult. interdependent world.
An alternative, more process-oriented approach pro­
motes the observance of commitments on a continuous Expanding world markets
basis. The goal is not to condemn wrongdoing but to keep The liberalization of trade and investment laws around the
states in compliance with their obligations and prevent world has contributed to an enormous increase in the vol­
violations. This approach relies to a much greater extent ume of world trade and foreign direct and portfolio invest­
on communication, consultation, monitoring, the sharing ment, whose impact on the welfare of participants has been
of information, and technical and financial assistance. considerable and for the better. Multilateral and regional
Recent conventions, particularly in the environmental agreements have supported market expansion, as greater
domain, incorporate mechanisms for monitoring and economic interdependence has made it necessary to main­
facilitating compliance. These include conferences among tain and extend an international system ofliberal trade and
the parties, separate secretariats, and financial assistance investment. Invigorated by buoyant trade, the global econ­
arrangements that ensure the submission and review of omy has grown rapidly, and that growth shows little sign
1 34 WORLD D EV E L O P M E N T R E P O RT 1 997

Box 8.1 The World Trade Organization-an international mechanism for bringing credibility to
national policy

The WIO was established in January 1995 to admin­ Of these matters, two have completed the entire
ister multilateral trade agreements negotiated by its process, and two further panel reports have been
member countries. The WIO can be regarded both as issued. Countries can no longer block the establish­
an institution embodying a set of rules and principles ment of arbitration panels or ignore their findings, as
on the use of policies that affect trade flows, and as a they could under the GATT. And although they may
"market" in which members exchange market access appeal, the decision of the appeals body is final. Every
concessions and agree on rules of the game. The WIO stage of the process is subject to strict time limits, and
requires its members to ensure that their trade policies countries that fail to comply face authorized trade
are largely nondiscriminatory and their rules and en­ sanctions.
forcement procedures transparent. The WIO also The largest trading nations and customs territories
provides legal mechanisms for countries to signal the continue to dominate the dispute settlement process,
seriousness of their commitments, and improved dis­ and the credibility of the system depends on their will­
pute settlement procedures for resolving conflicts be­ ingness to comply with judgments against them. But
tween member states. encouraged by the nature of the WIO system, includ­
In the first two years of its existence, the WIO ing the right to redress, developing countries are turn­
dispute settlement system received a total of sixty-two ing to the dispute settlement process far more often
cases involving more than forty-three distinct matters. than they did under the GATT.

of abating. International migration of people in search of tries between the mid- 1 980s and the mid- 1 990s. Such dis­
work is the laggard in this story. As World Development parity in the speed and extent of integration reflects how
1995 showed, annual migratory flows from developing well different regions have succeeded in raising their vol­
countries are no greater now, relative to total population, ume of trade with the rest of the world. While East Asia,
than in the 1 970s. Most workers in poorer countries are for instance, has consistently expanded its trade over sev­
only beginning to experience the benefits-and the costs­ eral decades, that of Sub-Saharan Africa has actually fallen.
of global migration. But the expansion of markets and the In addition to liberalizing trade, more countries are
increase in competitive pressure will leave some unpre­ also gradually removing restrictions on cross-border
pared countries highly vulnerable to unforeseen shocks and movements of capital, either unilaterally or as part of
policy mistakes. As Chapter 3 explained, countries will regional initiatives. The number of countries with liberal
need to adopt prudent, consistent, and credible policies at or mostly liberal capital regimes has grown from nine to
home to prepare for the new global environment. Interna­ thirty in the past two decades, while the number of coun­
tional collective action can help support these efforts by tries with relatively restrictive rules has dropped sharply,
offering ways for countries to make external commitments from seventy-three to fifty-three (Figure 8 . 1 ) .
that will give these policies more credibility. Just as countries differ markedly with respect to
The growing global consensus on the benefits of more growth in trade, so there is considerable disparity in coun­
liberal trade and international market expansion is tries' ability to attract foreign capital. Although worldwide
reflected in the large and growing membership of the private and official capital flows have expanded by about
WIO (Box 8 . 1 ) . The most recent series of multilateral a factor of ten in the past two decades, developing regions
negotiations toward trade liberalization, the Uruguay have fared unequally in attracting these flows. Much of
Round, led to significant reductions in both tariff and the expansion has been in private flows, and among devel­
nontariff barriers to trade in goods and services, particu­ oping regions most of these go to East Asia and Latin
larly among developing countries. America. One estimate suggests that more than half the
Yet reducing border barriers is only one of the precon­ population of the developing world has been little
ditions for participating more actively in the global trad­ touched by this aspect of globalization.
ing system. Countries also need a competitive exchange Of particular concern to developing countries is the
rate, good availability of foreign exchange, and a transport composition of these growing private capital flows.
infrastructure that can support expanded trade. Thus, de­ Whereas many developing countries actively seek foreign
spite spreading trade liberalization, the share of trade in direct investment, they regard portfolio investment with
GDP fell in forty-four of ninety-three developing coun- ambivalence. Foreign portfolio investors can help develop
 F A C I L I T AT I N G I N T E R N AT I O N A L C O LLECTIVE ACTI O N 1 3 5

Figure 8.1 Many countries are loosening restraints on international capital

Number of countries
.---�----�=---�--��-

45

40

35

30

25

20

15

10

o
Liberal Mostly liberal Partly liberal Restrictive Very restrictive

Rules governing foreign capital transactions

Note: Data are for 1D2 industrial and developing countries. Liberal means no restrictions; mostly liberal means a few restrictions by industry;
partly liberal means many restrictions on the size and timing of transactions; restrictive means that domestic investment by foreigners or
foreign investment by domestic residents requires official approval; very restrictive means that all cross-border transactions require official
approva l. Source: Adapted from Gwartney, Lawson, and Block 1996.

local financial markets by providing liquidity and by flows. A better understanding of these risks and greater
influencing the regulatoty framework and corporate gov­ confidence in managing them would encourage countries
ernance. But they also bring the risk of sudden capital to participate more actively in world markets. More-open
flight, whose destabilizing effects were dramatically illus­ and better-functioning capital markets in developing
trated by Mexico's crisis of 1 994-95 . countries would improve the use of global resources and
Managing the risk o f capital flight, and o f large capital increase portfolio diversification.
flows generally, has been a challenge for most developing What kind of collective actions could help achieve
countries. Increasingly the risk is regarded as a welcome these benefits? Closer consultation among central banks
source of government discipline, which discourages capri­ and financial regulators could help upgrade national reg­
cious and irresponsible policies, and many countries have ulatoty frameworks and financial practices. And greater
relaxed capital controls (see Chapter 3). Still, large flows cooperation among national authorities could help estab­
in either direction can accentuate a countty's vulnerabili­ lish procedures for mutual assistance in crises, such as the
ties through large external imbalances, rising inflation or IMP's new facility to help member countries absorb exter­
interest rates, or exuberant credit expansion that could nal shocks.
compromise the soundness of banks. Another concern is growing regionalism. The past
The means at governments' disposal to keep them­ two decades have witnessed a sharp increase in the num­
selves out of trouble are almost all a matter of domestic ber of regional market-opening agreements, including
policy: in particular, prudent fiscal policies, credible mon­ NAFTA, Mercosur, and APEC. Regionalism is not sim­
etaty and exchange rate regimes, a sound and prudent ply about trade. In the case of the European Union, for
banking system, and, possibly, measures that reduce the example, it also reflects the desires of neighboring nations
public's expectation that the government will bail them for greater political integration in response to common
out if investments turn sour. security concerns, for cost sharing for infrastructure and
But the international community has important inter­ institutions, and for increased bargaining power in inter­
ests at stake in addressing the risks associated with capital national negotiations.
1 36 WO R LD D EV E LO P M E NT R E P O RT 1 997

Opinion is divided on the merits of regional arrange­ production. New knowledge can make a dramatic differ­
ments, and the evidence remains inconclusive. Some ence in people's lives, as it did with the eradication of
argue that regionalism will divert attention and resources smallpox, the containment of malaria and river blindness,
away from the more important multilateral processes and and the significant increases in agricultural productivity
undermine progress toward global nondiscriminatory made possible by the green revolution. But these successes
trade rules. Others contend that regionalism enables states are few and far between. And new breakthroughs are
to undertake innovative market-opening measures that unlikely in the absence of assured continued support for
will eventually serve as building blocks for multilateral ini­ well-directed efforts.
tiatives. Regional partners have indeed pioneered arrange­ In developing countries research suffers from several
ments later adopted in multilateral agreements; an exam­ disadvantages. First, research activity in these countries is
ple is the European Union's treatment of trade in services. usually given low priority. In Sub-Saharan Africa, for
Some of the concerns about regionalism may be legiti­ example, less than 2 percent of health budgets is spent on
mate. But regional arrangements can be made more con­ health research; the result is shortages of research institu­
sistent with more-open and integrated world markets. One tions, facilities, and scientists. Second, the limited funding
way is to open membership in such arrangements to any that is devoted to research is usually misallocated. Pneu­
trading partners that wish to join, rather than restrict it to monia and diarrheal diseases account for 1 5 percent of the
countries within the region. Another option is to establish, disease burden in developing countries, yet only 0.2 per­
through a multilateral mechanism, a time-bound conver­ cent of medical research funding in developing countries
gence process for cutting differences between internal and is directed toward studying these diseases. This misalloca­
external trade barriers to a stipulated minimum. tion often reflects a lack of basic information and of the
skilled personnel needed to develop an appropriate re­
Supporting basic research and the creation ofknowledge search agenda. Third, there is little coordination and ex­
Knowledge is an international public good whose benefits change by researchers across developing-country borders;
accrue to all. International collective action can direct re­ the results are a considerable overlap in research activities
search toward the needs of developing countries, where and missed opportunities for cost saving.
most research activities that exist are fragmented, poorly The international community can do more to assist
funded, and inadequately directed. International assis­ developing countries in generating the new knowledge
tance can help in assessing needs, developing a cost­ that will address their needs. Through foreign aid, donors
effective agenda, encouraging international exchange and can help governments develop a research agenda based on
collaboration, and providing additional funding where it careful assessment of needs, and help finance a higher but
is needed. Successes such as those of the Consultative sustainable level of research spending. The industrial
Group on International Agricultural Research (CGIAR) countries can also help alleviate brain drain-the exodus
and the World Health Organization suggest that the re­ of skilled developing-country researchers-by providing
turn on investment in research in developing countries competent researchers and scientists to work with in­
can be substantial. stitutions in developing countries to develop training
Basic research is a classic-and global-public good. capacity and research programs that encourage the reten­
The benefits, although uncertain beforehand, and hard to tion of local personnel. Donors can help establish and
measure after, often prove exceptionally high. The trans­ fund regional research institutes to encourage cross-fertil­
formation of the global economy and of entire societies ization of ideas and limit redundant research activities.
has as its basis the knowledge gained from new discover­ And international institutions can help disseminate the
ies. Yet the incentives to conduct and fund basic research new knowledge gained to promote productivity, more
are extremely weak: the benefits of greater knowledge are effective treatment of diseases, and healthier lifestyles.
nonexcludable, and few constituencies lobby for more The scope for such efforts has been well illustrated by
research. Governments in rich countries often regard re­ successful cooperation in many areas of research and dis­
search as a luxury. Governments in poor countries seldom semination. The CGIAR, for example, was instrumental
pay it much attention. in developing more productive crop varieties and promot­
Perhaps the greatest mismatch between potential ing more efficient and environmentally friendly agricul­
returns and actual investment in research is to be found in tural methods. A network of sixteen agricultural research
developing countries. The scope for building human cap­ centers around the world, the CGIAR is supported by
ital there is enormous, but the process is complicated by fifty nations in its primary goal of alleviating hunger in
childhood malnutrition, debilitating diseases, and degra­ developing countries. But the benefits of its activity have
dation of the natural resources that support agricultural not been limited to those countries (Box 8.2) .
 FA C I L I TA T I N G I N T E R N AT I O N A L C O LLE CTIVE ACTI O N 1 3 7

International cooperation in health research has also

led to important advances. The World Health Organiza­ Box 8.2 How International agricultural
tion, for example, played a major role in the eradication of research benefits donors as well
smallpox. But much scope remains for collective action.
Of total worldwide spending on health research in the In 1 993 the United States produced about 1 2 per­
early 1 990s, an estimated 95 percent was devoted to health cent of the world's wheat crop. The United States
problems of concern mainly to industrial countries, and is also a major rice exporter, accounting for nearly
only 5 percent to the health needs of developing countries. 1 8 percent of international trade in the commodity.
Several research activities especially warrant more in­ Most wheat and rice varieties grown in the United
ternational support: States were developed through crop improvement
research. Many were developed through the work
• Improving the understanding of tropical diseases, par­ of two research centers in the CGIAR nenvork: the
ticularly those affecting children and rural dwellers of International Center for Maize and Wheat Im­
Sub-Saharan Africa provement (known by its Spanish abbreviation
• Controlling the spread of the human immunodefi­ CIMMYD and the International Rice Research
ciency virus (HIV), which causes AIDS
Institute (IRRI). Both are supported in part by con­
• Improving treatment and prevention of noncommuni­
tributions from the U.S. government.
cable diseases, which affect an increasing number of
A recent study sought to measure the benefits to
people in developing countries
the U.S. economy from CGIAR research. It was
• Finding or developing disease- and pest-resistant vari­
estimated that, during 1 970-93, gains from the
eties of such crops as cotton, cocoa, rice, and yams,
use of improved wheat varieties developed by
which play a key role in many economies
CIMMYT amounted to $3.4 billion to $ 1 3.7 bil­
• Developing mining and farming technology to mini­
lion. The benefit-cost ratio for U.S. government
mize soil erosion and deforestation.
suppOrt of CIMMYT was as high as 1 90 to 1 . IRRI
research was linked to $20 million to $ 1 billion in
Protecting the global environment
gains in rice revenues, yielding a benefit-cost ratio
A severe threat to development comes from environmen­
tal degradation, at both the global and the local level. Par­ of as much as 1 7 to I . Thus even though U.S. in­
ticularly worrisome global environmental issues include vestments in international agricultural research on
climate change (Box 8.3), loss of biodiversity, and protec­ wheat and rice were made primarily on humanitar­
tion of international waters. At the local level the most ian grounds, they have yielded direct benefits to the
pressing problems are urban air and water pollution, U.S. economy that far outweigh the costs of sup­
deforestation, and soil and rangeland degradation. Inter­ porting the CGIAR. And as the study concludes,
national collective action can help mitigate these problems "international agricultural research is an investment
through better coordination, increased public awareness, in international stability and economic growth
technology transfers, cost sharing, and consultation to overseas, which reaps further rewards for the United
help shape national and local policies and practices. States and other donor nations."
International cooperation is now recognized as the
cornerstone of a sustainable environmental regime. In the
past twO decades the number of international environ­
mental agreements has grown significantly. The wide arid and semiarid areas, forested areas, or areas vulnerable
array of interests at stake means that activities must be to forest decay; and countries with areas prone to natural
coordinated at the international level to ensure stable and disaster.
predictable patterns of behavior and to establish coopera­ Institutional and financial support is often needed to
tive management systems. Although willingness to partic­ enable certain countries to meet their obligations. One of
ipate in international collective action implies recognition the outcomes of the 1 992 U.N. Conference on Environ­
of a common objective, different countries have different ment and Development in Rio de Janeiro, for example,
interests at stake, and these, too, must be recognized. was a commitment by the industrial countries to provide
Article 4 of the 1 992 Climate Change Convention, for financial resources to meet the COStS incurred by devel­
example, requires that parties to the convention give full oping countries in implementing obligations set out in
consideration to the interests of (among others) small the conference's Agenda 2 1 . The Global Environment
island countries; countries with low-lying coastal areas, Facility, conceived to finance the incremental costs of
1 38 WORLD D EV E L O P M E N T R E P O RT 1 997

Box 8.3 The challenges of global climate change for international cooperation

Although some doubts remain about the magnitude of ments, such as tradable carbon emissions entitlements,
global climate change and the urgency of dealing with to reduce greenhouse gas emissions. In a tradable per­
it, a consensus is emerging that the problem is real and mits system, permits corresponding to a targeted ceiling
potentially dangerous, and that reasonable and appro­ of greenhouse gas emissions would be issued, and emis­
priate measures should not be postponed. The Inter­ sions without a permit would be prohibited. Countries
governmental Panel on Climate Change has predicted for which the costs of reducing carbon emissions are
that over the next 1 00 years the earth's surface will low would have an incentive to undertake those reduc­
warm by an average of 1 .5 to 6.3 degrees Fahrenheit, tions and sell their unneeded permits to countries for
and sea levels will rise 6 to 38 inches. These changes which the costs of emissions reduction are high. A
would bring more frequent and intense droughts, the recent World Bank study estimates that cutting emis­
spread of disease, the retreat of mountain glaciers, and sions in the countries of the OECD by 20 percent at
storms of greater malevolence. least cost could require global trading of entitlements
What challenges does climate change pose for inter­ worth $30 billion to $40 billion annually. Allowing
national cooperation? Under the auspices of the trading would generate savings equivalent to 65 percent
United Nations Framework on Climate Change, of global abatement costs.
signed in 1 992 and ratified by 1 59 countries, an inter­ The barriers to implementing this global market are
national agreement to limit the greenhouse gas emis­ largely political. The market's very existence depends
sions that contribute to climate change is being nego­ on governments' willingness to create and regulate it.
tiated and may be adopted by the end of 1 997. But (The financial resources for purchasing entitlements
climate change, if it brings the dire effects that are pre­ are expected to come from the private sector.) A crucial
dicted, will take far bolder cooperation-political, eco­ step in establishing the market will be the initial allo­
nomic, and financial-to meet needs projected to cation of entitlements-this will have to be deter­
reach $50 billion a year by 2040. mined by a global climate change protocol. Although
Recent analysis of climate change provides a strong many formulas have been suggested, this contentious
economic rationale for adopting market-based instru- issue has not yet been resolved.

projects that have global environmental impact, plays a Preventing and controlling conflict
crucial role in implementing these obligations (Box 8 .4). For most of the twentieth century the world has lived
Many of the most immediately pressing environmental under the specter of major war. The first half of the cen­
problems facing developing countries, such as urban water tury witnessed two global conflicts, catastrophic destruc­
and air pollution and soil degradation, are mainly local tion of lives and resources, and decades of rehabilitation
rather than global. But they have major implications for and reconstruction. During the second half the Cold War
productivity, health, and the quality of life within these loomed large, with the threat of even greater destruction
countries' borders. Progress in alleviating these problems from nuclear weapons. Global tensions led many coun­
has been slow, with lack of capacity and political will, at tries to devote a substantial share of national output to the
both the national and the local level, a major stumbling military. Only in the past ten years have these tensions
block. begun to subside, providing an opportunity for nations to
The lesson of recent experience is that bringing about reduce military spending and reap the dividends of peace
both local and global environmental integrity and sus­ (Box 8.5).
tainability will require a coordinated international effort, The threat of nuclear war has been replaced by a pro­
one that blends careful attention to financial incentives, liferation of smaller conflicts, bringing costly problems of
market forces, laws, and national interests. Equally refugee relief and rehabilitation. Existing cooperative
important, the international community must help raise mechanisms have had limited success in managing these
public awareness of the dangers of environmental degra­ conflicts, or in helping to avoid them. The problems often
dation, so as to change the political incentives facing lead­ spill over and engulf neighboring countries, as they did
ers, which often work against the goal of environmental in Southeast Asia and much of southern Mrica in past
integrity. decades and are doing now in Central and West Mrica.
 FA C I L I T A T I N G I N T E R N AT I O N A L C O LL E CTIVE ACTI O N 1 39

These conflicts are not confined to the poorest countries,

but can also break out in middle-income countries such as Box 8.4 Sharing the burden of environmental
the former Yugoslavia and Lebanon. The challenge facing protection
the international community is to find new ways to pre­
vent such conflicts or to manage them at an early stage The Global Environment Facility (GEF) was set up
before they turn into tragedies. in 1 9 9 1 to help developing countries finance the in­
The end of the Cold War brought rising optimism that cremental costs of new environmental investments
many of the issues that had contributed to instability and with global benefits in four areas: climate change,
conflict throughout the world would be resolved. Instead preservation of biodiversity, protection of the ozone
at least thirty major armed conflicts (defined as those layer, and protection of international waters. A joint
causing more than 1 ,000 deaths in a year) have taken undertaking of the United Nations Environment
place worldwide in recent years. The fragile peace settle­ Programme, the United Nations Development Pro­
ments in Cambodia and Mozambique now seem the gramme, and the World Bank, the GEF has led to
exception rather than the norm. We have seen: new institutional arrangements for the provision of
collective goods.
• A rising number of refugees and internally displaced The GEF has more than 1 65 member states and
persons, and a disproportionate number of women and is governed by a board of representatives from
children who lack access to the basic resources needed thirry-two countries, each representing a con­
for repatriation or rehabilitation (Figure 8.2) stituency. There are sixteen constituencies for devel­
• A rise in the number of humanitarian emergencies, oping countries, fourteen for industrial countries,
from an average of five a year in 1 985-89 to twenty in and two for Eastern Europe. The cOllntries in each
1 990, twenty-six in 1 994, and twenty-four in 1 995 constituency choose a board member and an alter­
• The erosion or total collapse of legitimacy and author­ nate, and each constituency determines its own
ity in many states, including Afghanistan, Liberia, process of consultation and decisionmaking. New
Rwanda, Somalia, and the former Yugoslavia, as a re­ members join an existing constituency. This innov­
sult of extended civil war or genocide. ative arrangement thus combines representativeness
with efficiency.
The relationship between refugees and the state is inex­
tricable. States are major actors in responding to and
defining refugee crises. Indeed, international law defines
"refugee" in relation to the state. Although NGOs and
receiving countries and communities play essential roles but by late 1 996 an external refugee population of
in providing for displaced persons, the scale of displace­ about 1 . 5 million remained dependent on international
ment in recent years has required that states-unilaterally assistance.
or within the framework of multilateral organizations­ States also differ in their ability to avoid or limit
mobilize and deliver protection, relief, and assistance. In refugee flows. Stronger states are more effective at denying
addition, states acting together, or as members of interna­ entry to refugees and asylum seekers. It is often the weaker
tional organizations, have initiated the negotiations that states, with the most limited resources, that shoulder the
have brought to an end several refugee-generating armed greatest burden in protecting refugees and repatriating
conflicts, including those in Cambodia, Mozambique, them when conflicts end.
and the former Yugoslavia. Today's international collective response to refugee
Nevertheless, the disincentives to cooperate on problems relies heavily on multilateral organizations. The
refugee issues are powerful. One is the difficulty in secur­ Office of the United Nations High Commissioner on
ing commitments in situations where a state may perceive Refugees has seen its budget doubled and its mandate
no direct interest of its own. Another is the prospect stretched in the 1 990s. It has provided in-country human­
of burden-sharing arrangements that require a state to itarian relief in Bosnia, cross-border operations in Soma­
accept refugees into its territory, often at high politi­ lia, assistance to internally displaced persons in Sri Lanka,
cal and financial cost. The case of Rwanda illustrates and repatriation of refugees in Central America and
the high cost of providing relief in large-scale humani­ Mozambique. These activities have required highly com­
tarian emergencies. Between April and December 1 994 plex coordination: in Mozambique, for example, relief
the international community allocated about $ 1 .4 bil­ operations in 1 99 1 involved twenty-six United Nations
lion for relief in Rwanda and neighboring coun­ agencies, forty-four bilateral donors, six other multilateral
tries. Rehabilitation efforts were gradually introduced, institutions, and 1 80 NGOs. It is estimated that more
1 40 WORLD D EVE L O P M E NT R E P O RT 1 997

than 1 6,000 NGOs are worlcing to provide relief an d

Box 8.5 How large the global peace humanitarian assistance worldwide.
dividend?
Improving the effectiveness offoreign aid
Global military spending has fallen significantly, Foreign aid is not strictly a public good, but it can be j us­
from about 4 percent of GOP in 1 990 to 2.7 percent tified by considerations of international equity, particu­
in 1 994 to 2.4 percent in 1 995 (see figure) . This larly concerning the future productivity and well-being of
drop, in sharp contrast to the rising trend of the pre­ people in poor countries. A vital part of improving the
vious two decades, resulted from the breakup of the climate for development assistance must be to make for­
Soviet Union, a changing global political climate, eign aid more effective from the standpoint of both the
increased democratization, and a fall in military aid. borrower and the donor. Recent research suggests that this
But has the reduction in military spending im­ can be achieved by linking aid more closely to recipients'
proved growth and welfare? The relationship be­ policies.
tween military spending and eamomic development The success or failure of aid-financed development
depends on a variety of factors and circumstances. projects, even in the social sectors, is particularly depen­
Empirical results vary, depending on the assump­ dent on the quality of a country's macroeconomic poli­
tions and methodologies used. Some studies show cies. A project to expand primary education, for example,
that global reductions in military spending have is more likely to succeed where macroeconomic policies
indeed generated a peace dividend in the form of are sound. If projects are the vehicle for development,
faster output growth. Others suggest that the rela­ macroeconomic policies can be seen as the fuel and lubri­
tionship between military spending and growth is cants that keep the vehicle going.
not linear but quadratic: at low levels of military Moreover, only in a good policy environment will for­
spending, increased spending contributes to faster eign aid have an impact on growth. In countries that have
growth; at higher levels further military spending pursued the key economic policies for growth-which
slows growth. Once the highest-spending nations are empirical research has identified as ensuring fiscal disci­
excluded from the sample, the relationship between pline, preventing high inflation, and maintaining a rea­
military spending and growth is not significant for sonably open economy-foreign aid has significantly in­
most developing countries (in peacetime). In such creased economic growth (Figure 8.3) . Countries that
cases the biggest dividend ultimately may come from have achieved a good policy environment and received
a country's perceived security and increased investor significant amounts of aid in recent years-Bolivia, EI Sal­
confidence, rather than from reductions in military vador, Mali, and Uganda, for example-have grown faster
spending per se. than would have been predicted by their policies alone.
The clear implication is that foreign aid would be more
M ilitary expenditure by Industrial, developing, and
effective if it were either more systematically targeted to
former Soviet bloc countries
poor countries with good economic reform programs or
Percentage of GDP used to promote good policies. At the same time, donors
8 share much of the responsibility for ensuring that foreign
Former Soviet Union aid is dispensed responsibly and effectively.
7 and CEE The past decade has seen a trend toward economic lib­
6 eralization in the developing world, indicating an improv­
Industrial ing climate for effective assistance. For example, India and
5 countries Vietnam-populous countries that undertook good re­
4 form programs in the early 1 990s-have built environ­
ments where foreign aid is likely to have a greater impact
3 on growth and poverty reduction. But the track record of
2 targeting aid to poor countries with good policies was gen­
Asia
erally weak between 1 970 and 1 993. Bilateral aid showed
1 Sub-Saharan
Africa
no tendency to favor good policies, whereas multilateral
aid reflected only modest favoritism toward countries
1990 1991 1992 1993 1994 1995 with good policies (as shown in a study that controlled for
income and population). Clearly, a high priority for aid
Note: Data are averages of the countries In each group,
weighted by GDP. Source: Gupta, Schiff, and Clements 1996. agencies is to channel resources more systematically
toward poor countries with good policies.
 FA C I L I TAT I N G I N T E R N AT I O N A L C O LL E CTIVE A CTI O N 1 4 1

Figure 8.2 Refugees have been flooding Africa, Asia, and Europe

Millions of persons
12 ,--------�

10

4 1985 1990 1995

o �--
Latin America North America Europe Asia Africa

Note: Data include refugees, returnees, and internally displaced persons. Source: Office of the United Nations High Commissioner for Refugees
1995.

Can aid help poor countries improve their policies and once good policies and good institutional structures are in
institutions? This is a difficult but critical question for the place, financial assistance can accelerate the transition to
allocation of aid. There has been little systematic research a more rapid growth path. The experience of successful
into this question, but the available results are suggestive. economies shows that the need is temporary: as a track
Structural adjustment lending to support policy re­ record of good policies and performance develops, private
form has been more successful where local "ownership" of capital flows increase and gradually eliminate the need for
the reform program has been strong. Although adjust­ foreign aid.
ment lending can provide a useful support to an existing
Strategic options: Furthering the provision of
reform program, it is not likely to generate reform on its
International collective goods
own: experience strongly suggests that donors cannot
"bribe" governments to introduce policies for which there More effective international cooperation can expand op­
is no domestic support. portunities and help nations cope with the new global
Where domestic social and political forces have initi­ challenges. Each country has to evaluate the merits of each
ated programs to reform policies and institutions, foreign proposed cooperative endeavor and decide on a case-by­
aid can provide effective support by bringing technical case basis whether or not to participate. But this chapter
expertise and lessons from other countries into a receptive has pointed to several areas where cooperation could be of
environment. Good examples of such positive interaction great value:
are Indonesia, Mauritius, and Uganda. But where there is
little domestic movement toward reform, assistance aimed • Expansion and preservation of open world markets,
at institution building and policy reform has had little including mitigation of the risk associated with volatile
impact. capital movements. Many developing countries are con­
Thus, in some environments it may be difficult for cerned about more-open capital markets because of the
foreign assistance to accomplish anything beyond peace­ possibility of sudden outflows that can destabilize eco­
keeping and emergency relief. But once domestic social nomic management.
and political forces have generated momentum for • Basic research directed at the needs ofdeveloping countries.
reform, foreign aid can provide important support for The green revolution, made possible by the support
both policy reform and institutional development. And of the CGIAR, shows that investing in research and
1 42 WORLD D E VE L O P M E NT R E P O RT 1 997

mental problems by improving coordination, increasing

Figure 8.3 Poor policies nUllify the effect
public awareness, transferring technology, and provid­
of aid ing incentives for appropriate national environmental
policies and enforcement.
Marginal impact of aid on GDP growth • Peacekeeping and the prevention of armed conflicts. The
(percentage points high human and financial cost of wars-and of associ­
per year) ated relief and rehabilitation efforts-is well known,
but existing mechanisms have had little success in pre­
venting conflicts or in resolving them before they
become large-scale human tragedies .
• Improving the effectiveness offoreign aid. Linking aid
more closely to recipients' policies can make aid more
effective: for any level of foreign aid available to a coun­
try, economic performance rises with the quality of pol­
icy and governance. Recipients' policies appear to have
influenced the allocation of multilateral but not of
bilateral aid.

The appropriate catalyst for greater cooperation will

vary, both according to the goal and according to the
Poor High
range of countries likely to participate. In several areas,
Policy Level of aid new functional or regional groups may be useful in help­
ing coordinate and enforce more effective voluntary col­
Note: Each value is an average for a group of countries . Results laboration. These groups can seek to develop common
are based on a regression using data from fifty-six countries for
the period 1970-73 to 1990-93. The level of aid is measured
rules and mechanisms for pursuing designated objectives.
as a percentage of the recipient country's GOP. Source: Adapted But the credibility and effectiveness of any such effort will
from Burnside and Dollar 1996. rely critically on striking the right balance among the
competing values of openness, diversity, and cohesion.
They will rely, too, on the political incentives-and the
commitment-of participants. Attempts to improve the
development can bring rich returns-for both the effectiveness of international collective actions, like simi­
donors and the intended beneficiaries. lar domestic efforts, will bear fruit only if leaders are will­
• Protection of the environment. International collective ing not merely to promise change, but to take the steps
action can help mitigate both global and local environ- required to deliver it.
T H E C H A L L E N G E O F I N I T I AT I N G

A N D S U S TA I N I N G R E F O R M S

The innovator makes enemies ofall those who prospered under the old order,
and only lukewarm support is forthcomingfrom those who wouldprosper under the new.
-Niccolo Machiavelli, The Prince ( 1 5 1 3)

temporary. Thus, radical reforms have often been under­

P can improve its effectiveness by matching its role
RECEDING CHAPTERS HAVE SHOWN HOW THE STATE

taken in response to an external threat or economic crisis,

more closely to its capability, and working to enhance that or during the "honeymoon" period of a new administra­
capability over time. Integral to this approach is a better tion or regime, when incumbents with a strong vested
understanding of why some countries do not meet even interest in the old system have been displaced.
the most basic requirements for sound economic manage­ The second lesson is that, given such an opportunity,
ment, and why so few developing countries have managed reformers can make the best use of the time available
to create effective state institutions. But understanding by adopting a strategy that understands the likely obsta­
the problem and fixing it are two very different things. cles and seeks to mitigate them. Tactically designing and
The basic questions remain: why and how is it that some sequencing the reforms can help, as can measures to make
countries have been able to throw off this legacy of failure institutions less susceptible to capture by special interests
and move forward with reform, while others have not? and gridlock, and, perhaps most important, building a
This chapter looks for some answers to these questions consensus in favor of reform.
by examining the main obstacles to reform and how they Finally, the message of the many reform successes­
can be overcome. Three factors turn out to be critical: the and failures-analyzed in this chapter is that break­
distributional characteristics of reform (the likely winners throughs will rarely happen by accident. At any given
and losers), the political strength of key groups (particularly time, the forces favoring the status quo are likely to pre­
those that will lose out), and the design of existing state vail. Reforms only succeed if they are directed by leaders
institutions. Sometimes a reform will be politically unde­ with a clear vision of the way things could be, and a con­
sirable because the likely losers are part of the political lead­ tagious determination to turn that vision into reality.
ership's support base. Even when the political will to
Obstacles to reform
change is present, reformers can find their efforts derailed
by constraints embedded in state institutions, which make The obstacles to reform in any country will be many and
it easier for opponents to maintain the status quo. varied. The recipe for reform failure is no more suscepti­
But the fact that opposition to reform can be rooted ble to easy generalizations than the recipe for success. But
deeply in a country's institutions need not be a counsel of chief among the barriers to change will always be the
despair. To the contrary, close examination of the imped­ powerful interest groups who stand to lose by it. Resis­
iments to reform yields three pieces of practical advice for tance will be even stronger when the prospective losers are
reformers. The first is that windows of reform opportu­ among the political leadership's core constituents. In
nity do open; they tend to be those times when the nor­ short, the redistributive effects of a reform and the politi­
mal rules of the game are in flux for some reason, however cal strength of groups affected by it may simply render
 TH E C HALLE N G E O F I N I T I AT I N G AND S U S TA I N I N G R E FO R M S 1 4S

some policy changes politically undesirable. Yet even ent groups, whose precise composition will depend on the
politically desirable reforms may fail because of con­ reform in question. For example, public sector reform,
straints embedded in state institutions, which tilt the play­ which is central to reinvigorating state institutions, can
ing field firmly in the opponents' favor. Thus, policy out­ sometimes be thwarted by civil servants who run the risk
comes can usually be seen as the combined effect of the of unemployment or finding themselves worse off in pri­
characteristics of the reforms themselves, the political vate sector employment. Politicians who use public em­
strength of different actors, and the design of existing state ployment as a source of patronage may also see an interest
institutions. in blocking certain kinds of reform. Decentralization, for
instance, raises the prospect of reallocating resources out­
Distributional conflicts, uncertainty, and reform side the political leadership's constituency. In Peru, a de­
Some common rypes of reform and the groups that stand centralization program that would have transferred re­
to gain or lose from them are listed in Table 9. 1 . These sources for financing primary and secondary education to
alignments do not apply in all circumstances. But the provincial municipalities was halted in 1 993, following
truth remains that resistance to reform is often triggered widespread victories by independents and opposition par­
by the potential redistribution of resources among differ- ties in the municipal elections.

Table 9.1 Alignment of interest groups, political costs, and tactical sequencing of reform by reform type

Interest groups
Detenninants of Tactical
Type of refonn Against For political cost sequencing Other issues
Trade Holders of import Consumers, ex- Redistribution (+) Reduce quantitative
liberalization quotas porters, the treasury Efficiency gains (-) restrictions before
Protected (if revenues will tariffs.
industrialists increase)

Pension Trade unions Employers Wealth reduction (+) Allow partiCipants to Young workers may
privatization Pensioners' Financial institutions Reduced coverage (+) opt out of public be willing to forgo
associations Young workers Older median voter (+) scheme, then phase some of their
Bureaucracies (labor Efficiency gains (-) it out. acquired rights.
ministry, social
security agency)

Decentralization
Functional Top officials and Top officials and staff Redistribution (+) Build consensus, Need to mitigate
staff in central in local administra- Political contest- phase in pilot fiscal imbalances and
administration tions, consumers, ability (+) program, design grant design new schemes
citizen benefiCiaries, Efficiency gains (-) schemes. for allocation of
local businesses grants across
jurisdictions

Political Top decision makers Local decisionmakers

in political parties in political parties,
aSSOCiations, and
labor unions; NGOs;
taxpayers

Fiscal Top officials in Department of finance

ministry of finance in local administra-
and strategic planning tion, local planning
(or public investment) and investment units
commission

Public sector Employees and Private business, Redundancy (+) Eliminate ghost Incentives:
reform managers of public rural elite, central Unemployment (+) workers, encourage severance, buyouts,
enterprises, agenCies, taxpayers Relative wages (+) voluntary and early capitalization
pOliticians prone to Efficiency gains (-) retirement, ensure scheme, training,
patronage retrenchment without private sector
revolving door. placement, credit
schemes

Note: A plus sign indicates a factor that increases, and a minus sign one that lowers, the political cost of reform.
1 46 W O R L D D EVE L O P M E NT R E P O RT 1 9 9 7

Ranking policy changes according to their political erations can also affect policy outcomes. Most public pen­
costs and benefits can help policymakers design the tacti­ sion schemes are unfunded, financed by current payroll
cal sequencing of a comprehensive reform program. taxes rather than past contributions. The resulting high
Although such an exercise is highly country specific, a marginal tax on labor and the weak link between contri­
good starting point is to compare the expected redistribu­ butions and benefits create distortions in the labor market.
tional effects of planned reforms with their expected effi­ In mature systems these distortions are compounded by
ciency gains. Some reforms, for example, are difficult to the low implicit return on pensions relative to the market
implement because in the short run they seem to be merely return on capital. The distortions could be reduced by,
reshuffling opportunities and incomes. Although such among other things, strengthening the link between con­
reforms, if they increase efficiency, ultimately increase the tributions and benefits and privatizing and funding pen­
size of the pie, their short-run redistributive effects may sion schemes. But such reforms would affect different gen­
exceed even the immediate benefits. In that case, other erations of workers differently. For example, privatizing
things equal, reform will not occur, because the political and fully funding the U.S. Social Security system could
difficulties of reforming outweigh the rewards. This polit­ generate net gains, including gains in efficiency, but
ical cost-benefit approach can be applied to a broad range younger workers would realize most of those gains, and
of reforms, such as trade liberalization (Box 9. 1 ). older workers would lose (Figure 9. 1 ). This dilemma helps
Applying the redistributional calculus to the case of explain why reform is so politically sensitive. Similarly,
pension reform shows how conflicts of interest across gen- redistribution away from the elderly helps explain why
countries in CEE and the CIS are resisting increasing the
pension age. In Ukraine, for example, a uniform pension
Box 9.1 Weighing the political costs and
age of 65 would ease the system's actuarial imbalance but
benefits of reform would also reduce the pension wealth of workers (in pres­
ent value terms) by about 25 percent of GOP.
Efficiency-enhancing reforms are often difficult to The difficulty of reforming universal pension programs
implement because they create both winners and thus stems from the anticipated reform's redistributive
losers, and there may be no way to compensate the effects and the power of elderly voters. Meanwhile unborn
losers. Defusing opposition is even more difficult generations, who would benefit the most from reform,
when the efficiency gains are low relative to the have no voice in the decision. The political costs of reform
redistributive effects. Applying a rough political in the United States have risen over time, as the gap in
cost-benefit ratio to reform measures can show how voter turnout between the young (those between 25 and
much redistribution takes place for a given amount 40 years of age) and those over 65 has widened in favor of
of efficiency gain. A policy that increases the income the latter, to some 1 2 percentage points. Clearly, reform­
of one group without taking income away from ing public pension and health care financing programs for
another, for example, would have a ratio of zero. the elderly, however fiscally unsustainable, is a difficult
For trade liberalization the political cost-benefit feat to pull off, but should be a high priority. Even when
ratio is inversely related to the tariff rate, the share one-time, comprehensive reform is not feasible, more­
of imports in total consumption, and the elasticity gradual changes and grandfathering of existing beneficia­
of import demand. In Sub-Saharan Africa the aver­ ries, in the recognition that changes are likely to be gener­
age import tariff exceeds 30 percent, and the share ational, with long lead times, may reduce opposition to
of imports in total consumption is about 40 per­ reform.
cent. Assuming an import demand elasticity of two In many countries utilities are inefficiently run public
(demand for imports rises by 2 percent for every 1 monopolies. Consumers would realize significant gains if
percent decline in price), the cost-benefit ratio of these utilities were privatized and effective regulatory
trade liberalization is more than four. Thus, for any agencies established to watch over them. Witness the case
given amount of efficiency gain, the redistributive of Argentina, which began privatizing its state-run infra­
effects would be four times that amount. When a structure services in 1 989. All income groups have bene­
reform program combines trade liberalization with fited from the efficiency gains induced by privatization,
a stabilization program that increases output, the and these gains (relative to spending on utilities) have
ratio declines significantly. A stabilization program been similar across income groups (Table 9.2) . In
that increases GOP growth by 1 percentage point Uruguay, for example, a 1 989 plebiscite rejected privati­
would be sufficient to lower the ratio from four to zation legislation. Yet a recent study shows that inefficien­
less than one. cies in public utilities add 30 percent to the average
Uruguayan's electricity, water, and telephone bills. And as
 TH E C H A L. L. E N G E O F I N I T I AT I N G A N D S U S TA I N I N G R E FO R M S 1 4 7

can be used to block reform, we focus here on two princi­

Figure 9.1 Older workers will lose from
pal ones: the electoral and party system and the system of
reforming pensions, but the young will gain checks and balances. The point is not that institutions
should be redesigned and changed frequently to facilitate
Projected net gains from pension privatization in the reform, or that a single design is desirable for all countries
United States (thousands of dollars per contributor) and situations. The aim, rather, is to show how elements
10
of the underlying institutional framework can condition
8 both the attempt to reform and the response.
ELECTORAL AND PARTY SYSTEMS. As has been empha­
6
sized throughout this Report, institutional choices are sel­
4 dom clear-cut: they will involve a careful tradeoff between
allowing state officials flexibility and imposing appropri­
2 ate restraints on them. Experience with proportional elec­
o toral systems is a case in point. Such systems are associated
with coalition governments, which can be desirable to the
-2 extent that they bring more voices to the cabinet table and
put a high value on consensus. Yet the same characteris­
-4
tics can also be a barrier to reform, leading to long delays
-6 in policymaking and higher fiscal deficits because of the
5 10 15 20 25 30 35 40 45 50 55 60 need to buy off sectoral or regional interests. Research has
Age (years) shown that countries with large and fragmented coalitions
tend to have more difficulty adjusting to external shocks,
Note: Data are aggregate lifetime gains or losses, at 1995
present value using a 5 percent discount rate. Source: Feldstein
such as the 1 973-74 oil price hikes. Both Belgium's and
and Samwick 1996. Italy's vety high levels of public debt have been partly
attributed to two decades of being governed by large and
unstable coalitions.
Brazil provides another illustration of how electoral
we saw in Box 4.2, many of the arguments commonly and party systems can interact with economic policy. The
offered against privatization are not valid. social security bill proposed by the administration of Pres­
So why is privatization still resisted in some countries? ident Fernando Henrique Cardoso in June 1 996 was
This reluctance to implement welfare-improving reforms defeated in the lower house of the legislature, despite a
is linked to at least three factors: formal majority in favor of the government alliance, be­
cause certain interest groups (civil servants and teachers,
• The perceived uncertainty of the outcome of reform, among others) exploited constitutionally protected privi­
which impedes the creation of a strong constituency for leges and a political system that discourages stable voting
reform and raises concerns that the immediate response majorities in the congress. The fact that deputies belong­
may be social unrest, while the benefits are only realized ing to the alliance voted against the bill reflects the
later
• The fact that private operators typically have to make
changes that are detrimental to certain groups in order
for the efficiency gains to materialize Table 9.2 Estimated efficiency gains from
• The fact that different groups may hold conflicting privatizing utilities In Argentina
views about the role of the state-for instance, in many Gains per dollar
countries that have previously relied entirely on state Efficiency gains of expenditure
utilities, many groups continue to resist privatization Income (millions of 1993 on utilities

on ideological grounds. quintile dollarsl (percentl

Poorest 205 30
Second 222 27
Institutional design
Middle 342 34
The preceding discussion has identified the losers from 335 27
Fourth
reform as potentially powerful obstacles. But whether or Richest 549 31
not these groups prevail in a given instance will often be Total 1,653 30
determined by the design of state institutions. Rather than Source: Chisari, Estache, and Romero 1996.
attempt an exhaustive account of how state institutions
1 48 WORLD D EVE L O P M E NT R E P O RT 1 997

unusual autonomy of elected officials from political par­ larly, as Chapter 7 showed, an ill-designed decentraliza­
ties that characterizes Brazil's system of proportional rep­ tion that leads to capture of local authority by special
resentation. A 1 99 1 study of Brazil's electoral and party interests can prevent the adoption of sound reforms.
system found that representatives had belonged to an Although the presence of many veto points can some­
average of three political parties, and that in 1 987-90 times contribute to delays, some evidence suggests that it
one-third of the 559 representatives had switched parties has helped contain the expansion of the welfare state. As
since being elected in 1 986. A bill to reform some aspects Figure 9.2 shows, the constitutional division of power
of party legislation may be voted in the congress in 1 997. ranks second only to aging in explaining changes in wel­
In Uruguay a number of institutions have speeded fare spending. As incomes per capita increase, demand for
some reforms-and held back others. One of the pecu­ government transfers also rises. Countries with fewer veto
liarities of the country's electoral system, prior to the points in their state structure (such as Sweden and Den­
recent reform, was that party primaries and general elec­ mark) are more receptive to these demands. By contrast,
tions were held simultaneously. As a result, the winning the greater number of veto points in Switzerland-a fed­
presidential candidate received only a minority of the total eral state with a bicameral legislature-has blocked many
vote and had to build alliances with opponents in the par­ initiatives to expand welfare programs. Reforming the
liament. In the November 1 994 election the winning can­ welfare state will therefore require going beyond stream­
didate received only 24 percent of the vote, and the three lining the functioning of transfer programs. Indeed, this
main parties each received more than 30 percent. Such an was recognized by the 1 992 Swedish commission on state
electoral system tends to be candidate centered and con­ reform, which recommended strengthening the executive
ducive to faction. Hence, groups that are able to mobilize by introducing a constructive vote of no confidence,
politically reap the most benefits. Another distinctive allowing the government to ask parliament to vote on
feature of Uruguay's political system is its heavy reliance measures as a package rather than line by line, extending
on direct democracy (through plebiscites) to decide on the time between elections from four to five years, and
features of the public pension system. In 1 992 voters reducing the size of the parliament by half.
reversed major privatization legislation. And a 1 989 POLITICAL REGIME. The choice of political regime has
plebiscite, initiated by the association of pensioners, guar­ justifications that go far beyond economic conditions. Yet
antees full wage indexation every three months. These the strong links between state institutions and policy out-
institutional designs help explain why pension expendi­
tures relative to GDP are about 35 percent higher in
Uruguay than in the United States, even though the two
Figure 9.2 M ultiple veto points help countries
countries have roughly the same proportion of elderly in
resist pressure to expand welfare
the population ( 1 6 percent) .
Uruguay has since recognized that its electoral system Contributors to welfare expenditure
is an impediment to a well-functioning state. A new sys­
tem was approved by the parliament in October 1 996. It Higher Type of
unemployment government
would end simultaneous voting for primaries and general 13% 4%
elections, and it would require a second-round ballot
between the two presidential front-runners when neither
has managed to secure 50 percent of the vote. These
changes are expected to strengthen party discipline and
deter factionalism.
CHECKS AND BALANCES. Chapter 6 showed how and
why inadequate checks and balances can lead to arbitrary Aging of
Constitutional
H igher GDP
government decisions and behavior. The veto points arise population
structure with
per capita fewer veto pOints
at three levels: the separation between the legislative and 51% 8% 15%
the executive branches, the division of the legislature into
separate chambers, and the division of power between
national and subnational governments. A bias toward the Note : Each slice represents the estimated contribution of
status quo develops when the state supports many institu­ that factor to observed government expenditure on pensions.

tional veto points, and groups that oppose change can Unemployment benefits, and family assistance. ResUlts are
based on a regression on data from twenty-two OECD countries
exert power at one or more levels. In a presidential system, for the period 1965-93. See the TeChnical Note for details.
for example, gridlock can emerge when different parties or Source: World Bank staff calCUlations.

coalitions control the executive and the legislature. Simi-

 TH E C H ALLE N G E O F I N I T I AT I N G A N D S U STAI N I N G R E FO R M S 1 49

Box 9.2 The predatory state under the Duvalier dynasty in Haiti

Haiti became independent in 1 804. A predatory state tion. Following a business strike in 1 957, the police
arose there between 1 843 and 1 9 1 5, a period charac­ were authorized to open the shops of striking mer­
terized by short-lived rulers, often removed by coups, chants and distribute their merchandise. Significant
driven by the creation of personal wealth. Of twenty­ resources were devoted to protecting Duvalier himself:
two administrations during that period, eleven held 30 percent of total expenditures during the first half of
office for less than a year, and only one managed to the 1 960s. Agriculture, particularly coffee, was heavily
complete its term. taxed. Some sources estimate that Duvalier transferred
The United States occupied the country from 1 9 1 5 more than $7 million a year out of Haiti for personal
to 1 934, but the logic of a predatory state remained purposes. Large-scale bribes also took place, through
unchanged. In 1 957 the democratically elected govern­ deals with foreign investors on projects that often
ment of Fran<;:ois (Papa Doc) Duvalier took that logic never materialized. Extortion under the veil of "volun­
to a new level, starting with an unprecedented purge of tary" donations was institutionalized under the Mouve­
civil society, the inherited army, political opposition, ment de Renovation Nationale. A pseudo-old-age
and other branches of government. Within two pension with a 3 percent deduction was created, and
months of coming to power, Duvalier had jailed 1 00 government employees were forced to buy a $ 1 5 book
political opponents. The Catholic Church was per­ containing Duvalier's speeches. An autonomous gov­
ceived as a threat, and spiritual leaders were expelled. ernment fund collected taxes and levies, which were
The mass media were silenced through the expulsion of excluded from the budget, and no accounting was
foreign journalists, and a 1 958 code allowed the gov­ made of their use.
ernment to shoot reporters charged with spreading After nearly thirty years of rule, the Duvalier
"false news." Imprisonment of the parents of striking dynasty fell in 1 986, when Jean-Claude (Baby Doc)
students was made mandatory. After lifting parliamen­ Duvalier, who had inherited the presidency from his
tary immunity in 1 959, Duvalier dissolved both the father, went into exile in France with an estimated $ 1 .6
Senate and the Chamber of Deputies. Modern military billion at his disposal. Haiti's history as a predatory
equipment was stored in the basement of the presiden­ state goes a long way toward explaining its dismal eco­
tial palace, and more than 200 officers were removed in nomic performance. During 1 965-90 growth in GNP
Duvalier's first eleven years of power. In 1 964 Duvalier per capita averaged -0.02 percent, and social indicators
declared himself president for life. remain the worst in the Western Hemisphere. Given
The economic pillars of Haiti's predatory state were the legacies of the predatory state, Haiti's history
expropriation, extortion, the inflation tax, and corrup- remains perhaps the biggest obstacle to change.

comes raise the question of whether obstacles to reform The end of the Cold War, combined with pressure
may be embedded in the political regime. Some observers from citizens, should lessen the risks of extreme state cap­
have argued that nondemocratic regimes, by having fewer ture embodied in a predatory state, with many countries
veto points, are more conducive to economic development. now having adopted elements of democratic regimes (such
The reality is more complicated: no single type of regime as free and open elections). But researchers have yet to
can guarantee economic and social progress. We do know, reach a consensus on the precise relationship between
however, that one kind of regime-the so-called predatory growth and democracy: about one-fifth of the studies find
state-can be almost guaranteed to produce economic a positive relationship, one-fifth a negative relationship,
stagnation. The focus of such a state is on the extraction of and the rest are inconclusive. The analysis of the determi­
economic rents from the citizenry by those in power. It nants of growth summarized in Chapter 2 found no statis­
does so by specifYing property rights in a way that maxi­ tically significant correlation between the two. And cer­
mizes the revenue of the group in power, regardless of the tainly, economic performance among developing countries
impact on the wealth of the society as a whole. Haiti under classified as sustained democracies has varied considerably.
the Duvalier regime (Box 9.2) and Romania under Nicolae The experience of countries that have combined polit­
Ceausescu are prime examples. A predatory state is incon­ ical transformation with the transition from a planned to
sistent with economic development because it discourages a market economy suggests equally mixed conclusions
productivity and leads to misallocation of resources, culmi­ with regard to the relationship between democracy and
nating sometimes in the collapse of the state itself. reform. As noted in Chapter 7, using the ballot box to
1 50 WORLD D EV E L O P M E NT R E PO RT 1 997

punish or reward politicians for past performance (retro­

spective voting) could be a powerful way to ensure Box 9.3 Reform under external threat:
accountability and good policy outcomes. But the road The Meiji restoration in Japan
can be rocky at first. Indeed, governments' initial reaction
to greater political contestability may add to the difficulty The inttusion of Western powers into national
of improving institutions, and transitions to democracy commerce was the impetus for reform in Japan.
are sometimes associated with increased budget deficits Starting in the 1 840s, Japan was under increasing
and inflation. pressure from the West to grant commercial and
Sub-Saharan Africa has witnessed about twenty-seven trade privileges. The Tokugawa leadership was
elections since 1 990, twenty-one of which were in coun­ aware that Japan's technological and military
tries holding elections for the first time. Young democra­ prowess lagged, and in 1 854 Japan had little choice
cies are not immune to the electoral cycle. Before Ghana's but to accede to Commodore Perry's demand that
1 992 elections, the government increased outlays and the some ports be opened to American ships. Similar
wage bill at the cost of macroeconomic stability and sub­ arrangements with other foreign governments fol­
sequent inflation. In Sub-Saharan Africa the numbers of lowed. By 1 865 Western powers had restricted
ministerial positions and legislative seats have increased Japan's ability to levy import tariffs: the highest rate
by 22 percent during the political transition that began was set at 5 percent. In 1 868 a coalition of feudal
in 1 989. The governments of Cameroon, Malawi, and lords overthrew the Tokugawa family, which had
Senegal all have more than thirty ministers each. A careful ruled J;ipan for more than two centuries, and
prioritization of policy issues is difficult to achieve in such replaced it with a leadership that would modernize
an atmosphere. Bolivia, for instance, has responded by Japan and transform it into a country better able to
putting legal restrictions on the size of the cabinet: only face up to foreign threat. This so-called Meiji
two additional ministries may be created, and those on a restoration marked the beginning of modern
temporaty basis. These experiences suggest that states need Japan's economic growth.
skill to manage the political transition in such a way that Reforms following the restoration transformed
it does not impede the development agenda. the Japanese state and society. The class system was
When and why do countries reform? abolished, a new system of local and national gov­
ernment was set up, and conscription into the army
Insights about the circumstances under which reforms are and the navy was instituted. To establi'sh the basis
likely to succeed are as useful as insights about the obsta­ for a sound fiscal system, the government under­
cles to reform. Indeed, the two are related. If circum­ took a land survey, established titles, and imple­
stances are conducive to reform, the first step is to alter mented a land tax payable in cash. Education was
the dynamics that created the status quo. The following gradually made compulsory, so that by the mid-
sections describe how an external threat or an economic 1 880s almost half of school-age children were
crisis-real or perceived-may override resistance to attending school. The Bank of Japan (the central
change. They may. But they have not always done so. It bank) was created, and bureaucratic reforms were
remains a puzzle why some countries reform in such undertaken, laying the ground for the recruitment
extreme circumstances and others do not. of state officials based on merit, not patronage.
Moreover, the new regime undertook initiatives
External threat that today would be called industrial policies: it
A growing external military threat has often triggered established and operated factories (silk, brick, glass,
reform. Until recently, a country's lagging technological cement, textiles, shipyards) , subsidized industries,
and economic performance became evident only during imported technicians, and sent students abroad.
wartime. In the 1 700s and 1 800s the leadership of the
Ottoman Empire reorganized the military and made
broad reforms in education and governance, in response important demonstration effects. Chile's economic success
to battlefield losses to European powers. Similarly, the clearly inspired other Latin American countries to under­
Meiji restoration in Japan in 1 868 was motivated by a take reform in the late 1 980s, as did the success of Japan
desire to strengthen the state against the encroachments of and, later, that of the Republic of Korea and Taiwan
Western powers (Box 9.3). (China) in East and Southeast Asia. Economic reform in
Today, military confrontation plays a smaller role in China can be explained by many factors. But among them
driving reform. But the perception that a country is lag­ was the demonstration effect of its neighbors' economic
ging behind its neighbors economically often leads to success and an unwillingness to be left behind.
 TH E C HALLEN G E O F I N I T I AT I N G AN D S U STAI N I N G R E FO R M S 1 5 1

Economic crisis and problems of social mistrust. A balance must be struck

Since the early 1 980s, economic crisis has been by far the between clear rules that circumscribe the freedom of state
most important factor driving the introduction of ambi­ officials to act opportunistically, and the need for them to
tious reforms. k the failure of prevailing policies becomes act flexibly and responsively. An effective state operates
widely recognized, popular demands for reform become with clear and transparent rules, yet is quick to exploit
more vocal, and politicians more willing to risk radical opportunities and to reverse course when circumstances
change. Economic crisis-particularly hyperinflation and demand it.
deep recession-preceded economic reform in, for exam­ The obstacles to building an effective state are not insur­
ple, Indonesia in 1 961-64 and Peru in 1 990. Yet other mountable. Change has a better chance of success when
countries in dire economic straits have failed to take cor­ policymakers do three things: tactically design and
rective measures, while several countries have not needed sequence reforms, compensate losers, and build consensus.
a deep crisis to spur reform. Economic crisis cannot be We take up each of these in the following discussion. But
credited with stimulating reform in Australia ( 1 983), in some cases institutions must be modified to make the
Colombia ( 1 989) , or Portugal ( 1 985). state function better: it is no longer a question of tactics but
Economic crisis and civil conflict often feed on one of fundamental reform. One lesson is clear: all these
another, leading to near disintegration of the state (for changes are a good deal more difficult-impossible, even­
example, in Liberia and Somalia) . Such crises have in the absence of leaders with a clear vision of the future.
immense social costs and offer little hope for quick reso­
lution, for state capability matters when it comes to turn­ Tactical design and sequencing
ing a crisis into an opportunity. Yet political leadership Tactical design and sequencing of reform can improve the
and political entrepreneurship are also important. And chances of success by recognizing the constraints of exist­
often political leaders who can convert opportunities for ing state capabilities, diluting resistance to change, and
economic gain into reality can capitalize on the benefits of building a constituency in favor of reform.
successful reform. MATCHING ROLE TO CAPABILITY. As emphasized
Even in time of crisis, incumbents are often more reluc­ throughout this Report, a good match between the state's
tant to embrace reform than are newcomers. Thus, a role and its capability is the key to effective policies. A
change in government in the middle of an economic crisis mismatch between capability and action can compromise
(as in Peru and Poland in 1 990) may provide the added the sustainability and effectiveness of reforms even in the
impetus needed to get reform started. Terrorism, hyper­ absence of political obstacles. Regulatory reform­
inflation, and the poor performance of traditional parties whether of antitrust, environmental, or financial regula­
in Peru all gave the new president, Alberto Fujimori, room tion-should reflect institutional capabilities (see Table
to maneuver. On the other hand, Colombia's reforms took 4.2). For instance, price-cap regulation, in which the reg­
place in 1 989, toward the end of the administration of ulator sets the adjustment factor used in determining a
Virgilio Barco, when the economy was not in crisis. So monopoly utility's prices, is more suited to countries with
honeymoon periods and economic crisis provide an oppor­ relatively strong institutions. Similarly, mechanisms to
tunity, but not the only opportunity, for embarking on improve the delivety of services have to take into account
reform. More important, even in countries where eco­ not only the characteristics of the service but also the
nomic crisis has triggered reform, the depth of reform has capability of the state (see Table 5 . 1 ) . Within the core
tended to be modest. Lasting improvements in economic public sector (in education and health care, for example),
performance have often remained elusive. Economic crisis using performance-based agencies and formal contracts
may provide an opportunity to go beyond stabilization, requires an institutional capability that many develop­
but whether or not countries seize the opportunity de­ ing countries lack. In these cases such institution-heavy
pends on the redistributive effects, the state's initial capa­ approaches are unworkable. Capability constraints should
bility, and political leadership. Deep institutional reforms also loom large in the choice of a decentralization strategy
are unlikely to result from a reform agenda triggered and (see Table 7.5). Where capability is low in both cen­
driven by crisis alone. tral and local government, a cautious decentralization
strategy with pilot testing is probably the best course. But,
Implementing and sustaining reform
as Part Three of this Report showed, capability is not
Reform of the state means not only reform of policies but destiny. And the return to improving capability is signifi­
also an institutionalization of good rules of behavior for cant indeed.
government agencies. Institutions must be created that STRATEGIC SEQUENCING AS A FIRST STEP TO IMPROVING
help avoid heavy discounting of the benefits from CAPABILITY. Where administrative capability is weak, rather
reforms, paralysis due to unfamiliar new circumstances, than attempt comprehensive reforms of all institutions,
1 52 WO R LD D EVE LO P M E NT R E P O RT 1 997

countries might do better to reform key functions and The strategic enclave approach allows countries to
agencies selectively. Besides being consistent with fiscal adopt the first generation of reforms (Table 9.3). These
and human resource constraints, this approach has two reforms-which can mostly be enacted through executive
advantages. First, it allows reformers to learn from the order-typically involve stabilization and selected struc­
unavoidable mistakes associated with institution building. tural reforms. But an excessively narrow approach to en­
Second, by beginning with the most promising agencies, claving can impede the deeper institutional changes
reformers can count on demonstration effects for the rest required by the second generation of reforms. And prog­
of the public sector. These two advantages increase the ress in the social sectors has generally been modest. For
likelihood of achieving a series of success stories that will example, in Ghana, one of the pioneer reformers in Sub­
maintain political support of an overall reform program. Saharan Mrica, health expenditures have become even
Many countries have used this strategic approach, more regressive since reforms began. Deep institutional
beginning reform with a few critical enclaves. Candidates reforms take time and are complex, and opposition by
for early treatment typically include the ministry of interest groups (for example, the teachers union in
finance, the central bank, and the tax collection agency. In Colombia) is often strong. For countries trapped in the
both Peru and Ghana, for example, very low tax revenues first generation of reforms, sustainable long-term develop­
forced the government to make swift changes in tax col­ ment will be elusive.
lection. Yet any country following such a strategy must Countries can implement a strategy that enables them
ensure that the assignment of policy responsibilities to escape the enclave trap. Such a strategy involves, above
among agencies and ministries takes into account where all, agreeing on clear rules for the conditions under which
the relevant professional expertise is concentrated, and agencies outside the original enclave will be brought
that mandates are broadly consonant with the public within the reform program. These rules provide a bridge
interest at large. For instance, a tariff regime that is man­ between the first- and second-generation reforms, while
aged oUt of the finance ministry is likely to emphasize rev­ mitigating animosities from agencies oUtside the enclave.
enUe goals over industry protection-the priorities would The Bolivian civil service reform has rightly moved in that
probably be reversed if the ministry of commerce were in direction. Embedded in the 1990 Financial Administra­
charge. Transforming quantitative restrictions into tariffs tion Act and associated agency-specific regulations are a
would typically receive more support from the treasury series of rules governing which entities are eligible to
(see Table 9 . 1 ) . The appropriate assignment of policy recruit highly paid civil servants, what conditions these
responsibilities can help sustain reform by influencing entities have to meet in order to qualifY, and what is
what gets approved and in what order. expected from them once they have implemented the

Table 9.3 First- and second-generation reforms

First generation Second generation

Main objectives Crisis management: reducing inflation and Improving social conditions and competitiveness,
restoring growth maintaining macroeconomic stability

Instruments Drastic budget cuts, tax reform, price Civil service reform, labor reform, restructuring of
liberalization, trade and foreign investment social ministries, judicial reform, modernizing of
liberalization, deregulation, social funds, the legislature, u pgrading of regulatory capacity,
autonomous contracting agencies, some improved tax collection, large-scale privatization,
privatization restructuring of central-local government
relationships

Actors Presidency, economic cabinet, central bank, Presidency and cabinet, legislature, civil service,
multilateral financial institutions, private financial judiciary, u n ions, political parties, media, state
groups, foreign portfolio investors and local governments, private sector,
multilateral financial institutions

Main challenge Macroeconomic management by an insulated Institutional development highly dependent on

technocratic elite middle management in the public sector
Source: Adapted from Naim 1995.
 TH E C HALLEN G E O F I N I T I AT I N G AN D S U STAI N I N G R E FO R M S 1 S3

reform. Yet Ecuador's experience with a similar reform reduction in rates, which was supposed to be accompanied
strategy illustrates that it requires a firm commitment to by a removal of tax holidays. But the powerful agricultural
the program to ensure that these rules are implemented in lobby blocked the lifting of exemptions, and an attempt in
practice. Two months after finalizing the rules governing 1 993 to introduce a tax on rich farmers was circumvented
administrative reform, the secretary in charge declared all by raising the exemption ceiling tenfold. By contrast, even
central administration entities "restructured" and granted a revenue-neutral tax rate reduction combined with a
salary enhancement, although none had met the eligibil­ broadening of the tax base would have cut distortions
ity conditions. Rules can underpin a commitment to without creating losers. A back-of-the-envelope estimate of
reform-but they cannot substitute for it. the benefit of reduced distortions suggests it would be
GRADUAL PHASING OUT. Matching the state's role to upward of 1 .4 percent of GOP (see the Technical Note) .
its capability and going beyond enclaving sometimes EFFICIENCY VERSUS TACTICAL SEQUENCING. The opti­
require replacing a public agency with a private one. This, mal sequencing from an efficiency standpoint may not be
in turn, may call for a two-stage strategy to circumvent politically feasible. For example, efficiency considerations
resistance. During the first phase, an opting-out mecha­ dictate setting up a credible and stable regulatory agency
nism might be put in place, to allow people to switch to before privatizing telecommunications. This sequencing
private providers if they want to. Wider recognition of the reduces the risk involved in the purchase, hence increasing
benefits of better services can then make it easier to carry the selling price of the company. Argentina, however, did
out the second phase: getting rid of the public providers. not follow this sequence. Instead the country's telephone
Sri Lanka's 1 9 9 1 Telecommunications Act shows the monopoly was sold a year before a new regulatory agency
benefits of such a strategy. This act created the regulatory was set up. This strategy was adopted to speed privatiza­
agency and allowed private operators to compete with the tion and prevent opposition to the reform. Regulatory
state monopoly Sri Lanka Telecom (SLT) in value added uncertainty may have reduced the selling price, but the
telecommunication services. The legal and regulatory political feasibility of the reform was greatly enhanced.
framework has contributed to making Sri Lanka one of And as noted above, the efficiency gains induced by the
the most liberalized telecommunications markets in Asia. overall privatization program were significant (Table 9.2) .
By 1 995 there were four mobile cellular operators, five Moreover, countries choosing for political reasons to
paging companies, three data transmission service reverse the most efficient sequencing might mitigate the
providers, and one Internet provider. At the end of 1 995, disadvantages of the lower initial selling price by selling
20 percent of all telephone subscribers were connected to shares in stages, as the reform's credibility improves.
cellular services. Competition between the cellular opera­ COMBINING AND PACKAGING REFORMS. Introducing
tors has led to some of the lowest tariffs in the region, and the right mix of reforms could allow key constituencies to
these services are increasingly seen as a credible alternative balance their gains and losses, hence reducing the political
to SLT's wired services. To reduce unsatisfied demand cost of the reform (see Box 9 . 1 ) . This strategy was pursued
quickly, in early 1 996 the telecommunications regulatory by New Zealand's Labour government in the 1 980s. Min­
agency licensed two fixed wireless private operators for ister of Finance Roger Douglas persuaded agricultural
basic telecommunications services. These impressive groups that losing their subsidies was essential to the total
results have created pressure for better performance by the reform package, which benefited farmers by cutting tar­
public telecommunications company. Consistent with a iffs, lowering inflation, and addressing the bias against
two-stage phasing-out strategy, the government has exports. Similarly, in Bolivia the broad reform package
announced the sale of 34 percent of SLT's equity to a introduced in 1 985 by the government of Victor Paz
strategic investor. Estenssoro, in a context of hyperinflation, managed to cir­
Peru's pension reform illustrates how gradual phasing cumvent labor opposition, which had vetoed previous
out can be applied to the social sectors as well. When the reform plans. Although support from the two main polit­
reform was launched in 1 993, workers were allowed to ical parties helped, the speed and comprehensiveness of
choose between public and private pension providers. In the reform prevented pressure groups from organizing to
1 996 disincentives for joining a private provider were derail it.
removed, leading to a de facto phasing out of the public When deep macroeconomic imbalances have to be cor­
scheme. During the second stage a strong constituency in rected, packaging some reforms could increase their politi­
favor of the reform was formed, comprising workers cal feasibility. For example, trade liberalization is often eas­
who had already shifted to a private provider and pension ier to implement in conjunction with an adjustment
fund managers. By contrast, the sequencing of Pakistan's program, because the gains from improved macro­
direct tax reform seems to have greatly reduced the chances economic policy (in lower inflation and positive growth)
of success. The government began the reform with a can offset the distributive effects of liberalization (see Box
1 54 WORLD DEVE LO P M E NT R E P O RT 1 997

9.1). Broad reforms may also enhance credibility. In 1 990 • Tangible benefits accrue to citizens early in the process.
the Polish government freed 90 percent of prices, elimi­ Beginning in May 1 997 each person over 65 will get an
nated most trade barriers, abolished state trading monopo­ annuity from the capitalization program with an esti­
lies, and made its currency convertible for current account mated value of $200 to $225. Bolivia's income per
transactions. After an initial decline in output in 1 990-9 1 , capita, for comparison, was $770 in 1 994.
the Polish economy has recorded vigorous growth. • A concern often raised by opponents of privatization,
namely, that it provides an opportunity for corruption,
Compensation is somewhat mitigated (whether warranted or not)
SEVERANCE PACKAGES. Both matching the state's role to because the state does not receive funds.
its capability and enhancing its capability require not only
tactical design and sequencing but also the compensation The Bolivian and Czech experiences show how a care­
of groups adversely affected by reform, to secure their sup­ fully designed privatization program can enhance political
port. These groups are not always the poorest in society. feasibility and achieve sustainable efficiency gains, but
They may, for example, include bureaucrats whose jobs poorly designed versions of these strategies can backfire.
are being eliminated, managers of privatized state enter­
prises, and businesspeople used to operating behind high Building consensus
levels of trade protection. Although compensation might Reforming the state requires cooperation from all major
be economically costly in the short run, it will pay off in groups in society. Deep-seated differences and mutual
the long run to the extent that it eases opposition to suspicions among groups can delay or kill reform. There
reform. A recent study of retrenchment programs found are no quick fixes for reversing age-old enmities, but social
that, on average, the associated benefits in terms of pro­ pacts can help. In a social pact, business, labor, and agri­
ductivity gains and wage bill savings offset the compensa­ cultural interests negotiate the terms of a contract with
tion cost after only 1 .7 years. Three factors show why sev­ government leaders, setting clearly defined responsibilities
erance payments can be so important to the success of for each group. This approach has proved successful in
reform. First, political feasibility may require that countries as diverse as Spain and Benin. In Spain a minor­
retrenchment be done on a voluntary basis. Second, even ity government was able to impose wage restraint by
where political constraints are not a factor, the law may bringing all political parties to the negotiating table
preclude involuntary separation, as in the case of the Cen­ and developing a common program, later known as the
tral Bank of Ecuador. Third, most developing countries Moncloa Pacts (Box 9.4). Benin's second democratically
do not have an unemployment insurance scheme, and sev­ elected government organized a consultation with politi­
erance pay then becomes a close substitute. cal parties and civil society on taking office in May 1 996.
Designing severance schemes that take into account This National Economic Conference created a number of
broader characteristics of workers can help make politi­ sectoral working groups and made specific recommenda­
cally feasible retrenchment less costly and better targeted. tions about the role of the state. Whether this initiative
One such mechanism is to set ceilings on the number of will translate into a consensus around an economic pro­
departures by skill level. In Argentina, for instance, gram remains to be seen.
trained professionals from the National Institute of Agri­
Leadership and vision
cultural Technology were made ineligible for voluntary
retirement packages. It is also important when designing There is no universal blueprint for reform. But almost
retrenchment programs to establish built-in mechanisms all successful reform episodes in developing economies
that prevent rehiring, which would defeat the purpose. have had one common feature: they have been crafted by
EQUITY INCENTIVES. In some cases compensation goes dynamic leaders who shepherded changes through com­
beyond generous severance payments: labor, manage­ plicated political terrain. Such leaders seize opportunities
ment, or the public at large may be given a share of priva­ as they appear, but they also create them, by identifying
tized enterprises. Bolivia's capitalization program is a very and reaching out to potential beneficiaries, reshaping
innovative approach. At least three features of the pro­ institutions, and articulating a compelling and achiev­
gram increased its political acceptance without compro­ able vision for the future. Political leadership is particu­
mising on efficiency gains: larly important in countries that lack trust and cohesion
among different social groups. When businesspeople mis­
• By distributing shares to employees and pensioners, the trust bureaucrats, workers are wary of managers, and
program circumvented the resistance to privatization farmers are suspicious of everyone, sensible reforms can
that often occurs when assets are sold entirely to foreign stall. Leaders must instill a sense of common purpose that
companies. minimizes polarization.
 TH E C HALLE N G E O F I N I T I AT I N G AND S U S TA I N I N G R E FO R M S 1 SS

Box 9.4 The Moncloa Pacts in Spain

Adolfo Suarez was named chief of government by agreements, reached in October 1977, have come to be
Spain's King Juan Carlos I in July 1 976, early in the called the Moncloa Pacts. Agreement among the polit­
transition to democracy following Generalissimo Fran­ ical parties proved easier to achieve because the party
cisco Franco's death in November 1 975. Suarez started leaders were more moderate than the interest groups
by instituting political reforms: he recognized free they represented, and because the far left (which had
trade unions and the right to strike, legal ized all polit­ no parliamentary representation) could be excluded.
ical parties (including the Communist Party) , pro­ The pacts went far beyond wage restraint and
claimed a political amnesty, and passed a new electoral encompassed provisions on monetary and fiscal poli­
law. The first free elections since the Spanish civil war cies and structural reforms as well. They promised a
were held on June 1 5, 1 977. Suarez won the elections, "new framework for labor relations" with increased
but his newly created party, the Center Democratic labor market flexibility, a more progressive tax system,
Union, held only 47 percent of the seats in parliament. and the rationalization and decentralization of public
The elections took place as the economy was falling enterprises. Importantly, the pacts contained measures
into a crisis. Inflation and unemployment were both to compensate workers for some of the costs that
on the rise, and the external balance was deteriorating adjustment was expected to impose on them. Increased
rapidly. As part of its anti-inflationary drive and its state spending on job creation and unemployment
policy of external liberalization, the Suarez government insurance, the progressive extension of unemployment
sought to reduce wage growth. But rather than con­ insurance to all the unemployed, and some price con­
front the labor movement and the trade unions, Suarez trols were among the compensatory measures. Given
took a consensual approach to incomes policy. Peak that Spain already had the highest level of worker con­
business and labor associations were brought together flict in all of Europe, getting labor to go along with
in late summer 1 977 to forge a common position. fundamental reforms without these concessions was a
These attempts failed, however, because of deep divi­ major achievement.
sions within business and labor. Labor, for example, Although not all the promises made in the Moncloa
was represented by officials from at least four distinct Pacts (especially those in the areas of labor market
political leanings. No one wanted to appear to be mak­ reform and public enterprises) were fulfilled, the pacts
ing concessions. were successful in achieving their primary targets. Price
Suarez then changed strategy and sought agreement and wage inflation was sharply reduced after 1977, and
among party rather than class leaders. The resulting the current account gap was closed.

The purpose of reform is to enhance economic well­ contrast, Prime Minister Mahathir Mohamad's policy ini­
being. The consequences of reform are often measured tiatives in the 1 990s were packaged in his Vision 2020,
using quantifiable yardsticks, such as national income, which set the eye-catching target of raising Malaysian living
exports, or inflation. But an equally important aspect of standards to industrial-country levels by 2020.
reform is whether it succeeds in reshaping the values and
Strategic options: Rnding the route to reform
norms of the state and the state's relationship to the econ­
omy. It is this transformation that ultimately legitimates Machiavelli rightly recognized that distributional conflicts
reforms in the public eye. Thus political leaders must offer lie at the heart of the difficulties of reforming the state. Yet
a compelling vision, beyond the dry realities of economic such conflicts, and the constraints embedded in state insti­
efficiency, about where their societies are headed. Such a tutions which can exacerbate them, are not immutable.
vision can motivate and rally support for reforms. Change will come when the incentives to throw out the
For example, in some transition economies-such as the old policies and institutional arrangements become
Czech Republic, Hungary, and Poland-reform was aided stronger than the incentives to keep them. An economic
by the prospect of joining the European Union. The same crisis or an external threat may provide the impetus for ini­
desire motivated reform in Spain and Portugal in the early tiating reforms. But its precise timing can be prolonged if
1980s. In other instances a clear vision does not present those who control state power stick with outdated policies
itself so easily. Venezuela's reforms under Carlos Andres because it is in their (or their allies') interest that it be so.
Perez were a political failure because there was no coherent Sometimes the delays can be painfully long, as in Haiti
vision to help sell the reforms (Box 9.5). In Malaysia, by under the Duvaliers or Zaire today.
1 56 WORLD D EV E L O P M E N T R E P O RT 1 997

Box 9 . 5 Venezuela's 1989 reform program and its reversal

In the late 1 980s the Venezuelan economy was experi­ community. Venezuela's bond rating dropped 20 per­
encing a deep crisis, with internal and external imbal­ centage points below its 1 99 1 level. In 1 994 real GOP
ances generated by an overextended state and a mis­ dropped by 3 percent, and inflation soared to 7 1 per­
managed economy. In 1 989 Carlos Andres Perez, who cent. In the second quarter of 1 996 the administration
had served as president in the 1 970s, was reelected. His began adopting more orthodox economic policies,
1 989 stabilization plan included a sharp devaluation of supported by an arrangement with the IMF. These
the bolivar and a lifting of price and interest rate con­ have been implemented with some success thus far.
trols. The plan restored internal and external balance How far-reaching and sustainable this program will be
and was accompanied by structural reforms such as remains to be seen.
trade liberalization, privatization, and increased central Venezuela's experience highlights some important
bank autonomy. points about the sustainability of reform. Economic
These reforms were made possible by the broad reform is more susceptible to reversal when it is sup­
executive powers of the Venezuelan presidency. But ported by only a few technocrats, without backing
the consensus on them did not last long. Mter a period from political parties or other groups. Reforms linked
of political instability, in February 1 994 Rafael Caldera to stabilization are easier to implement than are struc­
was elected as leader of a coalition government. The tural reforms requiring congressional approval. More­
new government started by repudiating some of the over, economic reforms are harder to implement in an
reforms, eliminating the value added tax and returning environment prone to political risk. Introducing new
to price and interest rate controls. The autonomy of taxes is contentious in an environment where state
the central bank was also compromised, prompting its control over natural resources (in this case petroleum)
president to resign. Constrained by international gives the appearance of cost-free public services. A cri­
agreements, the administration did not reverse trade sis may be sufficient to create the conditions for initi­
liberalization, but instead relied on nontariff protec­ ating reforms, but sustaining them requires much
tion. The program's lack of coherence caused an ero­ more. Long-term performance requires vision and
sion of confidence in the international investment unity of purpose.

This chapter has shown how windows of opportunity beyond reforming a few agencies, and thus escaping the
can open, and how important it is to seize these opportu­ enclave trap. This involves defining clear rules under
nities to bring about change-through compensation of which agencies outside the original enclave will be brought
potential losers, the skillful choice of tactics, and building into the reform program. Rules and tactics, however, are
consensus. As emphasized throughout this Report, it is no substitute for commitment and political leadership.
important to reckon on state capability when designing Leadership is not everything: even committed and
reforms. But reformers cannot afford to stop there: they visionary leaders are not always able to throw off the heavy
must also have a strategy for improving capability. A more legacy of years, perhaps decades, of poor performance.
capable state can broaden the scope of policy options Choosing reform in these circumstances usually involves a
and significantly improve economic performance. Strate­ leap of faith, a leap that can be as frightening to those who
gic sequencing, and even well-thought-our enclaving, are a will ultimately gain as it is to the losers. In these circum­
good first step and are consistent with the budgetary and stances the presence of someone who can convince the
other constraints facing many developing countries. Early public that the leap is worth making is a potent reform
on, however, countries should design a strategy for going weapon indeed.
T H E AG E N DA

FO R C H A N G E

T
HIS REPORT HAS SHOWN THAT THE STATE HAS ENOR­ their decisions. It takes time for national and provincial
mous sway over a country's economic and social legislatures, political appointees, judges, civil servants,
development and whether that development is sustain­ public-private deliberation councils, independent watch­
able. The state's potential to leverage, promote, and medi­ dogs, and nongovernmental organizations-arrayed in
ate change in pursuit of collective ends is unmatched. unique relations to one another in different societies-to
Where this capacity has been used well, economies have learn to respect the limits of one another's authority
flourished. But where it has not, development has hit a and to work together. It takes time to lay the foundations
brick wall. of a professional, rule-based bureaucracy. Still, it is pos­
The process is not irrevocable: examples through his­ sible to sequence reforms in a manner that yields some
tory, and throughout the world, have shown that countries early payoffs. Such early measures can include strengthen­
can change track, reforming policies and institutions to ing the capacity of central government, raising upper­
improve the state's effectiveness and forward development. end salary scales to attract capable staff, inviting more
But why do so many of these efforts fail to achieve their inputs into policymaking and making deliberations more
goals? Even more important, why is it that so many states, open, hiving off contestable and easily specified activi­
in desperate circumstances, do not even attempt them? ties for private sector involvement, and seeking more
Politics provides much of the answer. But it is not simply feedback from clients. In general, however, there are few
a matter of democracy versus authoritarianism. We need to quick fixes.
go beyond those broad concepts of political organization Second, the task is difficult because the same institu­
to understand the incentives that inspire state organiza­ tions that can foster credibility and accountability can also
tions to work better. We need to understand better how be constraining. The same rules that prevent abuse of state
and when the economic and political interests that favor authority can also lessen the ability to use that authority
development can be harnessed to bring about the institu­ well. The challenge is to devise institutional arrangements
tional changes needed to make development happen. that provide flexibility within appropriate restraints.
In the end each country must strike its own balance.
Efforts to restart development in countries with in­ Countries with strong track records of following through
effective states must start with institutional arrange­ on commitments, and whose state institutions have deep
ments thatfoster responsiveness, accountability, and roots in society, are likely to have room to experiment and
the rule oflaw. to respond flexibly to unanticipated events, with little cost
to credibility. But countries emerging from long periods
Enabling the state to do more good for the economy of arbitrary and dysfunctional government might be bet­
and society means building confidence; people must have ter off forswearing the short-term benefits of flexibility in
trust in the basic rules governing society and in the public favor of the long-term goal of building credible and sus­
authority that underpins them. The task is difficult for tainable institutions.
two reasons. Where prospects for reform are strong, this Report has
First, it requires patience. It takes time for judiciaries suggested a two-part approach to improving the effective­
to convince firms and citizens that they are impartial in ness of the state:
1 58 WO R LD DEVE L O P M E NT R E P O RT 1 997

• Matching role with capability, and involved is institutional, and institutional change is path­
• Reinvigorating state capability by subjecting the state dependent. We examine below some of the key opportu­
to more rules and restraint and greater competitive nities and challenges facing states in each developing
pressure, and making it more transparent and open. region. But the advice is premised on the assumption that
there is, at least, a state there to reform. Increasingly, even
Focusing limited state capability on the basics is a this basic precondition for improving development out­
badly needed first step in a wide range of coun­ comes does not apply. We turn first to these most extreme
tries-especially in Africa, the CIS countries, and cases of institutional failure, when, for a period, the state
parts ofLatin America, the Middle East, and South itself as a legitimate and functioning order is gone.
Asia.
When states collapse

Matching role with capability must come first. In In recent years a growing number of countries have seen
many parts of the world the state is not even performing virtually all of the functions and institutions of govern­
its basic functions: safeguarding law and order, protecting ment collapse, often in the context of civil war. When the
property rights, managing the macroeconomy, providing state ceases to perform even its most basic functions, the
basic social services, and protecting the destitute. associated crisis can be prolonged and severe. Structures
In some cases the state has been overregulating the that might normally mitigate the impact of the crisis and
economy, even though it lacks the capability to enforce reg­ provide a vehicle for eventual recovery are frequently
ulations systematically. One consequence has been the destroyed, making the more generic prescriptions for en­
spread of corruption, which corrodes capability even fur­ hancing state capability somewhat inapplicable.
ther-sometimes rendering the state incapable of deliver­
ing even basic services. Reasonably well functioning The causes ofstate collapse
bureaucracies have been weakened over the years and will State collapse is not a new phenomenon. It does, how­
now need considerable overhaul. Deregulating these eco­ ever, seem to have become more common in the 1 980s
nomies is vital. and 1 990s than in the earlier postwar years, and it is a
Reforms supported by the World Bank and other matter of grave concern for other states, individually and
international organizations have tried to help countries collectively. Collapsed states such as Afghanistan, Cambo­
design reforms to match the state's role to its capability. dia, Liberia, Rwanda, and Somalia have been the settings
Many reforms over the last decade or so have tried to trim for some of the worst humanitarian disasters of recent
back the state's role in some areas of the economy and years. These often spill over into neighboring countries in
refocus the released resources on core functions. These are the form of violence, banditry, and refugee flows. They
a start, but more is needed. also send countries into arrears, destroy economic assets
However, as this Report has shown, matching role to and infrastructure, claim huge amounts of international
capability is not simply a matter of reducing the state's assistance-and, of course, waste countless lives. Three
role. It is not just a question of what to do, but also a broad and overlapping pathologies of state collapse can
question of how to do it: how to manage the financial sec­ be identified:
tor, how to regulate economic activity, how to protect the
environment-all these choices depend critically on the • States that have lost (or failed to establish) legitimacy in
state's institutional capability. the eyes of most of the population notionally under
Efforts to focus the state's existing capability more their authority, and are therefore unable to exercise that
effectively must be complemented by reforms to improve authority
capability by reinvigorating public institutions. In many • States that have been run into the ground by leaders
areas the state will only be able to improve its effectiveness and officials who are corrupt, negligent, incompetent,
by forging new partnerships with other organizations of or all three
civil society. In other instances it will become more effec­ • States that have fragmented in civil war, and in which
tive only if its decisions and actions can be contested-if no party is capable of reestablishing central authority.
people and business have choices and if the state's monop­
oly is broken. What all these states have in common is a fundamen­
tal loss of institutional capability. As outlined in Chapter
Improving state capability is not simply a matter of 1 (see Table 1 . 1), at a minimum the state must perform
more technical assistance. It takes the right incentives. the most basic functions of maintaining law and order,
providing national defense, and establishing a framework
The precise recipe for improved state capability will for managing economic transactions. A collapsed state,
vaty from country to country, since so much of the reform then, is not one that fails to do the right things, but one
 TH E AG E N DA FO R CHANGE 1 59

that fails to do much of anything effectively-even main­ omy of armed violence has emerged, based on looting,
tain repressive order. A collapsed state is not the same as a protection rackets, drug trafficking, money laundering,
state defeated in war, or a state split apart into two or and the extraction of crude resources such as gems, min­
more states, where, despite some incapacity, systems con­ erals, and tropical timber (Box 1 0. 1 ) . Civil warfare in
tinue to function more or less effectively. Nor is a col­ these countries has its roots in political or ethnic rivalries,
lapsed state the same thing as a "predatory" or repressive but it has gradually shifted character and is now cen­
state. Successful repression of a whole population can re­ tered around the control of economic assets, which pro­
quire considerable organizational capacity. Such acts may vide the source of financing for the war and for private
provoke the replacement of one state structure or regime enrichment.
with another, as in Cambodia or Rwanda, but do not nec­ In such countries factional warfare is the main system
essarily-or even probably-bring about its collapse. of resource allocation, and violence the source of power.
These economies operate independently of any state insti­
Factors perpetuating the conflict tutions, and indeed would likely be hindered by them.
In most countries where the state has collapsed, there Thus, strong economic forces are at work perpetuating the
are forces that have an interest in perpetuating a state fighting. The role of economic factors as a driving cause
of anarchy, and whose unbridled pursuit of riches or of the war has been especially pronounced in the case of
power would be constrained by a state with the capability Liberia (Box 1 0.2), but it can also explain the prolonga­
to make rules, collect revenue, and enforce the law. The tion of wars in Angola and Sierra Leone. Ordinary people
most troubling and intractable of collapsed states are pay a high price for their helpless proximity to these sys­
those in which these forces predominate. In Angola, tems. Normal international economic transactions are dis­
Liberia, and Somalia, for example, a self-sustaining econ- rupted and, often, corrupted by them.

Box 10.1 State collapse and beyond in Somalia

Somalia is one of the most ethnically homogeneous some reconstruction from late 1 992 to early 1 995, but
countries in Africa; one of the most common factors in these gains were reversed after U.N. forces withdrew,
state collapse-interethnic conflict-played no part in and anarchy returned.
its collapse. Rather, the dynamic of Somalia's collapse Some elements of the private, informal market have
was set in motion during a long period ( 1 969-9 1 ) of shown an extraordinary, if somewhat perverse, resili­
dictatorial rule and egregious economic mismanage­ ence to the chaos and violence that surrounds them.
ment by Mohamed Siad Barre, followed by a fierce Merchants and entrepreneurs can operate only with
contest for power after he was violently deposed. Siad clan protection; those who benefit from this protection,
Barre played off the Cold War superpowers against and from their clan's control of economic assets such as
each other. His external support, first from the Soviet ports, mineral deposits, and agricultural lands, finance
Union and then from the United States, unbalanced clan militias. With no government regulations or con­
the fragile social ecology of Somalia's clan politics and trols, the prices of goods and foreign currencies float
introduced high levels of lethal weaponry. A north­ freely. Transactions costs are high, but markets operate
south conflict inherited from the pre independence era, efficiently. The Somali shilling has value despite the
an irredentist war to seize Ethiopia's Somali-populated absence of a central bank, but banknotes are physically
Ogaden region, and the suspension of economic and wearing out. Remittances from abroad are handled
military aid in 1989 all further contributed to the ero­ quickly and reliably through clan networks.
sion of state capability. Today, Somalia exemplifies a post-state economy.
Since 1 99 1 , continuous civil war between rival Productive capacity, private investment, and employ­
clans and factions has completed the destruction of the ment are extremely low; risks are high, and violence is
formal economy and left Somalia with no state institu­ the normal means of competition and resolution of
tional or public administration. Physical infrastructure economic disputes. If a functioning state with legiti­
and economic assets have been destroyed, private busi­ mate institutions were able to restore law and order
nesses looted, and agricultural and pastoral production without reverting to the heavy-handed economic mis­
drastically reduced. Professionals, technocrats, and management of the Siad Barre regime, the private sec­
civil servants have fled. International intervention to tor has shown that it could weather the high risk and
halt a major war-induced famine brought a respite and respond to the challenges of the market.
1 60 WO R LD D EV E L O P M E N T R E P O RT 1 997

Box 10.2 The economic underpinnings of conflict: The case of Liberia

Initially, the war in Liberia was fought largely for social fighters rarely receive direct payments, instead relying
and political motives, with control over the central on looting and pillaging for their livelihood.
government as the central objective. Foreign support Because fighting acrually runs down the "surplus,"
helped finance the launching of the war. Gradually as long as the prospects for private enrichment remain
control over Liberia's rich narural resources and other high the incentives are Strong for factions to main­
assets, in addition to being a means of ensuring fund­ tain a "no war, no peace" equilibrium. This helps ex­
ing for the war, has become an end in itself for the plain the difficulties in reaching a lasting peace agree­
fighting factions. ment in Liberia.
The factions depend on a steady supply of income Thus, to restore peace, any intervention will have to
from the export of rubber, timber, iron ore, gold, and include actions that make the "surplus" accruing to the
diamonds. During periods of intense conflict, much of fighting organizations zero or negative, while simulta­
the income is used to purchase arms and ammunition. neously eliminating individual fighters' income from
When no fighting is taking place, a revenue "surplus" looting, or raising the associated risk. Such actions
is created, which provides for the personal enrichment range from economic sanctions on the export of tim­
of the leaders and for the payoffs that keep faction ber and rubber exports to international agreements
members loyal. This, together with the uncertainty that increase the cost of arms. In addition, co�batants'
that faction members face regarding their economic incentives to continue the war must be removed
prospects after the war, creates strong pressures down through a combination of carefully planned demobi­
the ranks to share in the surplus. However, lower-rank lization and enforcement of criminal laws.

Although the diminishing returns of conflict and re­ embed bureaucratic decisionmaking within appropriate
source extraction imply that wars will eventually fade restraints. The integrity and professionalism of the civil
away without international intervention, this point is service are an important element in this.
reached only after nearly all the assets of a country have
been destroyed. This leaves other states, and intergovern­ An active civil society and a competent and profes­
mental organizations, facing two urgent questions: How sional bureaucracy are twin pillars ofa constructive
can state collapse be prevented? And how can a function­ relationship between state and society. When com­
ing state be rescued from the ashes of a collapsed one? prehensive collapse of the state is a danger, these
twin pillars may reduce the risk.
Preventing state collapse
The enormous toll of collapsed states has naturally turned The challenge ofreconstruction
attention to prevention as a preferable and potentially less Rapid retrieval of a lost state is even more difficult-if not
costly course of action. But there are no easy shortcuts. impossible. Most collapsed states are immersed in, or just
Preventing state collapse ultimately involves the whole emerging from, bitter internecine conflict. Politics is often
gamut of instirutions and policies that affect social, polit­ highly charged with suspicion of complicity; mistrust is
ical, and economic relations within a society. Neverthe­ widespread. Cooperation among former rivals is difficult
less, two interrelated approaches have emerged as ways of to achieve, and the desire for justice on the parr of some
reducing the likelihood that political conflict will spiral may look like vengeance seeking to others. There may be
down into a comprehensive collapse of the state. little confidence that peace will be sustained, or policies
The first strategy emphasizes the reinforcement of civil maintained, and social and human capital has often been
society as a way of increasing the resilience of social insti­ severely damaged.
tutions that may be able to fend off anarchy even if the External actors face unusual difficulties when they
state is very weak. A rich associational life may enable decide to become engaged in a country without a func­
communities to maintain local law and order, support a tioning state. A basic question arises: how and with whom
safety net, and resist official corruption or exploitation. should one work? One strategy involves choosing among
The second approach, drawn from the East Asian experi­ local factions or leaders and attempting to reinforce the
ence, points to the need to build bureaucratic structures position of the chosen partner. This is risky. The chosen
that are insulated from political interference, and to partner may be unreliable or may abuse the position of
 TH E A G E N DA FO R C HAN G E 1 6 1

leadership. There is also the risk that another external force ECONOMIC RECOVERY. Although the elements of a
will pick an alternative winner, prolonging the conflict, as postconflict stabilization and recovery program may differ
occurred in Mozambique and Angola. Alternatively, out­ little from programs applied elsewhere, there are grounds
siders can choose to work with those local authorities and for caution and for examining the components of the stan­
institutions that often retain legitimacy and capability long dard policy package in light of the conditions and
after central institutions collapse. Such a strategy can help distortions peculiar to the postconflict environment. Civil
rebuild local confidence and strengthen local decisionmak­ conflict erodes the social capital that inspires trust and
ing capacity. But it can also prolong the period of state facilitates investment. Consequently, fear may be a bigger
fragmentation if it is not combined with a strategy for obstacle to the revival of investment than damaged infra­
rebuilding the authority of a central government. Somalia structure. Policies to spur the private sector's recovety
IS a case in point. should therefore avoid overly aggressive increases in taxa­
In many instances external actors focus on mitigating tion and should stress the early sequencing of investment­
the human cost of state collapse through relief and rehabil­ sensitive reforms, including the preservation of low infla­
itation programs, rather than intervening directly in civil or tion, the sale or restitution of expropriated housing stock,
political reconstruction. Recent experience suggests, how­ and restraint in revenue collection. Avoiding aggressive
ever, that after some time these programs can lead to revenue collection does not, however, mean offering overly
dependency among the population, and even undermine generous tax incentives for private foreign investment. fu
the rebuilding of state capability by drawing attention away Cambodia's experience now shows, these may be counter­
from minimal state functions. By contrast, more-compre­ productive, depriving the government of substantial rev­
hensive peace approaches, such as adopted in Angola, enue for many years and taking government further from
Cambodia, and Mozambique, place far-reaching formal the all-important task of reviving domestic investment.
authority in the hands of international organizations to PROMOTING FUNDAMENTAL SOCIOPOLITICAL RECON­
oversee peace agreements, deliver public services, and facil­ CILIATION. Economic policy and sectoral projects need to
itate the repatriation of refugees. All this is with a view to be tailored to take account of the special problems of trau­
handing over power to an indigenous authority after elec­ matized populations and societies with heavily damaged
tions have been held. The international operations in social capital. The sequencing of standard economic pol­
Cambodia and Mozambique are generally considered to icy reform and of governance measures also needs to be
have been successful in this regard. But both were enor­ tailored to avoid threatening the sustainability of peace
mously costly, and external actors cannot and should not agreements and to take account of the typically severe dis­
be expected to replace absent state capability indefinitely. tortions in economic conditions.
The choice of strategy for external actors will differ BUILDING CAPABILITY. The problem at the heart of
according to the particular pathology of state collapse attempts to sustain recovety and reconstruction in post­
involved. fu the discussion in Chapter 8 suggests, there is conflict situations is lack of capability. Yet even where
an increasing awareness of the role that external donors effective macroeconomic and political reforms have been
and agencies may need to play in the future to allow for undertaken, improvements in bureaucratic capability have
the long process of reconstruction and rehabilitation. often lagged well behind (as in Uganda, for example). Var­
Some of the challenges facing external actors are men­ ious options have been tried to jump-start the capacity­
tioned below. building process, including drawing on a diaspora of pro­
REESTABLISHING SECURITY. The end of civil war does fessionals to occupy positions within the new government
not lead automatically to the end of insecurity. Fear of (as in Cambodia, Lebanon, and Haiti) and providing for­
personal violence or theft may actually increase after the eign experts to work as advisers to their local counterparts.
war, and without measures to increase the opportunity fu the strategy for enhancing state capability implies, con­
cost of warfare for individual combatants, the end of the ventional technical assistance is rarely effective in settings
war may signal increased opportunities for criminal activ­ where even minimal rules and restraints on arbitraty action
ity. Well-designed demobilization programs, like that in are lacking. The absence of such rules is a defining feature
Uganda, that assure combatants of their reintegration into of a failed state. Thus, it is vital that imported technical
civil society after the war, and so give them a legitimate assistance come with efforts to implement and enforce the
exit strategy, are therefore a priority. Also essential will be most basic rules of accountability and restraint within gov­
efforts to strengthen local police forces and tighten en­ ernment and so begin to rebuild its lost credibility.
forcement of criminal laws and other measures, to reduce The collapse of a state is an extreme phenomenon, and
the risks of banditty and criminal enterprise. The long­ each case is unique. Hence there are no simple generaliza­
term response, however, must be to address the socioeco­ tions about their causes or effects. Each produces its own
nomic root causes of the conflict. challenges for the afflicted nation and for the international
1 62 WORLD D EV E L O P M E N T R E P O RT 1 997

system. The consequences are, however, almost uniformly governments have felt a decreasing need to explain and
borne by ordinary people, illustrating once again the crit­ justifY their actions to the domestic population.
ical importance of an effective, responsive state to the
long-term health and wealth of society. The urgentpriority in Africa is to rebuild state capa­
bility through an overhaul ofpublic institutions and
Some regional steps-and missteps
credible checks on the abuse ofstatepower.
Inevitably, the elements of any strategy for improving the
state's effectiveness will differ hugely from country to The clear need in most African countries is for a thor­
country, according to the institutional and political set­ ough reform of the machinery of the state, so that it can
ting. The key features and challenges facing states in vari­ deliver quality public services and facilitate private activity
ous regions are summarized below. These are necessarily rather than impede both. As this Report has emphasized,
broad generalizations: each region includes several coun­ the second part of the strategy-rebuilding capability­
tries whose experiences are entirely different. must also start on an urgent footing. In this it is essential to
It is in Sub-Saharan Africa that the deterioration in the start in some areas of priority. Strengthening the rule of law
state's effectiveness has been most severe-the result of must be a vital first step. Another is to strengthen the capa­
eroding civil service wages, heavy dependence on aid, and bility for legislative oversight of the executive. But strength­
patronage politics. There are a few exceptions, such as ening the executive-particularly the central government's
Botswana. But a recent report commissioned by a group capacity to formulate macroeconomic and strategic policy,
of African finance ministers, echoing themes raised in the and its incentives to deliver core public goods efficiently­
preceding chapters of this Report, concluded that the is also a key priority. Disappointingly, with some promis­
majority of countries in Sub-Saharan Africa now have ing exceptions (Botswana and more recently Uganda),
lower capability (including state capability) than they did improving the effectiveness of the state in Africa has gener­
at independence. As a consequence, many are trapped in ally been limited to tinkering around the edges and to
a vicious circle of declining state capability and, thus, promulgating reforms on paper. But there are signs that
declining credibility in the eyes of their citizens. these issues are now being taken seriously. Recent reform
programs pay much greater attention to institutional
There is a crisis ofstatehood in much ofAfrica-a strengthening, and macroeconomic management is im­
crisis ofcapability and oflegitimacy. proving across a broad swath of African economies.
An important constraint on systemic institutional
The first part of the two-part strategy recommended reform of the state in Africa is its COSt, but resources can be
by this Report is perhaps the more urgently needed in found if the priorities are clear. Most countries will need
Sub-Saharan Africa. A sharp refocus of the state's priori­ to redirect existing, misallocated resources to raise real
ties is badly needed. In a few cases this refocus has taken public wages (more than proportionately to any savings
place, although only after protracted crisis. Typically, the from further retrenchment) , increase spending on social
reach and effectiveness of the state have withered away, services, and undertake vast investments in personnel
and perforce the state has in effect withdrawn. Unfortu­ management, retraining, and accountability. This major
nately, since the refocus has not been carefully managed, rebuilding of state capability cannot happen without inter­
the state has also weakened or withdrawn from areas that national assistance. But an exceptional degree of coopera­
are its legitimate function. An institutional vacuum of sig­ tion between governments and external agencies has cul­
nificant proportions has emerged in many parts of Sub­ minated in a pattern of external dependency. The types of
Saharan Africa, leading to increased crime and an absence assistance and the incentives it generates also need to be
of security, affecting investment and growth. reexamined, to ensure that assistance supports coherent
Achieving a turnaround in the effectiveness of the state and well-contested policies and strengthens the overall
will not be easy, since the roots of state failure are many framework of incentives within and outside the state. Pri­
and complex. Chief among them has been a continuing oritizing and even strategic enclaving are necessary, to start
struggle between traditional forms of governance and the reform process, but must be part of a well-thought-out
social organization (often based on tribes, lineages, and plan to broaden and deepen the reforms.
language and kinship groups) and modern forms of gov­
ernment. High military expenditure and dysfunctional Improving the delivery ofpublic and collective ser­
behavior of military personnel (in the absence of other vices will require closerpartnerships with the private
checks and balances) have been other important impedi­ sector and civil society. Such partnerships should be
ments. These have often reduced the transparency and encouraged, especially when the links between the
accountability of public institutions to the extent that state and civil society are underdeveloped.
 TH E A G E N DA F" O R C HANG E 1 63

A hopeful recent development is a growing array of Throughout the region substantial economic rents
self-help community initiatives, particularly in elementary (flowing from legal monopolies or restrictions, or from in­
education, basic health care, and local services such as fluence and corruption) continue to coexist with great pri­
waste disposal. These initiatives have often sprung from vate sector dynamism and international engagement. T01-
the state's own failure to provide such services effectively. erance of these rents is probably declining-witness the
Although they can seldom fully substitute for a well­ recent anticorruption offensives in China, Korea, and Viet­
functioning government administration, they offer a par­ nam. And heightened international competition may mean
tial escape from the current morass. That said, it is difficult that inefficient, protected sectors can no longer be carried
to imagine how reform of the role of the state and im­ on the shoulders of dynamic and efficient ones, either in
provement in its capability can be realized in most African Japan and Korea or in the newly emerging economies.
countries without the stronger incentives that this Report This suggests that deeper, modernizing reforms will be
also recommends: more competitive pressure, greater voice needed in much of East Asia to develop robust regulatory
and transparency, and rules and restraints including the structures to support competition and, in areas of contin­
rule of law. ued government action, mechanisms to ensure greater
The situation in Asia is different. In the newly industri­ transparency and accountability. Particularly vital for these
alizing countries of East Asia, the state is generally viewed countries' long-term development prospects will be more
as effective, engaged in a productive partnership with the efficient financing and delivery of infrastructure in part­
private sector. With few exceptions, it has matched its role nership with the private sector. Although many high­
to its capability very well and thereby enhanced its effec­ profile projects are under way, East Asia needs to move
tiveness. Whereas ineffective authoritarian states have been faster in developing regulatory frameworks for creating
directly responsible for economic decline in Africa, many competition, managing the contracting process, and regu­
East Asian countries have experienced remarkable growth lating monopolies.
(with some improvement in equity) under authoritarian At the same time, many East Asian societies are likely to
regimes. As the previous chapter implied, the link between face new areas where enhanced state action is called for.
authoritarianism and economic decline, so evident in These are likely to include formal mechanisms such as
Africa, has been inoperative in Asian countries, largely be­ social and health insurance schemes, to help manage the
cause of their powerful commitment to rapid economic new risks facing individuals and households in increasingly
development, strong administrative capability, and institu­ urbanized and aging societies, and more vigorous efforts to
tionalized links with stakeholders such as private firms, as protect the environment. Public action will also be needed
well as their ability to deliver on the economic and social to reach those left behind by rapid development, for exam­
fundamentals: sound economic management, basic educa­ ple the rural populations in some inland provinces of
tion and health care, and infrastructure. China, the relatively poorer populations of eastern Indone­
sia, and, in some countries, ethnic minorities. New mech­
In East Asia the state's ability to change in response anisms to respond to rising inequality may also be needed,
to important new challenges will be critical to the for example in China, Malaysia, and Thailand.
region's continued economic success. At the same Finally, many countries in the region face a need to
time, steps to modernize public administration and build more-effective core government institutions (follow­
achieve effective decentralization will be critical. ing the agenda laid out in Chapter 5) and address the
problem of corruption (Chapter 6) . Institution building is
Yet throughout East Asia there are major new chal­ a high priority for those countries where the civil service is
lenges to the role and functioning of the state. China and relatively weak (Indonesia, for example) and where tradi­
Vietnam, the region's transition economies, are strug­ tional state capabilities have eroded somewhat (such as the
gling with the need to redefine the state's role in the Philippines and Thailand) . Effons to build bureaucratic
enterprise and financial sectors. Both countries have capability at lower levels of government are also urgently
combined rapid growth with the maintenance of large needed in countries such as China, Indonesia, the Philip­
public enterprise sectors, but these sectors appear in­ pines, and Vietnam, where the decentralization of some
creasingly fragile financially. There is also a continuing government functions puts power in the hands of lower­
debate in these economies about the potential role for an quality staff and raises risks of local government capture
activist industrial policy in guiding investment. However, (see Chapter 7).
the conditions facing these two economies appear to be
very different from those prevailing in Japan and the The situation is different in South Asia, where in
Republic of Korea in their early stages of industrialization many countries state inefficiency and corruption
(Chapter 4). have coexisted with a relatively competent and
1 64 WORLD D EVE L O P M E N T R E PO RT 1 997

efficient civil service, albeit one whose quality has undergoing the transition from central planning. There
suffered a noticeable decline. are also broad differences between the CEE countries as a
group and the CIS countries. Although both face a com­
South Asia, too, suffers from a mismatch between the mon challenge of economic and political transforma­
state's role and its capability. Here it is not that the state's tion-and hence of a fundamental refocusing of state
capability was historically weak, as in Mrica. In fact it was activities-the CIS countries (except Russia) face the
not, but the state pursued an overly activist agenda that gigantic, and historically unique, double challenge of eco­
went well beyond its capability. As a result, development nomic transformation and state building: they have had
suffered, and over time the state's capability declined as no central government within living memory, nor have
well. The agenda now is to refocus the state's role to they constituted for centuries (most never) independent
match its current capability, stem its further decline, and political entities within their present boundaries.
improve that capability. The challenge of bringing more effective government
The main issue in South Asia is overregulation and an to these transition economies is in some ways easier and in
overextended state-both cause and effect of bloated pub­ other ways more difficult than-but certainly quite dif­
lic employment, and the surest route to corruption. As ferent from-that faced in most developing economies.
stressed in Chapter 4, regulatory simplification and pub­ The first part of the two-part strategy, that of matching
lic enterprise reform, and the resulting contraction of the role to capability, is critical, but especially difficult in a sit­
role of the state, will be complex and politically difficult. uation where both role and capability are changing
But such measures stand to boost economic efficiency, rapidly. The extent of deterioration in capability varies
increase competitive pressure, reduce corruption, and pro­ enormously, with islands of excellence in a sea of declin­
duce substantial fiscal savings. Another imperative is to ing effectiveness and huge problems of basic governance.
build stronger partnerships with, and listen more efFec­ In this context matching role to capability is not a simple
tively to, business and civil society, to improve feedback matter of focusing on the fundamentals. It is not that the
and supplement the state's capability. fundamentals are not critical-without them progress
Pervasive political interference is a second major bar­ toward a market-based economic system will be rocky.
rier to state effectiveness in many countries of the region. But the challenge in these countries is providing these
As discussed in Chapter 5, India's bureaucratic capability fundamentals while at the same time maintaining existing
suffers not merely from legendary amounts of administra­ centers of excellence that have been developed over time,
tive red tape, but from the fact that the autonomy of its and providing the population with the mechanisms of
highly qualified civil servants is severely circumscribed in social protection to which they are accustomed. Given the
practice (despite statutory protection from interference in inherent capabilities of a highly educated, socially con­
their individual actions) by frequent, often politically scious population, the task of rebuilding state capability­
motivated transfers of personnel and other arrangements. the second part of the strategy-is here more than else­
In Pakistan the machinery of the state has come where one of changing incentives and the culture of
increasingly under pressure from powerful business and bureaucracy. How quickly this reorientation is managed
feudal interest groups. More recently the resulting erosion will determine how quickly the transition is completed.
of state authority and effectiveness has spurred an attempt
to reform the very machinery of the state. Here, too, a The job of reorienting the state toward the task of
competent civil service, allied with an activist judiciary, "steering, not rowing" is for from complete in Cen­
offers grounds for optimism that reform is not only possi­ tral and Eastern Europe. But most countries have
ble, but will occur. In Bangladesh, recent political devel­ madeprogress in refocusing the state s role and are on
opments have also created conditions for beginning to the way to improving capability and accountability.
address the decline of the state's authority and efFective­
ness, using the pillars of strong top-level political com­ It is no surprise, then, that improvements in the efFec­
mitment, popular participation, and decentralization, tiveness of the state have been more noticeable in CEE,
buttressed by competent and professional elements of the especially in countries such as the Czech Republic, Hun­
civil service. Similar possibilities for improving govern­ gary, and Poland. Much ofthis has come from a very swift
ment and streamlining public administration are emerg­ refocusing of the state's role-part one of the two-part
ing elsewhere in the region. strategy. However, progress in southeastern Europe has
As noted earlier, substantial differences exist among generally been much less significant, both in terms of pol­
countries in all regions, and regional generalizations are icy reform and on the public administration front.
useful only as a first approximation. This is particularly In particular, several CEE countries have made
true of the countries of Central and Eastern Europe (CEE) advances toward setting up competitive systems for service
and the Commonwealth ofIndependent States (CIS), now delivery and toward relying much more on the private sec-
 TH E AG E N DA FO R CHANGE 1 65

tor (including, in part, for education and health care). Outside assistance and encouragement-to tighten the
Autonomous professional associations are also beginning to accountability of executives to legislatures, to strengthen
take root in these countries, with healthy potential im­ legislative oversight capacity, to streamline and reinforce
plications for institutional capability outside the govern­ j udicial systems, to clarifY property rights and provide for
ment (capability that is needed to help implement the accountable management and oversight of public assets,
reforms) and for the rebuilding of social capital. And sub­ to radically simplifY the regulatory framework and move
stantial regulatory reform and simplification have occurred, rapidly toward rules and away from discretion, and, not
aided by support from the European Union. Again, in least, to bring criminal activities under control and sever
southeastern Europe progress in all these areas tends to their links to the public sector-are clearly essential to
have been much slower. The difficulty is not so much a improve the functioning of the state and promote eco­
lack of consensus on the desirability of these reforms, but a nomic recovery throughout the region.
severe lack of capability at the core of government to for­ Genuine administrative reform to improve bureau­
mulate and guide them-compounded, in some countries, cratic capability has been conspicuous by its absence in
by a fluid political situation. most CIS countries. Staffing of central government tends
to be low, and although government workers are often
Low state capability in the former Soviet republics highly educated and technically knowledgeable, they lack
is a serious and mounting obstacle to further prog­ the skills needed for administration in a noncommand
ress in most areas ofeconomic and social policy. economy. They are, moreover, deprived of basic supplies
and resources and very badly paid. Unsurprisingly, during
In the CIS the process of reorienting the state is still at the first stage of the economic transformation, attention
an early stage, and a host of severe problems have and financial resources were devoted to the urgent tasks of
emerged. Unlike in CEE, in the CIS there is often no clear privatization, to reforming the price and foreign exchange
definition of the state's new role. And even where it is system, and to establishing some measure of fiscal and
clear in principle, in practice weak central capacity has monetary control. But it is equally unsurprising that the
made it extremely difficult to translate those principles next stage of the transformation, that dealing with reforms
into reality. In most cases the basic institutional structures that require decisive and clear administrative action, is
for an effective state are weak. The first and fundamental now severely hampered by the absence of the mechanisms
problem is the weak accountability of the executive to the and of the government personnel and resources necessary
legislature in most CIS countries. In the very early 1 990s, to implement those reforms.
parliaments in most of the new countries were the only The role of the state in Latin America and the
repository of whatever political legitimacy existed after the Caribbean has been undergoing profound change over the
collapse of the Soviet Union. There were even instances of past decade, fueled by fiscal crisis and rising expectations
excessive interference by the legislature in routine execu­ born of the return of democracy and the emergence of
tive functions (which remains a problem in Ukraine). But civil society. Competitive pressures from globalization
the situation in most countries today is one of a dominant have made it increasingly urgent for government to priva­
executive and weak legislative oversight. tize or to contract out activities in which it lacks compar­
Beyond the issue of increasing executive accountabil­ ative advantage, and to improve its efficiency and effec­
ity, three further sets of problems face most CIS countries. tiveness in producing public goods.
Between them these problems not only produce enor­ But while the first-stage reforms have been imple­
mous economic costs, but also give rise to pervasive cor­ mented successfully in a number of countries in the
ruption. This last is rightly decried almost everywhere in region, progress has lagged in the second-generation re­
the region, and confirmed in the results of the survey of forms, where institutional change is vital. For example,
private business commissioned for this Report. First, weak civil service reform and reforms in the social services are
and slow j udicial systems severely handicap both reform being held back by political constraints and vested inter­
and economic activity. As is well known, weak enforce­ ests. Such reforms (recently begun in Argentina and a few
ment of the law and weak j udicial procedures have per­ other countries) cannot be undertaken in isolation, but
mitted the unprecedented rise of organized crime. Sec­ must be part of a broader decentralization of political
ond, fuzzy boundaries between private and public administration and financial management, already under
property rights have generated massive rent seeking, with way in many countries.
officials often exploiting public assets, including those of
state enterprises, for private profit. Third, opaque and still Governments in Latin America are rethinking their
hugely complex regulatory frameworks have fueled cor­ approach to the alleviation ofpoverty, particularly
ruption across the spectrum of interactions between the important in a region with highly skewed income
public and the private sectors. distributions.
1 66 WORLD D EV E L O P M E NT R E P O RT 1 997

A number of Latin American countries, having services rendered-as axiomatic. BUt four decades of cen­
launched major economic and structural reforms, have tralized systems in Latin America and the Caribbean have
now created social investment funds for the poorer seg­ broken this unspoken bargain of trust, and poor cost
ments of society. At a broader level, governments in the recovery and low tax revenues are just two of the conse­
region have been faced with the bankruptcy of highly in­ quences. The outstanding feature of the new style of gov­
equitable, state-run, pay-as-you-go pension systems. Chile erning, and one bright prospect for the future, is the
privatized its system in 1 98 1 , reducing the role of govern­ restoration of this critical fiscal link at the local leve!.
ment to that of regulator; other countries (Argentina and Governments are also moving to create more open
Colombia, for example) have pursued dual systems. A administrations, reflecting the emergence of a more forceful
third group of countries are just now starting to contem­ civil society (media, private think tanks, nongovernmental
plate how pension reform should proceed. But more organizations) demanding greater access to decisionmaking,
aggressive action will be needed on the social fundamen­ particularly in the Commonwealth Caribbean through cit­
tals, to complement reform on the economic fundamen­ izens' charters (in Jamaica, for example) . Efforts are under
tals, if Latin America is to compete with East Asia. way in countries such as Colombia to develop performance
The priority in Latin America is to reinvigorate the indicators (of economy, efficiency, effectiveness, service
institutional capability of the state, and here some major quality, and financial performance) that will provide ac­
initiatives are under way. Both unitary and federal states countability for public sector managers and politicians.
have turned to decentralization, particularly to improve Court systems in most Latin American countries have
service delivery. Authority and responsibility for both rev­ suffered from major inefficiencies, widespread corruption,
enue and spending have been transferred, although often and political interference. For the new legislative and
these have been mismatched at first. Strengthening insti­ institutional structures to work effectively, the judicial sys­
tutional capability at the provincial and the local level is a tem must work well and fairly. Needed reforms, already
major challenge in countries with federal systems, such as under way in a number of countries (including Bolivia,
Argentina and Brazil, which have a legacy of overly in­ Ecuador, Trinidad and Tobago, and Venezuela) include
debted local governments and weak state or provincial legal education, better court administration and case flow
banks. Nevertheless, examples abound of successful local management, and procedural reform, including the devel­
government reforms (for example, through public-private opment of alternative dispute resolution systems outside
partnerships) emerging in time of crisis, where dynamic the courts. Efforts are also needed to strengthen the crim­
local leaders have been able to foster reforms on a man­ inal justice system, to address the growing problem of
ageable scale. crime and violence, which is partly related to drug traf­
ficking in the region.
Decentralization ofpower and ofspending, coupled
with democratization, has dramatically trans­ In the Middle East and North Africa, unemploy­
formed the localpolitical landscape in Latin Amer­ ment is byfar the single greatest economic and social
ica, in what some have called a "quiet revolution. " problem and makes government downsizing espe­
A new model ofgoverning is emerging in the region. cially difficult.

The first stages of local reform in Latin America, cov­ Countries in the Middle East and North Africa assigned
ering roughly the period 1 983-90, created an institu­ vast economic responsibilities to the state in the 1 960s
tional environment that nurtured a fresh generation of and 1 970s. More recently, governments have trimmed
office seekers, more professional and more reformist than back their roles to some extent, but much remains to be
their predecessors. Leaders in scores of cities were drawn done, within government and in the state enterprise sec­
by the ineluctable logic of popular participation as a nat­ tor. There has also been no proportionate slimming of the
ural means of sounding out the wishes of voters. This large civil services built up in those earlier years. With a
same logic led to a strengthening of the fiscal link between few exceptions (Tunisia is one), regulation is excessive, as
government and the governed, making more obvious the is state involvement in economic activity, and delivery of
connection between the public works and service im­ public services is inefficient.
provements that neighborhood residents say they want, Skilled civil servants are often in short supply, and the
and the payment burdens that authorities say residents delivery of public services is often inadequate. Overregula­
must bear to achieve cost recovery. For instance, many tion has produced a bloated work force, pervasive interfer­
local governments tie improvements to user fees or better­ ence in private economic activity, and widespread corrup­
ment levies, or rely on referendums. Traditional models of tion. Little effott has been devoted to streamlining agencies
government take this exchange-payment for goods and and improving state efficiency. And the system's capacity
 TH E AG E N DA FO R C: H A N G E 1 67

to change has slowly atrophied over time. Regional conflict fix capacity-building solutions have been attempted over
has also distracted attention from state reform, but the end the past twenty years, with limited impact. These efforts
of the Cold War, the conclusion of the Gulf War, and the have focused largely on training, on building skills, and on
change in attitudes brought about by the peace process importing technical systems. They have not focused on
have led governments in the region to begin to give the incentives, which come from competitive pressures, part­
issue more attention. nership, and transparency, and from rule-based systems.
The first steps in most countries in this region must be Reforms pushed forward too rapidly can produce new
to prevent any further growth in central government risks as well: they may be blocked by those likely to lose
employment, and to liberalize the economy. These steps from change, and the danger is always present that the
have begun in a few cases. Because the political and social reforms will lead to fragmentation and the creation of an
difficulties of reform are considerable, although not insur­ institutional vacuum.
mountable, one approach might be to decentralize selected International cooperation and decentralization are a
services to improve responsiveness and accountability, and potentially positive trend, since they create the opportunity
focus on selective state enterprise reforms while preparing to improve international collective action and the delivery
the ground for more comprehensive state reform. of local public goods. The two trends, in fact, reinforce
In the countries of the Organization for Economic Coop­ each other. But the gains will be realized only if the pitfalls
eration and Development (OECD), where the overall capa­ are avoided. International cooperation will yield gains only
bility of the state is high, efforts are ongoing to improve its if countries believe that they will benefit from international
effectiveness. Driven in part by globalization and technol­ integration. This can happen only if the risks and uncer­
ogy, changes are under way that will open greater oppor­ tainties of globalization-for households, workers, the
tunities in many OECD countries for government to enter poor, and the vulnerable-are skillfully handled. Decen­
into partnerships with the private sector and civil society, tralization will also need careful management to ensure that
especially in the area of social insurance and assistance. the costs, such as loss of macroeconomic control and rising
Some of the most comprehensive reforms of the state regional inequalities, do not overwhelm the benefits.
worldwide have occurred in OECD countries, driven pri­ In the past, it seemed clear that reform delayed was
marily by the rising cost of government and citizens' growth merely deferred, that the cost of missing an oppor­
demands for more value for money. It is too soon to ren­ tunity to reform would be, at worst, continued stagnation.
der a definitive judgment on most of these efforts. But the But a deeper understanding of the way in which declines
depth of dissatisfaction with the effectiveness of the state in state effectiveness and credibility-and resistance to
in these countries suggests that the search for more effec­ reform-can magnifY over time, coupled with examples
tive government, for better public services at lower overall of collapsed states at the end of these downward spirals,
cost to society, will and must continue. suggests the costs are far greater. If governments cannot
grasp the nettle of improving their effectiveness and rein­
Even small steps can make a big difference to the vigorating public institutions, the prospects for significant
state's effectiveness, leading to better standards of improvement in economic and social welfare, in some
living and opening opportunities for more reforms. countries, may be bleak indeed.
The challenge is to take those small steps that can The approach of the twenty-first century brings enor­
open the way to virtuous cycles. mous promise of change and reason for hope. In a world
of dizzying changes in markets, civil societies, and global
The two-part strategy laid out in this Report is only a forces, the state is under pressure to become more effec­
broad guide for the many different agendas of reform being tive. But it is not yet changing rapidly enough to keep
pursued throughout the world. Likewise, international pace. There is no unique model for change, and reforms
assistance for state reform must go beyond a one-size-fits-all will often come slowly, because they involve fundamental
approach, or one based on donors' preferences rather than alterations in the roles of institutions and in interactions
recipients' needs. It must be based on a clearer diagnosis of between citizens and government. This Report has shown
the case at hand and of how reforms would fit into broader that reform of state institutions is a long, difficult, and
political and social changes going on in each country. politically sensitive task. But if we now have a better sense
An important component of the reforms discussed in of the dimensions of the challenge, we are also now much
this Report is institutional, and so will take time. Quick- more aware of the costs of leaving things as they are .
T E C H N I C A L

N O T E

Overview education, and policy distortion in Table TN 1 ) . The

Data in Figure 1 are at current national prices. Data for heights of the other rwo bars are the values of the depen­
the OECD countries come from Tanzi and Schuknecht dent variable obtained by evaluating the estimated regres­
1 995, with updates from OECD, various years. The sion at the sample mean of all the right-hand-side vari­
countries included are Austria, Belgium, France, Ger­ ables except the variable of interest (credibility in Table
many, Italy, Japan, the Netherlands, Norway, Spain, Swe­ TN1 ), which is evaluated at one standard deviation above
den, Switzerland, the United Kingdom, and the United the sample mean for the high category and one standard
States. Data for the developing countries come from IMF, deviation below the sample mean for the low category.
various years (b). Developing countries include low- and In figures where a bar diagram is based on a simple cor­
middle-income countries as defmed by the World Bank; relation (for example, the top left panel of Figure 3 in the
the countries included vary across the period. Overview) , the following methodology is used unless oth­
The regional indexes in the left panel in Box 2 are erwise stated. Countries in the sample are ranked accord­
derived from averages of credibility indexes for the coun­ ing to their values for the variable on the horizontal axis.
tries in the region. On construction of the credibility The low, medium, and high categories are then defined as
index see "The private sector survey" below and the follows. The medium category includes countries within
Brunetti, Kisunko, and Weder background papers. one standard deviation of the sample mean, and the
The other rwo panels in Box 2 are based on regressions height of the bar is the average for those countries. The
reported in Table TNl . The GOP growth regression fol­ remaining countries, in the upper and lower tails of the
lows the instrumental variable (IV) methodology, using distribution, then make up the high and low categories,
the Freedom House Index of Political Rights (Freedom respectively, and again the bar height is the average for the
House, various issues) as an instrument for the level of countries in the category.
credibility. The regression for the share of investment in The top left panel in Figure 3 is based on a simple cor­
GOP reports ordinary least-squares (OLS) results. The relation berween a policy distortion index (averages for
credibility index is taken from the Brunetti, Kisunko, and 1 984-93) and a corruption index ( 1 996 data) . The corre­
Weder background paper (a) . The index is normalized lation coefficient is 0.53 with a t--statistic of 3.79. The
such that the level for the high-income OECD countries policy distortion index is taken from the Commander,
equals one. The source for the remaining variables is the Davoodi, and Lee background paper. Higher values of the
Commander, Davoodi, and Lee background paper. index mean more distorted policies. The corruption index
The methodology used to generate the rwo right-hand is taken from the private sector survey conducted for this
panels in Box 2 is routinely used in multiple regression Report (see below). See the technical note for Figure 5 for
analysis and is used throughout the Report unless stated the construction of the policy distortion index.
otherwise. The height of the vertical bar associated with The top right panel in Figure 3 is based on a regres­
the medium category is the value of the dependent vari­ sion, reported in Table TN2, of an index of corruption on
able obtained by evaluating the estimated regression at the an index of predictability of the judiciary (higher values
sample mean of all the right-hand-side terms (for exam­ mean greater predictability) , controlling for initial GOP
ple, the constant term, credibility, initial income, initial per capita and education (data from the World Bank data
 T E C H N I CA L N OTE 1 69

Table TN1 Regressions of growth and Table TN2 Regression of level of corruption
investment on level of credibility and other on predictability of the judiciary and crime
variables and theft
Regressio n coeffic ient Independent variable Regression coefficient

Growth in GOP Investment- Constant -7 .63 * * *

Independent per capita GOP ratio (0.703)
variable (IV method) (OLS method) Predictability of judiciary -0.59 * * *
(0.10)
Constant -9.550 * * -36.841 * * *
Log of initial GDP per capita in -0.51* * *
(4.14) (9.03)
1990 (0.162)
Level of credibility 13.44 * * 17.54**
Log of 1990 secondary school 0.39
( 0 worst. 1 best) (6.34) (7 .53)
enrollment (0. 185) * *
Log of initial GDP -0.048 5.025 * *
per capita (0.77) ( 1.43)
Adjusted R2 0.603
Log of initial -0.255 -1.109
No. of observations 59
mean years (0.85) (1.85)
of schooling * - * Significant at the 1 percent level.

Policy distortion -0.256 0.628 Note: Numbers in parentheses are standard errors. Estimation
is by the OLS method.
(0.64) (1.51)

Adjusted R2 0.264 0.674

No. of observations 33 33
" * Significant at the 1 percent level. The correlation coefficient for the data in Figure 4 is
- -Significant at the 5 percent level. -0.35, with a t-statistic of -3.65.
Note: Numbers in parentheses are standard errors.
Figure 5 is from the Commander, Davoodi, and Lee
background paper and is based on the IV regression, with
the interaction term, reported in TN3. The data are from
base) . Data on level of corruption and predictability of the both World Bank sources and the Summers-Heston
judiciary were taken from the private sector survey (see world tables (National Bureau of Economic Research
below) . The statistical methodology for generating the bars 1 997). The state variables are the logarithm of initial
is described in the technical note to Box 2. GDP per capita at 1 98 5 international prices, educational
The bottom left panel in Figure 3 is derived from a attainment (as measured by the logarithm of mean years
regression reported by Evans and Rauch 1 996. The de­ of schooling among the working-age population), the
pendent variable is corruption, data for which are taken population growth rate, and the logarithm of the share of
from various issues of the International Country Risk investment in GDP at 1 98 5 international prices. The
Guide, a publication of Political Risk Services, as com­ control variables include the logarithm of the share of gov­
piled by the IRIS Center, University of Maryland (see also ernment consumption in GDP (government size) at 1 985
Keefer and Knack 1 995), and rescaled so that higher val­ international prices, a policy distortion index, a measure
ues indicate more corruption. The regression includes a of the quality of bureaucracy or institutional capability,
constant term and, as independent variables, real GDP the average percentage change in the terms of trade, and
per capita and a merit-based recruitment index. Higher decade and regional dummies. The regression with the
values of this index indicate that a greater proportion of interaction term estimates the combined effect of govern­
higher-level officials in the core economic agencies en­ ment size and bureaucracy on growth of GDP per capita.
tered the civil service through a formal examination sys­ The institutional capability variable is a composite
tem, and that a higher proportion of those who did not index of measures of the quality of government and draws
enter through examinations have university or postgradu­ on Knack and Keefer 1 995 and Mauro 1 995, among oth­
ate degrees. The statistical methodology for generating the ers. This evaluation is put together from a set of responses
bars is described in the technical note to Box 2. by foreign investors that focus on the extent of red tape
The bottom right panel in Figure 3 shows the relation involved in any transaction, the regulatory environment,
berween, on the one hand, civil service wages relative to and the degree of autonomy from political pressure.
manufacturing wages and, on the other, the index of cor­ Although responses by foreign investors are likely to be
ruption from the InternationaL Country Risk Guide. The biased, these series are the only currently available large­
overall correlation coefficient was 0. 6 5 with a t-statistic of scale, cross-country evaluations of the way in which
3 .6 1 . Data are taken from the Van Rijckeghem and government bureaucracies function. All responses have
Weder background paper. been rescaled to range from zero to one, with higher scores
1 70 W O R LD D EV E L O P M E N T R E P O RT 1 997

Table TN3 Ordinary least-squares and instrumental variable regressions with growth of GOP per capita
as the dependent variable
OLS method IV method

Without With Without With

Independent variable interaction tenn interaction tenn interaction tenn interaction tenn

Constant 0.171 * * * 0.161 * * * 0.167* * * 0.136 * * *

(0.022) (0.024) (0.027) (0.038)
Dummy variable for 1974-83 -0.015* * * -0.015 * * * -0.015* * * -0.014 * * *
(0.003) (0.003) (0.004) (0.004)
Dummy variable for 1984-93 -0.017 * " -D.016* * * -0.017* * * -0.016* * *
(0.004) (0.004) (0.004) (0.004)
Initial GOP per capita -0.019 * * * -D.019* * * -D.021 ** * -0.021* * *
(0.003) (0.003) (0.003) (0.003)
Initial schooling 0.003 0.003 0.003 0.003
(0.003) (0.003) (0.003) (0.003)
Population growth -0.184 -D.209 -0.260 -D. 304
(0.192) (0.192) (0.204) (0.203)
Investment-GOP ratio 0.009 * * * 0.009 * * * 0.00 8 * * 0.007 * *
(0.003) (0.003) (0.003) (0.003)
Government size -0.016* * * -0.022 * * * -0.023 * * * -D.038* * *
(0.004) (0.008) (0.008) (0.015)
Institutional capability 0.017 * 0.041 0.027* * * 0.085*
(0 worst, 1 best) (0.009) (0.027) (0.010) (0.044)
Government size x Institutional capability 0.014 0.033
(0.014) (0.024)
Policy distortion -D.006* * * -0.006 * * * -0.005* * * -0.005* * *
(0.002) (0.002) (0.002) (0.002)
Terms-of-trade changes 0.034 0.034 0.042 0.044
(0.040) (0.040) (0.042) (0.042)
Latin America dummy variable -D.017 * * * -0.017 * * * -0.015 * * * -D.015* * *
(0.004) (0.004) (0.004) (0.004)
Sub·Saharan Africa dummy variable -0.030 * * * -0.030* * * -0.028 * * * -0.028* * *
(0.006) (0.006) (0.006) (0.006)
Socialist dummy variable -D.008 -0.008 -0.013* * -D.013 * *
(0.006) (0.006) (0.005) (0.005)

No. of observations 271 271 258 258

R2 0.5196 0 . 5213
••• Significant a t the 1 percent level.
•• Significant at the 5 percent level.
• Significant at the 10 percent level.
Note: Growth in GDP per capita is at 1985 international prices. Standard errors, corrected for heteroskedasticity, are i n parentheses.
a. The R2 is not an appropriate measure of goodness of fit with instrumental variable regressions.

indicating better bureaucracies. The policy distortion IV estimates are very close; the discussion concentrates on
index is obtained by principal component analysis of three the latter. The instruments for the policy distortion index
key indicators: the degree to which an economy is open and the investment share of GOP are their own lagged
(as measured by the share of trade in GOP) , the degree to values from five years previously. The instrument for the
which a country's currency has been overvalued (as mea­ government size variable is the prediction from the IV
sured by the black market premium on the exchange rate), regression for government size reported in the Comman­
and the degree to which local prices have departed from der, Oavoodi, and Lee background paper. Ail other vari­
international prices. Higher values of the index indicate ables in the regression were treated as exogenous.
greater policy distortion. The state variables all have the predicted signs. The co­
The data for Figure 5 were pooled so as to exploit the efficient on the initial income term indicates a conditional
information in ten-year averages covering the periods convergence rate of 2. 1 percent per year, which is close to
1 964-73 , 1 974-83, and 1984-93. Both OLS and IV the 2.6 percent reported by Barro and Sala-i-Martin 1 995.
regressions are reported in Table TN3. The OLS and the Human capital formation, as given by years of schooling,
 TEC H N I CAL N OTE 1 7 1

affects growth positively, but the effect is not statistically ernment credibility. The terms-of-trade and policy distor­
significant. The investment rate, on the other hand, affects tion variables (see the note to Figure 5 above) are from the
growth quite significantly. Population growth exerts a Commander, Davoodi, and Lee background paper. Data
negative effect on GDP growth per capita, whereas the on level of credibility are from the private sector survey
terms-of-trade variable has a positive effect. Both, how­ conducted for this Report (see "The private sector survey"
ever, are insignificant. There is an unambiguously nega­ below) . The regression also included a constant term.
tive, and statistically significant, effect from government
Chapter 3
consumption spending. A one-standard-deviation increase
in government consumption is associated with a decline of The data in Figure 3.B are simple averages of pensions,
0.65 percentage point per year, which is close to the 0.7 unemployment benefits, and family assistance expendi­
percentage point reported by Barro and Sala-i-Martin ture shares in GDP across twenty-two OECD countries.
1 995. There is also an unambiguously negative growth The series for the years 1 965-79 is constructed from data
effect of policy distortion, which is significant at the 1 per­ in ILO, various years. The 1 980-93 data are from OECD
cent level. This indicates that policy distortions, as mea­ 1 996.
sured by the index used here, will have a predictably neg­
Chapter 5
ative effect on growth. However, the size of that effect, as
given by the coefficient on the policy term (and control­ In Figure 5.5 the dependent variable, an index of bureau­
ling for other variables) is not that large, at least relative to cratic capability, is the bureaucratic quality rating variable
the government size variable (0.5 percentage point per reported in the International Country Risk Guide, various
year) . By contrast, the institutional capability variable issues, rescaled so that higher values signify higher bureau­
exerts a sizeable, positive, and significant effect on growth. cratic quality. The independent variables are initial GDP
Similarly, interacting the government consumption term per capita and an index of meritocracy. The regression
with the institutional capability variable-an attempt to also includes a constant term.
coax out the implications of high values of the two vari­ The correlation coefficient for the data in Figure 5.1 is
ables occurring simultaneously-yields a positive coeffi­ -0.37 with a t-statistic of - 1 0 . 1 4 . The countries repre­
cient. When evaluating the consequences of government sented are Botswana, Burkina Faso, Cameroon, Chad,
for growth, it is not simply size that is relevant. Bad poli­ Egypt, Gabon, the Gambia, Ghana, Kenya, Madagascar,
cies, as represented by overvalued currencies and pervasive Malawi, Mauritania, Mauritius, Morocco, Nigeria,
trade restrictions, hold down a country's growth, while the Rwanda, Senegal, Somalia, Sudan, and Togo. The sample
quality of government can exert a positive effect on per­ covers variation over time and across countries in pay and
formance. And it is clear that countries and regions that employment. The wage variable is the central government
have fared least well tend to do worst on all three indica­ real average wage relative to real GDP per capita, both
tors. It is the combination of government size and the measured in local currency; the employment variable
quality of policy and institutions that seems to matter. is central government employment relative to the total

Chapter 2

In Figure 2.2 the IV estimates from the growth regression

Table TN4 Regression of rates of return on
reported in the Commander, Davoodi, and Lee back­
World Bank-financed projects on level of
ground paper are used to decompose the sources of
credibility and other variables
growth in Sub-Saharan Africa and East Asia over the
Independent variable Regression coefficient
period 1 964-93. These sources (explained and unex­
plained) are added sequentially to GDP per capita in Sub­ Constant -7.080
(12.87)
Saharan Africa in 1 964.
Level of credibility 35.55 * *
See the technical note to Box 2 for details regarding the (0 worst, 1 best) (16. 18)
top two panels in Figure 2.4. The bottom panel in Figure Change in terms of trade, 1984-93 8.078
2.4 is derived from the regression reported in Table TN4. (31.07)
The dependent variable is the country-average rates of Policy distortion, 1984-93 2.481
return for a sample of 3 1 2 development projects financed (2.76)

by the World Bank. Project evaluation has been com­

Adjusted R2 0.088
pleted for the projects chosen. The data are from the No. of observations 30
World Bank's Operation and Evaluation (OED) data
.. Statistically significant at the 5 percent level.
base. The independent variables are the change in the Note: Numbers in parentheses are standard errors. Estimation
terms of trade over the period 1 9 84-93, the policy distor­ is by the OLS method.
tion index for 1 984-93, and an index of the level of gov-
1 72 WO R LD D EVE L O P M E NT R E P O RT 1 997

population. Employment and nominal wages are taken

from Kraay and Van Rijckeghem 1 995. The real average Table TNS Regression of share of gross
wage is constructed by deflating total nominal wages by investment In G D P on level and predictability
the product of the consumer price index and employ­ of corruption and other variables
ment. Population, the consumer price index, and real Independent variable Regression coefficient
GDP per capita are taken from the World Bank data base.
Constant 19.523
(13.49)
Chapter 6
Level of corruption -5.814* *
Figure 6. 1 is based on cross-country regression results pre­ (2 .23)
sented in Table TN5. For the countries included and def­ Predictability of corruption 6.309 * *
( 2.62)
initions of the corruption variables see "The private sector
Log of secondary school 1 . 987
survey" below. The dependent variable, the investment­ enrollment in 1990 ( 2 . 18)
GDP ratio, is a simple average of the share of gross invest­ Log of initial GDP per capita -1.149
ment in GDP over the period 1990-94. The predictabil­ in 1990 (1.87)
ity of corruption is a combination of predictability of Policy distortion -1.959
( 1.46)
outcomes and of the size of the additional payment to be
made. The regression controls for initial level of education Adjusted R2 0.24
(measured as the logarithm of secondary school enroll­ No. of observations 39
ment in 1 990), initial income (logarithm of 1 990 GDP * * Significant at the 5 percent level.
per capita, measured in PPP terms), and existing policy Note: Numbers in parentheses are standard errors. Estimation
is by the OLS methOd.
distortion. The policy distortion variable is taken from the
Commander, Davoodi, and Lee background paper (see
the technical note to Figure 5). Data on investment, edu­
cation, and initial income were obtained from World coefficients of 0.92 and 0.87, respectively, for the period
Bank sources. The statistical methodology for construct­ 1 973-94.
ing the figure is the same as for Figure 5. The level and The figures in Box 7.3 are based on simple correlations
predictability of corruption are important factors in deter­ and do not control for other characteristics of the villages.
mining the share of investment and are significant at the However, the relationships still hold when these charac­
5 percent level. teristics are controlled for. The data on social capital are
from the Social Capital and Poverty Survey (SCPS),
Chapter 7
which was carried out in rural Tanzania in April and May
The index of democracy in Figure 7. 1 is based on Polity 1 995 as part of a larger World Bank participatory poverty
III data developed by Jaggers and Gurr 1 996; regional assessment exercise. Expenditure data are from the same
groupings follow standard World Bank classifications. source, although that part of the survey covered house­
The index is derived from "institutionalized democracy" holds in only fifty-three of the eighty-seven clusters. The
and "institutionalized autocracy" indicators for each year village-level social capital index is the average number of
from 1 800 to 1 994, for all independent countries with groups (for example, churches, women's groups, farmers'
populations greater than 500,000 in the early 1 990s ( 1 77 groups) to which respondents belonged, multiplied by an
countries in all). The index is calculated by subtracting index of the average characteristics of those groups along
the latter indicator from the former. Each indicator con­ three dimensions: kin heterogeneity, income heteroge­
sists of five components: competitiveness of political par­ neity, and group functioning. The data on school quality
ticipation, regulation of political participation, competi­ are from the Human Resource Development Survey
tiveness of executive recruitment, openness of executive (HRDS), carried out in Tanzania in 1 993, which can be
recruitment, and constraints on the chief executive. Each matched at the cluster level with the eighty-seven clusters
of the components is scored according to Jaggers and from the SCPS. The school quality index is a cluster-level
Gurr 1 995 (p. 472). Both indicators are additive on an average derived from respondents' answers to questions
eleven-point scale from 0 to 1 0. The advantage of using on the relative importance of five attributes of schools,
the difference between the two indicators is that it shows and their assessment of the quality of their local school
a regime type along a political continuum of which along those same five dimensions. The HRDS was a
democracy (+ 1 0) and autocracy (-1 0) represent the two nationally representative survey of 5 ,000 households in
ends. The index of democracy is highly correlated with Tanzania. The survey was a joint effort undertaken by the
the Freedom House index of political rights and civil Department of Economics of the University of Dar es
rights (Freedom House, various issues), with correlation Salaam, the Government of Tanzania, and the World
 TE C H N I CA L N OT E 1 73

Bank, and was funded by the World Bank, the Govern­ of constitutional structure, type of government, and ideo­
ment of Japan, and the British Overseas Development logical orientation of the legislature (data for the last two
Agency. See Ferreira and Griffen 1 995. are from Alesina and Perotti 1 995). Constitutional struc­
ture is measured as the veto power given under the con­
Chapter 9
stitution to minorities and interest groups to block social
Figure 9.2 is based on the generalized least squares (GLS) legislation. H igher values of the index imply less obstruc­
regression reported in Table TN6. The regression captures tive capacity. A positive coefficient implies that countries
the effects of initial conditions and institutional, demo­ with low veto power are more likely to indulge in welfare
graphic, and economic variables on welfare spending. expansion. Government is classified into six types ranging
The dependent variable is government spending on from single-party to multiparty minority. Ideological ori­
pensions, unemployment, and family assistance as a share entation is classified as right-wing, right-center, balanced,
ofGDP (see the technical note to Figure 3.8) . Initial con­ left-center, or left-wing. A positive coefficient for govern­
ditions are captured by the initial Gini index for income ment type implies that single-party governments are less
distribution (Deininger and Squire 1 9 96) and the time prone toward expansionaty policies; for ideological orien­
elapsed since the start of the social security program in tation it implies that left-wing governments are more
each countty (US . Department of Health and Human prone to such policies. The percentage of population
Services 1 994) . The institutional variables include an above 65 years of age (aging), number of children 14 years
indicator of bureaucratic efficiency (institutional capabil­ and under, unemployment rate, real GDP per capita, and
ity, from the Commander, Davoodi, and Lee background inflation are taken from the World Bank's Social Indica­
paper) and three indicators of the political environment. tors data base; OECD, various years; ILO 1 986 and 1 994;
Higher scores imply greater efficiency. Although efficient IMF, various years (b); and the World Bank Economic
bureaucracies are more likely to curb fraud and abuse, and Social Data Base. A positive coefficient is expected for
they are also more likely to grant benefits to all eligible the aging and unemployment rate variables. Finally, the
beneficiaries. Thus, the sign of the coefficient on the more affluent the countty, the bigger its welfare bill. This
bureaucratic efficiency variable depends on the relative effect is picked up by a positive coefficient for real GDP
importance of these two effects. A positive coefficient per capita.
implies that more efficient governments provide greater A new variable, "residual average welfare spending," is
welfare coverage. Political environment indicators consist defined by subtracting, from the sample average of welfare
spending, the constant term of the regression and the fol­
lowing term: (coefficient X sample average of independent
variables not significant at the 1 0 percent level or less).
Table TN6 Regression of welfare spending on The contribution of each variable to welfare spending is
constitutional structure and other variables obtained by multiplying the estimated coefficient on each
Regression Standard
variable by the sample average of that variable and divid­
Independent variable coefficient elTOr ing the result by residual average welfare spending. The
Constant -6.37 4.229 reported decomposition of welfare spending is robust to
Constitutional structure 4.40 2 . 189* * retaining only those variables in the regression that were
Aging 0.583 0.082 * * * significant at the 1 0 percent level or better.
Unemployment rate 0.361 0.029 * * * The back-of-the-envelope calculation for the reduction
Type of government 0.227 0.063 * * *
in distortions resulting from tax reform in Pakistan is
Efficiency of bureaucracy 1.76 0.521 * * *
GDP per capita x 104 0.94 0.495* based on the so-called Harberger triangle. The deadweight
Ideology of government -0.04 0.045 loss (DWL) equation is given by:
Inflation rate 0.01 0.017
No. of children x 108 2 . 37 4.09
Starting year of program -0.006 0.039
Gini index -0.004 0.109
where:
R2 0.63 t = tax rate
No. of observations 365 eT = compensated demand elasticity
* • • Significant at the 1 percent level. TI = taxable income.
• * Significant at the 5 percent level.
* Significant at the 10 percent level.
Note: Estimation is by the generalized least·squares method.
The prereform tax rate used is 60 percent, and the post­
The R2 does not have all the properties of the OLS R2. reform rate 30 percent. The compensated demand elastic­
ity used is 0.5, the same as in Feldstein 1 995. The relevant
1 74 WOR LD D EV E L O P M E NT R E PO RT 1 997

ratio of taxable income to GDP is 7.22 percent. Based on of senior management's time is spent dealing with legal
these figures, the deadweight loss reduction (prereform requirements.
minus postreform) associated with a revenue-neutral • Uncertainty created by lack ofgovernment efficiency in pro­
reform is estimated at 1 .4 percent of GDP. viding services. These questions concentrate on whether
and how efficiently the government delivers certain basic
The private sector survey
services such as mail, health care, telephone service, and
Why this survey? roads.
A vast number of anecdotal reports document the harm
done to private sector development by uncertainty about Implementation and results
laws, policies, and regulations. Examples are De Soto 1 989 The questionnaire was originally written in English.
on the problems of informal firms in Peru, the description However, worldwide distribution required its translation
by K1itgaard 1 990 of the uncertainties of doing business in into several major languages: French, German, Portu­
Equatorial Guinea, and the analysis of institutional uncer­ guese, Russian, and Spanish. Wherever possible the ques­
tainty in Nicaragua by Borner, Brunetti, and Weder 1 995. tionnaires were administered in one of these languages or
Adequate data for such an analysis have been hard to in English. At times, however, it was vital to provide
come by, however. The private sector survey conducted translations for a single country. This was done in the
for this Report sought to fill that gap by creating an inter­ cases of Albania, Bulgaria, the Czech Republic, Hungary,
nationally comparable data set, for a broad cross section of Italy, Poland, the Slovak Republic, and Turkey.
countries, on different aspects of institutional uncertainty The survey was implemented between August 1 996
as perceived by private entrepreneurs. and January 1 997. At its conclusion sixty-nine countries
had participated. These include the following: industrial
The survey questionnaire countries, Austria, Canada, France, Germany, Ireland,
The questionnaire first asks about some general character­ Italy, Portugal, Spain, Switzerland, the United Kingdom,
istics of the responding firm. Five different dimensions are and the United States; South and Southeast Asia, Fiji,
considered: size (fewer than 50 employees, between 50 India, and Malaysia; Middle East and North Africa, Jor­
and 200 employees, or more than 200 employees); the dan, Morocco, and the West Bank and Gaza; Central and
firm's line of business (manufacturing, services, or agri­ Eastern Europe, Albania, Bulgaria, the Czech Republic,
culture); its headquarters location (capital city, other large Estonia, Hungary, Larvia, Lithuania, Macedonia, Poland,
city, or small city or countryside); the presence or absence the Slovak Republic, and Turkey; Latin America and the
of foreign capital participation; and whether the firm Caribbean, Bolivia, Colombia, Costa Rica, Ecuador,
exports its products. Jamaica, Mexico, Paraguay, Peru, and Venezuela; Sub­
The main part of the questionnaire consists of twenty­ Saharan Africa, Benin, Cameroon, Chad, the Congo,
five multiple-choice questions, which are grouped in five Cote d'Ivoire, Ghana, Guinea, Guinea-Bissau, Kenya,
sections, each with its own focus. The questionnaire is Madagascar, Malawi, Mali, Mauritius, Mozambique,
divided into the following five sections: Nigeria, Senegal, South Africa, Tanzania, Togo, Uganda,
Zambia, and Zimbabwe; Commonwealth of Independent
• Predictability of laws and policies. These questions seek States, Armenia, Azerbaijan, Belarus, Georgia, Kazakstan,
to assess the uncertainties created by the lawmaking the Kyrgyz Republic, Moldova, Russia, Ukraine, and
process. Uzbekistan.
• Political instability and security ofproperty. These ques­ The companies selected ran the gamut of firm size,
tions ask about the uncertainties that arise from both geographic location within the country, and type of busi­
regular and irregular transfers of government power. ness, and companies both with and without foreign capi­
• Government-business interface. The questionnaire lists tal participation were well represented. Questionnaires
fifteen areas where the firm is confronted with govern­ were sent by mail where possible, but were delivered by
ment action and asks it to evaluate the degree to which hand in some countries where mail delivery was unreli­
each of these areas creates obstacles to doing business. able. Table TN7 provides details on response rates. Con­
• Law enforcement and bureaucratic red tape. These ques­ sidering other experience with mailed surveys, the high
tions focus on the degree of corruption and whether overall response rate for the mailed survey in developing
it is a predictable transactions cost or a source of un­ countries (30 percent) is remarkable. The high rate can be
certainty. A problem in analyzing the responses is, of attributed to two factors: the fact that the survey raised
course, firms' reluctance to openly admit that they pay questions of great concern for local businesspeople, and
bribes. In addition, the questionnaire asks directly the fact that the survey was sponsored by an international
whether uncertainties in dealing with the state have sti­ organization with considerable name recognition in devel-
fled planned investment projects, and what percentage opmg countries.
 TE C H N I CA L N OTE 1 7 5

-- -- ---- -

Table TN7 Responses to the private sector survey by region

No. of questionnaires returned

No. of countries No. of finns
Region or group surveyed surveyed Average Median Minimum Maximum

industrial countries 11 254 23 20 14 56

South and Southeast Asia 3 139 46 45 41 53
Middle East and North Africa 3 109 36 42 15 52
CEE 11 771 70 70 46 114
Latin America and Caribbean 9 474 53 47 17 87
Sub-Saharan Africa 22 1.288 59 48 13 124
CiS 10 650 65 62 31 91
All developing countries 58 3,431 59 51 13 124
All countries 69 3.685 53 50 13 124

Because of budget and time constraints, in some coun­ tries' investment climate, which concentrated entirely on
tries the responding firms did not represent a random the perceptions of multinational firms.
sample of those to which questionnaires had been distrib­
uted. In other countries, political and economic condi­ Construction ofthe credibility indicator
tions allowed only limited geographical coverage. On The credibiliry indicator was designed as a broad measure
average, however, the survey achieved its goal of fifty of the reliabiliry of the institutional framework as per­
responses per country. ceived by private entrepreneurs. It encompasses several dif­
Almost half of the firms were small (fewer than fifry ferent sources of uncertainry in the interaction of govern­
employees); the rest were divided more or less equally ment and the private sector and summarizes these into one
between the two larger firm sizes. The survey intended global indicator. The credibiliry index is constructed as the
that the companies in the sample represent a variery of simple mean of the average answers to five subindicators,
geographic locations within each country. Firms located which is then normalized such that the index for the high­
in the capital ciry constituted about half of those respond­ income OEeD countries equals one:
ing. It is encouraging, however, that management of
almost one-quarter of the firms was located in a small ciry • Predictability of rulemaking, or the extent to which
or in the countryside. entrepreneurs have to cope with unexpected changes in
The aggregate results, however, hide considerable vari­ rules and policies, whether they expect the government
ation within countries. The share of firms located in the to stick to announced major policies, the degree to
capital ciry varies between 1 00 percent and 0 percent. which entrepreneurs are usually informed about impor­
Such variation can be explained by the distribution of pri­ tant rule changes, and whether they have an opportu­
vate businesses over country territory. In some former niry to voice concerns when planned changes affect
republics of the Soviet Union more than half of registered their business
businesses are in the capitaL In other countries the socio­ • Subjective perception ofpolitical instability, or whether
economic and political situation limited distribution of changes in government (constitutional or unconstitu­
the questionnaire to the more remote parts. In some tional) are perceived to be accompanied by far-reaching
countries the unreliabiliry of the mails made it infeasible policy surprises that could have serious effects on the
to distribute questionnaires to remote places and have private sector
them returned in a timely fashion. • Security ofpersons and property, or whether entrepre­
Services and manufacturing were represented about neurs feel confident that the authorities will protect
equally among respondents, but responses from agricul­ them and their properry from criminal actions, and
tural enterprises were relatively few. This bias can be whether theft and other forms of crime represent seri­
explained by geography: more than three-quarters of the ous problems for business
surveyed firms were headquartered in the capital ciry or • Predictability ofjudicial enforcement, or the degree of
another large ciry, where few agricultural firms are located. uncertainry arising from arbitrary enforcement of rules
Firms were evenly distributed with respect to foreign by the judiciary, and whether such unpredictability
capital participation and access to foreign markets. Two­ presents a problem for doing business
thirds of the surveyed companies reported no foreign par­ • Corruption, or whether it is common for private entre­
ticipation. The results therefore contrast with those of preneurs to have to make some irregular additional pay­
other earlier attempts at subjective measurement of coun- ments to get things done.
B I B L I O G RA P H I CA L

N O T E

HIS HAS A
T
REPORT DRAWN ON WIDE RANGE OF tance at various stages. Helpful conrributions on individ­
World Bank documenrs and on numerous outside ual chapters are listed under the chapter acknowledgments.
sources. World Bank sources include ongoing research as The survey of private secror firms conducted specially
well as counrry economic, sector, and project work. These for this Report was made possible through the assistance
and other sources are listed alphabetically by author or and cooperation of staff in the operational complex of the
organization in two groups: background papers commis­ World Bank. Particular thanks go to the coordinators of
sioned for this Report and a selected bibliography. The the survey in the regional vice presidencies as well as the
background papers, some of which will be made available resident representatives and the staff of the resident mis­
through the Policy Research Working Paper series, and sions in the participating countries.
the rest through the World Development Report office, syn­ A wide range of consultations was undertaken for the
thesize relevant literature and Bank work. The views they Report. We particularly wish to thank the following orga­
express are not necessarily those of the World Bank or of nizations for arranging consultation meetings: the Re­
this Report. search Institute for Development Assistance, Overseas
In addition to the principal sources listed, many per­ Economic Cooperation Fund, Tokyo; the German Min­
sons, both inside and outside the World Bank, provided istry of Cooperation; the Norwegian Ministry of Foreign
valuable advice and guidance. Special thanks is owed to Affairs; the North-South Institute, Ottawa; the National
Gregory Ingram, Arturo Israel, Ravi Kanbur, and Michael Council for Applied Economic Research, New Delhi; the
Walron. Caroline Anstey and Hans Jurgen Gruss helped African Economic Research Consortium, Nairobi; the
facilitate inputs and consulrations from many sources. Overseas Development Agency, London; the Global
Valuable comments and contributions were also provided Coalition for Africa, Addis Ababa; and InterAction,
by Sri-Ram Aiyer, Mark Baird, Shahid Javed Burki, Uri Washington.
Dadush, Partha Dasgupta, Gloria Davis, Shanta Devara­ We wish ro thank in Tokyo: Yuan Gangming, Kaoru
jan, Mamadou Dia, Jessica Einhorn, Gunnar Eskeland, Hayashi, Mr. Hisatake, Naoko Ishii, Shigeru Ishikawa,
Francisco Ferreira, Cesar Gaviria, Roger Grawe, Jeffrey Shinichi Jin, Yutaka Kosai, Isao Kubota, Toru Nakanishi,
Hammer, Ricardo Hausmann, Enrique Iglesias, Edmundo Nobutake Odano, Tetsuji Okazaki, Yoshio Okubo, Toru
Jarquin, Robert Klitgaard, Geoff Lamb, Moises Nairn, Shinotsuka, Masaki Shiratori, Akira Suehiro, Shigeki Te­
Gobind Nankani, John Nellis, Richard Newfarmer, jima, Prof. Juro Teranishi, and Yoshio Wada; in Brussels:
Guillermo Perry, Guy Pfeffermann, Robert Picciono, Dominique Be, Brunet Bernard, Noel Coghlan, P. De­
Boris Pleskovic, Stephen Pursey, Sarath Rajapatirana, Mal­ fraigne, M. de Lange, L. de Richemom, Daniel Guyader,
colm Rowat, Salvatore Schiavo-Campo, Nemat Shafik, Maurice Guyader, Dine Juul Jorgensen, Maral LeRoy,
Ibrahim Shihata, Mary Shirley, I. J. Singh, Andrew Steer, Franc;:oise Moreau, L. R. Pench, Regine Roy, G. Tebbe, A.
Nicholas Stern, Maurice Strong, Roger Sullivan, Vinod Tincani, J. Vignon, and Rutger Wissels; in the United
Thomas, Jacques van der Gaag, Paulo Vieira da Cunha, Kingdom Mandeep Bains, Bill Baker, Richard Barley, Kate
Steve Webb, Alan Winters, and John Williamson. Bruce Bayliss, Sarah Bernard, Graham P. Chapman, Anne Coles,
Ross-Larson, Meta de Coquereaumonr, Paul Holtz, and Paul Collier, Sean Collins, Rosalind Eyben, Mick Foster,
Alison Strong provided valuable editorial advice and assis- Peter Grant, Mr. Greif, P. Holden, Tony Killick, Robert
 B I B L I O G RA P H I C A L N OT E 1 77

Lasiett, Andrew Leslie, Deborah McGurk, Dino Merotto, med EI Sayed Selim, Mohamed Aboul Enein, Samiha
Mick Moore, Peter Mountfield, Rachel Phillipson, Trevor Fawzy, Ahmed Gweily, Heba Handoussa, Taher Helmy,
Robinson, Sally Taylor, Sandra Wallman, Jon Wilms­ Mohamed Mahmoud El Imam, Mohamed Lofty Man­
burst, and Geoffrey Wood; in Stockholm: Stefan Foister, sour, Omar Mohanna, Mohamed Ozalp, Ghada Ragab,
Jorgen Holmqvist, Erik Johnsson, Assar Lindbeck, Eva Yasser Sobhi, Arvind Subramanian, Fouad Sultan, and EI
Lindstrom, Per Molander, and Joakim Palme; in Ferney­ Sayed Yasseen; in Oslo: Ole Winkler Andersen, Christian
Voltaire, France. Hans Engelberts, Elie Jouen, and Mike Friis Bach, Ingrid Braenden, Adne Cappelen, Arne Disch,
Waghorne; in Bonn: Friedrich W. Bolay, Hans-Gert Thorvald Grung Moe, Tor Halvorsen, Trond Folke Lind­
Braun, Hartmut Elsenhans, Ingrid Hoven, Ernst-J. Ker­ berg, Desmond McNeill, Lars Mjoset, Frode Neergaard,
busch, Elmar Kleiner, Gudrun Kochendorfer-Lucius, Poul Engberg Pedersen, Erik Reinert, Reiulf Steen, Ami
Rolf]. Langhammer, Hildegard Lingnau, Peter Molt, Mr. Suhrke, and Lars Udsholt; in the Netherlands: M. Bienefelt,
Preuss, Dirk Reinermann, Hans-Bernd Schafer, Mr. K. Blekxtoon, J. de Groot, L. de Maat, K. Doornhof, J.
Schroder, Christian Sigrist, Klaus Simon, Albrecht Enneking, J. Faber, H. Gobes, A. C. M. Hamer, J. P.
Stockmayer, Franz Thediek, Josef Thesing, Dr. Tittel­ Ramaker, F. Roos, G. Storm, R. J. Tjeerdsma, A. van't
Gronefeld, Klemens van de Sand, and Peter Wolf; in Paris: Veer, F. Ph. M. van der Ktaaji, G. van Dijk, G. J. J. M.
Sophie Bismut, Catherine Bourtembourg, Christian Cha­ van Empel, F. D. van Loon, L. van Maare, A. van Raver­
vagneux, Jean Coussy, Maximin Emagna, Benedicte Etien, stein, and M. van Wier; .from Belgium: Guido Dumon,
Ulrich Hiemenz, Etienne Le Roy, Turkia Ould-Daddah, Dany Ghekiere, Luc Hubloue, Thomas Lievens, and Guy
Michel Pipelier, and Jean Pisani Ferry; at a meeting of Schorochoff; at the World Health Organization: D. Bett­
NGO representatives in London: Graham Bray, Joji Carino, cher, A. Moncayo, S. Sapirie, J. Tulloch, J. Visschedijk,
Marcus Colchester, Harriet Goodman, Andrew Gray, Car­ and Derek Yach; at the Office of the United Nations High
oline Harper, Rob Lake, Christine Lippai, Brendon Mar­ Commissioner for Refogees: Jamal Benomar and Eric Mor­
tin, Arthur Neame, Henry Northover, Helen O'Connell, ris; in Addis Ababa: Members of the Economic Committee
Robin Poulton, Mohammed Sulliman, Sabjit Tohal, Kitty of the Global Coalition for Africa; in the West Bank and
Warnock, Alex Wilks, Christian Wisskirchen, and Jessica Gaza: Samir Abdallah, Hatem Halawani, Nabil Kassis, Ali
Woodroffe; at the European Commission: Roderick Abbott, Mahmoud Khadr, Mohammad Zuhdi Nashashibi, Yousif
Christoph Bail, Chris Boyd, Gunther Burghardt, Carlos Nasser, and Mohammad Shtayyeh; at a meeting in Cancun,
Camino, Jim Cloos, Robert Coleman, Carlos Costa, Pierre Mexico: Jose Afonso, Pedro Aguayo, Kenny Anthony,
Defraigne, Xavier de Larnaudie-Eiffel, Joly Dixon, Nicolas Ardito-Barletta, Edgardo Boeninger, Juan Bour,
Michael Green, Alexander Italianer, Horst Krenzler, Ed Hernan Buchi, Ruben Carles, Alejandro Carrillo, Tarsicio
Kronenburg, Franlfois Lamoureux, Rene Leray, Jean­ Castaneda, Pelegrin Castillo, Jose Dagnino Pastore,
Franlfois Marchipont, Stefano Micossi, Agne Pantelouri, Andres Dauhajre, Diego de Figueiredo Moreira Neto,
Bernard Petit, Juan Prat, Giovanni Ravasio, Alexander Alberto Diaz Cayeros, Haydee Garda, Rudolf Hommes,
Schaub, Steffen Smidt, Michel van den Abeele, Robert Tasso Jereissati, Arnoldo Jimenez, Eduardo Lizano,
Verrue, Jerome Vignon, Heinrich von Moltke, and Jorg Thereza Lobo, Rolf Lilders, Gabriel Martinez, Nestor
Wenzel; at Georgetown University, Washington: Daniel Martinez, Helen McBain, Ambler Moss, Marthe Muse,
Brumberg, Marsha Darling, Bruce Douglas, Steven King, Arturo Nunez del Prado, Tomas Pastoriza, Ramon
Carol Lancaster, Marilyn McMorrow, Dennis McNamara, Pinango, Fernando Romero, Luis Rubio, Ricardo Sama­
Gwendolyn Mikell, Howard Schaeffer, and Dan Unger; at niego, Cezley Sampson, Antonio Sancho, Enrique Ves­
the Washington College ofLaw, American University. Clau­ covi, and Eduardo Wiesner Duran; in India: Swaminathan
dia Martin and Rochas Pronk; at a World Bank meeting Aiyar, Yoginder Alagh, Surjit Bhalla, Onkar Goswani, R.
with NGO representatives: Peter Bachrach, Deborah N. Malhotra, Rakesh Mohan, and Pai Panandikar; in
Brautigam, Jim Cox, George Devendorf, Jack Downey, Bern: Franz Blankart, Thomas Greminger, Beat Kappeler,
Justin Forsyth, Jo Marie Griesgraber, Wendy Grzywacz, Luzius Mader, and Mathias Meyer; at the A.frican Economic
Kari Hamerschlag, Carola Kaps, Meg Kinghorn, Michael Research Consortium: Ibrahim Elbadawi and Benno Ndulu;
Kronthal, Carolyn Long, Claudia Martin, Carmen Mon­ in Berlin: Heinz Buhler, Alexander Friedrich, Gotz Link,
ico, Joe Muwonge, Gabriel Negatu, Michal Nehrbass, Theo Sommer, and Carl-Dieter Spranger; at the Interna­
Carolyn Reynolds, Mildred Robbins Leet, Bruce Robin­ tional Labour Organisation: Katherine Hagen and Stanley
son, Berta Romero, James Rosen, Frances Seymour, Taylor; at the International Confederation of Free Trade
Gmakahn Sherman, Carla Simon, Andrea Soccobo, Julia Unions: Gemma Adaba; in Canada: Isabella Bakker, Man­
Taft, Nicolas van de Walle, Nick Vanedwaild, and Chuck fred Bienefeld, Jim Carruthers, G. Shabbir Cheema, Roy
Woolery; in Cairo: Ismail Sabry Abdallah, Mamdouh El Culpeper, Nasir Islam, Devesh Kapur, Bahman Kia, Peter
Beltagy, Ahmed Galal, Abdel Fattah El Gebalyl, Moha- Larson, Caroline Pestieau, and Alison Van Rooy; in Addis
1 78 WORLD D EV E L O P M E N T R E PO RT 1 997

Ababa: Addis Anteneh, Tedenekialesh Assfaw, Asrat i-Martin 1 995, Bosworth, Collins, and Chen 1 995, Deva­
Bekele, Befekadu Degefe, Getachew Demeke, Tekalign rajan, Swaroop, and Zou 1 996, Kormendi and Meguire
Gedamu, Murtaza Jaffer, Rehenia Jingo-Kakonge, Te­ 1 98 5 , Landau 1 986, Ram 1 986, and Slemrod 1 995.
shome G. Mariam, Berhane Mewa, Gabriel Negatu, Flor­ Knack and Keefer 1 995 look explicitly at the role of insti­
ence Nekyon, Tom L. Torome, and Kiffie Wodajo. tutions. Mauro 1 995 looks at the consequences of cor­
For this consultation process we wish to thank in par­ ruption for growth. The discussion of credibility draws on
ticular Patricia Dufour, Tomoko Hirai, Mika Iwasaki, Ali Borner, Brunetti, and Weder 1 995, and the results re­
Khadr, Geoff Lamb, S. Miyamura, Fayez Omar, Sudar­ ported are derived from the credibility survey conducted
shan Gooptu, Claudia Von Monbart, and Spiros Voy­ for this Report, which is described in detail in the Bru­
adzis and several Executive Directors of the World Bank netti, Kisunko, and Weder background papers. The gen­
and their staff based in Washington. eral discussion on institutions draws on North 1 990,
Olson 1 996, and Dia 1 996. The discussion of evolution
Chapter 1 in economists' thinking about growth draws on Barro and
A bold and panoramic look at the evolution of the state Sala-i-Martin 1 995 , Solow 1 956, Dasgupta 1 995, and
over the past thousand years is provided in Tilly 1 990. Dreze and Sen 1 989.
Classic texts that deal with the state and its management
include Machiavelli's The Prince and Kautiliya's Arthashas­ Chapter 3
tra (see Kangle 1 965). Helm 1 989 analyzes the shifting This chapter benefited from valuable contributions and
boundaries of the state after 1 945. Diaz Alejandro 1 988 suggestions from Richard Ball, Jeanine Braithwaite, Lionel
considers shifting fashions in development in the Latin Demery, Jeffrey Hammer, Estelle James, Emmanuel
American context. Tanzi and Schuknecht 1 995 provide a Jimenez, Maureen Lewis, Geoffrey Shepherd, Carlos Silva,
recent evaluation of the effectiveness of states. World Bank Kalanidhi Subbarao, and Dominique van de Walle.
1 99 1 b provides an overview of competing paradigms of The discussion on shared growth is based on Aoki,
development and the differing roles accorded to the state. M urdoch, and Okuno-Fujiwara 1 995 and Ishikawa 1 990.
Teranishi and Kosai 1 993 provide a comprehensive review Box 3.2 is drawn from Guerrero 1 996. The discussion of
of Japanese economic policies. IMF 1 996 provides a mining in Nevada is from Libecap 1 996. The material on
review of the fiscal policy issues facing developing coun­ land tiding was provided by Klaus Deininger, with addi­
tries. A comprehensive review of the arguments for state tional information from Feder and Nishio 1 996. Berry
intervention is contained in Stiglitz 1 994. See Mueller and Levy 1 994 describe patterns of export marketing by
1 989 for an alternative approach. Box 1 . 1 is adapted from Indonesian firms. Box 3.3 builds on Stone, Levy, and
Sills 1 968, Gould and Kolb 1 964, and Kuper and Kuper Paredes 1996.
1 996. Box 1 .2 is summarized from Stiglitz 1 996. Box 1 .3 The section on the policy environment draws on
draws from a background note by Swaminathan Aiyar. World Bank 1 994a for its discussion of price distortions in
The historical section benefited from contributions by Mrican agriculture. The discussion of changes in the way
Emma Rothschild and draws as well on the background developing countries raise tax revenue is based on infor­
paper by Aron, Elbadawi, and Ndulu. Box 1 .4 is summa­ mation provided by Vinaya Swaroop. The discussion of
rized from Stiglitz 1 986. Table 1 . 1 benefited from valu­ mechanisms for establishing fiscal and monetary credibil­
able inputs from Jeffrey Hammer. ity draws on the background papers by A1esina and Ball.
The discussion on patterns of public expenditure
Chapter 2 draws on Hammer 1 997, Pradhan 1 996, and World Bank
Peter Knight contributed material for Box 2. 1 . Figure 2. 1 1 994c. The discussion of benefit incidence of public
draws on Alston 1 996. On measurement of the state see spending draws on contributions by Lionel Demery and
Gemmell 1 993 and Lindauer 1 988. The standard refer­ on van de Walle and Nead 1 995. The discussion of the
ence on purchasing power parity prices is Summers and historical role of the private sector draws on Psacharopou­
Heston 1 99 1 . The empirical work in this chapter is los and Nguyen 1 997 and van der Gaag 1 99 5 . Box 3.6 is
based on the Commander, Davoodi, and Lee background based on van der Gaag 1 995.
paper. There is an extensive literature on the factors deter­ Box 3.7 is based on Coloma 1 996 . Box 3.8 was pro­
mining government size: see, among others, Borcherding vided by Nisha Agrawal.
1 985, Buchanan 1 977, Courakis, Moura-Roque, and Tri­
dimas 1 993, Lybeck 1 986, Meltzer and Richard 1 98 1 , Chapter 4
Oxley 1 994, Peacock and Wiseman 1 96 1 , Ram 1 987, and Jean Aden, Gerard Caprio, Cheryl Gray, Luis Guasch,
Rodrik 1 996. On the effects of government size on Robert Hahn, Gordon H ughes, Pablo Spiller, and
growth and other indicators of well-being see A1esina and Andrew Stone made valuable contributions to this chap­
Perotti 1 995, Anand and Ravallion 1 993, Barro and Sala- ter. Box 4. 1 was prepared by Andrew Stone.
 B I B L I O G RAPH I CAL N OT E 1 79

The discussion of privatization and liberalization draws tributed Box 5 . 1 . Box 5 .2 is from Campos and Pradhan
heavily on Galal and others 1 994, World Bank 1 995c, 1 996. The discussion on policymaking as the brains of
and the Guasch and Hahn background paper. Lau and government draws on Israel 1 990. The discussion of pol­
Song 1 992 delineate the evolution of public-private own­ icymaking in Poland and Hungaty draws on Nunberg
ership in the Republic of Korea and Taiwan (China). forthcoming.
The frameworks for the discussion of financial, utili­ The section on service delivery draws on information
ties, and environmental regulation draw heavily from, provided by Nicholas Manning and on Israel 1 997. Box 5 .3
respectively, Caprio 1 996, Levy and Spiller 1 994, and is from World Bank 1 996b. Box 5 .4 draws from van der
Afsah, Laplante, and Wheeler 1 996. The discussion of Gaag 1 995 and Heyneman forthcoming. Box 5.5 is from
banking supervision draws heavily on Polizatto 1 992. Box van der Gaag 1 995. The study on performance contracts
4.3 is drawn from Sheng 1 992. The World Bank study on with public enterprises is World Bank 1 995c. The compar­
episodes of bank insolvency is Caprio and Klingebiel ison of the Indian and Korean irrigation systems draws
1 996. The description of price-cap regulation in the upon Wade 1 994. The section on financial and manage­
United Kingdom is based on Spiller and Vogelsang 1 996. ment controls draws on information from Gary Reid,
The information on environmental regulation in indus­ Chetana Neerchal, George Russell, and Jim Wesberry.
trial countries is from Lovei and Weiss 1 996 and Rose­ The section on building capable, motivated staff bene­
Ackerman 1 995. The shortcomings of top-down environ­ fited from extensive contributions by Barbara Nunberg.
mental regulation are examined in Margulis 1 996. The section on meritocratic recruitment and promotion
Stiglitz and Uy 1 996 probe some East Asian ap­ draws from Evans 1 995 and Campos and Root 1 996. Box
proaches to maintaining bank solvency, and Saunders and 5.6 is from Nunberg 1 995. The discussion on pay and
Wilson 1 995 synthesize some historical experiences with employment, including the study on wage decompression
contingent liability in banking in the Western world. The in Africa, draws on Lindauer and Nunberg 1 994; the anal­
discussions of telecommunications regulation in Jamaica ysis of the decline of public sector wages is derived from
and the Philippines are from Spiller and Sampson 1 996 Haque and Sahay 1 996. The study of civil service reform
and Esfahani 1 996. The discussion of Indonesia's experi­ efforts over 1 98 1-9 1 is reported in World Bank 1 9 9 1 a.
ence with environmental regulation is adapted from Box 5 .7 is from Tendler 1 997.
Afsah, Laplante, and Makarim 1 996. Box 4.5 is from
Metropolitan Environment Improvement Program 1 996. Chapter 6
The section on industrial policy builds on Aoki, Mur­ This chapter has benefited from valuable inputs, sugges­
doch, and Okuno-Fujiwara 1 995, Ohno 1 996, World tions, and comments by Ladipo Adamolekun, Robert
Bank 1 993, Levy and others 1 994, and Humphrey and Bates, Ed Campos, Maria Dakolias, Matthew McCub­
Schmitz 1 995. Box 4.6 is adapted from Okazaki 1 997. bins, Elena Panaritis, Andres Rigo Sureda, Susan Rose­
The Philippine experience with capital-intensive projects Ackerman, Kenneth Shepsle, Mike Stevens, Andrew
is summarized in World Bank 1 987. Lee's background Stone, and Douglas Webb.
paper lays out the experience with infrastructure in the The section on the judiciary is based on the Webb
Cholla region of the Republic of Korea. Tendler 1 997 background paper. The study on property rights and the
examines public procurement in Ceara State, Brazil. stability of the regime is Clague and others 1 996. Box 6. 1
was provided by Elena Panaritis. The section on corrup­
Chapter 5 tion draws on the Rose-Ackerman background paper. The
This chapter has benefited from valuable contributions, analysis of the predictability of corruption has benefited
suggestions, and comments from Ladipo Adamolekun, Ed from discussions with Ed Campos. Boxes 6.2, 6.3, and 6.4
Campos, Migara da Silva, Giulio de Tommaso, Roger were provided by Susan Rose-Ackerman, drawing on Brett
Grawe, Jeffrey Hammer, Malcolm Holmes, Arturo Israel, 1 993 and Ruzindana 1 995 (Box 6.3) and Manion 1 996
Klaus Konig, Alexander Kotchegura, Patricia Langan, and Quah 1 993 (Box 6.4) . There is a vast literature on
Nicholas Manning, Ernesto May, Julie McLaughlin, corruption, which includes Klitgaard 1 988, Mauro 1 995,
Amitabha Mukherjee, Vikram Nehru, Chetana Neerchal, Rose-Ackerman 1 978, and Shleifer and Vishny 1 993.
Barbara Nunberg, Gaty Reid, Susan Rose-Ackerman,
George Russell, Claude Salem, Salvatore Schiavo-Campo, Chapter 7
Maty Shirley, Mike Stevens, Roger Sullivan, Jim Wes­ This chapter has benefited from valuable contributions
berty, and David Wood. and comments from Junaid K. Ahmad, Dan Aronson,
The chapter draws on the Campos and Pradhan back­ Katherine Bain, Ela Bhatt, Richard Bird, Tim Campbell,
ground paper, the Schiavo-Campo, de Tommaso, and John Clark, Peter Evans, Marianne Fay, Deon Filmer,
Mukherjee background paper, and background notes by Ashraf Ghani, Jim Hicks, Michael Laver, Deepa Narayan,
Nicholas Manning and Gaty Reid. Mike Stevens con- Vikram Nehru, Samuel Paul, Lant Pritchett, Lester Sala-
1 80 WORLD DEVELO P M E NT R E P O RT 1 99 7

mon, David Sewell, Anwar Shah, Jerry Silverman, section on basic research makes use of findings reported in
Albrecht Stockmayer, and David Wildasin. Ad Hoc Committee on Health Research Relating to
The section on voice and participation draws heavily Future Intervention Options 1 996. Box 8.2 is based on
on ideas developed in Evans 1 996a and 1996b, Pardey and others 1 996. The discussion of international
Hirschman 1 970, and Montgomery 1 988. Box 7. 1 is environmental agreements is based on material supplied
based on Linz, Lipset, and Pool n.d.,Weaver and Dickens by Laurence Boisson des Chassournes; examples of global
1 995, and polls conducted by Europinion, Brussels, and environmental issues are drawn from Flavin 1 996. Box 8.3
India Today 1 996. The reference to electoral arrange­ was prepared by Carter Brandon and Charles Feinstein.
ments under parliamentary systems and women's political Box 8.5 draws on work by Landau 1 993 and Knight,
representation comes from Lijphart 1 995. The section on Loayza, and Villanueva 1 995. The discussion of refugees
diversiry and representation is based on the Brautigam and the role of the state is based on the background paper
background paper and a background note by Jalali. The
by Suhrke and Newland. Evidence on the effectiveness of
distinction among service delivery NGOs, intermediary
aid is drawn from Burnside and Dollar 1 996.
organizations, and primary associations draws on Fisher
1 993 and Carroll, Schmidt, and Bebbington 1 996. The
Chapter 9
reference to Umu-Irodo, Nigeria, comes from Francis and
This chapter benefited from written contributions by
others 1 996. Box 7.3 is based on Putnam, Leonardi, and
Dani Rodrik and Gary Reid and suggestions and com­
Nanetti 1 993 and Narayan and Pritchett 1 997. The dis­
ments from Barry Ames, Juan Cariaga, Antonio Estache,
cussion of the role of social capital in enhancing the qual­
iry of public action draws on Evans 1 996a and 1 996b . Sue Goldmark, Jorge Gorrio, Ravi Kanbur, Octavio
The discussion of participatory mechanisms is inspired Amorim Neto, Graham SCOtt, Mary Shirley, and Zafiris
by Campos and Root 1 996, Paul 1 994, Picciotto 1 995 , and Tzannatos.
Holmes and Krishna 1 996. The reference to the user assess­ The information on the decentralization program in
ment of water supply in Baku, Azerbaijan, comes from Peru is from Graham and Kane 1 996. The study on inef­
World Bank 1 995a. Box 7.4 is based on material supplied ficiency in Uruguay's water utilities is Estache, Rodriguez­
by Patricia Langan. The evidence in Box 7.5 is based on Pardina, and Smith 1 996. The study on political coali­
Narayan 1 995 and subsequent empirical work by Isham, tions in Brazil is Alesina and Rosenthal 1 995. On pension
Narayan, and Pritchett 1 995. The example from Recife, expenditure in Uruguay see Kane 1 995. Box 9.2 is based
Brazil, comes from Orstrom 1 996, and the discussion of on Lundahl 1 992. Box 9.3 is based on Lewis 1 96 1 . The
the implications for public agencies and the enabling envi­ discussion of telecommunications in Sri Lanka is based
ronment draws on World Bank 1 996c and 1 996e. on World Bank 1 996g. Box 9.4 is based on Bermeo and
The section on decentralization draws on the work of Garcia-Duran 1 994. Box 9.5 is based on Navarro 1 996.
Bennett 1 990, Campbell and Fuhr forthcoming, Oates
1 972, Scharpf 1 994, Shah 1 994, Stiglitz 1 977 and 1 996, Chapter 10
Tanzi 1 995a, Wallich 1 994, and World Bank research led The discussion o n state collapse i s based o n the Suhrke
by Hans Binswanger and Anwar Shah. Table 7.2 is based and Newland background paper. It also draws on discus­
on contributions by Jeffrey Hammer. Box 7.6 was pre­ sions with Mamadou Dia and Steven Holtzman and on
pared by Bill Dillinger and Vikram Nehru, and Box 7.7 by Tallroth 1 997. Box 1 0. 1 is based on Mubarak 1 996. Box
Anwar Shah. Table 7.4 was prepared by Anwar Shah. 1 0.2 is based on Tallroth 1 997. The discussion on the
Examples of decentralization initiatives in various coun­
regional agenda was prepared with the help of Malcolm
tries are based on Barzelay 1 99 1 , Kanter 1 995, Villadsen
Rowat, Salvatore Schiavo-Campo, and Michael Walton.
and Lubanga 1 996, and information provided by Tim
Shahrokh Fardoust, Alan Gelb, Costas Michalopoulos,
Campbell, Florence Eid, Armin Fidler, Vikram Nehru,
Marcelo Selowsky, Shekhar Shah, Roger Sullivan, and
Alcyone Saliba, Klaus Simon, and Markus Steinich.
John Williamson also provided valuable comments.
Chapter 8 Background papers
This chapter draws extensively on the framework set out
Aiyar, Swaminathan. "Evolution of the Role of the State in
by Stiglitz 1 995. The principles of voluntary cooperation
India."
are drawn from Lawrence, Bressant, and Ito 1996. The Alesina, Alberro. " Politics, Procedures, and Budget Deficits."
section on ensuring more effective cooperation draws on Aron, Janine, Ibrahim Elbadawi, and Benno Ndulu. "The State
Shihata 1 996. Hoekman 1 995 provides useful back­ and Development in Sub-Saharan Africa."
ground materials on opening world markets. Box 8 . 1 is Ball, Richard. "The Institutional Foundations of Monerary
based on Hoekman 1 995 and Financial Times 1 996. The Commitment: A Comparative Analysis."
 B I B LI O G RA P H I CA L N OT E 1 B 1

Braathen, Einar, and Harald Ekker. "The State and National Adamolekun, Ladipo. 1 99 1 . "Promoting Mrican Decentraliza­
Reconstruction: Interdependency Between Central and tion." Public Administration and Development 1 1 (3) : 285-9 1 .
Local Level." Aden, Jean. 1 996. "Industrial Pollution Abatement in the
Brautigam, Deborah. "The State and Ethnic Pluralism: Manag­ Newly Industrializing Countries: Korea." Asia Technical
ing Conflict in Mulriethnic Societies. " Department, World Bank, Washington, D.C.
Brunetti, Aymo, Gregory Kisunko, and Beatrice Weder. "Cred­ Ad Hoc Committee on Health Research Relating to Future
ibility of Rules and Economic Growth: Evidence from a Intervention Options. 1 996.Investing in Health Research and
Worldwide Survey of the Private Sector." (a) Development: Report of the Ad Hoc Committee on Health
___ . "Institutional Obstacles for Doing Business: Region­ Research Relating to Future Intervention Options. Geneva:
by-Region Results from a Worldwide Survey of the Private World Health Organization.
Sector. " (b) Msah, Shakeb, Benoit Laplante, and Nabiel Makarim. 1 996.
Campos, Ed, and Sanjay Pradhan. "Building Institutions for a "Program-based Pollution Control Management: The
More Effective Public Sector." Indonesian PROKASIH Program. " World Bank Policy
Commander, Simon, Hamid Davoodi, and Une J. Lee. "The Research Working Paper No. 1 602. Policy Research Depart­
Causes and Consequences of Government for Growth and ment, Environment, Infrastructure and Agriculture Divi­
Well-Being." sion, World Bank, Washington, D.C.
De Silva, Migara. "War, Tax Revenue and the Rise of the Mod­ Msah, Shakeb, Benoit Laplante, and David Wheeler. 1 996.
ern Public Administration in Western Europe. " "Controlling Industrial Pollution: A New Paradigm." World
Disch, Arne. "The Scandinavian 'Model': Successes and Limita­ Bank Policy Research Working Paper No. 1 672 . Policy
tions of the Activist State." Research Department, Environment, Infrastructure and
Guasch, J. Luis, and Roben W. Hahn. "The Costs and Benefits Agriculture Division, World Bank, Washington, D.C.
of Regulation: Some Implications for Developing Countries. " Alesina, Alberto, R. Hausmann, R. Hommes, and E. Stein.
Jalali, Rita. "State and Ethnicity." 1 996. "Budget Institutions and Fiscal Performance in Latin
Lee, Kyu Sik. "Cholla Region Catches Up with Korea: The Role America. " NBER Working Paper No. 5556. National
of Local Governments." Bureau of Economic Research, Cambridge, Mass.
Molander, Per. "Public Sector Spending Control: Swedish Alesina, Alberto, and Roberto Perotti. 1 995. "Fiscal Expansions
Experiences. " and Adj ustments in OECD Countries." Economic Policy: A
Ohno, Kenichi. "Creating the Market Economy: The Japanese European Forum 2 1 (October): 205-48.
View on Economic Development and Systemic Transition." ___ . 1996. "Income Distribution, Political Instabiliry, and
Rose-Ackerman, Susan. "When Is Corruption Harmful?" Investment." European Economic Review 40: 1 203-28.
Schiavo-Campo, Rino. "Civil Service and Economic Develop­ Alesina, Alberto, and Howard Rosenthal. 1995. Partisan Poli­
ment-A Selective Synthesis of International Facts and tics, Divided Government, and the Economy. Cambridge,
Experience." England: Cambridge University Press.
Schiavo-Campo, Salvatore, Giulio de Tommaso, and Amitabha Alston, Lee. 1 996. "Empirical Work in Institutional Econom­
Mukherjee. "An International Statistical Survey of Govern­ ics: An Overview." In Lee Alston, T. Eggerrsson, and Doug­
ment Employment and Wages. " lass North, eds., Empirical Studies in Institutional Change.
Suhrke, Ami, and Kathleen Newland. "States and Refugees: Cambridge, England: Cambridge University Press.
International Cooperation on Issues of Displacement." Amsden, Alice. 1 989. Asia s Next Giant: South Korea and Late
Van Rijckeghem, Caroline, and Beatrice Weder. "Corruption Industrialization. New York, N.Y.: Oxford University Press.
and Rate of Temptation: Do Low Wages in the Civil Service Anand, Sudhir, and Martin Ravallion. 1993. "Human Devel­
Cause Corruption?" opment in Poor Countries: On the Role of Private Incomes
Webb, Douglas. "The Judiciary: The Arbiter of Rules and and Public Services." Journal of Economic Perspectives 7(1):
Resolver of Disputes." 1 33-50.
WHO (World Health Organization). "Essential Public Health Andic, Fuat, and Suphan Andie. 1 996. The Last ofthe Ottoman
Functions: A New Initiative in Support of Health for All." Grandees: The Life and Political Testament ofAli Pasha. Istan­
___ . " Redefining the Scope of Public Health Beyond the bul: Istanbul's Press.
Year 2000." Aoki, Masahiko, and Ronald Dore, eds. 1 994. The Japanese
___ . "The Role of Government in Public Health Through Firm: Sources of Competitive Strength. Oxford, England:
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S E L E C T E D I N D I C AT O R S O N
P U B L I C F I N A N C E

D Goods and services expenditure includes all government

ATA ON CENTRAL GOVERNMENT REVENUE AND EX­

penditure are from IMP, various years (a) and (b), payments in exchange for goods and services, whether in
and IMP data files. The accounts of each country are the form of wages and salaries to employees or other pur­
reported using the system of common definitions and chases. Wages and salaries consists of all cash payments to
classifications in IMP 1 986. See these sources for com­ employees in return for services rendered, before taxes and
plete and authoritative explanations of concepts, defini­ pension contributions. Interest payments are payments for
tions, and data sources. the use of borrowed money to domestic sectors and non­
residents. Subsidies and other current transfers includes all
Table A.1 Central government revenue
unrequited, nonrepayable transfers on current account to
Current revenue includes tax receipts and nonrepayable private and public enterprises, and the cost of covering the
receipts (other than grants) from the sale of land, inrangi­ cash operating deficits of departmental enterprise sales to
ble assets, government stocks, or fixed capital assets, or the public. Capital expenditure is expenditure to acquire
from capital transfers from nongovernmental sources. fixed capital assets, land, intangible assets, government
Income, profit, and capital gains taxes are levied on the stocks, and nonmilitary, nonfinancial assets. Also in­
actual or presumptive net income of individuals, on enter­ cluded are capital grants.
prise profits, and on capital gains. Social security contribu­
Table A.3 Central government expenditure by function
tions includes employers' and employees' contributions
and those of self-employed and unemployed people. Central government expenditure data by function are often
Domestic goods and services taxes include general sales and incomplete, and coverage varies from country to country
turnover or value added taxes, selective excises on goods, because functional responsibilities stretch across levels of
selective taxes on services, taxes on the use of goods or government for which no data are available. Consequently,
property, and profits of fiscal monopolies. International the data presented, especially those for education and
trade taxes include import and export duties, profits of health, may not always be comparable across countries.
export or import monopolies, exchange profits, and Health covers public expenditure on hospitals, mater­
exchange taxes. Other taxes includes employers' payroll or nity and dental centers, and some clinics; on national
labor taxes, taxes on property, and taxes not allocable else­ health insurance schemes; and on family planning and pre­
where. Nontax revenue includes requited nonrepayable ventive care. Education comprises expenditure on prepri­
receipts for public purposes, such as fines, administrative mary, primary, and secondary schools; universities and
fees, or entrepreneurial income from government owner­ colleges; and vocational, technical, and other training insti­
ship of property, and voluntary, unrequited nonrepayable tutions. Social security and welfare covers compensation for
receipts other than from government sources. loss of income to the sick and temporarily disabled; pay­
ments to the elderly, the permanently disabled, and the
Table A.2 Central government expenditure by
unemployed; family, maternity, and child allowances; and
economic type
the cost of welfare services, such as care of the aged, the dis­
Government expenditure includes all nonrepayable pay­ abled, and children. Defense comprises all expenditures,
ments, whether current or capital, requited or unrequited. whether by defense or other departments, to maintain mil­
Expenditure can be measured either by economic type as itary forces. Other expenditures include general public ser­
shown here or by function as in Table A.3. vices, interest payments, and items not included elsewhere.
1 96 WORLD D EVE L O P M E NT R E P O RT 1 997

Ta ble A. I Central gove rnment revenue

Percentage of total current revenue
Tax revenue
Income, profit, Social security Domestic goods International
and capital gains contributions and services trade Other taxes Nontax revenue
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
j Low-income economies
1 Mozambique
2 Ethiopia 27.5 26.5 22.2 25.1 20.2 18.5 0.7 1.1 27.5 23.4
3 Tanzania 28.1 55. 0 9.6 1.3 4.6
4 Burundi 22.4 2.9 28.1 24.0 2.3 10.8
Malawi 35.0 32.2 1 9 .0 0.5 1 3.3
6 Chad 19.0 22.6 35.3 33.1 27.5 15.3 6.6 5.2 9.5 21.8
7 Rwanda 17. 1 14.7 64 3.5 33.6 35.2 26 1 31.4 3.3 3.8 13.0 1I.2
8 Sierra Leone 26.0 22.8 22.7 35.4 41.2 37.7 1 .2 0.3 8.8 3.8
9 Nepal 8.6 8.8 38.7 39. 1 29.2 28.0 0.2 17.2 1 9.3
10 Niger
11 Burkina Faso 1 7.8 21.5 8.2 1 7.6 35.8 5.1 2.0 1 3 .7 25.0
12 Madagascar 1 l.4 1 6.0 21.0 24.6 45.9 46.7 0.7 0.4 19.6 11.1
13 Bangladesh 9.6 25.3 32.2 1.5 29.5
14 Uganda 8.2 31.1 58.6 0.1 3. 1
15 Vietnam
16 Guinea-Bissau 9.9 2.1 15.8 33.5 8.8 36.6
17 Haiti 14.9 0.3 30.7 23.8 62 1 l.5
18 Mali 1 2.3 4.7 3 1 .8 21.5 1 1 .0 1 1 .2
19 Nigeria 50.5 6.9 12. 1 0.2 50.6
20 Yemen, Rep. 25.8 22.8 10.2 10.8 16.8 19.1 4.5 2.7 42.6 42.9
21 Cambodia
22 Kenya 28.6 28.5 39.9 47.5 20.1 1 2 .4 0.9 1 .0 1 0 .6 1 0.6
23 Mongolia 34.8 1 1 .6 24.3 13.1 0.4 1 6.0
24 Togo 33.5 6.4 1 1 .6 3 1 .2 0.2 1 3.2
25 Gambia, The 1 5.8 13.3 10.5 38.0 65.4 42.4 0.8 0.4 7.4 5.9
26 Central African Republic 16 1 64 20.8 39.8 7.4 9.1
27 India 16.0 1 9.7 37.8 32.9 26.2 23.3 0.1 0.2 1 9.5 23.8
28 Lao PDR
29 Benin
30 Nicaragua 1 3.5 1 1 .2 9.7 1 1 .8 43.8 45.1 1 3.2 1 9.4 2.1 5.3 9.5 6.6
31 Ghana 22.5 1 7.7 28.2 37.1 37.2 3 1 .2 0.1 12.1 1 4 .0
32 Zambia 33.2 33.5 4 1 .2 42.5 17.8 1 8.5 1 .2 0.1 6.4 5.1
33 Angola
34 Georgia
35 Pakistan 1 2.3 14.2 33.0 32.0 3 1 .7 26.5 0.0 22.8 26.8
36 Mauritania
37 Azerbaijan
38 Zimbabwe 44.8 44. 4 29.0 263 14.7 19.0 0.8 0.8 10.4 9.3
39 Guinea 8.6 10.4 166 25. 1 47.0 46 1 0.4 0.8 27.4 17.6
40 Honduras 24.2 25.9 42.4 1.0 5.7
41 Senegal 20.7 3.5 260 35.6 2.1 7. 1
42 China 3/.2 33.5 17.6 29.2 13.8 1 7.7 0.8 37.4 19.4
43 Cameroon 39.0 18.1 5.7 5.6 1 5. 1 1 8.4 19.7 1 6.9 2.9 3.6 1 5.0 33.4
44 Cote d'Ivoire
45 Albania 8.4 15.2 39.6 14.0 0.4 21.5
46 Congo
47 Kyrgyz Republic
48 Sri Lanka 1 3.4 1 3.2 38.5 49.6 32.6 22. 1 1 2.7 1 1.1
49 Armenia
- 1vfiddle-incoine economics
Lo\\'er-middlc-income
50 Lesotho 1 1 .3 1 5 .4 16.8 15.9 59.7 55.1 0.4 0.1 1 1 .9 1 3.4
J
51 Egypr, Arab Rep. 1 6. 5 20.6 13.1 10.5 1 1 .4 1 2.8 1 5.7 10.4 6.4 9.0 35.9 36.0
52 Bolivia 3.7 4.3 8.7 7.5 37.5 38.5 12.5 6.6 3.8 0.5 29.2 33.9
53 Macedonia, FYR
54 Moldova
55 Uzbekistan
56 Indonesia 6 1 .9 52.2 2.0 1 6.9 28.0 5.2 5.4 0.5 0.5 14.1 1 1 .5
57 Philippines 23.6 29.2 36.3 26.7 24 . 1 28.1 2.1 3.6 13.1 12.2
58 Morocco 1 9.0 22.6 4.7 3.8 39.4 39.9 17.2 18.0 3.9 1.4 1 3.5 12.0
59 Syrian Arab Republic 26.6 27.4 20.6 34.0 7.9 1 1 .5 6.1 6.0 36.7 1 9.9
60 Papua New Guinea 46.0 45.0 12.8 10.8 23.9 23.8 1.8 1.9 1 5. 5 1 8.4
61 Bulgaria 32.4 20.7 20.9 25.4 20.0 21.1 1.8 6.9 1.2 4.3 23. 7 2 1 .6
62 Kazalman
63 Guaremala 1 5.7 1 9.4 39.4 42.4 2 1 .2 20.1 7.5 3.5 1 4 .8 13.7
64 Ecuador 53.9 56.0 20.8 24.9 20.2 1 1 .6 1.1 1.0 2.5 5.5
65 Dominican Republic 1 9.4 17.1 4.1 4.1 28.4 25.1 33.7 44.2 1 .4 0.3 1 2.3 8.6
66 Romania 18.9 32.4 1 5.4 29.6 32. 6 22.7 0.5 4.0 1 1.1 2.5 68.3 8.8
67 Jamaica 34.5 4.6 38. 0 7.7 8.7 4.8
68 Jordan 12.0 1 1 .1 1 3.8 20.6 34.0 3 1 .6 5.6 5.3 30.0 26.9
69 Algeria
70 EI Salvador 20.2 22.2 39.9 49.8 25.8 17.0 0.8 0.2 8.3 7. 1
71 Ukraine
72 Paraguay 12.7 9.8 13.1 22.6 27.7 1 4 .6 14.8 12.7 1 1 .9 1 6.7 30.0
Note: Components may not add to 100 percent because of adjustments to current revenue totals by the reporting countries. Figures in italics are for years other than those
specified.
 APPEN DIX 1 97

Percentage of total current revenue

Tax revenue
Income, profit, Social security Domestic goods International
and capital gains contributions and services trade Other taxes Nontax revenue
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
73 Tunisia 1 3.7 13.6 9.0 12.3 2 1 .0 23.2 27.4 28.4 2.6 2.9 24.4 178
74 Lithuania 20.7 29.8 38.2 3.7 0.3 6.5
75 Colombia 24.6 39.3 10.3 28.2 37.2 17.0 9.7 6.2 0.7 1 4. 4 13.2
76 Namibia 34.9 26.2 21.9 26.6 29.3 33.6 0.3 0.4 12.9 12.7
77 Belarus 11.9 32.2 39.9 4.5 8.7 2. 0
78 Russian Federation 14.2 33.6 32.7 12.1 1.4 64
79 Latvia 1 1.5 34.9 40. 0 3.6 0.4 9.8
SO Peru 1 4.6 1 2.5 74 12.3 49.8 49.3 20.8 9.8 8.0 7.3 9.1 8.6
81 Costa Rica 12.3 9.8 26.2 27.7 26.0 32.2 25.5 16.1 1 .2 0.7 10.6 13.1
82 Lebanon 10.3 6.8 35.5 6.7 30.5
83 Thailand 20.3 28.4 0.2 1.1 46.5 40.7 2 1 .3 17.6 0.7 0.8 9.3 9.1
84 Panama 20.7 1 8.0 22.4 20.5 1 5.5 16.8 9.9 10.5 1 .7 1.7 25.6 31.1
85 Turkey 44.4 37.0 28.0 35.4 6.9 4.1 3.7 2.3 1 5 .6 20.1
86 Poland 25.8 276 24.0 24.7 30.0 28.0 66 8.1 6.4 1.1 5.3 10.4
87 Estonia 20.5 33.6 38.8 1 .8 0.5 4.6
88 Slovak Republic
89 Botswana 35.6 29.7 1.3 3.0 20.4 18.6 42.5 48.6
90 Venezuela 60.0 ')0.6 3.9 5.5 5 . 'i 10.4 1 2.6 9.1 I.! 1 .3 18.3 22.3
Upper-middle-in�ome
91 South Africa 'i 1 .4 50.9 1 .5 1.8 3 1 .0 34.9 4.4 2.9 1.4 1..'3 8.7 6.5
92 Croatia 10.7 36.9 38.1 8.3 0.5 5.1
93 Mexico 27.9 34.2 12.9 17.9
55.3 50.2 10.1 7.1 1 .0 2.4 1 0.7 9.0
94 Mauritius 1 2.S 12.5 4.4 5.1
19.2 23.9 49.2 4 1 .0 0.4 0.7 10.9 1 1.1

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1 7 .4
__�7.�
1� 4____ 1 .,8____,�
-
7 0.9
�__ ��� 2 9. 2____�2�.3_
9�
96 Brazil 17.4 1 6.3 24.8 30.1 2 1 .0� 19.2 2.7� 1 .9 4.5 5.2 29.5 27.2
97 Trinidad and Tobago 62.3 1 1 .0 8.0 0.6 1 7.7
98 Czech Republic 16.6 38.0 3 1 .9 3.9 1.7 7.5
99 Malaysia 34.8 34.3 0.6 1.0 17.8 22.0 20.5 14.1 1.8 3.5 24.1 24.6
1 00 Hungary 1 6.9 22.8 34.7 6.2 3.5 1 3.2
101 Chile 1 3.3 18.1 8.4 6.7 41.8 45.2 8.7 9.6 6.3 3.7 21.1 16.7
102 Oman 24.3 1 9.9 0.7 1 .0 2.5 3.2 0.5 0.7 7 1 .9 74.9
103 Uruguay 7 .4 7.3 26.1 30.1 42.2 32.4 1 1 .4 5.6 4.9 8.4 6.4 5.9
1 04 Saudi Arabia
105 Argentina 4.9 2. 6 26.4 45.9 33.1 266 13.8 79 6.0 4. 6 1 1 .9 9.1
106 Slovenia
1 07 Greece 1 8.5 29.6 3 1.7 1.1 37.8 66.5 0.9 0.1 4.7 3.9 9.7 6.4
High-income economies
1 08 Korea, Rep. 27.1 3 1 .6 2.2 6.9 40.9 33.6 14.2 6.9 2.7 6.0 1 1 .4 12.1
1 09 Portugal 2 1 .6 24.7 25.0 25.0 35.1 35.2 3.4 0.2 5.5 2.8 8.3 1 1 .8
1 10 Spain 25.6 31.2 41.5 38.2 19.9 21.5 3.3 0.6 0.3 7.9 8.1
111 New Zealand 59.7 58.2 2 1 .5 27.4 3.4 2.1 I.! 1.4 13.4 10.1
1 12 Ireland 33.9 38.6 1 3.6 14.7 3 1 .2 30.9 8.2 5.9 1 .4 1.5 10.0 6.4
113 t Israel 38.2 37.4 8.4 7.7 28.8 35.9 3.9 1 .2 3.5 3.1 1 6.7 1 3.7
114 t Kuwait 1 .7 0.6 1 .6 96.0
1 15 t United Arab Emirates 2.5 2.1 24.1 26.0 77.3 7 1 .9
1 16 United Kingdom 39.2 35.2 16.9 16.9 29.7 32.3 0.1 0.1 1.0 0.1 10.7 8.3
1 17 Australia 61. 5 63.9 22.8 20.4 4.8 3.3 0.5 1.5 10.1 10.9
1 18 Iraly 36.3 36.6 33.7 29.2 25.6 28.8 0.0 0.0 1 .4 1 .2 4.0 2.9
1 19 Canada 50.3 49.3 13.6 18.4 19.2 1 8.2 4.4 2.6 0.0 1 2.5 1 1 .4
120 Finland 30.5 29.0 9.5 1 1 .4 46.7 44.2 1.1 0.9 0.3 0.3 8.4 1 1 .6
121 t Hong Kong
1 22 Sweden 1 6.9 8.9 31.5 36.0 28.6 3 1 .6 0.6 0.8 5.1 3.0 14.5 1 5.8
1 23 Netherlands 26.0 28.7 39.0 38.5 20.6 2 1 .6 0.4 0.9 1 2.0 8.0
1 24 Belgium 37.2 33.6 33.4 35.4 23.5 24.7 0.0 0.0 0. 1 3.7 3.8
1 25 hanee 1 7.6 1 7.7 42.1 44.1 29.4 27.5 0.0 0.0 1 .2 2.0 7.7 6.8
1 26 t S ingapore 27.2 28.0 1 5.3 1 8.3 3.7 1 .7 5.4 8.9 40.1 36.5
1 27 Austria 1 9.6 19.9 36.3 37.5 26.2 24.6 1.4 1.4 6.5 6.5 8.3 8.6
1 28 United S rates 5 1 .4 50.9 32.4 34.5 4.4 3.9 1 .5 1.5 0.0 0.0 9.2 8.1
1 29 Germany 17.3 1 5. 5 53.9 47.7 22.5 25.2 0.0 6.2 6.2
1 30 Denmark 36.7 38.3 3.9 3.9 42.6 39.6 0.1 0.1 0.7 1.4 1 3.2 14.8
131 Norway 2 1 .4 16.0 22.7 24.0 37.9 36.7 0.5 0.6 0.1 0.0 16.4 2 1 .9
1 32 Japan 67.8 38.7 25.6 17.4 1 3.9 1 .7 1 .2 3.6 1 .6 5.2 1 5.4
133 Switzerland 14.9 14.7 48.7 52.6 1 9.2 16.9 8.4 6.4 6.0 6.6
t Economies classified by the United Nations or otherwise regarded by their authorities as developing. fu ofJuly 1 , 1997, Hong Kong is a paft of China.
1 98 WO R LD D EV E L O P M E NT R E PO RT 1 997

Table A.2 Central govern ment expend iture by economic type

Percentage of total expenditure
Subsidies and other
Goods and services Wages and salaries- Interest payments e..-rent transfers Capital expenditure
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
�Low-income economies
I Mozambique
2 Ethiopia 78.0 74.6 35.0 43.9 4.9 72 7.2 /4.9 20.5 /3. /
3 Tanzania 52.4 /9.0 8.9 /3. / 28. 6
4 Burundi 39. 4 25.5 /.9 6.8 45.5
5 Malawi 47.9 1 8 .2 1 7 .0 6.5 28.6
6 Chad 34. / 40.9 24.3 23.9 .
/2 2.8 2.5 2 .1 6/. 1 60.3
7 Rwanda 479 60.2 29.3 273 5.3 8.9 14. 1 7.l 32.9 3/.6
8 Sierra Leone 54.1 36.4 27.0 18.8 1 5.6 23.7 6.8 19.4 24 . 3 30.0
9 Nepal
10 Niger
11 Burkina Faso 63.8 46.0 53.0 378 5.8 8.3 12.8 //.6 1 5 .3 34.0
12 Madagascar 37.5 32.1 26. 0 20.9 /0. 8 2 1 .9 8. / 7. 1 39. 9 35.4
13 Bangladesh
14 Uganda 16.9
15 Vietnam
16 Guinea-Bissau 22.9 /3.9 6. / 4.0 62. 1
17 Haiti 70 5. 3 .4 /5. 2 /0.8
18 Mali 37.1 25.8 2.4 6.5 3.3
19 Nigeria /6.2 9.5 3/.8 /2.3 38.5
20 Yemen, Rep. 64.2 68.1 55.0 58.4 8.4 1 0.0 6.5 8.2 33. 4 13.6
21 Cambodia
22 Kenya 53.2 49.8 3 1 .4 31.1 1 5.7 26.3 14.8 8.4 16.3 1 5.4
23 Mongolia 32. 1 8.2 2.5 47.7 1 7.7
24 Togo 48.1 26.2 /2. 1 /3. 0 28.5
25 Gambia, The 49. 9 25.3 8.0 /0.4 30. 9 30.7
26 Central African Republic 670 53. 6 /.2 /6. 0 6. 0
27 India 27.2 22.8 12.3 10.0 17.1 25.6 42.6 40.1 1 3. 1 1 1 .5
28 Lao PDR
29 Benin
30 Nicaragua 59.9 47.9 1 4.6 27.9 4.0 10.7 14.6 1 9.2 17.2 22. 1
31 Ghana 55.5 47.4 32. 1 31.1 12.7 13.8 14.8 20.7 16.2 18.1
32 Zambia 47 3 37.6 26.2 19.6 9.9 1 8 .4 /9. 0 16.9 19.7 26.0
33 Angola
34 Georgia
35 Pakistan 50.0 4 5 .7 16 .9 23.7 1 8.9 1 3.7 1 4.2 16.8
36 Mauritania
37 Azerbaijan
38 Zimbabwe 48.6 55. / 30.4 38. 0 1 2.5 /5.5 30.6 /8.2 8.2 / /. /
39 Guinea 363 39. 4 /7. 2 22.0 5.8 7.2 5.8 4.4 52. / 48.9
40 Honduras
41 Senegal 52.4 36.3 7.5 /6. 9 /6.9
42 China
43 Cameroon 473 59.0 30. 0 47.8 3. 0 8. 1 / /.9 1 4.4 37.9 16.0
44 COte d'lvoire
45 Albania 26.3 //.8 76 48.4 /7.8
46 Congo 45.6
47 Kyrgyz Republic
48 Sri Lanka 26.3 34.4 14 .2 1 8.4 16.7 21.8 19.6 2 1 .6 37.4 22.2
49 Armenia
. Middle-income economies
Lower-middle-income
50 Lesotho 43.8 5/ . 8 23. 5 29.3 9.0 7.l 4.9 6. 0 42.3 33.2
51 Egypt, Arab Rep. 42.4 33.6 20.3 17.8 9.2 18.9 33.0 25.2 16. 1 22.3
52 Bolivia 62.6 58.0 4/.6 32.8 6.6 8.3 /8.9 1 3.5 //.8 20.2
53 Macedonia, FYR
54 Moldova
55 Uzbekistan
56 Indonesia 23.5 25.4 1 4.3 16.0 9.9 1 1 .3 19.6 14 . 1 47.0 48.6
57 Philippines 52.0 42.5 29.0 28.0 23. 1 29.8 6.8 9.9 18.1 1 7.8
58 Morocco 47.3 50.6 34.1 37.3 1 4.6 /7. 9 1 2.5 9. / 25.7 22.5
59 Syrian Arab Republic 30. 1 3 1 .9
60 Papua New Guinea 6 1 .9 57.0 35.2 28.7 9.5 9.2 19. 1 22.5 9.6 1 1 .3
61 Bulgaria 34.0 26.6 2.8 5 .7 6.9 24.6 54.2 46.0 4.9 2.9
62 Kazakstan
63 G uatemala 52.8 50.2 37.3 34.4 9.7 1 1 .4 14.0 1 5.5 25.6 25.6
64 Ecuador 32.0 46. 1 28.9 42.2 /78 22.7 26.5 1 1 .2 /9.2 16.7
65 Dominican Republic 47. 1 33.9 34.8 22.9 4.1 6.1 13.3 1 0.2 34.2 48.7
66 Romania 25.9 33.4 5.9 1 5.8 /.8 1.8 34.2 53.9 39.0 1 0.8
67 Jamaica 44./ /8. 4 30.7 / 0. 5 14. 1
68 Jordan 53.9 57.9 48. 9 43.4 9.0 1 2.4 1 2.4 10.5 26.0 1 9.6
69 Algeria
70 EI Salvador 6 1 .2 5 1 .3 5 1 .0 4 1 .9 8.3 13.2 14.0 17.4 1 0.6 16.8
71 Ukraine
72 Paraguay 55.9 53.7 35.3 42.4 6.2 7.0 20.9 22.5 16.9 1 6. 8
Note: Components may not add to 100 percent because of adjustments to total expenditure by the reporting countries. Figures in italics are for years other than those
specified.
 APPEN DIX 1 99

Percentage of total expenditure

Subsidies and other
Goods and senices Wages and salaries" Interest payments current transfers Capital expenditure
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
73 Tunisia 35.3 35.9 26.9 29.2 7.5 10.3 30.9 32.9 27.0 20.9
74 Lithuania 31.5 1 1 .8 0.7 55.8 1 2.2
75 Colombia 28.1 25.2 19.3 1 6.2 7.3 10.0 45.7 42.7 20.7 22. 1
76 Namibia 51.5 72.5 21.8 5.8 1.1 25.7 10.9 169 15.5
77 Belarus 364 2. 1 1.8 46.3 15.5
78 Russian Federation 39.6 13. 7 9.7 49.4 4.6
79 Latvia 368 18.6 2.4 566 4.2
80 Peru 46.0 29.7 18.5 1 5.6 21.6 19.3 1 5.8 35.7 16.6 15.3
81 Costa Rica 49.4 50.5 38.9 38.0 9.2 1 5.2 29.2 23.9 1 5.3 10.5
82 Lebanon 52.9 37.0 26.6 20.5
83 Thailand 59.9 58.4 30.8 32 . 1 1 3.8 5.5 8.0 7.5 1 8.4 28.6
84 Panama 57.3 53.0 37.6 40.1 1 5 .8 9.7 1 8.9 28.9 7.9 8.3
85 Turkey 39.9 46.3 25.3 34.5 1 1 .8 14.4 28.1 27.9 20.2 1 1 .4
86 Poland 18.2 261 14. 1 0.5 10.3 74.5 60. 1 69 3.5
87 Estonia 25. 1 7.8 0.2 72.8 7.5
88 Slovak Republic
89 Botswana 48.8 53.0 25.7 27.9 3.3 2.1 26.0 27.0 2 1 .8 1 7.9
90 Venezuela 37.4 30.9 29.5 24.4 12.4 17.4 29.8 34.7 19.2 1 5.4
Upper-middle-income
91 South Africa 49.6 47.4 21.5 31.9 1 1 .8 1 5.2 27.8 29.0 10.7 8.4
92 Croatia 57.5 21.3 3.1 33.2 6.2
93 Mexico 23.7 32.6 17.9 23.4 40.6 22.7 19.2 29.9 1 6.7 15.1
94 Mauritius 43.1 46.1 34.1 35. 1 17.7 1 1 .6 24.6 23.5 1 4.6 1 8.7
95 Gabon 35.8 23. 0 27.1 5.5 62 3.8 45.3 45.6
96 Brazil 16.5 15.1 9.4 8.7 39.7 44.5 46.7 47.3 5.5 3.2
97 Trinidad and Tobago 40.6 34.8 6.2 30.2 23.0
98 Czech Republic J 9.6 8.6 3.7 66.1 10.6
99 Malaysia 45.1 47.9 31.1 30.7 19.8 16.5 14.6 J 6.6 20.9 19.6
100 Hungary 19.6 7.0 3.6 67.9 8.9
101 Chile 30.0 28.4 19.3 1 8. 6 5.9 6.3 54.0 50.9 1 0. 1 14.4
1 02 Oman 7 1 .4 72. 1 16.5 22.4 3.9 5.2 4.7 6.5 20.0 1 6.2
1 03 Uruguay 39.9 30.3 24.9 J 5.8 6.5 5.9 46.4 57.5 7.2 6.3
1 04 Saudi Arabia
105 Argentina 28.4 29.3 19.8 22.2 1 1 .6 10.2 50.6 57.7 9.5 2.8
1 06 Slovenia
1 07 Greece 39.2 3 1 .4 24.8 22.1 1 \.1 25.8 38.6 32.3 1 1 .6 10.4
High.income economles
1 08 Korea, Rep. 39.9 31.7 14.2 13. 1 6.3 3.4 39.0 49.5 14.8 15.5
109 Portugal 3 1 .7 38.2 22.0 28. 5 16.6 1 5.8 40.0 33.4 1 0. 5 1 2.6
1 10 Spain 29.0 20.5 2 1 .6 14.9 6.6 10.2 53.5 6 1 .7 10.7 7.7
III New Zealand 25.2 43.6 16.1 10.5 1 5.2 1 3.6 54.5 39.4 5.1 3.4
112 Ireland 18.1 1 8. 5 12.8 13.2 1 7.9 1 6.0 56.9 58.1 7. 1 7.4
113 t Israel 38.4 34.3 1 1 .6 13.5 22.6 1 5.2 35.0 39.6 3.9 1 1.1
1 14 t Kuwait 46.9 41.9 24.8 19.7 24. 1 47.8 29.0 10.3
115 t United Arab Emirates 88.6 88.1 30.6 34.0 8.8 8.2 4.4 3.8
116 United Kingdom 30.6 29.8 12.8 1 0.4 10.0 7.2 54. 1 56.4 5.3 6.6
1 17 Australia 22.2 23.5 11.1 J O.O 8.3 5.5 63. 1 65.7 6.4 5.2
118 Italy 160 15.3 11.7 1 1 .7 1 7. 1 21.8 560 56.5 9.5 6.0
1 19 Canada 20.6 18.9 9.8 9.2 1 7.2 1 7. 3 60.4 60.9 1.8 1.4
1 20 Finland 20.3 17.9 10.4 7.8 3.6 6.3 67.0 71.1 9.0 4.7
121 t Hong Kong
1 22 Sweden 14.4 14.7 6.3 5.8 1 3.7 1 1.7 68.6 72.9 3.2 2.5
123 Netherlands 14.9 14.5 9. 1 8.7 7.5 9.1 69.9 71.9 7.8 4.5
1 24 Belgium 19.9 1 8.0 14.2 14.2 17.1 20.1 56.6 57.4 6.4 4.6
1 25 France 27.4 24.9 1 7. 8 16.3 4.2 6.0 63.8 64.3 4.6 4.9
1 26 t Singapore 49.2 54.1 26.3 28.2 14.7 10.2 7.4 13.0 28.6 22.7
1 27 Austria 25.9 24.9 10.2 9.7 7.3 9.5 58.0 57.7 8.8 7.9
1 28 United States 30. 1 25.3 10.5 9.3 14.3 14.6 50.6 55.7 5.1 4.4
1 29 Germany 33.7 30. 1 8.6 7.6 4.9 6.3 56.0 58.4 5.3 5.2
1 30 Denmark 20.4 19.8 12.6 1 1 .4 15.1 1 3.6 60.3 63.0 4.2 3.5
131 Norway 1 8.8 19.7 9.0 8.0 7.0 5.6 70.8 69.4 3.4 5.2
132 Japan 1 3.4 J 8.7 53.0 14.9
1 33 Switzerland 29.3 30.4 65 5.0 2.5 2.8 62. 1 62.0 62 4.8
a. Included in goods and services. tEconomies classified by the United Nations or otherwise regarded by their authorities as developing. As of July I , 1997, Hong Kong
is a parr of China.
200 WO RLD D EV E L O P M E N T R E P O RT 1 997

Ta ble A.3 Centra l government expenditure by function

Percentage of total expenditure
Social security
Health Education and welfare Defense Other
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
Low-income econ omies
1 Mozambique
2 Ethiopia 3.5 4.2 10.7 12.4 5.2 5.8 32.8 30.2 47.7 47.5
3 Tanzania 5.5 U.8 0.5 13.3 68.8
4 Burundi
5 Malawi 6.5 1 1 .9 0.8 6.4 74.3
6 Chad
7 Rwanda
8 Sierra Leone 7.8 14.8 1.9 6. 1 69.4
9 Nepal 4.6 3.8 10.8 1 2.5 0.6 5.9 5.7 78.4 78.0
10 Niger
II Burkina Faso 6.1 6.9 1 7.3 17.3 5.5 1 9. 1 14. 0 53.2 61.8
12 Madagascar 5.6 5.3 14.3 1 3.5 2.3 1 .6 7.2 5.9 73. 0 73.7
13 Bangladesh 5.1 9. 1 3.4 JO.8 71.6
14 Uganda 3.7 1 2.6 1 .5 20. 1 62.0
15 Vietnam
16 Guinea-Bissau 6.1 8.0 4.0 7.2 75.4
17 Haiti
18 Mali 2.6 1 0.0 4.2 8.3 74.8
19 Nigeria 1.7 6.1 0.3 7.5 84.5
20 Yemen, Rep. 4.1 4.4 17.4 19.7 29.5 30.3 49. 0 45.6
21 Cambodia
22 Kenya 6.4 5.6 20.6 20.3 0.1 0.1 1 0.7 7.6 62.1 66.4
23 Mongolia 2.4 3.6 22.2 1 1 .3 60.5
24 Togo 5.1 18.5 7.8 8.0 60.6
25 Gambia, The 7.4 14.8 2.5 4.3 74. 0
26 Central African Republic 5.1 17.6 6.2 9.7 61.4
27 India 2.0 1 .7 2.2 2.0 19.2 15.1 76.7 8 1 .3
28 Lao PDR
29 Benin
30 Nicaragua 1 3.3 13.4 13.7 1 5.4 8.3 1 6.3 28.5 7.6 36.2 47.3
31 Ghana 8.5 7.8 2 1 .9 23.0 6.0 7.0 5.4 4.7 58.2 57.6
32 Zambia 6.5 9.9 1 1 .6 1 2.8 1 .8 2.9 80.1 74.4
33 Angola
34 Georgia
35 Pakistan
36 Mauritania
37 Azerbaijan
38 Zimbabwe 6.8 21.5 4.5 17.1 50.1
39 Guinea
40 Honduras
41 Senegal 4.3 18.0 5.5 JO.O 62.3
42 China 0.4 0.4 2.1 2.4 0.1 0.1 15.4 16.3 82. 0 80.8
43 Cameroon 3.8 4.8 U.8 18.0 4.6 1. 0 7.5 9.4 72.3 66.8
44 Cote d'Ivoire
45 Albania 5.6 2.3 21.7 7. 1 63.3
46 Congo JO.3 4.2 88.9
47 Kyrgyz Republic
48 Sri Lanka 4.7 5.5 8.6 1 0. 2 1 0.8 1 6.9 5.4 1 1 .8 70.5 55.6
49 Armenia
'Middle-income economies
Lower-middle-income
50 Lesotho 8.9 12. 1 15.7 21.3 1. 7 1.3 7.4 6.1 66.3 59.2
51 Egypt, Arab Rep. 2.6 2.4 1 1 .2 1 2.0 1 1 .9 10.4 1 5.4 9.4 58.9 65.8
52 Bolivia 5.5 6.3 20.4 18.0 17.4 1 5.3 13.6 9.5 43.2 50.8
53 Macedonia, FYR
54 Moldova
55 Uzbekistan
56 Indonesia 2.2 2.8 9.2 9.8 5.3 9.7 6.6 78.9 79.5
57 Philippines 5.0 3.8 1 7.6 1 5. 7 1 .6 2.7 1 2.7 10.5 63.0 67.3
58 Morocco 2.9 3.0 1 7.4 1 7.8 5.8 6.1 1 4.6 14.3 59.3 58.8
59 Syrian Arab Republic 1 .4 2.3 8.8 9.0 4.2 2.0 36.3 35.2 49.3 5 1. 5
60 Papua New Guinea 9.3 8.3 1 7.4 1 6.2 0.5 0.8 4.6 3.9 68.1 70.8
61 Bulgaria 1 .7 3.2 2.8 3.7 21.8 30.7 8.8 7.0 65.0 55.4
62 Kv..kstan
63 Guatemala 7.7 10.1 14.1 1 6.8 3.5 4.4 1 4. 1 13.9 60.9 58.2
64 Ecuador 9.0 24.9 1 .4 1 2.2 52.6
65 Dominican Republic 10.1 1 1 .0 1 2.4 10.1 6.4 3.7 7.2 4.9 63.8 70.4
66 Romania 3.1 8.1 3.4 9.7 2 1 .4 27.0 7.1 8.1 65.0 47. 1
67 Jamaica
68 Jordan 4.4 6.5 1 2.4 14.8 1 1 .4 1 4.6 25.8 22.6 46. 1 4 1 .5
69 Algeria
70 El Salvador 7.5 8.0 1 6.7 1 3.4 3.3 4.5 2 1 .7 1 4.0 50.8 60. 1
71 Ukraine
72 Paraguay 4.3 6.3 1 1 .9 1 7.6 24.6 1 5.6 1 1 .9 1 2. 1 47.3 48.5
Note: Components may not add to 1 00 percent because of rounding. Figures in italics are for years other than those specified.
 APPEN DIX 20 1

Percentage of total expenditure

Social security
Health Education and welfare Defense Other
1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95 1981-90 1991-95
73 Tunisia 6.3 6.5 15.1 17.5 10.7 14. 1 7.7 5.5 60.2 56.4
74 Lithuania 6.0 6.9 35.8 2.4 48.9
75 Colombia 4.6 5.4 21.1 1 8.3 16.7 8.3 8.0 8.0 49.5 60. 1
76 Namibia
77 Belarus 2.5 17.6 36.5 4. 1 39.3
78 Russian Federation 1.6 2.7 28. 1 14.3 53.3
79 Latvia 6.4 13. 8 39. 0 3. 0 37.9
80 Peru 5.7 16.9 20.1 57.2
81 Costa Rica 25.0 26.7 1 9.6 2 1 .0 1 3.2 14.4 2.5 39.9 38.0
82 Lebanon
83 Thailand 5.7 7.6 19.7 2 1 .3 3.2 3.6 19.1 1 5 .6 52.4 5 1 .8
84 Panama 17.1 20.5 16.0 18.4 14.5 22 .4 7.2 5.2 49.4 33.5
85 Turkey 2.3 3.0 1 3.6 16.1 1 .2 3.1 12.2 10.0 70.8 67.8
86 Poland
87 Estonia 13.1 8.2 34.9 2.6 4 1 .9
88 Slovak Republic
89 Botswana 5.5 5.1 19. 1 2 1 .3 2.3 2.1 9.3 12.1 63.9 59.4
90 Venezuela 8.6 1 8.3 6.7 6.3 60.2
Upper-middle-income
91 South Africa
92 Croatia 1 5.3 6.2 32.2 18.7 27.6
93 Mexico 1 .4 3.0 1 1 .9 23.7 10.0 2 1 .0 2.2 3.8 74.5 48.6
94 Mauritius 7.9 8.8 14.5 15.5 1 5.8 1 5.9 1.1 1.5 60.7 58.3
95 Gabon
96 Brazil 7.1 5.9 3.9 3.5 26.8 30.6 3.9 2.8 58.3 57.3
97 Trinidad and Tobago
98 Czech Republic 17.2 1 1 .2 27.8 6.1 37.7
99 Malaysia 4.9 5.6 18. 7 20.4 4. 0 5.9 10.7 1 1 .7 61.8 56.3
1 00 Hungary 3.4 2.0 24.3 4.5 65.8
101 Chile 7.5 1 1 .4 13.2 13.5 37.7 33.5 1 1 .4 9.2 30.3 32.3
1 02 Oman 4.2 6.0 8.9 1 2. 1 3.0 3.6 44.4 35.4 4 1 .6 42.9
1 03 Uruguay 4.1 5.4 7.2 6.7 50.6 58.4 1 0.8 6.5 27.4 23.0
1 04 Saudi Arabia
1 05 Argentina 2.0 2.2 7.9 7.0 35.7 47.5 7.9 6.8 46.8 36. 4
1 06 Slovenia
1 07 Greece 10.5 7.7 9.6 8.2 30. 6 14.2 10.8 8.6 38.4 61.3
High-income economies
1 08 Korea, Rep. 1.7 1.1 18.9 18.8 6.9 10.0 29.0 20.0 43.5 50. 1
1 09 Portugal 8.7 9.9 24.2 6.0 5 1.3
1 10 Spain 8.2 6.2 5.9 4.4 47.0 39.0 4.9 3.7 34.0 46.7
111 New Zealand 12.8 13.5 1 1 .8 14.4 29.4 37.7 4.9 3.8 41.1 30.7
112 Ireland 13.0 14.1 1 1 .7 12.8 25.4 27.5 3.1 3.1 46.9 42.6
1 13 t Israel 3.7 5.4 8.5 12.0 17. 1 23.5 27.8 20.3 43.0 38.8
1 14 t Kuwait 6.7 4.5 1 1 .9 8.8 1 0.6 1 3.7 14.5 36.8 56.3 36. 1
1 15 t United Arab Emirates 6.8 7.1 1 1 .4 16.2 3.1 3.4 43.3 37.5 35.5 35.8
1 16 United Kingdom 1 3 .6 14.0 2.7 4.2 30.0 30.5 1 3.0 9.2 40.7 42.2
117 Australia 9.8 12.9 7.4 7.4 27.7 32.5 9.1 7.7 46.0 39.5
1 18 Italy 1 1 .0 8.2 32.8 3.4 44.6
1 19 Canada 5.8 4.9 3.3 2.8 34.7 40.6 7.8 6.5 48.5 45.1
1 20 Finland 10.7 2.9 14. 1 12.2 32.2 45.3 5.1 4.2 37.9 35.4
121 t Hong Kong
122 Sweden 1.3 0.5 9.2 7.3 46.1 50. 1 6.8 5.6 36.6 36.4
1 23 Netherlands 1 1 .2 1 3.9 1 1 .0 1 0.5 36.6 37.4 5.2 4.3 35.9 33.9
1 24 Belgium 1 .9 12.9 40.3 5.0 39.9
1 25 France 16.1 17.8 7.5 7.0 43.0 42.9 6.6 5.7 26.8 26.6
126 t Singapore 5.5 6.8 19. 1 21.0 1 .5 3.3 20.6 26.5 53.2 42.3
1 27 Austria 1 2.4 1 3.3 9.6 9.5 45.5 45.4 2.9 2.3 29.6 29.6
1 28 United States 1 1 .7 16.9 1.9 1.8 29.9 28.5 24.2 1 9.3 32.3 33.6
1 29 Germany 1 8.6 1 6.8 0.7 0.8 48.9 45. 3 8.8 6.4 23.1 30.7
1 30 Denmark 1.2 1 .0 9.4 9.8 38.7 41.1 5.4 4.5 45.2 43.6
131 Norway 9.0 3.5 7.9 6.3 35.2 36.7 8.2 7.0 39.7 46.5
1 32 Japan 1 .5 6.2 37.5 4.4 50.3
1 33 Switzerland 1 3.0 20.7 3.2 2.7 49. 1 46.0 10.4 7.1 24.3 23.4
t Economies classified by the United Nations or otherwise regarded by their authorities as developing. As of July 1, 1997 , Hong Kong is a part of China.
C O N T E N T S

Introduction to Selected World Development Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Key and Primary Data Documentation . . .. . . .. .. .. . . .. .. .. . . .. .. .. . . .. .. .. . . .. .. .. . . .. . . .. .. . 210

Tables
Summary ofsocioeconomic development indicators
Table 1 Basic indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Table 2 Macroeconomic indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
Table 3 External economic indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218

Human resources
Table 4 Population and labor force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Table 5 Distribution of income or consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Table 6 Health . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Table 7 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 226

Environmental sustainability
Table 8 Commercial energy use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Table 9 Land use and urbanization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Table 1 0 Forest and water resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

Economic performance
Table 1 1 Growth of the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Table 1 2 Structure o f the economy: production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Table 1 3 Structure o f the economy: demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
Table 14 Central government budget . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
Table 1 5 ExportS and importS of merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Table 1 6 Balance o f payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Table 1 7 External debt . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Table 1 a. Basic indicators for other economies 248

Technical notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Data so urces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

Classification of economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

I N T R O D U C T I O N T O S E L E C T E D
W O R L D D EV E L O P M E N T
I N D I C AT O R S

HESE SELECTED WORLD DEVELOPMENT INDICATORS tion? What kind of external economic environment do
provide a core set of data covering three develop­ countries face?
ment themes: people, the environment, and the economy. Tables 4 to 7, Human resources, show the rate of
The layout of the seventeen tables retains the tradition of progress in social development during the past decade.
past editions of World Development Report of presenting Data on population growth, labor force participation, and
comparative socioeconomic data covering more than 130 income distribution are included. Measures of well-being
economies for the most recent year or period for which such as malnutrition and access to health care, school
data are available and one earlier year or period. An addi­ enrollment ratios, and gender differences with respect to
tional table presents basic indicators for seventy-six adult illiteracy are also presented.
economies with sparse data or with populations less than Tables 8 to 1 0, Environmental sustainability, include
1 million. measures of human impacts on the environment-defor­
Most of the indicators presented here have been estation, changing land use patterns, freshwater with­
selected from more than 500 indicators covered in the drawals, and emissions of carbon dioxide-and of some of
new, freestanding World Development Indicators 1997. the activities that cause these impacts-energy use and
Published annually, World Development Indicators is the urbanization. Also included is information on the extent
World Bank's flagship statistical publication. It features of protected areas that preserve natural habitat and, hence,
a broader, more integrated approach to the presentation biodiversity.
of development statistics. In its five main sections it rec­ Tables 1 1 to 1 7, Economic peiformance, present infor­
ognizes the interplay of a wide range of issues: human cap­ mation on economic structure and growth, as well as on
ital development, environmental sustainability, macro­ foreign investment, external debt, and degree of integra­
economic performance, private sector development, and tion into the global economy.
the global links that influence the external environment Because the World Bank's primary business is provid­
for development. It also features, for the first time, exten­ ing lending and policy advice to low- and middle-income
sive documentation of the data to highlight potential pit­ member countries, the issues covered focus mainly on
falls in intercountry and intertemporal comparisons. these economies. Where available, information on the
World Development Indicators is complemented by a new high-income economies is also provided for comparison.
CD-ROM data base of over 1 ,000 data tables and 500 Readers may wish to refer to national statistical publica­
time-series indicators for 209 economies. tions or publications of the Organization for Economic
Cooperation and Development and the European Union
More about the Selected World Development
for more information on the high-income economies.
Indicators
Classification of economies
Tables 1 to 3 , Summary ofsocioeconomic development indi­
cators, offer an overview of key development issues: How As in the Report itself, the main criterion used to classify
rich or poor are the people? What is the life expectancy of economies and broadly distinguish stages of economic
newborns? What percentage of adults are illiterate? How development is GNP per capita. Countries are classified
has the economy performed in terms of growth and infla- into three categories according to income. The GNP per
 I NT R O D U CTI O N TO S E L E CT E D WO R LD D EV E LO P M E NT I N D I C AT O R S 207

capita cutoff levels in this edition of Selected World national currency figures are described in the Technical
Development Indicators are as follows: low-income, $765 Notes.
or less in 1 995 (forty-nine economies); middle-income,
Summary measures
$766 to $9,385 (fifty-eight economies); and high-income,
$9,386 or more (twenty-six economies) . A further divi­ Summary measures, presented in the colored bands on
sion, at GNP per capita $3,035, is made between lower­ each table, are either totals (indicated by t), weighted aver­
middle-income and upper-middle-income. Economies are ages (w) , or median values (m) calculated for groups of
further classified by region. For a list of all economies in economies. Countries for which data are not shown in the
each income group and region, including those with pop­ main tables have been implicitly included in the summary
ulations of fewer than 1 million, see the Classification of measures on the assumption that they followed the trend
Economies table at the end of the Selected World Devel­ of reporting economies during the period. The countries
opment Indicators. excluded from the main tables (those presented in Table
l a, Basic indicators for other economies) have been
Data sources and methodology
included in the summary measures when data are available
Socioeconomic data presented here are drawn from sev­ or, when not, by assuming that they follow the trend of
eral sources: primary collection by the World Bank, reporting countries. This gives a more consistent aggre­
member-country statistical publications, nongovernmen­ gate measure by standardizing country coverage for each
tal organizations such as the World Resources Institute, period shown. Where missing information accounts for a
and other international organizations such as the United third or more of the overall estimate, however, the group
Nations and its specialized agencies, the International measure is reported as not available. The method used for
Monetary Fund, and the Organization for Economic computing the summary measures in each table is stated
Cooperation and Development. (See Data Sources at the in the technical note for the table.
end of the Technical Notes for a complete listing of
Terminology and country coverage
sources.) Although international standards of coverage,
definition , and classification apply to most statistics The term "country" is not meant to imply political inde­
reported by countries and international agencies, there pendence but may refer to any territory for which author­
are inevitably differences in coverage, currentness, and ities report separate social or economic statistics.
the capabilities and resources devoted to basic data col­ Data are shown for countries or economies as they
lection and compilation. In some cases, competing were constituted in 1 995, and historical data are revised to
sources of data require review by World Bank staff to reflect current political arrangements. Throughout the
ensure that the most reliable data available are presented. tables, exceptions are noted.
Where available data are deemed too weak to provide Data for China do not include data for Taiwan, China,
reliable measures of levels and trends, or do not ade­ unless otherwise noted. As ofJuly 1 , 1 997, Hong Kong is
quately adhere to international standards, the data are a part of China.
not shown. Data are shown separately whenever possible for the
Data presented in these tables are consistent with those Czech Republic and the Slovak Republic, the countries
in World Development Indicators 1997. Differences be­ formed from the former Czechoslovakia.
tween data in each annual edition reflect not only newly Data are shown separately for Eritrea whenever possi­
received information, but also revisions to historical series ble; in most cases prior to 1 992, however, they are
and changes in methodology. Thus data of different vin­ included in the data for Ethiopia.
tages may be published in different editions. Readers are Data for Germany refer to the unified Germany unless
advised not to compare data series between publications. otherwise noted.
Consistent time-series data are available on the World Data for Jordan refer to the East Bank only unless oth­
Development Indicators 1997 CD-ROM erwise noted.
Considerable effort has been made to standardize the In 1 99 1 the Union of Soviet Socialist Republics was
data, but foll comparability cannot be ensured, and care formally dissolved into fifteen countries: Armenia, Azer­
must be taken in interpreting the indicators. For example, baijan, Belarus, Estonia, Georgia, Kazakstan, Kyrgyz
the indicators in Table 5, Distribution of income or con­ Republic, Latvia, Lithuania, Moldova, Russian Federa­
sumption, are not strictly comparable across countries, tion, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
because the underlying household surveys differ in Whenever possible, data are shown for the individual
method and in the type of data collected. countries.
All dollar figures are in current U.S. dollars unless oth­ Data for the Republic of Yemen refer to that country
erwise stated. The methods used for converting from from 1 990 onward; data for previous years refer to the
20B WO R LD D EV E LO PM E N T R E P O RT 1 997

former People's Democratic Republic of Yemen and the Technical Notes, the Key and Primary Data Documenta­
former Yemen Arab Republic, unless otherwise noted. tion table, the Classification of Economies table, and the
Whenever possible, data are shown for the individual footnotes to the tables. These describe the methods, con­
countries formed from the former Yugoslavia: Bosnia and cepts, definitions, and data sources used in compiling
Herzegovina, Croatia, the former Yugoslav Republic of the tables. For more extensive documentation see World
Macedonia, Slovenia, and the Federal Republic of Development Indicators 1997. The Data Sources section at
Yugoslavia (Serbia and Montenegro). the end of the Technical Notes lists sources that contain
more comprehensive definitions and descriptions of the
Table layout
concepts used.
The table format of this edition generally follows that of For more information about the Selected World
previous editions of World Development Report. Eco­ Development Indicators and the World Bank's other sta­
nomies are listed in ascending order of GNP per capita in tistical publications, please contact:
all tables except Table l a. High-income economies
marked by the symbol t are those classified by the United Information Center, Development Data Group
Nations, or otherwise regarded by their authorities, as The World Bank, 1 8 1 8 H Street, N.W.
developing. Economies with populations of fewer than 1 Washington, D .C. 20433
million and those with sparse data are not shown sepa­ Hotline: (800) 590- 1 906 or (202) 473-7824
rately in the main tables but are included in the aggre­
Fax: (202) 522- 1498
gates. Basic indicators for these economies may be found
E-mail: [email protected]
in Table l a. The alphabetical list in the Key and Primary
World Wide Web: http:// www.worldbank.org or
Data Documentation table shows the reference number
for each economy. http://www.worldbank.org/wdi.

Technical Notes To order World Bank publications, e-mail your re­

Because data quality and intercountry comparisons are quest to [email protected], or write to World Bank
often problematic, readers are encouraged to consult the Publications at the address above, or call (703) 66 1 - 1 580.
K E Y A N D P R I M A RY D ATA

D O C U M E N TAT I O N

HE KEY AND PRIMARY DATA DOCUMENTATION TABLE In each statistical table of the Selected World Devel­
below provides an index to the countries included opment Indicators, economies are listed in ascending
in the Selected World Development Indicators and addi­ order of GNP per capita. The ranking below by GNP
tional information on the sources, treatment, and cur­ per capita therefore indicates a country's place in the
rentness of the principal demographic, economic, and statistical tables.
environmental indicators for the 1 33 countries included Figures in the colored bands in the tables are sum­
in the main statistical tables. mary measures for groups of economies. The letter w
The World Bank is not a primary data collection means weighted average; m, median; and t, total.
agency for most areas other than living standards sur­ Except where noted in the Technical Notes, growth
veys and debt. As a major user of socioeconomic data, rates for economic data are in real terms.
however, the World B an k places particular emphasis The data cutoff date was February 1 , 1 997.
on data documentation to inform users of data in eco­ The symbol . . means not available.
nomic analysis and policymaking. Differences in the A blank space means not applicable.
methods and conventions used by the primary data The figures 0 and 0.0 mean zero or less than half the
collectors-usually national statistical agencies, central unit shown.
banks, and customs services-may give rise to signifi­ Figures in italics indicate data that are for years or
cant discrepancies over time both among and within periods other than those specified.
countries. See the 1 997 World Development Indicators The symbol t indicates high-income economies
for a more complete treatment of primary data docu­ classified by the United Nations, or regarded by their
mentation. own authorities, as developing.

Govern-
GNP per Vital Latest ment
National accounts
capita Latest Latest household regis- water Fiscal finance
ranking population or demographic tration withdrawal year base price accounting
Economy in tables census survey complete data end year valuation concept
Albania 45 1989 j 1970 Dec. 31 1993 VAP
Algeria 69 1987 PAPCHILD, 1992 1990 Dec. 31 1980 VAB
Angola 33 1970 1987 Dec. 31 1970 YAP
Argentina 105 1991 1976 Dec. 31 1986 YAP C
Armenia 49 1989 j 1989 Dec. 31 1993 VAB
Australia 117 1991 j 1985 Jun. 30 1989 YAP C
Austria 127 1991 j 1991 Dec. 31 1990 YAP C
Azerbaijan 37 1989 j 1989 Dec. 31 1987 YAP
Bangladesh 13 1991 DHS, 1994 1987 Jun. 30 1985 YAP
Belarus 77 1989 j 1989 Dec. 31 1990 VAB C
Groups of economies

=
Low-income economies
For this map, economies are classified by Income group, as they are for the tables that follow. Middle-Income economies
Low-Income economies are those with a GNP per capita of $765 or less In 1995; middle-income,
High-lncome economies
$766- $9,385; high-income, $9,386 or more. Five middle-Income economles-American Samoa (US),
FIJI, Kiribati, Tonga, and Western Samoa, one high-income economy-French Polynesia (Fr), and Tuvalu,
for which income data are not available, are not shown on the map because of space constraints • o Data not available

.-

[0

-::-.
r.� .-
•
Indon.,,,
..���
� "'"
/bJ •.
",""';;:P
 S E L E CTE D WORLD D EV E L O P M E NT I N D I C AT O R S 2 1 1

Govern­
GNPper Vital Latest ment
National accounts
capita Latest Latest household regis­ water Fiscal finance
ranking population or demographic tration withdrawal year base price accounting
Economy in tables census survey complete data end year valuation concept
Belgium 124 1991 j 1980 Dec. 31 1985 YAP C
Benin 29 1992 WFS, 1981 1994 Dec. 31 1985 YAP
Bolivia 52 1992 DHS, 1994 1987 Dec. 31 1980 YAP C
Botswana 89 1991 DHS, 1988 1992 Mar. 31 1986 YAP B
Brazil 96 1991 DHS, 1991 1990 Dec. 31 1980 VAB C
Bulgaria 61 1992 j 1988 Dec. 31 1990 YAP C
Burkina Faso 11 1985 SDA, 1995 1992 Dec. 31 1985 VAB C
Burundi 4 1990 1987 Dec. 31 1980 VAB
Cambodia 21 1962 1987 Dec. 31 1 960 YAP
Cameroon 43 1987 DHS, 1991 1987 Jun. 30 1980 YAP C
Canada 119 1991 j 1991 Mar. 31 1986 VAB C
Central African Rep. 26 1988 DHS, 1994-95 1987 Dec. 31 1 987 VAB
Chad 6 1993 1987 Dec. 31 1977 VAB C
Chile 101 1 992 1975 Dec. 31 1 986 YAP C
China 42 1 990 Population, 1995 1980 Dec. 31 1 990 VAP B
Colombia 75 1993 DHS, 1995 1987 Dec. 31 1 975 YAP C
Congo 46 1984 1987 Dec. 31 1978 YAP
Costa Rica 81 1984 CDC, 1993 j 1970 Dec. 31 1987 VAP C
Cote d'Ivoire 44 1988 DHS, 1994 1986 Dec. 31 1986 VAB C
Croatia 92 1991 j Dec. 31 1994 VAB C
Czech Republic 98 1991 CDC, 1993 j 1991 Dec. 31 1 984 YAP C
Denmark 130 1991 1990 Dec. 31 1980 VAB C
Dominican Republic 65 1993 DHS, 1991 1987 Dec. 31 1970 YAP C
Ecuador 64 1990 DHS, 1 994 1 987 Dec. 31 1975 YAP B
Egypt, Arab Rep. 51 1986 DHS, 1 995 j 1992 Jun. 30 1987 VAB C
El Salvador 70 1992 CDC, 1 994 1975 Dec. 31 1962 YAP B
Estonia 87 1989 j 1989 Dec. 31 1993 VAB C
Ethiopia 2 1994 Fam. & fen., 1990 1987 Jul. 7 1981 VAB B
Finland 120 1990 j 1991 Dec. 31 1990 VAB C
France 125 1990 Income, 1989 j 1 990 Dec. 31 1980 YAP C
Gabon 95 1993 Dec. 31 1989 YAP B
Gambia, The 25 1993 1982 Jun. 30 1976 VAB B
Georgia 34 1989 j 1989 Dec. 3 1 1 987 VAB
Germany 129 j 1991 Dec. 31 1990 YAP C
Ghana 31 1 984 DHS, 1993 1970 Dec. 31 1 975 YAP C
Greece 107 1991 j 1980 Dec. 31 1970 VAB C
Guatemala 63 1994 DHS, 1995 1970 Dec. 31 1 958 YAP B
Guinea 39 1 991 SDA, 1 991 1991 Dec. 31 1 986 YAP
Guinea-Bissau 16 1983 SDA, 1 994-95 1987 Dec. 31 1989 YAP C
Haiti 17 1982 DHS, 1994-95 1987 Sep. 30 1976 YAP
Honduras 40 1988 DHS, 1994 1992 Dec. 31 1978 VAB
t Hong Kong 121 1991 j Dec. 31 1990 VAB
Hungary 100 1990 Income, 1995 j 1991 Dec. 31 1991 VAB C
India 27 1991 Nat. fam. hlth., 1975 Mar. 31 1 980 VAB C
1992-93
Indonesia 56 1990 DHS, 1994 1987 Mar. 31 1993 YAP C
Ireland 112 1996 j 1980 Dec. 31 1985 VAB C
t Israel l l3 1983 j 1989 Dec. 31 1990 VAB C
Italy ll8 1991 j 1990 Dec. 31 1 985 YAP C
Jamaica 67 1991 LSMS, 1994 j 1975 Dec. 31 1986 YAP
Japan 132 1990 j 1990 Mar. 31 1985 YAP C
Jordan 68 1994 DHS, 1990 1975 Dec. 31 1990 VAB B
2 1 2 WO R LD D EV E LO P M E N T R E P O RT 1 997

Go vern-
GNP per Vital Latest ment
National accounts
capita Latest Latest household regis- water Fiscal finance
ranking population or demographic tration withdrawal year base price accounting
Economy in tables census survey complete data end year valuation concept
Kazakstan 62 1 989 j 1 989 Dec. 3 1 1 994 VAB
Kenya 22 1 989 DHS, 1 993 1 990 Jun. 30 1 982 VAB B
Korea, Rep. 108 1 995 1 992 Dec. 3 1 1 990 YAP C
t Kuwait 1 14 1 995 j 1 974 Jun. 30 1 984 YAP C
Kyrgyz Republic 47 1 989 LSMS, 1 994 j 1 989 Dec. 3 1 1 993 VAB
Lao PDR 28 1 985 1 987 Dec. 3 1 1 990 YAP
Latvia 79 1 989 j 1 989 Dec. 3 1 1 993 VAB C
Lebanon 82 1 970 1 975 Dec. 31 1 9 90 VAB
Lesotho 50 1 986 DHS, 1991 1 987 Mar. 3 1 1 980 VAB C
Lithuania 74 1 989 j 1 989 Dec. 3 1 1 993 VAB C
Macedonia, FYR 53 1 994 j Dec. 31 1 990 YAP
Madagascar 12 1 993 SDA, 1 993 1 984 Dec. 31 1 984 VAB C
Malawi 5 1 987 DHS, 1 992 1 994 Mar. 31 1978 VAB B
Malaysia 99 1 991 j 1 975 Dec. 31 1 978 YAP C
Mali 18 1 987 DHS, 1 987 1 987 Dec. 31 1 987 VAB
Mauritania 36 1 988 PAPCHILD, 1 990 1 985 Dec. 31 1 985 VAB
Mauritius 94 1 990 CDC, 1 991 j 1 974 Jun. 30 1 992 VAB C
Mexico 93 1 990 DHS, 1 987 1991 Dec. 3 1 1 980 YAP C
Moldova 54 1 989 j 1 989 Dec. 3 1 1 993 VAB
Mongolia 23 1 989 1 987 Dec. 3 1 1 986 VAB C
Morocco 58 1 994 DHS, 1 995 1 992 Dec. 3 1 1 980 YAP C
Mozambique 1 1 980 1 992 Dec. 3 1 1 987 VAB
Namibia 76 1 99 1 DHS, 1 992 1991 Mar. 3 1 1 990 VAB C
Nepal 9 1991 1 987 Jul. 14 1 985 VAB C
Netherlands 1 23 1 971 j 1991 Dec. 3 1 1990 YAP C
New Zealand 111 1 99 1 j 1 991 Jun. 30 1 982 YAP B
Nicaragua 30 1 995 LSMS, 1 993 1 975 Dec. 31 1 980 YAP C
Niger 10 1 988 Hsld. bgt. & cons., Dec. 31 1 987 YAP
1 993
Nigeria 19 1 99 1 Cons. expenditure, 1 987 Dec. 3 1 1 987 VAB
1 992
Notway 131 1 990 j 1 985 Dec. 3 1 1 990 YAP C
Oman 102 1 993 Child health, 1 989 1 975 Dec. 3 1 1 978 YAP B
Pakistan 35 1 981 LSMS, 1991 1 975 Jun. 30 1 981 VAB C
Panama 84 1 990 1 975 Dec. 3 1 1 992 VAB C
Papua New Guinea 60 1 990 1 987 Dec. 3 1 1 983 YAP B
Paraguay 72 1 992 CDC, 1 992 1 987 Dec. 31 1 982 YAP C
Peru 80 1 993 LSMS, 1 994 1 987 Dec. 31 1 979 YAP C
Philippines 57 1 990 DHS, 1 993 1 975 Dec. 31 1 985 YAP B
Poland 86 1 988 j 1991 Dec. 31 1 990 YAP C
Portugal 109 1991 j 1 990 Dec. 31 1 985 YAP C
Romania 66 1 992 LSMS, 1 995 j 1 994 Dec. 31 1 993 VAB C
Russian Federation 78 1 989 LSMS, 1 994 j 1991 Dec. 3 1 1 993 VAB C
Rwanda 7 1 991 DHS, 1 992 1 993 Dec. 3 1 1 985 VAB C
Saudi Arabia 104 1 992 Mat'!' & child hlth., j 1 975 Hijri year 1 970 YAP
1 993
Senegal 41 1 988 DHS, 1 992-93 1 987 Dec. 3 1 1 987 YAP
Sierra l.eone 8 1 985 SHEHEA, 1 989-90 1 987 Jun. 30 1 985 VAB B
t Singapore 1 26 1 990 j 1 975 Mar. 31 1 985 YAP C
Slovak Republic 88 1991 j 1 99 1 Dec. 31 1 993 YAP
Slovenia 106 1991 j Dec. 3 1 1 992 VAB
South Africa 91 1991 LSMS, 1 993 1 990 Mar. 3 1 1 990 VAB C
 S E LE CTED WORLD D EV E L O P M E N T I N D I CATO R S 2 1 3

Go vern-
GNP per Vital Latest ment
National accounts
capita Latest Latest household regis- water Fiscal finance
ranking population or demographic tration withdrawal year base price accounting
Economy in tables census survey complete data end year valuation concept
Spain 1 10 1 99 1 j 1991 Dec. 3 1 1 996 VAP C
Sri Lanka 48 1981 DHS, 1 993 j 1 970 Dec. 3 1 1 982 VAB C
Sweden 122 1 990 j 1 99 1 Jun. 30 1 990 VAB C
Switzerland 1 33 1 990 j 1991 Dec. 3 1 1 990 VAP C
Syrian Arab Republic 59 1 994 1 976 Dec. 3 1 1 985 VAP C
Tanzania 3 1 988 LSMS, 1 993 1 994 Jun. 30 1 992 VAB
Thailand 83 1990 DHS, 1 987 1 987 Sep. 30 1 98 8 VAP C
Togo 24 1981 DHS, 1 9 8 8 1 987 Dec. 3 1 1 978 VAP
Trinidad and
Tobago 97 1 990 DHS, 1 987 j 1 975 Dec. 3 1 1 985 VAB
Tunisia 73 1 994 1 990 Dec. 3 1 1 990 VAP C
Turkey 85 1 990 Pop. & health, 1 983 1 99 1 Dec. 3 1 1 994 VAB C
Uganda 14 1 99 1 DHS, 1 995 1 970 Jun. 30 1 99 1 VAB
Ukraine 71 1 98 9 j 1 989 Dec. 31 1 990 VAB
t United Arab
Emirates 1 15 1 980 1 980 Dec. 3 1 1 985 VAB B
United Kingdom 1 16 1991 j 1991 Dec. 3 1 1 990 VAB C
United States 1 28 1990 Current pop., 1 994 j 1 990 Sep. 30 1 985 VAP C
Uruguay 103 1 985 1 965 Dec. 3 1 1 983 VAP C
Uzbekistan 55 1 989 j 1 989 Dec. 31 1 987 VAB
Venezuela 90 1 990 LSMS, 1 993 1 970 Dec. 3 1 1 984 VAP C
Vietnam 15 1 989 Intercensal demo., 1 992 Dec. 3 1 1 989 VAP
1 995
Yemen, Rep. 20 1 994 DHS, 1 99 1-92 1 987 Dec. 3 1 1 990 VAB C
Zambia 32 1 990 SDA, 1 993 1 994 Dec. 3 1 1 977 VAP C
Zimbabwe 38 1 992 DHS, 1 994 1 98 7 Jun. 30 1 98 0 VAB C

Notes:
• Latest population census shows the most recent year in which a census was conducted.
• Latest household or demographic survey gives information on the surveys used in compiling household and demographic data.
PAPCHILD is the Pan Arab Project for Child Development; DHS is Demographic and Health Survey; WFS is World Fertility
Study; LSMS is Living Standards Measurement Study; SDA is Social Dimensions of Adjustment; CDC is Centers for Disease Con­
trol and Prevention; and SHEHEA is Survey of Household Expenditure and Household Economic Activities.
• Vital registration complete identifies countries judged to have complete registries of vital statistics (j) by the United Nations Depart­
ment of Economic and Social Information and Policy Analysis, Statistical Division, and reported in Population and Vital Statistics
Reports. Countries with complete vital statistics registries may have more accurate and more timely demographic indicators.
• Latest water withdrawal survey refers to the most recent year for which data have been compiled from a variety of sources.
• Fiscalyear end is the date of the end of the fiscal year for the central government. Fiscal years for other levels of government and the
reporting years for statistical surveys may differ, but if a countty is designated as a fiscal year reporter in the following column, the
date shown is the end of its national accounts reporting period.
• National accounts base year is the year used as the base period for constant price calculations in the countty's national accounts. Price
indexes derived from national accounts aggregates, such as the GDP deflator, express the price level relative to prices in the base year.
Constant price data reported in the World Bank are partially rebased to a common 1 9 87 base year.
• National accounts price valttation shows whether value added in the national accounts is reported at basic or producers' prices (VAB)
or at purchasers' prices (VAP). Purchasers' prices include the value of taxes levied on value added and collected from consumers and
thus tend to overstate the actual value added in production.
• Governmentfinance accounting concept describes the accounting basis for reporting central government financial data. For most coun­
tries government finance data have been consolidated (C) into one set of accounts capturing all fiscal activities of the central govern­
ment. Budgetaty central government accounts (B) exclude central government units.
2 1 4 WO R LD D EV E L O P M E N T R E P O RT 1 997

Ta ble 1 . Basic i n d i cators

PPP estimates of GNP Poverty Life
GNP per capita'
per capitab o/i of people expectancy
Population Surface area Avg. ann. living on less than at birth Adult
(millions) (thousands Dollars growth (%) US=100 Current int'l $ $1 a day (PPP) (years) illiteracy (%)
mid-1995 of sq.·km) 1995 1985-95 1987 1995 1995 1981-95 1995 1995
, Low�incomc economies 3 , 1 79.9 1 40,606 1 430 w 3.8 w 63 w 34 w
Excluding China and India 1,050.3 1 27,758 1 290 w - 1 .4 w 56 w 46 w
<,, =
1 Mozambique 16.2 802 80 3.6 2.5 3.0 8 1 0' 47 60
2 Ethiopia 56.4 1 ,097 1 00 -0.3 2.0 1.7 450 33 .8 49 65
3 Tanzaniad 29.6 945 120 1.0 2.6 2.4 640 16.4 51 32
4 Burundi 6.3 28 1 60 -1.3 3.2 2.3 630' 49 65
5 Malawi 9 .8 1 18 1 70 -0.7 3.1 2.8 750 43 44
6 Chad 6.4 1 ,284 1 80 0.6 2.5 2.6 700' 48 52
7 Rwanda 6.4 26 180 -5.4 3.8 2.0 540 45.7 46 40
8 Sierra Leone 4.2 72 1 80 -3.6 3. 2 2.2 580 40
9 Nepal 2 1 .5 141 200 2.4 4.0 4.3 1 , 1 70' 53.1 55 73
10 Niger 9.0 1 , 267 220 3.6 2.8 750' 61.5 47 86
11 Burkina Faso 10.4 274 230 -0.2 3.3 2.9 780' 49 81
12 Madagascar 1 3.7 587 230 -2.2 3.1 2.4 640 72.3 52
13 Bangladesh 1 1 9.8 144 240 2.1 4.8 5.1 1 ,380 58 62
14 Uganda 1 9.2 236 240 2.7 4.7 5.5 1 ,470' 50.0 42 38
15 Vietnam 73-5 332 240 68 6
16 Guinea-Bissau 1.1 36 250 2.0 2.8 2.9 790' 87.0 38 45
17 Haiti 7.2 28 2 50 -5.2 5.8 3.4 9 1 0' 57 55
18 Mali 9.8 1 ,240 250 0.8 2.3 2.0 550 50 69
19 Nigeria 1 1 1 .3 924 260 1.2 4.4 4.5 1 ,220 28.9 53 43
20 Yemen, Rep. 1 5. 3 528 260 53
21 Cambodia 1 0.0 181 270 53 35
22 Kenya 26.7 580 280 0.1 5.7 5.1 1 ,380 50.2 58 22
23 Mongolia 2.5 1,567 310 -3.8 1 0.6 7.2 1 ,950 65
24 Togo 4.1 57 31 0 -2.7 5.5 4.2 1 , 1 30' 56 48
25 Gambia, The 1.1 11 320 4.5 3.5 930' 46 61
26 Central African Republic 3.3 623 340 -2.4 5.0 4.0 1 ,070' 48 40
27 India 929.4 3,288 340 3.2' 4.4 5.2 1 ,400 52.5 62 48
28 Lao PDR 4.9 237 350 2.7 52 43
29 Benin 5.5 1 13 370 -0.3 6.9 6.5 1 ,760 50 63
30 Nicaragua 4.4 130 380 -5.4 1 1 .8 7.4 2,000' 43.8 68 34
31 Ghana 1 7. 1 239 390 1 .4 7.4 7.4 1 ,990' 59
32 Zambia 9.0 753 400 -0.8 4.2 3.5 930 84.6 46 22
33 Angola 1 0.8 1 ,247 410 -6.1 8.9 4.9 \,3 1 0 47
34 Georgii 5.4 70 440 -17.0 28. 1 5.5 1 ,470 73
35 Pakistan 1 29.9 796 460 1 .2 8.4 8.3 2,230 1 1 .6 60 62
36 Mauritania 2.3 1 ,026 460 0.5 6.0 5.7 1 , 540' 3 1 .4 51
37 Azerbaijanf 7.5 87 480 -1 6.3 2 1 .8 5.4 1,460 70
38 Zimbabwe 1 1 .0 391 540 -0.6 8.6 7.5 2,030 4 1 .0 57 15
39 Guinea 6.6 246 550 1 .4 26.3 44
40 Honduras 5.9 112 600 0.1 7.9 7.0 1 ,900 46.5 67 27
41 Senegal 8.5 197 600 7.3 6.6 1 ,780 54.0 50 67
42 China 1 ,200.2 9,561 620 8.3 6.3 10.8 2,920 29.4 69 19
43 Cameroon 13.3 475 650 -6.6 15.1 7.8 2, 1 1 0 57 37
44 Cote d'Ivoire 14.0 322 660 8.2 5.9 1 ,580 17.7 55 60
45 Albania 3.3 29 670 73
46 Congo 2.6 342 680 -3.2 1 1 .5 7.6 2,050 51 25
47 Kyrgyz Republicf 4.5 199 700 -6.9 1 3.6 6.7 1 ,800 1 8.9 68
48 Sri Lanka 18.1 66 700 2.6 1 0.6 12.1 3,250 4.0 72 10
49 Armenii 3.8 30 730 -15.1 25.4 8.4 2,260 71
1,Middlc-income economies 1,590.9 1 60,838 1 2,390 w -0.7 w 68 w 18 w
'
t. Lower-�idd1e-�ncom� \ , 1 57.6 1 401323 1 1,670 w ,, 1 .3 w, 67 w
,
50 Lesotho 2.0 30 770 1 .2 6.1 6.6 1,780' 50.4 61 29
51 Egypt, Arab Rep. 57.8 1 ,00\ 790 1.1 14.3 14.2 3,820 7.6 63 49
52 Bolivia 7.4 1 ,099 800 1 .8 9. 1 9.4 2,540 7.1 60 17
53 Macedonia, FYR 2. 1 26 860 73
54 Moldova f 4.3 34 920 6.8 69
55 Uzbekistanf 22.8 447 970 -3.9 12.6 8.8 2,370 70
56 Indonesia 193.3 1 ,905 980 6.0 9.8 14.1 3,800 14.5 64 16
57 Philippines 68.6 300 1 ,050 1 .5 1 0.3 1 0.6 2,850 27.5 66 5
58 Morocco 26.6 447 1 , 1 10 0.9 1 3.2 1 2.4 3,340 1.1 65 56
59 Syrian Arab Relublic 14.1 185 1 , 120 0.9 1 8.5 19.7 5,320 68
'
60 Papua New Guinea 4.3 463 1 , 1 60 2.3 8.5 9.0 2,420' 57 28
61 Bulgaria 8.4 III 1 ,330 -2.6 23.4 1 6.6 4,480 2.6 71
62 f
Kazakstan 16.6 2,7 1 7 1 ,330 -8.6 24.2 1 1 .2 3,0 1 0 69
63 Guatemala 1 0.6 109 1 ,340 0.3 1 3.2 1 2.4 3,340 53.3 66 44
64 Ecuador 1 1 .5 284 1 ,390 0.8 15.8 1 5.6 4,220 30.4 69 10
65 Dominican Republic 7.8 49 1,460 2.1 1 3 .7 14.3 3,870 19.9 71 18
66 Romania 22.7 238 1 ,480 -3.8 22.2 1 6 .2 4,360 17.7 70
67 Jamaica 2.5 11 1,510 3. 6 1 1 .3 13.1 3,540 4.7 74 15
68 Jordan 4.2 89 1,510 -4.5 23.8 1 5. 1 4,060' 2.5 70 13
69 Algeria 28.0 2,382 1 ,600 -2.4 26.5 1 9.6 5,300 1 .6 70 38
70 El Salvador 5.6 21 1,610 2.8 8.2 9.7 2,6 1 0 67 29
71 Ukrainef 5 1 .6 604 1 ,630 -9.2 20.7 8.9 2,400 69
72 Paraguay 4.8 407 1,690 1.2 1 3.3 1 3.5 3,650 68
Note: For other economies, see Table 1 a. For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CT E D W O R LD D EV E L O P M E N T I N D I C ATO R S 2 1 5

PPP estimates of GNP Poverty Life

GNP per capita"
per capitab % of people expectancy
Population Surface area Avg. ann. living on less than at birth Aduit
US= 100
(millions) (thousands Dollars growth (%1 Current int'l $ $1 a day (PPPI (years) illiteracy (%)
mid-1995 of sq. kml 1995 1985-95 1987 1995 1995 1981-95 1995 1995
73 Tunisia 9.0 1 64 1,820 1 .9 18.3 1 8.5 5,000 3.9 69 33
74 LithuaniaF 3.7 65 1,900 -1 1 .7 25.2 1 5 .3 4, 120 2.1 69
75 Colombia 36.8 1 , 139 1 ,9 1 0 2.6 20.7 22.7 6, 1 30 7.4 70 9
76 Namibia 1.5 824 2,000 2.9 1 5 .8 1 5 .4 4 , 1 50' 59
f
77 Belarus 1 0.3 208 2,070 -5.2 26.3 1 5.6 4,220 70
78 Russian Federationf 148.2 17,075 2,240 -5 . 1 30.9 16.6 4,480 1.1 65
79 Latviaf 2.5 65 2,270 -6.6 24.5 12.5 3,370 69
80 Peru 23.8 1 ,285 2,3 1 0 - 1 .6 17.9 14.0 3,770 49.4 66 11
81 Costa Rica 3.4 51 2,6 1 0 2.8 19.8 2 1 .7 5,850 1 8.9 77 5
82 Lebanon 4.0 10 2,660 68 8
83 Thailand 58.2 513 2,740 8.4 1 6.2 28.0 7,540 0. 1 69 6
84 Panama 2.6 76 2,750 -0.4 26. 1 22.2 5,980 25.6 73 9
85 Turkey 61.1 779 2,780 2.2 20.4 20.7 5,580 67 18
86 Poland 38.6 313 2,790 1 .2 2 1 .5 20.0 5,400 6.8 70
87 Estoniaf 1.5 45 2,860 -4.3 25.5 1 5 .6 4,220 6.0 70
88 Slovak Republic 5.4 49 2,950 -2.8 17.6 13.4 3,6 1 0 12.8 72
89 Botswana 1.5 582 3,020 6.1 1 5 .3 20.7 5,580 34.7 68 30
90 Venezuela 2 1 .7 912 3,020 0.5 33.0 29.3 7,900 1 1 .8 71 9
'orne
Upper-middle-inc 438.3 t . :. 20,514 t 0.2 w 69 w 14 w :..
91 South Africa 41.5 1 ,221 3, 1 60 -1.1 22.4 1 8.6 23.7 64 18
92 Croatia 4.8 57 3,250 74
93 Mexico 9 1 .8 1 ,958 3,320 0. 1 27.8 23.7 6,400 14.9 n 10
94 Mauritius 1.1 2 3,380 5.4 39.0 49.0 13,210 71 17
95 Gabon 1.1 268 3,490 -8.2 55 37
96 Brazil 1 59.2 8,5 1 2 3,640 -0.8 24.2 20.0 5,400 28.7 67 17
97 Trinidad and Tobago 1 .3 5 3,770 -1.7 38. 1 3 1 .9 8,610' 72 2
98 Czech Republic 10.3 79 3,870 - 1 .8 44.9 36.2 9,770 3.1 73
99 Malaysia 20. 1 330 3,890 5.7 22.9 33.4 9,020 5.6 71 17
1 00 Hungary 1 0.2 93 4 , 1 20 - 1 .0 28.9 23.8 6,4 1 0 0.7 70
101 Chile 14.2 757 4 , 1 60 6. 1 24.6 35.3 9,520 1 5.0 72
1 02 Oman 2.2 212 4,820 0.3 33.2 30.2 8 , 1 40' 70
1 03 Uruguay 3.2 1 77 5 , 1 70 3.1 23.6 24.6 6,630 73 3
1 04 Saudi Arabia 19.0 2 , 1 SO 7,040 - 1 .9 43.0 70 37
1 05 Argentina 34.7 2,767 8,030 1 .8 3 1 .6 30.8 8,310 73 4
106 Slovenia 2.0 20 8,200 74
1 07 Greece 1 0. 5 1 32 8,2 10 1.3 44.2 43.4 1 1 ,710 78
Low- and middle-income 4,770.8 t 1 0 1 ,444 t 1 ,090 w 0.4 w 65 w 30 �
Sub-Saharan Africa 583.3 t 24,271 t 490 w -1 . 1 w 52 w 43 w
East Asia and Pacific 1 ,706.4 t 1 6,249 t 800 w 7.2 w 68 w 17 w
South Asia 1 ,243.0 t 5, 133 t 350 w 2.9 w 61 w 51 w
Europe and Central Asia 4 87 .6 t 24,355 t 2,220 w -3.5 w 68 w
Middle East and N. Africa 272.4 t 1 1 ,021 t 1 ,780 w -0.3 w 66 w 39 w
Latin America and Caribbean 477.9 t 20,4 1 4 t 3,320 w 0.3 w 69 w 13 w
, High-income eC!J�omiJ�s 902.2 t Dt.039. t 24,930 w 1.9 w 77 IN

1 08 Korea, Rep. 44.9 99 9,700 7.7 27.3 42.4 1 1 ,450 n h

1 09 Portugal 9.9 92 9,740 3.6 4 1 .6 47.0 12,670 75
1 10 Spain 39.2 505 1 3,580 2.6 50.5 53.8 14,520 77
III New Zealand 3.6 27 1 14,340 0.8 63.3 60.6 16,360 76 h
1 12 Ireland 3.6 70 1 4 ,7 1 0 5.2 44.2 58.1 1 5 ,680 77 h
1 13 t lsrael 5.5 21 1 5 ,920 2.5 56.3 61.1 1 6,490 77
1 14 t Kuwait 1 .7 18 17,390 1.1 86.3 88.2 23,790' 76 21
115 t United Arab Emirates 2.5 84 17,400 -2.8 84.4 61.1 16,470 75 21
1 16 United Kingdom 58.5 245 1 8 ,700 1.4 72.0 7 1 .4 1 9,260 77 h
1 17 Australia 18.1 7,7 1 3 1 8 ,nO 1 .4 70. 1 70.2 1 8,940 77 h
1 18 Italy 57.2 301 1 9,020 1 .8 72.5 73.7 19,870 78 h
1 19 Canada 29.6 9,976 19,380 0.4 84.6 78.3 2 1 , 1 30 78 h
120 Finland 5.1 338 20,580 -0.2 72.9 65.8 17,760 76 h
121 t Hong Kong 6.2 1 22,990s 4.8 70.7 85.1 22,950s 79 8
122 Sweden 8.8 450 23,750 -0.1 77.7 68.7 1 8,540 79 h
1 23 Netherlands 15.5 37 24,000 1 .9 70.5 73.9 19,950 78 h
124 Belgium 10.1 31 24,7 1 0 2.2 76.3 80.3 2 1 ,660 77 h
1 25 France 58.1 552 24,990 1.5 77.6 78.0 2 1 ,030 78 h
1 26 t Singapo re 3.0 1 26,730 6.2 56. 1 84.4 22,770' 76 9
1 27 Austria 8.1 84 26,890 1 .9 75.0 78.8 2 1 ,250 77 h
1 28 United States 263 . 1 9,364 26,980 1.3 1 00.0 1 00.0 26,980 77 h
1 29 Germany 8 1 .9 357 27,5 1 0 74.4 20,070 76 h
J 30 Denmark 5.2 43 29,890 1 .5 78.7 78.7 2 1 ,230 75 h
131 Norway 4.4 324 3 1 ,250 1.7 78.6 8 1 .3 2 1 ,940 78 h
1 32 Japan 1 25 . 2 378 39,640 2.9 75.3 82.0 22, 1 10 80 h
133 Switzerland 7.0 41 40,630 0.2 105.4 95.9 25,860 78 h

World . 5,673.0 t 133,483 t 4,880 w 0.8 ", 67 w

tEconomies classified by the United Nations or otherwise regarded by their authorities as developing. a. Atlas method; see the techniLdl notes. b. Purchasing power parity;
See the technical notes. c. The estimate is based on regression; others are extrapolated from the latest International Comparison Programme benchmark estimates. d. In all
tables, GDP and GNP cover mainland Tanzania. e. GDP growth rates were revised after the statistics for this publication were finalized. f. Estimates for economies of the
former Soviet Union arc preliminary; their classification will be kept under review. g. Data refer to GOP. h. According to UNESCO, illiteracy is less than 5 percent.
2 1 6 WORLD D EV E L O PM E N T R E PO RT 1 997

Ta ble 2. Ma c roec o n o m i c i n d icators

Money and quasi money Nominal interest rates of banks Gross
Central Average Current Net present
gOY't. curr. Avg. ann. Average (average annual %) annual international value of
account
deficit/surplus" nominal outstanding Deposit Lending inflation {%I balance reserves {months external debt
{% of GDPI growth (0/.1 as a % of GDP rate rate {GDP deflatorl {% of GDPI of import coy.1 {% of GNPI
1980 1995 1985-95 1980 1995 1980 1995 1980 1995 1985-95 1980 1995 1980 1995 1995
L-- -- --- -�- ---
�'ow --;-
-
in c-
ome economies
Excluding China and India
I Mozambique 52.2 �1 8 . 1 333
�l.7b b 1 1 .5 15.1 -4. 1b �1.9 4.0b 7.0 61
2 Ethiopia 21.6 42.1
3 Tanzania �1.3 40.7 30.7 4.0 24.6 1 1 .5 42.8 32.3 �7. 1 � 1 7 . 5 0.2 1.5 148
4 Burundi 1.9 1 3.5 19.9 2.5 1 2.0 1 5.3 6.1 �0.6 8.7 50
5 Malawi 1.1 23.6 1 8.0 1 5.2 7.9 37.3 16.7 47.3 22.1 �2 1 .0 �35. 0 1 .4 1.5 65
6 Chad �0.6 20.0 1 3.7 5.5 5.5 1 1 .0 1 6.0 3. 1 1 .2 -4. 1 1.7 4.2 38
7 Rwanda 3.5 7.3 13.6 1 5. 5 6.3 5.0 13.5 15.0 10.8 --4.2 �6.5 6.7 4.7 40
8 Sierra Leone -4. 4 �3.3 5 1 .4 19.4 9.8 9.2 7.0 1 1 .0 28.8 6 1 .6 �14.2 �1O.1 0.7 2.7 1 37
9 Nepal 2 1 .9 33. 7 4.0 14.0 1 1 .6 --4.8 �8.9 8.9 4.9 26
10 Niger 5.0 1.1 1 3.3 14.2 6.2 14.5 1 .3 � 1 0.9 �8.2 1.6 2.6 53
II Burkina Faso 2.0 9.3 13.8 22.3 6.2 14.5 2.6 �2.9 0.8 1.5 7. 1 27
12 Madagascar �2.8 24.2 1 8.2 1 7.9 1 8.4 �1 3.8 �8.6 0.1 1.1 98
13 Bangladesh 14.1 1 8.4 35.6 8.3 6.0 1 1 .3 14.0 6.4 --{j.5 -3.5 1.5 4.2 32
14 Uganda -2.2 69.0 12.7 1 0. 1 6.8 7.6 10.8 20.2 65.7 �6.6 -7.6 0.1 3.8 43
15 Vietnam 88.3 �9.9 0.0 138
16 Guinea-Bissau 1 3.8 26.5 32.9 62.5 -48. 0 �16.1 2.5 235
17 Haiti �3.2 16.9 24.0 42.9 1 0.0 14.7 �6.9 -3.3 0.6 l oG 25
18 Mali �1.4 6.5 17.9 20.2 6.2 14.5 4.6 -8.0 �8, 9 0.6 4.0 73
19 Nigeria 23.8 25. 1 5.3 13.5 8.4 20.2 33.0 5.6 � 1 .9 5.8 1.5 1 32
20 Yemen, Rep. �13.4 47.0 3.0 2.5 128
21 Cambodia 7.7 8.7 1 8.7 �6.7 0.8 52
22 Kenya 2.5 �0.3 2 1 .3 29.8 37.6 5.8 1 3 .6 10.6 28.8 1 3.0 �12. 1 �4.4 2.1 1 .2 72
23 Mongolia 8.6 25.7 60. 1 1 14.9 5 1 .6 �34 .7 4.5 3.4 39
24 Togo 1.8 0.5 29.0 28.9 6.2 14.5 -8.4 �5. 8 1 .4 3.6 75
25 Gambia, The 6.7 7.4 14.4 21.1 23.1 5.0 12.5 1 5.0 25.0 9.0 �37.2 �2. 1 0.4 5.3 59
26 Central African Republic -2. 1 6.1 1 8.9 20.9 5.5 5.5 10.5 1 6.0 3.8 �5.4 �2.8 2.2 9.0 52
27 India 0.0 � 1 .6 16.8 34.7 46.0 1 6. 5 16.3 9.8 � 1 .7 �1.8 8.0 5.2 23
28 Lao PDR 1 2.7 1 4.0 25.7 22.6 �1 2.7 1 .8 43
29 Benin 10.1 1 7. 1 25. 1 6.2 14.5 �2.5 2.4 0.4 3.2 46
30 Nicaragua �I . 5 3.1 836.2 24.0 30.0 ILl 1 9.9 9 6 1 .6 �19.2 �36.9 0.9 1 .2 520
31 Ghana �2.9 �0.9 38.4 1 6.2 1 5.4 1 1 .5 28.7 1 9.0 28.6 0.7 �6. 5 3.1 4.3 61
32 Zambia �8.1 3.4 75.1 28.4 12.6 7.0 9.5 113.3 91.5 �13.3 1.2 1 39
33 Angola 1 69.5 �18, 1 260
34 Georgia 3 10.0 44
35 Pakistan 1.8 0.3 1 5.6 38.7 40.9 9.2 --4.8 �3. 8 3.1 2.1 38
36 Mauritania 7.5 20.5 1 9.3 5.5 12.0 6.9 �18.8 �2.6 3.6 1.7 166
37 Azerbaijan 9.5 162.5 �1 0.9 8
38 Zimbabwe �9.0 22.1 29.5 26.0 3.5 25.9 17.5 34. 7 20.9 �2.8 �73 2.7 65
39 Guinea 8.8 1 7. 5 21.5 �5.3 1 .0 59
40 Honduras 1 8.6 21.1 25.2 10.6 12.0 16.5 27.0 14.3 �12.3 -5. 1 1.5 1.5 101
41 Senegal 1.8 3.9 26.6 20.0 6.2 14.5 3.7 � 1 2.8 0. 1 0.2 1 .9 54
42 China 28.3 33.2 92.4 5.4 1 1 .0 5.0 12.1 9.3 2.8 0.2 10.5 6.3 16
43 Cameroon 5.8 0.2 �2.9 20.6 16.2 7.5 5.5 1 3.0 1 6.0 2.0 � 1 O. 1 �2.2 1.1 0.1 97
44 Cote d'Ivoire 3.8 2.2 26.7 26.2 6.2 1 4.5 4.0 � 1 8.0 �2.7 0.1 1 .5 185
45 Albania --4.7 47.5 15.3 19.7 27.3 �0.5 3.7 32
46 Congo 1.1 14.8 14.7 6.5 5.5 1 1 .0 1 6. 0 2.2 �9.8 �26.4 0.9 0.4 325
47 Kyrgyz Republic �9.5 15
48 Sri Lanka �4.5 �1.5 1 7.0 28.4 31.8 14.5 16.1 19.0 14.7 1 1 .8 � 1 6. 3 -4.7 1.5 4.2 44
49 Armenia 1 83 . 1 �13.6 14
""
Middle-income economies
Lower-middle-income
50 Lesotho 1.3 18.0 1 3.9 3 9 .7 28.9 9. 1 3 .3 1 1 .0 16.4 13.4 1 5.3 12.2 1 .3 5.4 26
51 Egypt, Arab Rep. 9. 0 6.5 19.0 52.2 96.8 8.3 10.9 1 3.3 1 6. 5 1 5.7 � 1 .9 �2.0 3.1 1 1 .8 56
52 Bolivia � 1 .2 43. 1 1 6.2 44.9 1 8 .0 1 8.9 28.0 5 1 .0 1 8.4 -0.2 �4. 0 6.0 6.7 67
53 Macedonia, FYR 1 .7 57
54 Moldova 1 1 .5 �2.7 2.9 16
55 Uzbekistan 0.0 7
56 Indonesia 9.6 9.9 13.2 6.0 1 7. 1 8.8 �0. 6 �3.5 2.9 3.0 54
57 Philippines 4.1 2.0 20.7 22.0 45.4 1 2.3 8.4 14.0 14.7 9.8 �5.9 �2.7 4.6 2.6 49
58 Morocco 0.5 13.1 38.5 65.2 4.9 7.0 10.0 4.8 �7.5 �4.7 1 .7 3.6 62
59 Syrian Arab Republic �3.5 7. 1 40.9 63.2 5.0 16.0 1.9 2.6 2.2 1 18
60 Papua New Guinea --{j.2 -4. 1 32.9 30.2 6.9 5. 1 1 1 .2 9.2 4.5 �1 1 .3 1 3.8 3.5 1.3 45
61 Bulgaria �4. 1 45.9 4.8 2.7 87
62 Kazakstan �2.4 2.8 22
63 Guatemala 2.1 0.8 22.7 20.5 23.5 9.0 7.9 1 1 .0 2 1 .2 18.6 �2. 1 �3.9 4.3 2.4 19
64 Ecuador 0.9 3.3 55.3 2 1 .2 26.6 43.3 9.0 55.7 45.5 �5.5 �4.6 4.1 3.4 76
65 Dominican Republic 2.9 8.3 3 1 .9 17.8 24.4 26.4 �1O.9 �I.I 1 .5 0.7 33
66 Romania 15.5 2.2 5 1 .3 33.4 19.9 68.7 �3.8 2.1 2.9 18
67 Jamaica 33.4 32.8 44.0 9.5 23.2 1 5.6 43.6 28.3 �5. 1 �5.6 0.8 2.0 1 23
68 Jordan 2.5 10.2 104.5 3.3 9.0 �9. 0 6.3 5.3 108
69 Algeria 14.8 53.3 38.8 22.9 0.6 �5.6 5.8 5.0 64
70 El Salvador �0.4 0.8 2 1 .2 28.0 36.1 14.4 19.1 14.9 0.9 �0.7 3.6 3.2 22
71 Ukraine 0.0 70.3 122.7 � 1 .4 0.7 10
72 Paraguay 3.3 3.0 36.5 19.8 26.4 2 1 .2 3 1 .0 24.9 �13.5 �19.0 6.7 27
Note: F o r data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CTED WO RLD DEVE LO P M E NT I N D I C ATO R S 2 1 7

Money and quasi money Nominal interest rates of banks Average Gross Net present
Central Current
(average annual %!
gov't. curro Avg. ann. Average annual account international value of
deficit/surplus' nominal outstanding Deposit Lending Inflation (%) balance reserves (months external debt
(% of GDP) growth (%! as a % ol GDP rate rate (GDP deflator! (% of GDP! 01 import coy.) (% of GNP!
----
-
1980 1995 1985-95 1980 1995 1980 1995 1980 1995 1985-95 1980 1995 1980 1995 1995
73 Tunisia 9.2 9.8 37.6 44.3 2 .5 7.3 6.0 -4.0 -4.1 2.0 2.1 52
74 Lithuania 0.7 22.6 8.4 27.1 -8.7 2.5 9
75 Colombia 1.5 2.B 3 1 .6 1 7. 1 19.5 32.3 42.7 25.2 -0.6 -5.4 1 2.5 5.0 27
76 Namibia OJ 38.7 IO.S I S. 5 1 0.4 1 .6 1 .3
77 Belarus 10.5 1 00.8 1 75.0 6

4.4 -4.2 14.5 50. 1 5 1 .7 5.5 13.5 9. 5 1 7.9 13.9 4.5 -2.6 3.6 I .�
92 Croatia 2.1 22.1 5.5 20.2 -9 . 5 2.5 18
93 Mexico 3.8 2.4 46. 1 25.2 30.7 20.6 39.2 28.1 36.7 - 5 .3 -0.3 1 .4 2.1 67
94 Mauritius - 1 .9 1 .9 20.3 40 .0 73.2 9.3 1 2. 2 12.2 20.8 8.8 -10.3 -0.6 1.9 4.2
__9__
5 _____.___________ 1 .2
Gabon _1 5.3
.:..:
:... ... 14.6
:..:: ..:... ::... ... 7.5
.:..: ...:.::...
.: ....
... 5....: ____
.5 1 2. 5..____
1 6 . 0 . _________
5.0 9.0 .__ 8 . 1 0.8
0.7 .:...
c:.:::.
... _.. _89 _
:... ...
_
96 Brazil 4.1 -13.3 9 9 5 . 5 I I .I 26. 1 1 1 5.0 52.2 875.3 -5.5 -2.6 2.3 7.9 23
97 Trinidad and Tobago 24.1 4.3 27.1 40.1 6.6 6.9 1 0.0 1 5. 2 6.8 5.7 5.5 1 1 .4 1.8 52
98 Czech Republic 4.0 8 1 .0 7.0 12.8 12.2 --3 . 1 6.5 36
99 Malaysia 7.1 7.3 15.5 46.1 85.0 6.2 5.9 7.8 7.6 3.3 -1.1 -5.9 4.6 3.2 39
100 HungalY .__ ...i!.. _
43. 0 3.0 26. 1 32.6
- -
1 9.9 -2.3 -5.8' __.".:...:_ 6.7
�
72
101 Chile 6.7 5.3 25.5 2 1 .0 33.9 37.7 1 3�7�i8.2 - i7-:9----- -7 . 1 0.2 5.9 8.8 41
102 Oman 7.9 -4.3 5.7 13.8 3 1 .3 6.5 9.4 -0.2 1 5. 8 -8 . 1 3.2 2.6 28
1 03 UflIguay 2.1 0.6 7 1 .3 3 1 .2 33.4 50.3 38.2 66.6 99.1 70.7 -7.0 -2.0 12.5 5.3 31
104 Saudi Arabia 5.1 U.8 50.4 2.8 26.5 --<l.5 5.0 2.7
1 05 Argentina -2.6 257.9 1 9.0 18.S 79.6 1 1 .9 17.8 255.6 -6.3 - 1 .4 7.0 6.2 31
106 Slovenia 32.5 1 5.3 24.8 -0.2 2.1 IS
lo07 cce-; �
-c
ree ___ -:.;.
0 .4 ;:c. 4.::. __ 50
_
�_,- .5
,---- 53. 0 1 4.5 15.8 2 1 .3 23. I 1 5.4 -5.5 -.:':
.2
3.:. 3 .7 7 .::.
0
-'-;_
_ -,--
_ G __ 14
-:...
,,--_ _ --'-
--;;- � _....:.:.:;,
. �_;..:. ��
Low- and middle-income
Sub-Saharan Africa
East Asia and Pacific
South Asia
Europe and Central Asia
Middle East and N. Africa
Latin America and Caribbean
High-income economies_
.::. ___ __ _ __ _ __ _ __ � _ _ __ __ _ _ _ ___ _�.�_ _ __ ___ __ _

108 Korea, Rep. 2.8 6.U 18.5 29.0 40.9 1 9.5 8.8 1 8.0 9.U 6.7 -8.3 - 1 .8 1 .3 2.)
109 Portugal -2.7 -3.4 1 5.5 70. 1 78.1 19.0 S.4 1 8.8 13.8 11.2 --3.7 -0.2 1 5 .2 6.2
1 10 Spain 0.4 --4.9 1 1 .2 75.4 78.6 1 3 . 1 7.7 16.9 1 0.0 6.3 - 2.6 0.2 6.0 3.2
III New Zealand -1.6 3.8 19.2 26.4 7 7 . 6 1 1 . 0 8.5 1 2.6 1 2.2 3.9 -4.3 -6.6 0.6 2.4
112 -5.7 1 1 .4 _� 3.:::.
. 8....5
4::.: :. ....: 0::.:
...: :.
1 ."
1... 2
:.0
"'_ _0.4
'_" _ 1 6.0 6.6 2.5 - 1 0.6 2.3 2.7 2.0
. -
- ---
Ireland -l.B
1 13 - 16.9 20.2 1 7. 1 -3.9 -6.0 3.6 -"2 5 -
t lsrael -2.4 22.1 1 4.8 67.3 14.1 1 76.9
1 14 t Kuwait 70.5 3.2 33. 1 77.7 9.2 6.5 9.2 8.4 -0.5 53.4 1 5 .8 6.2 4. 1
l iS t United Arab Emirates -1 1 . 0 -B.B 4.6 19.0 54.0
9.5 12.1
1 16 United Kingdom - \ .2 -3.4 14.1 4.1 1 6. 2 6.7 5.1 1 .3 -0.4 2.0 1.3
1 17 0.6 -..c.9�
lc: . 9-
I .:.
I =-- .4-
3-::-
6__= 6 1 __=
. 3- 8.6 _.... ... 1 ::.c
0....:. .::..
6_.... ..:.. _ 3:.:..
.7__ _- 2.8 -5.5 2.5 1.9
-=-- .. -= _; _c_ .:...
...:.. .... :... ... _.:::.
Aumalia
_:_ 6.4 1 9.0 1 2.5 6.0 -2.3 2.4 6.4 2.4
1 18 Italy -6.4 -8.4 70.9 62.5 12.7
119 Canada -2.4 8.9 45.1 59.3 1 2.9 7.1 14.3 8.6 2.9 -0.6 -1.5 2.3 0.8
1 20 Finland 2.0 -9.0 6.6 39.8 56.7 9.0 3.2 9.8 7.7 3.8 -2.7 4.5 1 .6 2.9
In t Hong Kong 60.7 8.7 -4.4
1 5--c
. 2_ -c
6..= .2c- I l . l 5.5 --3.4 2.0 2.0 3.1
1 22 Swede:.c
n ___ -:. =-.5
2.: ...
__.... _.... .9. _
5.: .:...
-:.. -c-c_.
.. ---cc -c _ .:...
I :.
I :..:
. 3._
. -=- - -'c -
-- --ccO""O"--
:..-
., - " ---c -
1 23 Netherlands
-
1.2 -2.3 5.6 67.3 82.0 6.0 4.4 13.5 7.i"" - 4-
-"""""T:? ---�-. 1--4.4 -2.5 - - --
1 24 Belgium -2.9 -2. 6 13.0 45.0 80.2 7.7 4.0 1B.0 8.4 3.2
1 25 France 2.2 -3.8 3.7 7 1 .6 64.4 7.3 4.5 1 2.5 8.1 2.8 -0.6 1.1 5.2 1.5
1 26 t Si ngapore 9.8 1 5.0 14.3 57.7 82.6 9.4 3.5 1 1 .7 6.4 3.9 -13 . .> I S.O 3.0 5.7
1 27 0.6 7.0 72.6 89.5 5.0 2.2 3.2 - -5.0 -2.2 6.4 2.5
._ _ .._---
Austria -1.5 -- -------_

1 28 United States -0.5 -1 .4 3.9 60.4 59.4 13.1' 5.9c 1 5 .3 8.8 3.2 0.1 -2. 1 6.2 2.0
1 29 Germany -0.2 8.1 62.0 7.9 3.9 1 2.0 1 0.9 -0.9 5.3 2.1
1 30 Denmark -1.2 -\.2 4.4 42.6 57.8 10.8 3.9 1 7.2 10.3 2.8 -3.3 0.8 1 . ')
1.5
131 Norway 4.0 1.0 5.9 47.1 55.6 5.0 5.0 1 2.6 7.8 3.0 i.7 3.0 3.0 5.5
132 Japan --3.2 5.9 83.4 1 1 2.7 5.5 0.7 8.3 3.4 1 .4 - 1 .0
2.2 2.8 4.1
3::.:
_ =: .4 ::.c
..:...
2 7
;:.2
=
, - --' 3.. ....:...;.
1 3.;. 7� .1· ��� .......,
1 33 Switzerland 0.8 -3.4 4.6 107.4 1 26.3 8.8 1 .3 5. 6 5.5
-- :... ... --'
�
-0
_...: -- "' -
- World
a . Refers t o current budget balance excluding grants. b. Includes Eritrea. c. Certificate of deposit rate.
2 1 8 WORLD D EVE L O P M E N T R E P O RT 1 997

Table 3 . External economic i n d icators

Net barter Aggregate net Net private
tenns of trade Trade resource flows capital flows Aid
(1987=1001 (% of GDPI (% of GNP1 (millions $1 (% of GNPI
1985 1995 1980 1995 1980 1995 1980 1995 1980 1994
Low-income economies 111 m 91 Tn 3.4 w 5.9 w 7,368 , 53,446 , 1 .9 w 4.3 "
Excluding China and India 1 12 m 91 Tn 6.3 w 7.3 w 4 .769 , 5.5 1 7 , 4.1 w 12.6 " I
1 Mozambique 1 13 124 61 1 02 3.9 76.8 0 67 8.4 1 0 1 .0
2 E'hiopia 1 1 9' 74 27' 39 8.3' 12.0 26' -42 4.7' 22.7
3 Tanzania 126 83 37 96 164 1 8. 1 100 1 37 12.4 29.9
4 Burundi 1 33 52 32 43 8.1 24.5 -3 1 1 2.8 3 1 .6
5 Malawi 99 87 64 69 1 5.7 22.4 30 -14 1 2 .6 38.0
6 Chad 99 1 03 65 46 3 .3 16.2 0 7 4.9 23.9
7 Rwanda 1 36 75 41 32 9.3 53.8 14 1 1 3.4 95.9
8 Sierra Leone 109 89 62 40 5.2 22.7 -7 -28 8.0 36.0
9 Nepal 98 85 30 60 6.5 6.4 0 -2 8.3 1 0.9
10 Niger 91 101 63 30 1 2 .9 8.6 J 99 -23 6.8 25.0
11 Burkina Faso 1 03 103 43 45 8.4 1 3.9 4 0 12.5 23.7
12 Madagascar 124 82 43 54 8.7 8.4 131 4 5.8 10.2
13 Bangladesh 126 94 24 37 1 3 .0 3.5 J1 10 9.9 6.8
14 Uganda 1 49 58 45 33 8.9 10.1 44 1 12 9.0 19.2
15 Vietnam 83 4.4 0 1,487 5.9
16 Guinea-Bissau 91 92 52 48 108.0 26.4 18 1 56.6 74.3
17 Haiti 89 52 52 17 5.2 28.0 20 2 7.3 37.3
18 Mali 100 1 03 51 38 12.1 1 3.9 10 1 16.6 24.5
19 Nigeria 167 86 48 81 0.9 0.8 694 453 0.0 0.6
20 Yemen. Rep. 131 84 88 3.6 97 -2 4.6
21 Cambodia 36 1 5. 1 0 164 14.3
22 Kenya 124 98 67 72 8.8 5.6 301 -42 5.6 9.7
23 Mongolia 58 0. 0 16.0 0 -4 0.0 27.6
24 Togo 1 39 90 107 65 12.7 1 1 .3 83 0 8.3 13.8
25 Gambia. The 137 111 1 19 1 03 35.0 9.0 21 10 24.4 19.8
26 Central African Republic 1 09 91 69 46 1 0.7 12.5 4 3 13.9 19.4
27 India 92 150 17 27 1 .4 1.0 868 3,592 1.3 0.8
28 Lao PDR 53 16. 1 0 88 14.2
29 Benin III 110 66 64 7.2 1 0.7 4 1 6.4 17.4
30 Nicaragua III 95 68 76 1 3 .8 33.3 -26 -7 1 0.9 46.1
31 Ghana 93 64 18 59 4.1 17.4 -26 525 4.3 8.5
32 Zambia 89 85 87 71 14.6 12.5 175 30 8.9 20.7
33 Angola 1 53 86 132 2 1 .3 38 523 1 1 .0
34 Georgia 46 66.2 0 0 7.5
35 Pakistan 112 1 14 37 36 5.4 4.1 230 1,443 5.1 3.1
36 Mauritania 110 1 06 104 1 04 29.4 17.8 27 3 26.2 27.7
37 Azerbaijan 66 7.9 0 1 10 3.8
38 Zimbabwe 100 84 64 74 4.2 7.2 23 99 3.1 1 0.2
39 Guinea 120 91 46 9. 1 80 20 1 1 .0
40 Honduras 118 77 80 80 1 1 .7 6.5 1 37 65 4.2 9.5
41 Senegal 1 07 107 72 69 9.0 8.4 18 24 9.0 17.2
42 China 109 1 05 J3 40 1.0 7.9 1,732 44.339 0.0 0.6
43 Cameroon 113 79 54 46 1 0.9 2.8 409 49 4.4 1 0.0
44 Core d'Ivoire 109 81 76 76 1 1 .8 7.9 936 36 2.2 24.8
45 Albania 52 9.2 0 70 9. 1
46 Congo 1 50 93 120 1 28 35.5 1.1 440 -49 6.0 24.9
47 Kyrgyz Republic 58 6. J 0 15 5.5
48 Sri Lanka 106 88 87 83 1 0.6 6.0 129 140 9.8 5.1
49 Armenia 85 7.2 0 8 9.8
Middle-income economies !14 m 2.8 w 4.1 w 44,334 , 1 30,742 , 0.6 w l .O w
Lower-middle-income 1 .3 w l .4 w
50 Leso,ho 143 1 38 10.5 8.4 7 32 1 4.9 8.9
51 Egyp" Arab Rep. 147 95 73 54 14.2 1 .9 1,133 294 6.5 6.4
52 Bolivia 130 67 38 47 14.1 12.9 203 191 5.9 1 0.9
53 Macedonia, FYR 86 3.0 0 0
54 Moldova 78 4.9 0 79 1 .5
55 Uzbekistan 125 2.3 0 235 0.1
56 Indonesia 145 79 53 53 2.5 6.8 987 1 1 ,648 1.3 1 .0
57 Philippines 99 114 52 80 3.9 5.2 840 4,605 0.9 1.6
58 Morocco 99 90 45 62 8.6 2.9 73 1 572 4.9 2.2
59 Syrian Arab Republic 1 38 78 54 19.7 1.9 42 43 [ 3.0 5.3
60 Papua New Guinea 94 90 97 106 16.8 1 0.8 106 578 13.1 6.4
61 Bulgaria 95 1 06 66 94 1 .7 3.7 339 489 0.0 1 .6
62 Kazaks'an 69 4.7 0 500 0.2
63 Guatemala 114 93 47 47 2.8 1.7 91 85 0.9 1.7
64 Ecuador 143 71 51 56 7.4 4.8 594 561 0.4 1 .4
65 Dominican Republic 115 123 48 55 7.1 1.5 1 50 237 1.9 0.7
66 Romania 66 111 75 60 4.4 1,360 687 0.5
67 Jamaica 89 1 05 1 02 145 12.3 5.5 9 188 5.1 2.9
68 Jordan 127 128 121 35.0 8.4 28 -143 6.5
69 Algeria 173 83 65 57 3.1 2.6 897 129 0.4 1 .0
70 El Salvador 122 89 67 55 3.2 1.6 -17 8 2.8 3.9
71 Ukraine 0.9 0 247 0.3
72 Paraguay 110 101 44 82 3.6 4.3 121 174 0.7 1 .3
Note: For da,a comparability and coverage, see ,he ,echnical no'es. Figures in i'alics are for years o,her rhan rhose specified.
 SELECTED WORLD D EV E L O P M E NT I N D I C ATO R S 2 1 9

Net barter Aggregate net Net private

terms of trade Trade resource flows capital flows Aid
(1987=100) (% of GDP) (% of GNP) (millions $) (% of GNP)
1985 1995 1980 1995 1980 1995 1980 1995 1980 1994
73 Tunisia 1 23 91 86 93 7.2 5.7 337 751 2.7 0.7
74 Lithuania 1 08 3.6 o 194 1.1
75 Colombia 1 24 80 32 35 2.9 2.7 688 3,74 1 0.3 0.2
76 Namibia 142 1 10 0.0 4.7
77 Belarus 1 .4 0 103 0.5
78 Russian Federation 44 0.5 2,8 17 1,116 0.6
79 Latvia 91 2.2 0 224 0.9
80 Peru III 83 42 30 1.8 6.4 -67 3,532 1.0 0.8
81 Costa Rica III 92 63 81 9.2 1 .6 248 384 1.4 0.9
82 Lebanon 105 95 70 1 1 .3 70 1 , 1 53 2.5
83 Thailand 1 03 1 00 54 90 6.5 6.1 1,465 9,143 1.3 0.4
84 Panama 104 86 79 4. 1 10.1 65 228 1 .3 0.6
85 Turkey 82 109 17 45 3.0 0.8 660 2,000 1 .4 0.1
86 Poland 95 109 59 53 5.5 5.6 2,265 5,058 0.0 2.0
87 Estonia 1 60 6.5 0 207 1.1
88 Slovak Republic 98 86 124 4.3 0 653 0.6
89 Botswana 97 152 116 101 20.3 2.3 1 15 64 1 1 .8 2.2
90 Venezuela 166 82 51 49 2.6 0.0 1,825 848 0.0 0.1
· · ·· ·
e·- ···" ¥-·· �
Le r-m iddl e-in oo· � 1 10 m m
_U�pP
_ _ _ __ __ _ _ __
L
_ __
_ ____ __
__�� �=- __� ��__
9
5 __
__ __�__
__ ____�__� ��__� �=-
____ � __
__� �� �
0. l w
���� o.r �J
91 �
South Africa 101 11I 64 44 0.2
92 Croatia 93 1.9 o 346
93 Mexico 145 92 24 48 4.8 8.7 8,181 13,068 0.0 0.1
94 Mauritius 77 1 03 1 13 1 20 8.4 7.9 48 304 3.0 0.4
95 Gabon 1 54 90 96 101 - 1 .9 9.6 -93 -125 1.4 5.6
96 Brazil 101 101 20 15 2.9 2.6 5,656 19,097 0.0 0.1
97 Trinidad and Tobago 138 86 89 68 6.3 6.4 258 271 0.1 0.5
98 Czech Republic 98 86 1 08 0.0 9.2 o 5,596 0.0 0.4
99 Malaysia 1 14 92 113 194 8.7 14.7 1,913 1 1 ,924 0.6 0.1
100 Hungary 1 03 97 80 67 3.3 1 7.4 596 7,841 0.0 0.5
101 Chile 91 94 50 54 8.7 4.7 2,447 4,230 0.0 0.3
1 02 Oman 1 82 77 1 00 89 3.3 1.3 33 1 26 3.1 1.0
1 03 Uruguay 91 1 12 36 41 5.3 1.8 479 217 0.1 0.5
1 04 Saudi Arabia 175 92 1 01 70 0.0 0.0
105 Argentina 1 23 120 12 16 4.6 4.1 3,475 7,204 0.0 0.1
106 Slovenia 113 4.0 o 838
107 Greece 96 111 47 57 0.1 0.0
Low- and middle-income 111 m 93 m 2.9 w 4.5 W 5 1 ,702 t 184,188 t 1 .0 w 3.3 W;
Sub-Saharan Africa 1 10 m 91 m 5.5 W 8.3 w 7,906 t 9,128 t 3.4 w 1 6.3
East Asia and Pacific 2.9 w 7.8 W 7,135 t 84,137 t 0.7 w 1 . 1 WI
South Asia 1 09 m 94 m 3.0 w 1 .6 w 1 ,238 t 5,191 t 2.4 w 1 .9 "1
Europe and Central Asia 1 .7 w 3.8 w 26,164 t 30,059 t 0.4 w
Middle East and N. Africa 147 m 92 m 1 .9 w 0.4 w - 1 ,040 t 1,414 t 1.1 w O:� "1
Latin America and Caribbean 111 m 94 m 4.2 w 4.3 w 24,590 t 54,261 t 0.3 w J
1 .7 ,
, High-income economies 96 m 97 m
108 Korea, Rep. 94 102 74 67 0.2 0.0
109 Portugal 117 92 61 66
110 Spain 82 114 34 47
11 1 New Zealand 90 108 62 62
1 12 Ireland 96 90 108 136
1 13 t Israel 99 1 09 91 69 4.1 1.6
1 14 t Kuwait 1 65 88 113 1 04 0.0 0.0
1 15 t Uni ted Arab Emirates 181 93 1 12 139 0.0 0.0
116 United Kingdom 1 04 1 02 52 57
117 Australia 110 101 34 40
118 Italy 84 107 47 49
119 Canada 99 1 00 55 71
1 20 Finland 88 95 67 68
121 t Hong Kong 118 87 181 297 0.0 0,0
122 Sweden 92 102 61 77
123 Netherlands 101 1 03 1 03 99
1 24 Belgium 96b 101b 128 143
125 France 89 1 06 44 43
1 26 t Singapore 108 89 423 0. 1 0.0
127 Austria 92 87 76 77
128 United States 101 1 02 21 24
1 29 Germany 84' 96 46
1 30 Denmark 91 100 66 64
131 Norway 142 95 81 71
132 Japan 73 127 28 17
133 Switzerland 85 60 77 68

World

a, Includes Eritrea. b, Includes Luxembourg, c, Data refer to the Federal Republic of Germany before unification,
220 WO R LD D EV E L O P M E N T R E P O RT 1 997

Table 4 . Population a n d labor force

Population Labor force
Total Ayg. annual Aged 15-64 Tolal' Avg. annual
(millions) growth rate (%) Imillions) (millions) growth rate 1%) Female (%) AgricuHure (%) Indusby (%)
1980 1995 1980-90 1990-95 1980 1995 1980 1995 1980-90 1990-95 1980 1995 1980 1990 1980 1990
Low-income economies 2,378 1 3,180 1 2.0 w 1 .7 w 1,351 1 1 ,934 1 1 , 1 56 < 1 ,575 1 2.2 w 1 .7 w 40 w 41 w 73 w 69 w 13 w 15",
Excluding China and India 709 1 1 ,050 1 2.7 w 2.4 w 371 1 563 1 317 1 467 1 2.6 w 2.5 w 40 w 41 w 72 w 67 w lO w 12 \:V
I Mozambique 12 16 1.6 2.6 6 9 7 8 1.2 2.4 49 48 84 83 7
Elhiopia 38 56 3.1 1.9 19 28 17 25 2.9 2.3 42 41 86 80
Tanzania 19 30 3.2 3.0 9 15 10 15 3.2 2.9 50 49 86 84
Burundi 4 6 2.8 2.6 2.6 2.7 50 49 93 92
Malawi 6 10 3.3 2.7 3.0 2.5 51 49 88 95
6 Chad 6 2.4 2.5 3 2.1 2.5 43 44 88 81
7 Rwanda 6 3.0 -1.7 4 3.2 2.0 49 49 93 92 3
Sierra Leone 3 2.1 1 .0 2 I 2 1.8 2.0 36 36 70 67 14 15
Nepal 15 21 2.6 2.5 12 7 10 2.4 2.4 39 40 95 95 o
10 Niger 6 9 3.3 3.3 4 3 4 3.0 2.9 45 44 93 91 4
11 Burkina Faso 7 10 2.6 2.8 5 4 5 2.0 2.1 48 47 92 92 3 2
12 Madagascar 9 14 2.9 3.1 7 4 6 2.5 3.1 45 45 85 84 6 7
13 Bangladesh 87 120 2.4 1 .6 44 64 41 60 2.8 2.1 42 42 74 64 9 16
14 Uganda 13 19 2.4 3.2 6 9 7 9 2.2 2.7 48 48 89 93 4 5
15 Vietnam 54 73 2.1 2.1 28 43 26 37 2.7 1 .9 48 49 73 72 13 14
16 Guinea-Bissau I 1.8 2.1 0 I 0 1 .3 1 .8 40 40 86 85 2
17 Haili 7 1.9 2.0 4 3 1.3 I.7 45 43 71 68 9
18 Mali 7 10 2.5 2.9 3 5 3 2.3 2.7 47 46 93 93 2
19 Nigeria 71 III 3.0 2.9 38 58 30 44 2.6 2.8 36 36 55 43 7
20 Yemen, Rep. 9 15 3.3 5.0 4 8 2 5 3.7 4.9 33 29 70 58 13 16
21 Cambodia 6 10 2.9 2.8 3 5 3 2.8 2.5 56 53 76 74 7 8
22 Kenya 17 27 3.4 2.7 8 14 8 13 3.6 2.7 46 46 83 80 6 7
23 Mongolia 2 2.9 2. 1 3. 1 2.9 46 46 40 32 21 22
24 Togo 4 3.0 3.0 2.6 2.8 39 40 69 66 10 10
25 Gambia, The I 3.6 3.7 3.4 3.2 45 45 84 82 7 8
26 Cemral African Republic 2 3 2.4 2.2 2 I 2 1.7 1.8 48 47 85 80 3
27 India 687 929 2.1 1 .8 394 562 300 398 1 .9 2.0 34 32 70 64 13 16
28 Lao PDR 5 2.7 3.0 3 2.3 2.7 45 47 80 78 6 6
29 Benin 5 3.1 2.9 2.7 2.5 47 48 67 62 7 8
30 Nicaragua 4 2.9 3.1 I 2 2 2.9 4.0 28 36 39 28 24 26
31 Ghana II 17 3.3 2.8 6 9 8 3.1 2.7 51 51 61 60 13 13
32 Zambia 6 9 3.0 2.9 3 5 2 4 3.1 2.8 45 45 76 75 8
33 Angola 7 II 2.7 3. 1 4 5 3 5 2. 1 2.8 47 46 76 75
34 Georgia 5 5 0.7 -0.2 3 3 3 0.4 -0.1 49 46 32 26 27 31
35 Pakistan 83 130 3.1 2.9 44 70 29 46 2.9 3.3 23 26 62 56 15 20
�7 --��- - � --
t-�·-- --------
� ----� --� � ----�� ----� ---
--�----� ----�1--��� --��� --
36 Mauri ania 2. 6 2.5 1 2 .0 2 .7 45 44 72 55 7 10
37 Azerbaijan 6 1.5 1.0 5 3 3 1.0 1.7 47 44 35 31 28 29
38 Zimbabwe 7 II 3.3 2.4 6 3 5 3.6 2.2 44 44 74 69 12 8
39 Guinea 4 7 2.5 2.7 .J 2.1 2.4 47 47 91 87 I 2
40 Honduras 4 6 3.3 3.0 I 3.6 3.8 25 30 56 40 14 19
41 Senegal 6 2.9 2.7 4 3 2.6 2.7 42 42 81 76 6 7
42 China 981 1 .200 1.5 1.1 586 811 539 709 2.2 1.1 43 45 76 74 14 15
43 Cameroon 9 13 2.8 2.9 5 7 4 5 2.4 3.1 37 38 73 70 8 9
44 Cote d'ivoire 8 14 3.8 3.1 4 7 5 3.1 2.3 32 33 65 60 8 10
45 Albania 2.1 -0.1 2.6 0.8 39 41 57 55 23 23
46 Congo 2 3.1 2.9 3. 1 2.6 43 43 58 48 13 14
47 Kyrgyz Republic 4 1.9 0.5 2 1.6 1.2 48 47 34 32 29 26
48 Sri Lanka 15 18 1 .4 1.3 9 12 2.3 2.0 27 35 52 49 18 21
49 Armenia 3 4 1.4 1.2 1.6 1.1 48 48 21 17 43 41
'M iddle-income economies 1,236 1 1,591 1 1 .8 w l.4 w 717 1 981 1 513 1 688 1 2. l w 1.8 w 36 w 38 w 38 w 32 w 28 w 27 w
Lower-middle-income 905 & ) , 1 53 1 1 .7 w 1.4 w 527 1 712 1 387 1 507 1 1 .8 w . 1 .7 w 38 \� 40 w 41 w ._ 36 w 27 w 27 w
50 Lesolho 1 2 2.7 2.1 1 1 2.3 2.3 38 37 41 41 33 28
51 Egypt, Arab Rep. 41 58 2.5 2.0 23 34 14 21 2.5 2.7 26 29 61 43 17 23
52 Bolivia 5 7 2.0 2.4 3 4 3 2.6 2.6 33 37 53 47 18 18
53 Macedonia, FYR 2 0.7 0.9 1 1.2 1.3 36 41 34 22 31 41
54 Moldova 4 0.9 -0.1 3 2 2 0.2 0.2 50 49 43 33 26 30
55 Uzbekistan 16 23 2.5 2.1 9 13 6 9 2.2 2.8 48 46 38 34 25 25
56 Indonesia 148 193 1.8 1 .6 83 120 59 89 2.9 2.5 35 40 59 57 12 14
57 Philippines 48 69 2.4 2.2 27 40 19 28 2.7 2.7 35 37 52 45 15 15
58 Morocco 19 27 2.2 2.0 2.6 10 2.6 16 34 35 7 56 4510 20 25
59 S ian Arab Rep u bl c 9 4 3 .3 3. 0 4 7 4 3 .0 3 .5 23 26 39 34 28 24
__ yr �� i__ ____ __
___
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�n ,�� �,� �-r � � � , � �
60 Papua New Guinea 3 2.2 2.3 2 2 2 2.1 2.3 42 42 83 79 6 7
61 Bulgaria 9 -0.2 -0.7 6 6 5 4 -0.4 -0.6 45 48 20 14 45 50
Kazakstan 15 17 1.2 -0.2 9 10 7 8 1.1 0.5 48 47 24 22 32 31
63 Guatemala 7 II 2.8 2.9 4 6 4 2.9 3.5 22 26 54 52 19 17
64
; __ Ecc=ad
u= o:r __n-
c:: --,-;
c--- 8 __
1 1 ,...
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2 .5 2. 2
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--7 -; � - __ __
__7__ : .:� ---- ; ---- �- ..:
___c -- � ----:
�---..: �
- ':.:'. - �:-C ---c'
65 Dominican Republic 6 8 2.2 1 .9 3 5 2 3.1 2.6 25 29 32 25 - 2 4- 29-
66 Romania 22 23 0.4 -0.4 14 15 11 II -0.2 0.1 46 44 35 24 41 47
67 Jamaica 3 1.2 1 .0 2 1 I 2.1 1.8 46 46 31 24 16 23
68 Jordan 2 4 3.7 5.7 2 4.9 5.3 15 21 24 21 32 32
69 Algeria 19 28 2.9 2.2 16 3.7 4.1 21 24 36 26 27 31
70 E l Salvador 5 6 1.0 2.2 2 3 2 2 1 .7 3.4 27 34 43 36 19 21
71 Ukraine 50 52 0.4 -0.1 33 34 26 26 -0.1 -0.2 50 49 25 20 39 40
72 Paraguay 3 5 3.0 2.7 3 2.9 2.9 27 29 45 39 20 23
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CTED WO R LD D EV E LO P M E NT I N D I C ATO R S 2 2 1

Population Labor force

Total Avg. annual Aged 15-64 Total' Avg. annual
Imillions) growth rate 1%) Imillions) Imillions) growth rate 1%) Female 1%) Agriculture 1%) Industry 1%)
1980 1995 1980-90 1990-95 1980 1995 1980 1995 1980-90 1990-95 1980 1995 1980 1990 1980 1990
73 Tunisia 6 2.5 1.9 2.7 3.0 29 30 39 28 30 32
74 Lithuania 3 0.9 0.0 2 2 0.7 -0.2 50 48 28 18 38 40
75 Colombia 28 37 1.9 1.8 16 23 16 3.9 2.7 26 37 39 25 20 22
76 Namibia 1 2 2.7 2.7 1 1 a 2.3 2.5 40 41 56 49 15 15
77 Bdarus 10 10 0.6 0.2 6 7 5 0.5 0.2 50 49 26 20 38 40

78 Russian Federation 1 39 148 0.6 0.0 95 99 76 77 0.2 0.0 49 49 16 14 44 42

79 Latvia 3 3 0. 5 - \. 2 2 2 1 0.2 -1 . 1 51 50 16 16 42 40
80 Peru 17 24 2.2 2.0 9 14 9 3.1 3.1 24 29 40 36 18 18
81 Costa Rica 2 3 2.8 2.3 1 3.8 2.5 21 30 35 26 23 27
82 Lebanon 3 4 2. 5 1 .9 2 2 I 1 3.5 2.9 23 28 13 5 26 22
83 Thailand 47 58 1 .7 0.9 26 39 24 34 2.6 1.3 47 46 71 64 10 14
84 Panama 2 3 2.1 1 .7 1 2 3.1 2.4 30 34 29 26 19 16
85 Turkey 44 61 2. 3 1 .7 25 38 19 28 2.9 2.1 35 35 60 53 16 18
86 Poland 36 39 0.7 0.3 19 26 19 19 0.1 0.6 45 46 30 27 38 36
87 Estonia 1 0.6 -1.1 1 1 1 0.4 -0.8 51 49 15 14 43 41
88 Slovak Republic 5 0.6 0. 3 3 3 0.9 0.7 45 48 14 12 36 32
89 Botswana 1 3.5 2. 5 1 1 3.4 2.5 50 46 64 46 10 20
90 Venezuela 15 22 2.6 2.3 13 8 3.5 3.0 27 33 15 12 28 28
'
Upper-)1liddle-income 331 1 438 1 2.0 w 1.7 w 191 t 269 t 126 1 182 1 2.7 w rO w 29 w 34 w 31 w 21 w 29 w 27 w
91 South Africa 29 41 2.4 2.2 16 24 11 16 2.7 2.4 35 37 17 14 35 32
92 Croatia 5 5 0.4 0.0 3 3 2 2 0.3 0.1 40 43 24 15 32 32
93 Mexico 67 92 2.3 1.9 35 54 22 36 3.5 2.8 27 31 37 28 29 24
94 Mauritius 1 0.9 1.3 0 2.3 1.8 26 32 27 17 28 43
95 Gabon 3.0 2.8 0 1 2.1 1. 9 45 44 76 61 14 19
96 Brazil 121 159 2.0 1.5 71 101 48 71 3.2 1 .6 28 35 37 23 24 23
97 Trinidad and Tobago 1 1 1 .3 0.8 1 1 1 1 .2 1.8 32 36 11 11 39 31
98 Czech Republic 10 10 0.1 -0.1 6 7 6 0.2 0.4 47 47 13 11 56 45
99 Malaysia 14 20 2.6 2.4 8 12 2.8 2. 7 34 37 41 27 19 23
1 00 Hungary 11 10 -0.3 -0.3 7 7 -0.8 0.1 43 44 18 15 43 38
101 Chile 11 14 1 .7 1.5 7 9 6 2.7 2.1 26 32 21 19 25 25
10 2 Oman 2 3.9 6.0 1 3.4 5.1 7 14 50 48 22 26
1 03 Uruguay 3 0.6 0.6 2 1 1.6 1 .0 31 40 17 14 28 27
1 04 Saudi Arabia 9 19 5.2 3.7 5 10 6 6.5 3.2 13 45 20 16 20
1 05 Argentina 28 35 1.5 1 .3 17 21 11 14 1 .3 2.0 28 31 13 12 34 32

1 06 Slovenia 0.5 -0.1 1 1 0.3 0.1 46 46 15 42 44

1 07 Greece 10 10 0. 5 0.6 6 7 4 1 .2 0.9 28 36 31 23 29 28

Low- '=d middle-inc;"me 1';)1' 3,614 I 4;771 I 2.0 w 1.6 w 2,069 I 2,9 1 6 I i�669 I 2,263 I 2.2 w' 1 .7 w 38 w 40 w 63 w 58 w 17 ';' 18 w
Sub-Saharan Africa 381 I 583 I 3.0 w 2.6 w 196 I 305 I 173 I 257 I 2.7 w 2.6 w 42 w 42 w 72 w 68 w 9w 9w
Easl Asia and Pacific 1 ,360 I 1 ,706 I 1 .6 w 1.3 w 796 t 1 , 1 19 I 704 I 951 I 2.3 w 1.3 w 43 w 45 w 73 w 70 w 14 w 15 w
Soulh Asia 903 1 1,243 1 2.2 w 1.9 w 508 1 732 1 389 1 532 1 2.1 w 2.1 w 34 w 33 w 70 w 64 w 13 w 16 w
Europe and Cenlral Asia 437 I 488 I 0.9 w 0.3 w 277 I 317 I 219 t 238 t 0.6 w 0.5 w 46 w 46 w 27 w 23 w 37 w 36 w
Middle Easl and N . Africa 175 I 272 I 3.1 w 2.7 w 91 I 151 I 54 I 88 I 3.2 w 3.3 w 24 w 26 w 48 w 36 w 21 w 24 w
Lalin America and Caribbean 358 t 478 I 2.0 w 1.7 w 201 t 293 I 130 I 197 I 3.0 w 2.3 w 27 w 33 w 34 w 25 w 25 w 24 w
, High -income economies 816 I 902 I 0.7 w 0.7 w 522
�=� I �605
�� I 36,8
��� I �
432
= �t �J.2..n:,
= 2 r � �0.9
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39
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w =� w = 9�w =5�w 35 ),· 31 'w
L� �
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� = �
K=� � � == ==
orea , Rep .
�--�--� =
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45
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16 22 2.3
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1 09 Portugal 10 10 0.1 0.1 6 7 5 5 0.4 0.5 39 43 26 18 36 34
1 10 Spain 37 39 0.4 0.2 23 27 14 17 1.3 1. 0 28 36 19 12 37 33
III New Zealand 3 4 0.8 1 .4 2 2 2.0 1.5 34 44 11 10 33 25
112 Iteland 0.3 0.5 2 0.4 L7 28 33 19 14 34 29

1 13 t Tsraei 6 1.8 3.5 3 2.3 3.5 34 40 6 4 32 29

1 14 t Kuwait 4.4 -4.9 0 5.S - I .G 13 27 1 32 25
115 t Unired Arab Emirates 1 5.7 5.8 1 1 1 1 5.1 3.9 5 13 7 37 24
1 16 United Kingdom 56 59 0.2 0. 3 36 38 27 29 0.6 0.3 39 43 3 38 29
1 17 Australia 15 18 1.5 1.1 10 12 7 9 2.3 1 .4 37 43 6 32 26
I 1S Italy 56 57 0.1 0.2 36 39 23 25 0.8 0.4 33 38 13 38 32
1 19 Canada 25 30 1 .2 1 .3 17 20 12 15 1. 9 1. 0 40 45 7 33 25
12 0 Finland 5 5 0.4 0.5 3 3 2 3 0.6 0.1 46 48 12 35 31
121 t Hong Kong 5 6 1 .2 1 .6 4 2 3 1 .6 1.3 34 37 I 50 37
1 22 Sweden 0.3 0.6 6 4 5 1 .0 0.3 44 48

1 23 Netherlands 14 15 0.6 0.7 9 11 6 7 2.0 0.6 31 40 6 31 26

1 24 Belgium 10 10 0.1 0.4 6 7 4 4 0.2 0.5 34 40 35 28
125 ftance 54 58 0. 5 0. 5 34 38 24 26 0.4 0.8 40 44 35 29
12 6 t Singapore 1 .7 2.0 2 2.3 1.7 35 38 o 44 36

127 Austria 0.2 0.8 5 0.5 0.5 40 41 10 8 41 37

1 28 United States 228 263 0.9 1.0 151 172 110 1 33 1 .4 1.1 42 46 3 3 31 28
1 29 Getmany 78 82 0.1 0.6 52 56 37 40 0.6 0.3 40 42 7 4 45 38

1 30 Denmark 5 5 0.0 0.3 3 4 3 0.7 0.1 44 46 7 6 31 28

131 Norway 4 4 0.4 0.5 2 2 0.9 0.7 40 46 6 29 25

1 32 Japan 1 17 125 0.6 0.3 79 87 57 66 1.1 0.6 38 41 1 1 7 35 34

6 7 0.6 1 .0 4 5 3 4 1 .5 0.8 37 40 6 6 39 35
133 Switzerland
· '
�W!,rld 4,429 t 5,673 I 1.7 w 1 . 5 w 2,590 I 3,521 I 2,037 I 2,695 I 2.0 w 1 .6 w 38 \Y 40 w 5:J w 49 w 20 w 20 wl
a. Participation rates from ILO are applied to population estimates [Q derive labor force estimates.
222 WO R LD D EV E L O P M E N T R E PO RT 1 997

Table 5 . Distribution of i n come o r consu mption

Percentage share of income or consumption

Survey Gini Lowest Lowest Second Third Fourth Higllest Higllest

year index 10% 20% quintile quintile quintile 20% 10%
T,Qw-inc(ime economies
Excluding China and India
I Mozambique
2 Ethiopia
3 Tanzania 38.1 2.9 6.9 10.9 1 5.3 21.5 45.4 30.2
4 Burundi
5 Malawi
6 Sierra Leone
7 Rwanda 1 983-85,·b 28.9 4.2 9.7 1 3 .2 16.5 21.6 39. 1 24.2
8 Chad
9 Nepal I 995-96,·b 36.7 3.2 7.6 1 1 .5 15.1 2 1 .0 44.8 29.8
10 Niger I 992" b 36.1 3.0 7.5 1 1 .8 15.5 21.1 44.1 29.3
II Madagascar 1993" b 43.4 2.3 5.8 9.9 14.0 20.3 50.0 34.9
12 Burkina Faso
13 Vietnam I 993" b 35.7 3.5 7.8 1 1 .4 1 5 .4 2 1 .4 44.0 29.0
14 Bangladesh I 992" b 28.3 4. 1 9.4 13.5 17.2 22.0 37.9 23.7
15 Uganda I 992-93" b 40.8 3.0 6.8 10.3 14.4 20.4 48. 1 33.4
16 Mali
17 Guinea-Bissau 56.2 0.5 2.1 6.5 12.0 20.6 58.9 42.4
18 Haiti
19 Nigeria I 992-93" b 45.0 1 .3 4.0 8.9 14.4 23.4 49.3 31.3
20 Yemen, Rep.
21 Cambodia
22 Kenya 57.5 1 .2 3.4 6.7 10.7 17.0 62. 1 47.7
23 Togo
24 Mongolia
25 Gambia, The
26 India 33.8 3.7 8.5 12.1 1 5.8 21.1 42.6 28.4
27 Central African Republic
28 Lao PDR 30.4 4.2 9.6 12.9 16.3 2 1 .0 40.2 26.4
29 Benin
30 Nicaragua 50.3 1 .6 4.2 8.0 12.6 20.0 55.2 39.8
31 Ghana 33.9 3.4 7.9 12.0 16.1 21.8 42.2 27.3
32 Zambia 46.2 1.5 3.9 8.0 13.8 23.8 50.4 31.3
33 Angola
34 Georgia
35 Pakistan 31.2 3.4 8.4 12.9 16.9 22.2 39.7 25.2
36 Mauritania 42.4 0.7 3.6 10.6 16.2 23.0 46.5 30.4
37 Azerbaijan
38 Zimbabwe 1990"b 56.8 1.8 4.0 6.3 10.0 17.4 62.3 46.9
39 Guinea 1 9 9 1 '·b 46.8 0.9 3.0 8.3 14.6 23.9 50.2 3 1 .7
40 Honduras I 992"d 52.7 1.5 3.8 7.4 12.0 19.4 57.4 4 1 .9
41 Senegal 54. 1 1.4 3.5 7.0 1 1 .6 19.3 58.6 42.8
42 China 41.5 2.2 5.5 9.8 14.9 22.3 47.5 30.9
43 Cameroon
44 Cote d'Ivoire 36.9 2.8 6.8 1 1 .2 1 5.8 22.2 44.1 28.5
45 Albania
46 Congo
47 Sri Lanka 30. 1 3.8 8.9 13.1 16.9 21.7 39.3 25.2
48 Kyrgyz Republic
49 Armenia
�iddle-income economies
Lower-middle-income
50 Lesotho 1986-87',' 56.0 0.9 2.8 6.5 1 1 .2 19.4 60.1 43.4
51 Egypt, Arab Rep. 1 99 1 " b 32.0 3.9 8.7 12.5 16.3 21.4 41.1 26.7
52 Bolivia I 990" d 42.0 2.3 5.6 9.7 14.5 22.0 48.2 3 1. 7
53 Macedonia, FYR
54 Moldova 34.4 2.7 6.9 1 1 .9 16.7 23.1 41.5 25.8
55 Uzbekistan
56 Indonesia 1993,b 3 1 .7 3.9 8.7 1 2.3 16.3 22.1 40.7 25.6
57 Philippines 1988" b 40.7 2.8 6.5 10.1 14.4 21.2 47.8 32.1
58 Morocco 1990-91" b 39.2 2.8 6.6 1 0.5 1 5.0 2 1 .7 46.3 30.5
59 Syrian Arab Republic
60 Papua New Guinea
61 Bulgaria I 992" d 30.8 3.3 8.3 1 3 .0 17.0 22.3 39.3 24.7
62 Kazakstan 1 993" d 32.7 3.1 7.5 12.3 16.9 22.9 40.4 24.9
63 Guatemala 1989"d 59.6 0.6 2.1 5.8 1 0.5 1 8.6 63.0 46.6
64 Ecuador 1994"b 46.6 2.3 5.4 8.9 1 3 .2 19.9 52.6 37.6
65 Dominican Republic 1 989"J 50.5 1 .6 4.2 7.9 12.5 19.7 55.7 39.6
66 Romania I 992" d 25.5 3.8 9.2 14.4 18.4 23.2 34.8 20.2
67 Jordan 1 9 9 1 ',b 43.4 2.4 5.9 9.8 13.9 20.3 50.1 34.7
68 Jamaica 1 9 9 1 ',b 41.1 2.4 5.8 10.2 14.9 21.6 47.5 3 1 .9
69 Algeria 1988"b 38.7 2.8 6.9 1 1 .0 1 5. 1 20.9 46.1 31.5
70 El Salvador
71 Ukraine 25.7 4.1 9.5 14. 1 18.1 22.9 35.4 20.8
72 Paraguay
Note: For data comparability and coverage, see the technical notes.
 S E LE CTE D WORLD D EVELO PM E NT I N D I C ATO R S 2 2 3

Percentage share of income or consumption

Survey Gini Lowest Lowest Second Third Fourth Highest Highest
year index 10% 20% qulntlle quintlle qulntlle 20% 10%
73 Tunisia 1990"b 40,2 2,3 5.9 10.4 1 5.3 22. 1 46.3 30.7
74 Li[huania 1993" d 33,6 3.4 8.1 1 2.3 16.2 2 1 .3 42.1 28.0
75 Colombia 1991"d 5 1 .3 1.3 3.6 7.6 12.6 20.4 55.8 39.5
76 Namibia
77 Belarus 2 1 .6 4.9 11.1 1 5.3 18.5 22.2 32.9 1 9 .4
78 Russian Federa[ion 1993" b 49,6 1.2 3.7 8.5 13,5 20.4 53.8 38.7
79 Latvia 1993" d 27,0 4,3 9,6 13.6 17,5 22.6 36.7 22.1
80 Peru 1 9 94" b 44,9 1.9 4,9 9,2 14.1 2 1 .4 50.4 34.3
81 Costa Rica 1989" d 46,1 1.2 4.0 9,1 14.3 2 1 .9 50.7 34.1
82 Lebanon
83 Thailand 46.2 2.5 5.6 8.7 13.0 20.0 52.7 37. 1
84 Panama 56.6 0.5 2.0 6.3 1 1 .6 20.3 59.8 42.2
85 Turkey
86 Poland 27.2 4.0 9.3 13.8 17.7 22.6 36.6 22.1
87 Estonia 39.5 2.4 6.6 10.7 1 5. 1 2 1 .4 46.3 31.3
88 Slovak Republic I 992" d 19,5 5.1 1 1 .9 1 5.8 1 8.8 22.2 3 1 .4 1 8.2
89 Venezuela 1990"d 53.8 1 .4 3.6 7. 1 1 1 .7 19.3 58.4 42.7
90 Botswana
Upper-m iddle- income
9I South Mrica 58.4 1 .4 3.3 5.8 9.8 17.7 63.3 47.3
92 Croa[ia
93 Mexico I 992,·h 50.3 1.6 4.1 7.8 1 2.5 20.2 55.3 39.2
94 Mauri[iu5
95 Gabon
96 Brazil 63.4 0,7 2.1 4.9 8.9 16.8 67.5 5 1 .3
97 Trinidad and Tobago
98 Czech Republic 1 993" d 26,6 4,6 10.5 13.9 16.9 2 1 .3 37.4 23.5
99 Malaysia 1989" d 48.4 1 .9 4.6 8.3 13.0 20.4 53.7 37.9
100 Hungary 1 993,·b 27,0 4.0 9.5 14.0 1 7.6 22.3 36.6 22.6
101 Chile 56.5 1 .4 3.5 6.6 10.9 18.1 6 1 .0 46.1
102 Oman
103 Uruguay
104 Saudi Arabia
lOS Argemina
1 06 Slovenia 1993" d 28.2 4.1 9.5 1 3.5 17.1 2 1 .9 37.9 23.8
1 07 Greece
Low- and mldale�income
'Sub-Saharan Africa
East Asia and Pacific
South Asia
Europe and Central Asia
Midd le East and N. Mrica
Latin America and Caribbean
High-income economies
108 Korea, Rep.
109 POrtugal
110 Spain 1 988',f 8.3 1 3.7 18.1 23.4 36.6 21.8
III New Zealand 1 9 8 1 -82',f 5.1 10.8 16.2 23.2 44.7 28.7
112 Ireland
113 t Israei 6.0 12.1 17.8 24.5 39.6 23.5
1 14 t Kuwait
115 t United Arab Emirates
1 16 United Kingdom 4.6 10.0 16.8 24.3 44.3 27.8
1 17 Australia 4.4 ILl 17.5 24.8 42.2 25.8
118 Italy 1986',f 6.8 12.0 16.7 23.5 4 1 .0 25.3
119 Canada 1 9 87',f 5.7 1 1 .8 17.7 24.6 40.2 24.1
1 20 Finland 1 9 8 1',f 6.3 12.1 1 8.4 25.5 37.6 2 1 .7
121 t Hong Kong 1 980',f 5.4 10.8 1 5.2 2 1 .6 47.0 31.3
1 22 Sweden 1 9 8 1 ',f 8.0 1 3.2 17.4 24.5 36.9 20.8
1 23 Netherlands 1 988<,[ 8.2 13.1 18.1 23.7 36.9 2 1 .9
1 24 Belgium I 978-79<.f 7.9 1 3.7 1 8.6 23.8 36.0 21.5
1 25 France 1989" f 5.6 1 1 .8 17.2 23.5 4 1 .9 26. 1
1 26 t Singapore I 982-83',f 5.1 9.9 14.6 2 1 .4 48.9 33.5
1 27 Austria
1 28 United States 1 985',f 4.7 1 1 .0 17.4 25.0 4 1 .9 25.0
1 29 Germany 1 988d 7.0 1 1 .8 17.1 23.9 40.3 24.4
1 30 Denmark 1 9 8 1 ',f 5.4 12.0 1 8.4 25.6 38.6 22.3
131 Norway 1979d 6.2 1 2.8 1 8.9 25.3 36.7 2 1 .2
132 Japan 1979d 8.7 1 3.2 17.5 23.1 37.5 22.4
I33 Switzerland 1 982',f 5.2 1 1 .7 16.4 22.1 44.6 29.8

World
a. Refers to expenditure shares by percentiles of persons. b. Ranked by per capita expenditure. c. Refers to income shares by percentiles of persons. d. Ranked by per capit�
income. e. Refers to income shares by percentiles of households. f. Ranked by household income.
224 WORLD D EV E L O P M E NT R E P O RT 1 997

Table 6. Health
Maternal
Infant mortality Prevaleace of Contraceptive mortality ratio
Percentage of total population witII access to rate (per 1,000 malnutrition prevalellc:e (per 100,000
Health care Safe water Sanitation live births) ToIal fertility rate
(% under 5) rate (%) live births)
1980 1993 1980 1994-95 1980 1994-95 1980 1995 1989-95 1989-95 1980 1995 1989-95
Low·income economies 98 w 69 w 4.3 w 3.2 w
Excluding China and India 1I6 w 89 w 6.3 w 5.0 w
I Mozambique 9 28 10 23 145 1 13 6.5 6.2 1 , 5 1 2'
2 Erhiopia 55 4 27 10 1 55 112 47 4 6.G 7.0 1 , 5 28'
3 Tanzania 72 93 49 86 104 82 28 10 6.7 5.8 748'
4 Burundi 80 58 48 121 98 6.8 6.5 1,327'
5 Malawi 40 54 63 1 69 1 33 27 13 7.6 6.6 620h
6 Chad 26 29 32 147 117 5.9 5.9 1 ,594'
7 Rwanda 1 28 133 28 21 8.3 6.2 1 , 5 1 2'
8 Sierra Leone 26 13 190 1 79 23 6.5 6.5
9 Nepal 10 11 48 o 6 1 32 91 70 6.4 5.3 5 1 5'
10 Niger 30 57 15 1 50 1 19 4 7.4 7.4 593b
11 Burkina Faso 35 5 14 121 99 8 7.5 6.7 939'
I2 Madagascar 32 17 1 38 89 32 17 6.5 5.8
13 Bangladesh 80 74 83 30 1 32 79 84 40 6.1 3.5 887'
14 Uganda 42 GO 1 16 98 23 15 7.2 6.7 506'
15 Vietnam 75 38 21 57 41 45 5.0 3.1 105d
16 Guinea-Bissau 30 24 27 20 1 68 1 36 6.0 6.0
17 Hairi 28 24 1 23 72 27 18 5.9 4.4 600h
18 Mali 20 44 44 1 84 1 23 7. 1 6.8 1 ,249'
19 Nigeria 40 67 43 63 99 80 43 6 6.9 5.5
20 Yemen, Rep. 16 52 51 141 100 30 7.9 7.4 1,471'
21 Cambodia 13 201 108 4.7 4.7
22 Kenya 49 43 72 58 23 27 7.8 4.7
23 Mongolia 90 82 55 IO 5.4 3.4
24 Togo 67 20 1 10 88 6.6 6.4 626'
25 Gambia, The 90 42 61 34 1 59 1 26 6.5 5.3
26 Cenrral African Republic 16 I I7 98 5.8 5.1 649
27 India 50 63 29 116 68 63 43 5.0 3.2 437d
28 Lao PDR 41 30 127 90 40 6.7 6.5
29 Benin 42 70 22 1 22 95 36 6.5 6.0
30 Nicaragua 57 90 46 12 44 6.2 4.1
31 Ghana 25 56 29 1 00 73 27 20 6.5 5.1 742'
32 Zambia 47 42 90 109 27 15 7.0 5.7
33 Angola 70 24 32 16 1 53 1 24 20 6.9 6.9
34 Georgia 25 18 2.3 2.2
35 PakiStan 65 85 38 60 16 30 1 24 90 40 14 7.0 5.2
36 Mauritania 41 64 1 20 96 6.3 5.2
37 Azerbaijan 30 25 3.2 2.3
38 Zimbabwe 55 74 5 58 82 55 16 6.8 3.8
39 Guinea 45 49 12 6 161 1 28 18 6.1 6.5 88W
40 Honduras 70 68 70 45 19 47 6.5 4.6
41 Senegal 40 91 62 20 7 6.7 5.7
42 China 83 42 34 17 83 2.5 1 .9 1 1 5'
43 Cameroo n 20 41 40 94 56 14 16 6.5 5.7
44 Core d'Ivoire 20 82 17 54 108 86 II 7.4 5.3 887'
45 Albania 100 92 100 47 30 3.6 2.6 23d
46 Congo 60 9 89 90 6.2 6.0
47 Kyrgyz Republic 75 53 43 30 4.1 3.3
48 Sri Lanka 90 57 6(, 34 16 38 3.5 2.3
49 Armenia 26 16 2.3 1 .8
I Middle-income economies 65 w 39 w 3.8 w 3.0 w
Lower-middle-income 68 w 41 w 3.7 w . 3.0 w
50 Lesorho 18 57 12 35 108 76 21 H 5.6 4.6 598'
51 Egypr, Arab Rep. 100 99 90 84 70 1 20 56 9 48 5.1 3.4
52 Bolivia 60 44 118 69 13 45 5.5 4.5
53 Macedonia, FYR 54 23 2.5 2.2
54 Moldova 50 35 22 2.4 2.0
55 UzbekiStan 18 47 30 4.8 3.7
56 Indonesia 63 55 90 51 39 55 4.3 2.7
57 Philippines 84 75 52 39 30 40 4.8 3.7
58 Morocco 62 32 59 50 63 99 55 9 50 5 .4 3.4
59 Syrian Arab Republic 99 71 87 45 78 56 32 7.4 4.8
60 Papua New Guinea 31 26 67 64 5.7 4.8
61 Bulgaria 96 99 20 15 2.1 1 .2
62 Kazaksran 33 27 2.9 2.3
63 Guaremala 64 71 75 44 32 6.2 4.7
64 Ecuador 70 64 67 36 45 57 5.0 3.2
65 Dominican Republic 79 85 76 37 10 56 4.2 2.9
66 Romania 77 50 49 29 23 57 2.4 1 .4
67 Jamaica 70 74 21 13 IO 55 3.7 2.4
68 Jordan 90 89 89 76 30 41 31 17 6.8 4.8 132'
69 Algeria 77 98 34 9 51 6.7 3.5 140"
70 EI Salvador 62 73 81 36 22 53 5.3 3.7
71 Ukraine 97 50 49 17 15 2.0 1 .5
72 Paraguay 30 50 41 4 48 4.8 4.0
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E LECTED WO RLD D EV E L O P M E NT I N D I C AT O R S 225

Matemal
Infant mortality
Percentage of total population with access to Prevalence of Contraceptive mortality ratio
rate (per 1,000 malnutrition prevalence (per 100,000
Health care Safe water Sanitation live birthsl Total fertility rate
(% under 5) rate (%) live births)
1980 1993 1980 1994-95 1980 1994-95 1980 1995 1989-95 1989-95 1980 1995 1989-95
73 Tunisia 95 90 72 86 46 72 71 39 5.2 2.9 1 38'
74 Lithuania 20 14 2.0 1 .5 16d
75 Colombia 88 96 70 45 26 10 72 3.8 2.8 1 07'
76 Namibia 57 36 90 62 29 5.9 5.0 518
77 Belarus 50 100 16 13 2.0 1 .4 25d
78 Russian Federarion 22 18 1 .9 1 .4 52d
79 Larvia 20 16 2.0 1.3
80 Peru 60 47 81 47 16 55 4.5 3.1
81 Costa Rica 1 00 99 20 13 2 3.7 2.8
82 Lebanon 92 59 48 32 4.0 2.8
83 Thailand 30 59 81 87 49 35 13 3.5 1.8
84 Panama 82 87 32 23 7 3.7 2.7
85 Turkey 67 92 94 109 48 4.3 2.7
86 Poland 100 67 50 100 21 14 2.3 1 .6
87 Esronia 17 14 2.0 1 .3
88 Slovak Republic 43 51 21 11 2.3 1 .5 8d
89 Borswana 70 55 69 56 6.7 4.4 220'
90 Venezuela 88 55 36 23 6 4.1 3.1 200d
Upper-middle-income 57 w 35 w 3.9 w 2.9 w
91 Sourh Africa 46 67 50 4.9 3.9
92 Croaria 96 68 21 16 1.9 1.5
93 Mexico 51 87 70 51 33 4.5 3.0
94 Mauritius 100 99 100 100 32 16 75 2.7 2.2 1 1 2d
95 Gabon 67 76 1 16 89 4.5 5.2 483'
96 Brazil 92 73 70 44 18 3.9 2.4
97 Trinidad and Tobago 82 56 35 13 3.3 2. 1
98 Czech Republic 16 8 69 2. 1 1 .3
99 Malaysia 88 90 75 94 30 12 23 4.2 3.4
100 Hungary 94 23 11 1 .9 1 .6
1 01 Chile 96 71 32 12 2.8 2.3
1 02 Oman 75 89 15 56 72 41 18 9.9 7.0
1 03 Uruguay 83 82 37 18 2.7 2.2
1 04 Saudi Arabia 85 98 91 93 76 86 65 21 7.3 6.2
1 05 Argenrina 64 89 35 22 3.3 2.7
1 06 Slovenia 90 15 7 2. 1 1.3
1 07 Greece 96 18 2.2 1.4
Low- and middle-income 87 w 60 w 4.1 w 3.1 w
Sub-Saharan Africa 1 14 w 92 w 6.7 w 5.7 w
Easr Asia and Pacific 56 w 40 w 3.1 w 2.2 w
South Asia 120 w 75 w 5.3 w 3.5 w
Europe and Central Asia 40 w 26 w 2.5 w 2.0 w
Middle Easr and N. Africa 97 w 54 w 6.1 w 4.2 w
Larin America and Carribbean 60 w 37 w 4.1 w 2.8 w
High-income econo)nies 13 w 7w 1.9 w 1.7 w
1 08 Korea. Rep. 100 89 100 26 10 2.6 1 .8 30d
1 09 Porrugal 57 100 24 7 2.2 1 .4 21
1 10 Spain 98 99 95 97 12 7 2.2 1 .2
111 New Zealand 100 87 13 7 2.1 2. 1
112 Ireland 100 11 6 60 3.2 1 .9
113 t Israei 99 70 15 3.2 2.4
114 t Kuwair 100 100 100 27 11 5.3 3.0
115 t Unired Arab Emirares 96 90 100 98 75 95 55 16 5.4 3.6
1 16 Unired Kingdom 100 96 12 6 1.9 1.7
1 17 Ausrralia 99 99 95 99 90 11 6 1.9 1.9
1 18 lraly 99 99 100 15 7 1 .6 1.2
1 19 Canada 97 100 60 85 10 6 1.7 1 .7
1 20 Finland 100 100 100 5 1.6 1 .8
121 t Hong Kong 11 5 2.0 1 .2
1 22 Sweden 85 100 7 4 1 .7 1 .7
123 Netherlands 100 100 100 100 6 1 .6 \ .6
124 Belgium 99 100 12 8 1 .7 1 .6
125 France 100 85 96 10 6 1.9 1.7
1 26 t Singapore 100 100 100 12 4 14 1 .7 1.7
1 27 Ausrria 100 85 100 14 6 1 .6 1 .5
128 Unired Srares 90 98 85 13 8 1 .8 2. 1
129 Germany 100 12 6 1.6 1.2
1 30 Denmark 100 100 100 100 8 6 1.5 1 .8
131 Norway 100 100 100 8 5 1.7 1.9
132 lapan 100 95 85 8 4 3 1.8 1.5
133 Swirzerland 100 85 100 9 6 1 .6 1.5
• World 80·w 55 w 3.7 w 2.9 w
a . UNICEFfWHO esrimare based o n staristical modeling. b . Indirecr esrimare based o n sample survey. c . Based o n sample survey. d . Official esrimare. e . Based o n a
survey covering chirty provinces. f. Based on civil registration.
226 WORLD D EV E L O P M E NT R E P O RT 1 997

Table 7 . Education
Percentage
School enrollment as a % of age group of cohort reaching
Secondary _ _gra d e 4____ Adult illiteracy 1%1
__
Primary '-- __
Female Male Female Male Tertiary Female Male Female Male
1980 1993 1980 1993 1980 1993 1980 1993 1980 1993 1980 1990 1980 1990 1995 1995
'
�
'tow-i ncome economies 81 w 98 w (ii4� 1 1 2 w 26 w 41 42 w 45 ,;, 24 w
,Excluding China and I ndia 64 w 85 w 14w 25 w 55 w 37 w�
1 Mozambique 84 51 1 14 69 3 6 8 9 o o 54 60 77 42
2 Erhiopia' 23 19 44 27 6 11 11 12 o 1 48 56 42 56 75 55
3 Tanzania 86 69 99 71 2 5 4 6 89 90 90 89 43 21
4 Burundi 21 63 32 76 2 5 4 9 83 79 83 79 78 51
5 Malawi 48 77 72 84 2 3 5 6 55 68 62 73 58 28
6 Sierra Leone 43 61 8 20 82 55
7 Rwanda 60 76 66 78 3 9 4 11 o 74 76 73 73 48 30
8 Chad 30 62 1 65 74 65 38
9 Nepal 49 87 1 17 129 23 33 46 6 86 59
10 Niger 18 21 33 35 4 7 9 o 1 79 82 93 79
11 Madagascar 133 72 1 39 75 14 14 3 4 72 68
12 Burkina Faso 14 30 23 47 2 6 4 11 o 79 90 79 86 91 71
13 Vietnam 106 111 40 44 2 2 67 71 9 4
14 Bangladesh 46 105 76 128 9 12 26 26 3 30 46 29 44 74 51
15 Uganda 43 83 56 99 3 10 7 17 50 26
16 Mali 19 24 34 38 5 6 12 12 77 84 73 87 77 61
17 Guinea-Bissau 43 94 2 2 10 10 47 63 58 32
18 Haiti 70 82 13 14 64 60 63 60 58 52
19 Nigeria 104 82 1 35 1 05 14 27 27 32 2 76 74 53 33
20 Yemen, Rep.
21 Cambodia 46 48 47 20
22 Kenya 1 10 91 120 92 16 23 23 28 85 78 84 76 30 14
23 Togo 91 81 146 122 16 12 51 34 2 3 84 82 90 87 63 33
24 Mongolia 1 07 107 97 87 85
25 Gambia, The 35 61 67 84 7 13 16 25 75 47
26 India 67 91 98 113 20 39 52 57 62 35
27 Central African Republic 51 92 92 7 21 1 2 48 32
28 Lao PDR 104 92 123 123 16 19 25 31 o 2 31 31 56 31
29 Benin 41 44 87 88 9 7 24 17 2 73 58 77 58 74 51
30 Nicaragua 102 105 96 101 45 44 39 39 13 9 55 62 51 55 33 35
31 Ghana 71 70 89 83 31 28 51 44 2 82 87 47 24
32 Zambia 83 99 97 1 09 11 22 2 29 14
33 Angola o 37 49
34 Georgia 30
35 Pakisran 27 49 51 80 20 41 45 53 55 76 50
36 Mauritania 26 62 47 76 4 11 17 19 4 86 83 96 82 74 50
37 Azerbaijan 87 91 88 89 25 26
38 Zimbabwe 114 123 40 51 1 6 20 10
39 Guinea 25 30 48 61 10 6 24 17 5 78 81 78 50
40 Honduras 99 1 12 98 111 31 37 29 29 8 9 27 27
41 Senegal 37 50 56 67 7 11 15 21 3 3 90 93 77 57
42 China 1 03 1 16 121 1 20 37 51 54 60 1 4 27 10
43 Cameroon 89 107 13 24 2 2 81 81 48 25
44 Core d'lvoire 63 58 95 80 12 17 27 33 3 91 82 94 85 70 50
45 Albania III 97 1 16 95 63 70 8 10 96 97
46 Congo 91 91 33 17
47 Sri Lanka 100 105 1 05 1 06 57 78 52 71 3 6 96 95 13 7
48 Kyrgyz Republic 28 21
49 Armenia 93 87 90 80 30 49
'
i Middle-income economies' '99 ", f O l w ' 1 06'", 10, w 48 w (;t w 53 w ' 64 " 21 w 20\;; 23 w 14w
Lower-middle-income 97 w 1 0 1 w 1 06 w 1 06 w 50 w 61 w 56 w 65 w 24 w 22 w
50 Lesotho 120 105 85 90 21 31 14 21 2 2 77 85 Gi 75 38 'f9
51 Egypr, Arab Rep. 61 89 84 105 39 69 61 81 16 17 83 75 61 36
52 Bolivia 81 92 32 42 16 23 50 52 24 10
53 Macedonia, FYR 87 88 55 53 28 16
54 Moldova 77 78 72 67 29 35
55 Uzbekisran 79 80 92 96 30 33
56 Indonesia 100 1 12 115 1 16 23 39 35 48 10 22 10
57 Philippines 1 12 1 13 69 61 24 26 82 78 6 5
58 Morocco 63 60 102 85 20 29 32 40 6 10 89 81 90 83 69 43
59 Syrian Arab Republic 88 99 111 III 35 42 57 52 17 18 91 96 94 97 44 14
60 Papua New Guinea 51 67 66 80 8 10 15 15 2 70 72 37 19
61 Bulgaria 98 84 98 87 84 70 85 66 16 23 95 91 98 93
62 Kazakstan 86 86 91 89 34 42
63 Guatemala 65 78 77 89 17 23 20 25 8 56 66 51 38
64 Ecuador 116 122 119 124 53 56 53 54 35 76 78 12 8
65 Dominican Republic 99 95 43 30 18 18
66 Romania 101 86 102 87 69 82 73 83 12 12 94 93
67 Jordan 102 95 1 05 94 73 54 79 52 27 19 95 97 95 99 21 7
68 Jamaica 104 108 103 109 71 70 63 62 7 6 100 98 11 19
69 Algeria 81 96 108 111 26 55 40 66 6 11 91 95 92 96 51 26
70 EI Salvador 75 80 75 79 23 30 26 27 4 15 55 52 30 27
71 Ukraine 87 87 95 65 42 46
72 Paraguay 101 110 107 1 14 38 36 8 10 78 79 7
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CTED WORLD D EVE L O PM E NT I N D I C ATO R S 2 2 7

Percentage
School enrollment as a % of age group
of cohort reaching
Primal}' Secondal}' grade 4 Adult illiteracy (%1
-cc :- :- -
----:c:-
Female Male Female Male Tertial}' -Ie-
Fema - Male- Female Male
1980 1993 1980 1993 1980 1993 1980 1993 1980 1993 1980 1990 1980 1990 � 1995
73 Tunisia 88 113 118 1 23 20 49 34 55 5 11 90 93 94 95 45 21
74 Lithuania 90 95 79 76 49 39
75 Colombia 1 26 1 20 123 1 18 41 68 40 57 10 46 74 42 72
76 Namibia 138 134 61 49 3 64 65
77 Belarus 95 96 96 89 39 44
78 Russian Federation 102 107 1 02 1 07 97 91 95 84 46 45
79 Latvia 82 83 90 84 45 39
80 Peru 111 117 54 63 17 40 83 85 17 6
81 Costa Rica 1 04 1 05 106 106 51 49 44 45 21 30 84 91 80 90 5
82 Lebanon 114 117 78 73 30 29 10
83 Thailand 97 97 1 00 98 28 37 30 38 13 19 8 4
84 Panama 105 1 08 65 65 58 21 23 88 88 87 85 10 9
85 Turkey 90 98 1 02 107 24 48 44 74 5 16 98 98 28 8
86 Poland 99 97 100 98 80 87 75 82 18 26
87 Estonia 83 84 96 87 43 38
88 Slovak Republic 101 101 90 87 17
89 Venezuela 97 95 25 41 18 29 21 29 10
90 Botswana 100 120 83 1 13 20 55 17 49 3 98 94 91 92 40 20
Upper-middle-income 103 w 106w 43 w 43 w 13 w 16w 14 w 12w l
91 South Africa 110 III 84 71 13 18 18
92 Croatia 86 80 27
93 Mexico 121 1 10 122 114 46 58 51 57 14 14 63 85 13
94 Mauritius 91 106 94 107 49 60 51 58 4 97 98 97 99 21 13
95 Gabon 136 132 3 79 80 82 82 47 26
96 Brazil 97 101 36 31 II 12 17 17
97 Trinidad and Tobago 100 94 98 94 78 74 4 8 89 97 83 3
98 Czech Republic 100 99 88 85 18 16
99 Malaysia 92 93 93 93 46 61 50 56 4 99 98 22 11
100 Hungary 97 95 96 95 67 82 72 79 14 17 96 97 96 97
101 Chile 108 98 110 99 56 67 49 65 12 27 81 95 78 95
102 Oman 36 82 69 87 6 57 19 64 5
1 03 Uruguay 107 108 107 109 62 61 17 30 99 98 93 98 2
104 Saudi Arabia 49 73 74 78 23 43 36 54 7 14 90 81 50 29
105 Argen tina 106 107 106 108 75 70 22 41 76 73 4 4
106 Slovenia 97 97 90 88 28
1 07 Greece 103 1 03 77 85 17 98 98
Low- and middle-income 87 w '99' w 1 05 w flO w 33 w 49 w 45 w' 8 ,.., 39 w � if�"
Sub-Saharan Africa 68 w 65 w 90 w 78 w 10 w 22 w 20 w 27 w I w 54 w 35 w
East Asia and Pacific 102 w 1 1 6 w 1 1 8 w 1 20 w 36 w 51 w 51 w 60 w 3w 5w 24 w 9w
South Asia 61 w 87 w 91 w 1 I 0 w 18 w 35 w 36 w 5w 64 w 37 w
Europe and Central Asia 97 w 97 w 90 w 81 w 31 w 32 w
Middle East and N. Africa 74 w 91 w 98 w 1 03 w 32 w 51 w 52 w 65 w II w 14 w 50 w 28 w
Latin America and Caribbean 105 w 108 w 41 w 40 w 14 w 15 w 14 w I2w
High-income econorn_ies 1,03 w 103 w 103 w 103 w 98 w 56 w
108 Korea, Rep. 111 102 109 100 74 92 82 93 IS 48 96 100 96 1 00 b
109 Portugal 123 118 124 122 40 34 11 23
110 Spain 1 09 105 110 104 89 1 20 85 107 23 41 94 95 92 94
III New Zealand III 101 III 1 02 84 1 04 82 103 27 58 99 98 b b
1 12 Ireland 100 1 03 100 103 95 110 85 101 18 34 100 99 97 98 b b
1 13 t Israel 96 95 91 84 29 35 97 98
1 14 t Kuwait 100 lOS 76 84 II 25 18
liS t United Arab Emirates 88 108 90 112 49 94 55 84 3 II 93 94 20 21
116 United Kingdom 103 113 1 03 1 12 85 94 82 91 19 37 b b
I 17 Australia 1 10 107 112 108 72 86 70 83 25 42 97 100 94 98 b b
1 18 Italy 100 99 1 00 98 70 82 73 81 27 37 b b
1 19 Canada 99 104 99 106 89 103 87 104 52 103 97 98 94 95 b b
1 20 Finland 96 100 97 100 105 130 94 1 10 32 63 99 98 99 98 b b
121 t Hong Kong 1 06 107 65 63 10 21 12 4
1 22 Sweden 97 100 96 100 93 1 00 83 99 31 38 100 99 b b
1 23 Netherlands 101 99 99 96 90 120 95 126 29 45 100 97 b b
1 24 Belgium 103 100 104 99 92 1 04 90 1 03 26 81 78 b b
1 25 France 110 lOS 1 12 1 07 92 107 77 1 04 25 50 b b
1 26 t Singapore 1 06 109 59 56 8 100 100 99 lao 14 4
1 27 Austria 98 103 99 103 87 1 04 98 1 09 22 43 97 99 92 97 b b
128 United States 1 00 1 06 101 107 97 98 56 81 b b
129 Germany" 98 97 100 101 36 98 99 96 97 b b
130 Denmark 95 98 96 97 1 04 1 15 lOS 1 12 28 41 b b
131 Norway 100 99 100 99 96 1 14 92 118 26 54 b b
1 32 Japan 101 102 101 102 94 97 92 95 31 30 1 00 100 100 lOa b b
133 Switzerland 102 100 89 93 18 31 94 92 b b

-World 90 w 99 w l 04 w 1 09 w 39 w 57 w 50 w 13w
,
a. Data for 1980 include Eritrea. b. According to UNESCO, illiteracy is less than 5 percent. c. Data before 1990 refer to the Federal Republic of Germany before
unification.
228 WORLD D EVE L O P M E N T R E P O RT 1 997

Table 8. Commerc i a l e n ergy use

Net
Energy use loil equivalent) energy imports Carbon dioxide emissions·
Total Per capita Ayg. annual GDP per kg. as % of energy Total Per capita
(thous. metric tons) (kg) growth rate (%) (1987 $) consumption (mill. metric tons) (metric tons)
1980 1994 1980 1994 1980-94 1980 1994 1980 1994 1980 1992 1980 1992
�w�income economl'es " 587,124' [ ' "i , 1 54,712 , 248 w 369 w '4:4 w 0.9 w I.I w 2,Q63 ' 3,880 , 0.9 w 1.3 w
! Excluding China and Ivdia 80,087 , 1 37,034 , 1 14 w 134 w 2.3 w 2.6 w 223 t 443 , 0.3 w O.5 W[
1 Mozambique 1 , 123 619 93 40 -2.5 1 .4 3.3 -15 74 3 0.3 0.1
2 Ethiopia 624 1 , 193 17 22 5.2 6.9 91 87 2 0.0 0.1
3 Tanzania 1,023 975 55 34 0.7 4.5 92 83 2 2 0.1 0.1
4 Burundi 58 143 14 23 6.8 1 3.9 8.3 98 97 o o 0.0 0.0
5 Malawi 334 370 54 39 1.5 3.2 3.4 70 59 1 0.1 0.1
6 Chad 93 100 21 16 0.6 6.2 10.9 100 100 a 0.0 0.0
Rwanda 190 209 37 34 -0.4 9.3 4.9 85 78 a 0.0 0.1
8 Sierra Leone 310 323 96 77 0.5 2.3 2.4 100 100 o 0.2 0.1
9 Nepal 174 582 12 28 8.7 12.5 7.3 91 88 0.0 0.1
10 Niger 210 327 38 37 2.1 12.1 7.3 93 83 0.1 0.1
11 Burkina Faso 144 160 21 16 l.l 1 1 .2 1 6.0 1 00 100 0.1 0.1
12 Madagascar 391 479 45 36 1 .7 6.7 5.6 90 83 2 0.2 0.1
13 Bangladesh 2,809 7,566 32 64 7.7 4.5 3.1 60 28 17 0.1 0.2
14 Uganda 320 425 25 23 1 .3 22.6 52 58 1 0.1 0.1
15 Vietnam 4,024 7.267 75 101 3.1 7.5 32 -55 17 22 0.3 0.3
16 Guinea-Bissau 31 39 38 37 2.1 3.8 5.8 100 100 o o 0.2 0.2
17 Hai[i 240 200 45 29 1 .2 9.5 7.9 77 93 1 1 0.1 0.1
18 Mali 164 205 25 22 1 .8 1 1 .2 1 1 .5 87 80 o o 0.1 0.0
19 Nigeria 9,879 17,503 139 162 3.8 3.1 2.2 -968 -484 68 97 1 .0 0.9
20 Yemen, Rep. 1 ,364 3,044 160 206 4.1 100 -463 3 10 0.4 0.7
21 Cambodia 393 512 60 52 2.2 2.4 97 96 o 0.0 0.1
22 Kenya 1 ,991 2,872 120 110 3.1 3.1 3.3 95 83 6 0.4 0.2
23 Mongolia 1 ,943 2,550 1 , 1 68 1,058 2.0 1 .2 1 .2 38 15 7 4.0 4.0
24 Togo 195 183 75 46 1 .8 6.3 69 99 100 0.2 0.2
25 Gambia, The 53 60 83 56 0.9 3.5 4.9 100 100 0.2 0.2
26 Central Mrican Republic 59 93 26 29 2.7 16.2 12.1 71 76 o o 0.0 0.1
27 India 93,907 226,638 137 248 6.6 1 .9 1.6 21 21 350 769 0.5 0.9
28 Lao PDR 107 182 33 38 2.6 9.1 -121 -18 o o 0.1 0.1
29 Benin 149 107 43 20 -3.5 8.3 18.0 93 -194 1 0.1 0.1
30 Nicaragua 756 1,273 270 300 3.3 5.1 2.7 83 63 2 0.7 0.6
31 Ghana 1,303 1 ,542 121 93 2.5 3.6 4.4 57 66 2 4 0.2 0.2
32 Zambia \ ,685 1,296 294 149 -2.6 1 .3 1 .8 32 31 4 2 0.6 0.3
33 Angola 937 931 133 89 0.3 7.0 -722 -2,576 5 5 0.8 0.5
34 Georgia 3,325 6 14 0.7 85 14 2.5
35 Pakiscan 1 1 ,698 32,133 142 254 7.4 1 .8 1 .5 38 40 32 72 0.4 0.6
36 Mauriunia 214 229 138 103 0.5 3.8 4.8 100 100 3 0.4 1 .4
37 Azerbaijan 1 5 ,001 1 6,274 2,433 2,182 -2.7 0.2 1 1 64 8.7
38 Zimbabwe 2,797 4,722 399 438 3.9 1 .5 1.4 28 24 10 19 1 .4 1.8
39 Guinea 356 418 80 65 1 .3 6.1 89 86 1 0.2 0.2
40 Honduras 843 1,173 230 204 2.1 4.2 4.4 76 82 2 0.6 0.6
41 Senegal 875 803 158 97 -0.1 4.2 6.3 100 100 3 3 0.5 0.4
42 China 4 1 3, 1 30 791 ,040 421 664 5.0 0.3 0.7 -4 -1 1 ,489 2,668 1 .5 2.3
43 Cameroon 774 1 ,335 89 103 2.6 10.0 6.9 -269 -333 4 2 0.4 0.2
44 Co,e d'Ivoire 1,435 1 ,406 175 103 1 .4 6.8 6.8 87 70 5 6 0.6 0.5
45 Nbania 3,058 1,093 1 , 1 45 341 -4.8 0.6 2.4 o 3 4 2.8 1 .2
46 Congo 262 847 157 331 3.7 5.7 2.8 - 1 , 193 -1,013 o 4 0.2 1.6
47 Kyrgyz Republic 2,755 616 0.9 47 15 3.4
48 Sri Lanka 1 ,4 1 1 1,728 96 97 1 .9 3.4 5.1 91 80 5 0.2 0.3
49 Armenia 1 ,071 1 ,441 346 384 1 .6 4.3 1 .4 79 4 l.l
Middle-income economics 1,873,142 , 2,313,337 , 1,537 w 1,475 w 1.7 w 2,831 , 7,221 , 2.9 w 4.8 �
Lower-middle-income 1,4.48,776 , ., .1,647,009 " ,l,632 w 1 ,664 , 5,565 , 2.6 w 5.1 w
, l
50 Lesotho o 0.0
51 Egyp', Arab Rep. 1 5 , 176 34,071 37 1 600 5.7 1 .6 1 .2 -120 -79 45 84 1.1 1.5
52 Bolivia 1,713 2,698 320 373 1 .6 2.7 2.1 -107 -61 5 7 0.8 1 .0
53 Macedonia, FYR 2,686 1,279 44 4 2.0
54 Moldova 4,763 1 ,095 99 14 0.0 3.3
55 Uzbekistan 41,825 1,869 0.3 o 123 5.7
56 Indonesia 25,028 69,740 169 366 8.3 2.1 1 .8 -275 -120 95 185 0.6 1 .0
57 Philippines 1 3 ,406 2 1 , 1 99 277 316 3.5 2.4 1 .9 79 71 37 50 0.8 0.8
58 Morocco 4,927 8,509 254 327 4.1 3.1 2.9 87 95 16 27 0.8 l.l
59 Syrian Arab Republic 5,343 13,675 614 997 6.1 1.9 1.2 -78 - 1 30 19 42 2.2 3.3
60 Papua New Guinea 705 990 228 236 2.4 3.9 4.8 89 -150 2 2 0.6 0.6
61 Bulgaria 28.476 20,568 3,213 2,438 -2.7 0.7 1 .0 74 56 75 54 8.4 6.4
62 Kazakstan 76,799 56,664 5,153 3,371 -2.3 0.3 o -25 298 17.6
63 Gua'emala 1,443 2,165 209 210 3.2 5.0 4.3 84 74 4 6 0.6 0.6
64 Ecuador 4,209 6,345 529 565 2.7 2.3 2.2 -156 -231 13 19 1.7 1 .8
65 Dominican Republic 2,083 2,591 366 337 1 .4 2.0 2.5 93 94 6 10 l.l 1 .4
66 Romania 63,846 39,387 2,876 1,733 -3.1 0.5 0.7 19 27 191 122 8.6 5.4
67 Jamaica 2 , 1 69 2,703 1 ,0 1 7 1,083 2 .3 1 .3 1.5 99 100 8 8 4.0 3.3
68 Jordan 1 ,7 1 0 4,306 784 1,067 5.2 1.5 100 96 5 11 2.2 3.0
69 Ngeria 12,078 24,834 647 906 4.9 4.1 2.6 -452 -3 1 8 66 79 3.5 3.0
70 El Salvador 1 ,000 2,032 220 370 4.0 4.5 2.6 63 70 2 4 0.5 0.7
71 Ukraine 108,290 1 6 5 , 1 32 2, 1 64 3,180 -1.4 0.4 -1 48 61 1 1 1 .7
72 Paraguay 550 1 ,402 175 299 6.9 6.0 3.5 88 - J 23 3 0.5 0.6
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CTED WO RLD D EV E L O PM E NT I N D I C ATO R S 229

Net
Energy use (oil equivalent) Carbon dioxide emissions'
energy imports
Total Per capita Avg. annual GDP per kg. as % of energy Total Per capHa
(thous. metric tons) (kg) growth rate (%) (1987 $) consumption (mill. metric tons) (metric tons)
1980 1994 1980 1994 1980-94 1980 1994 1980 1994 1980 1992 1980 1992
73 Tunisia 7,555 595 0.8 70 22 5.9
74 Li thuania 1 3,972 22,470 501 2,030 3.5 2.1 2.1 -99 39 61 1 .4 1 .8
75 Colombia 622 o 0.0
76 Namibia 2,385 24,772 247 13.4 0.8 -8 88 102 9.9
77 Belatus 750,240 595,440 5,397 2,392 -2.6 0.6 0.5 o -5 3 2, 1 03 14.1
78 Russian Federation 3,997 4,014 1 .2 90 15 5.6
79 Latvia 8 , 1 39 8,555 471 1,569 -0.2 2.5 2.7 -36 0 24 22 1 .4 1 .0
80 Peru 1 ,292 1 ,843 566 367 3.5 3. 1 3,4 86 67 2 4 1.1 1 .2
81 Costa Rica 2,376 3,790 840 558 2.3 97 98 6 11 2.2 2.9
82 Lebanon 1 2,093 41,395 259 964 1 3,4 2.8 2.2 96 61 40 112 0.9 2.0
83 Thailand 1,376 1 , 5 97 703 769 1 .2 3.2 3.9 97 87 4 4 1 .9 1.7
84 Panama 3 1 ,3 1 4 57,580 705 618 4,4 1 .9 1 .8 45 53 76 1 45 1 .7 2.5
85 Turkey 124,500 92,537 3,499 957 -2.0 0.5 0.7 3 -2 460 342 12. 9 8.9
86 Poland 5,560 2,401 0.7 39 21 0.3 1 3. 5
87 Estonia 17,343 3,709 0.9 72 37 7.0
88 Slovak Republic 35,0 1 1 46,300 2,354 3,243 2.3 1 .3 1 .2 -280 -269 90 1 16 6.0 5.7
89 Botswana 424,366 666,328 1 ,282 387 2.6 2.3 1 .7 1 , 167 1 ,656 3.7 4.0
90 Venezuela 384 549 426 2,186 2.6 2.1 4.7 32 55 2 1. 1 1.6
Upper-middle-income\, :, 424.366 t 666,328 t 1 , 282 w 1,544 w 2_3 w l. 7 w 1, 167 1 1 ,65 6 1 3.7 w 4.0 w
91 South Mrica 60,5 1 1 86,995 2,074 2 , 1 46 2.1 1 .2 1 .0 -14 -35 213 290 7.3 7.5
92 Croatia 6,667 1,395 43 16 3.4
93 Mexico 97,434 1 40,840 1 ,464 1,561 2.6 1 .3 1.2 -4 9 -48 260 333 3.9 3.8
94 Mauritius 339 431 351 387 2.8 3.7 6.3 94 92 1 0.6 1 .3
95 Gabon 759 692 1 ,098 652 -0.4 5.0 5.5 - 1 , 1 06 -2, 2 1 2 6 6.9 5.5
96 Brazil 72, 1 4 1 1 1 2,795 595 718 3.9 3.4 2.8 65 39 184 217 1.5 1 .4
97 Trinidad and Tobago 3,863 6,935 3,570 5,436 2.9 1.5 0.7 -240 -87 17 21 1 5 .4 16.5
98 Czech Republic 29,394 39,982 2,873 3,868 45.2 0.8 -29 136 13.1
99 Malaysia 9,522 33,4 1 0 692 1 ,699 10.0 2.4 1.7 -58 -71 28 70 2.0 3.8
1 00 Hungary 28,322 24,450 2,645 2,383 -0.9 0.8 1.0 49 47 82 60 7.7 5.8
101 Chile 7,743 1 4 , 1 55 695 1,012 5.0 2.3 2.3 50 68 27 35 2.4 2.6
102 Oman 1,346 5,0 1 8 1,223 2,392 9.1 2.9 2.4 -1 ,024 -787 6 10 5.3 5.3
103 Uruguay 2,208 1,971 758 622 3.2 3.4 4. 6 89 67 6 5 2.0 1.6
104 Saudi Arabia 35,496 83,772 3,787 4,566 5.5 2.7 I.! -1,361 -463 131 221 1 4.0 13.1
105 Argentina 39,669 5 1 ,405 1,411 1 ,504 1 .6 2.8 2.7 -18 107 117 3.8 3.5
106 Slovenia 5,195 2,612 51 6 2.8
1 07 Greece 1 5,973 23,560 1,656 2,260 3.3 2.8 2.2 77 62 51 74 5.3 7.2
Low- and middle-income 2,460,266 1 3,468,049 1 686 w 739 w -0.1 w 1 .4 w 1.l w 4,893 1 1.1,101 1 1.5 w 2.4 w
Sub-Saharan Africa 94,721 1 133,471 1 249 w 237w 1.2 w 2.2 w 2.0w 353 1 472 t 0.9 w 0.9 w
East Asia and Pacific 5 14,066 1 1 ,000,586 1 378 w 593 w 4.8 w 0.7 w 0.9 w 1 ,846 1 3,378 1 1.4 w 2.l w
Soulh Asia 1 10,906 1 271,293 1 123 w 222 w 6.4 w 2.0 w 1.7w 395 1 866 1 0.4 w 0.7 w
Europe and Central Asia 1,279,071 1 1 ,288,624 1 3,105 w 2,647 w --4.6 w 0.6 w 944 1 4,506 1 9.3 w
Middle Eas< and N. Africa 143,540 1 323,064 1 825 w 1,220w 4.8 w 3.2 w 1.7w 500 1 849 1 2.9 w 3_4w
Latin America and Caribbean 3 1 7,962 1 451,011 1 888 w 960 w 2.9 w 2.3 w 2.0w 855 1 1 ,029 1 2.4 w 2.3 w.
.,tJigh-income, economies 3,789,479 1 ,,,.,4,543,482 1 4,644 w 5, 066w 1 .9 w , 2.9 w 3.4w 9,8n 1 10,f161. , 12.4 w
1 08 Korea, Rep. 4 1 ,426 1 32,538 1,087 2,982 9.5 1 .8 1.8 77 86 126 290 3.3 6.6
1 09 Portugal 1 0,291 18,090 1 ,0 5 4 1,827 4.7 3.5 2.8 86 88 27 47 2.8 4.8
1 10 Spain 68,692 96,200 1 ,837 2,458 2.8 3.6 3.6 77 69 200 223 5.4 5.7
III New Zealand 9,202 1 5,070 2,956 4,245 4.1 3.4 2.8 39 15 18 26 5.7 7.6
1 12 Ireland 8,485 1 1 ,200 2,495 3,137 2.2 3.1 3.9 78 68 25 31 7.4 8.7

113 t Israel 8,616 1 4 ,624 2,222 2,717 4.9 3.4 3.7 98 96 21 42 5.4 8.1
1 14 , Kuwait 9,500 1 3,968 6,909 8,622 0.3 2.7 2.0 -739 -693 25 16 1 8.0 1 1 .2
115 t United Arab Emirates 8,558 25,1 37 8,205 10,531 6.3 3.6 -996 -454 36 71 34.8 33.9
116 United Kingdom 20\,200 220,270 3,572 3,772 0.8 2.8 3.5 -10 588 566 10.4 9.8
1 17 Australia 70,399 95,280 4,792 5,341 2.3 2.4 2.6 -22 -83 203 268 13.8 1 5.3

118 Italy 139,190 1 54,600 2,466 2,707 1 .4 4.8 5.5 86 81 372 408 6.6 7.2
119 Canada 1 93,170 229,730 7,854 7,854 1 .5 1 .7 2.0 -7 -47 430 410 17.5 14.4
120 Finland 24,998 30,520 5,230 5,997 1.7 2.9 3.0 72 58 55 41 1 1.5 8.2
121 t Hong Kong 5,628 1 3,243 1,117 2 , 1 85 6.4 5.3 5.3 100 100 16 29 3.3 5.0
1 22 Sweden 40,992 50,250 4,933 5,723 1 .3 3.4 3.3 61 38 71 57 8.6 6.6
1 23 Netherlands 65, 1 06 70,440 4,601 4,580 1 .3 3.0 3.7 -10 7 1 53 139 1 0.8 9.2
1 24 Belgium 46,122 5 1 ,790 4,684 5 , 1 20 1.5 2.8 3.2 83 78 128 102 13.0 10.1
1 25 France 190,660 234, 1 60 3,539 4,042 2.0 4.1 4.4 75 95 484 362 9.0 6.3
1 26 t Singapore 6,049 23,743 2,651 8,103 9.9 2.2 1 .6 100 100 30 50 13.2 1 7.7
1 27 Austria 23,449 26,500 3 , 1 05 3,301 1 .6 4.6 5.4 67 66 52 57 6.9 7.2

1 28 United States 1,801 ,000 2,037,980 7,908 7,8 1 9 1 .6 2.1 2.6 14 19 4,623 4,881 20.3 19. 1
129 Germany 359, 170 336,490 4,587 4,128 -0.1 49 58 1 ,068 878 1 3.6 10.9

1 30 Denmark 1 9,488 20,700 3,804 3,977 0.8 4.4 5.5 97 28 63 54 1 2.3 1 0.4

131 Norway 18,865 23,060 4,6 1 1 5,3 1 8 1 .6 3.9 4.6 -195 -638 40 60 9.8 14.1

1 32 Japan 347,120 4 8 1 ,850 2,972 3,856 2.8 5.5 6.2 88 81 934 1 ,093 8.0 8.8

1 33 Switzerland 20,840 2 5 ,380 3,298 3,629 1.7 7,3 7 .4 66 57 41 44 6.5 6.4

" World 6,249,745 t 8,011,531 1 1,419w 1,433 � .

1 0w 2. 3 w 2.4 w " 14,770 t 17 1
2 1 ,3. 3. 6 w
a. From industrial processes.
230 WORLD D EV E L O P M E N T R E P O RT 1 997

Table 9. Land use and u rb a n izati o n

Land use ( % of total land areal Urban population Population in urban agglomerations
Pennanent As % of total Ayg. annual of 1 million or more as % of
Cropland pasture Other population growth rate 1%1 Urban Total

1980 1994 1980 1994 1980 1994 1980 1995 1980-95 1980 1995 1980 1995
V
t Low.income economies 12 w 12 w 31 w 32 w 57 w 55 w 21 w 29 w 4.0 w 32 w 34 w 7w 1O �;
Excluding China and India 8w 8w 32 ,X\' 32 w 60 w 60 w 21 w 28 w 4.6 w 28 w 31 w 6w 9w
I Mozambique 4 4 56 56 40 40 13 38 8.5 48 36 6 14
2 Ethiopia 11 20 69 11 13 4.5 30 29 3 4
3 Tanzania 3 4 40 40 57 56 15 24 6.7 30 24 5 6
4 Burundi 46 46 39 39 15 15 4 8 6.8 o o o 0
5 Malawi 14 18 20 20 66 62 9 13 6.0 o o o 0
6 Sierra Leone 7 8 31 31 62 62 25 39 4.9 o o o 0
7 Rwanda 41 47 28 28 30 24 5 8 4.7 o o o 0
8 Ch� 3 3 36 36 62 62 19 21 3.4 o o o 0
9 Nepal 17 17 14 15 69 68 7 14 7.8 o o o 0
10 Niger 3 3 8 8 90 89 13 23 7.2 o o o 0
11 Madagascar 5 5 41 41 54 53 18 27 5.7 o o o 0
12 Burkina Faso 10 13 22 22 68 65 9 27 1 1 .3 o o o 0
13 Vietnam 20 21 79 78 19 21 2.7 27 31 5 7
14 Bangladesh 70 74 25 21 11 18 5.6 46 47 5 9
15 Uganda 28 34 63 57 9 12 5.2 o o o 0
16 Mali 2 2 25 25 74 73 19 27 5.3 o o o 0
17 Guinea-Bissau 10 12 38 38 51 50 17 22 3.7 o o o 0
18 Haiti 32 33 18 18 49 49 24 32 3.9 55 56 13 18
19 Nigeria 33 36 44 44 23 20 27 39 5.6 23 27 6 11
20 Yemen, Rep. 3 3 30 30 67 67 20 34 7.6 o o o 0
21 Cambodia 12 22 3 85 70 12 21 6.7
22 Kenya 8 8 37 37 55 55 16 28 7.0 32 28 8
23 Togo 43 45 4 4 53 52 23 31 5.1 o o o 0
24 Mongolia I I 79 75 20 24 52 60 3.6 o o o 0
25 Gambia, The 16 17 19 19 65 64 18 26 6.3 o o o 0
26 India 57 57 4 4 39 39 23 27 3.1 25 35 6 10
27 Central African Republic 3 3 5 5 92 92 35 39 3.1 o o o 0
28 Lao PDR 3 4 3 3 94 93 J3 22 6.3 o o o 0
29 Benin 16 17 4 4 80 79 32 42 5.1 o o o 0
30 Nicaragua 10 10 40 45 50 44 53 62 3.9 42 44 23 27
31 Ghana 15 19 37 37 48 44 31 36 4.3 30 27 9 10
32 Zambia 7 7 40 40 53 53 40 45 4.0 23 33 9 15
33 Angola 3 3 43 43 54 54 21 32 5.9 63 64 13 20
34 Georgia 17 16 39 24 44 60 52 58 1.3 42 43 22 25
35 Pakistan 26 28 6 6 67 66 28 35 4.6 39 53 II 18
36 Mauritania 0 o 38 38 62 62 29 54 6.8 o o o 0
37 Azerbaijan 22 23 27 25 51 52 53 56 1.7 48 44 26 25
38 Zimbabwe 7 7 44 44 49 48 22 32 5.7 o o o 0
39 Guinea 3 3 44 44 54 53 19 30 5.8 65 77 12 23
40 Honduras 16 18 13 14 71 68 36 48 5.2 o o o 0
41 Senegal 12 12 30 30 58 58 36 42 4.0 49 55 18 23
42 China II 10 36 43 53 47 19 30 4.2 41 35 8 II
43 Cameroon 15 15 4 4 81 81 31 45 5.3 19 22 6 10
44 Cote d'Ivoire 10 12 41 41 49 47 35 44 5.2 44 46 15 20
45 Albania 26 26 15 15 59 59 34 37 2.1 o o o 0
46 Congo 0 o 29 29 70 70 41 59 5.6 o o o 0
47 Sri Lanka 29 29 7 7 64 64 22 22 1.6 o o o 0
48 Kyrgyz Republic 8 7 47 44 45 48 38 39 1.6 o o o 0
49 Armenia 66 69 1.6 51 51 34 35
'
Middle-income economies 9w 10 w 28 w 23 w 62 w 67 w 52 w 60 w 2.8 w 31 w 33w 16 w 20 w "
Lower-middle-income 10 w Il w 18 w 71 w 48 w 56 w 2.. 8 »: 28 w 30 w 13 w 17 "C
50 Lesotho 10 11 66 66 24 24 13 23 6.5 o o o 0
51 Egypt, Arab Rep. 2 4 o o 98 96 44 45 2.5 52 51 23 23
52 Bolivia 2 2 25 24 73 73 46 58 3.9 30 29 14 17
53 Macedonia, FYR 26 25 49 53 60 1.5 o o o 0
54 Moldova 67 66 11 13 23 21 40 52 2.4 o o o 0
55 Uzbekistan 10 II 57 50 33 39 41 42 2.5 28 24 11 10
56 Indonesia 14 17 7 7 79 77 22 34 4.8 33 39 7 13
57 Philippines 29 31 3 4 67 65 38 53 4.9 33 25 12 14
58 Morocco 18 21 47 47 35 32 41 49 3.3 26 37 II 18
59 Syrian Arab Republic 31 30 46 45 24 25 47 53 4.1 60 52 28 28
60 Papua New Guinea I I o o 99 99 13 16 3.6 o o o 0
61 Bulgaria 38 38 18 16 44 46 61 71 0.6 20 23 12 16
62 Kazakstan 13 13 70 70 16 17 54 60 1.6 12 13 6 8
63 Guatemala 16 18 12 24 72 58 37 42 3.6 o o o 0
64 Ecuador 9 11 15 18 77 71 47 58 3.9 29 44 14 26
65 Dominican Republic 29 31 43 43 27 26 51 65 3.8 49 51 25 33
66 Romania 46 43 19 21 35 36 49 55 1.0 18 17 9 9
67 Jordan 4 5 9 9 87 87 60 72 5.8 49 39 29 28
68 Jamaica 22 20 24 24 54 56 47 55 2.2 o o o 0
69 Algeria 3 3 15 13 82 83 43 56 4.5 25 24 11 13
70 EI Salvador 35 35 29 29 36 35 42 45 2.0 o o o 0
71 Ukraine 61 59 12 13 27 28 62 70 1.0 22 22 14 15
72 Paraguay 4 6 40 55 56 40 42 54 4.7 o o o 0
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E LECTED W O R LD D EVE L O P M E NT I N D I C AT O R S 23 1

Land use (% of total land areal Urban population Population in urban agglomerations
Pennanent As % of total Avg. annual of 1 million or more as % of
Cropland pasture Other population growth rate (0/01 Urban Total

1980 1994 1980 1994 1980 1994 1980 1995 1980-95 1980 1995 1980 1995
73 Tunisia 30 32 22 20 48 48 51 57 3.0 34 40 17 23
74 Lithuania 49 47 8 7 43 46 61 72 1.8 o o o o
75 Colombia 37 39 58 56 64 73 2.7 34 38 22 28
76 Namibia 1 46 46 53 53 23 38 6.2 o o o o
77 Belarus 31 31 16 14 53 55 56 71 2.0 24 24 14 17
78 Russian Federation 5 87 70 73 0.8 23 26 16 19
79 Latvia 28 28 12 13 60 59 68 73 0.5 o o o o
80 Peru 3 3 21 21 76 76 65 72 2.9 40 44 26 31
81 Costa Rica 10 10 39 46 51 44 43 50 3.7 o o o o
82 Lebanon 30 30 1 69 69 73 87 3.7
83 Thailand 36 41 1 2 63 58 17 20 2.6 59 56 10 11
84 Panama 7 9 17 20 75 71 50 56 2.8 o o o o
85 Turkey 37 36 13 16 50 48 44 70 5.4 39 35 17 24
86 Poland 49 48 13 13 38 39 58 65 1 .2 31 28 18 18
87 Estonia 24 27 7 68 66 70 73 0.4 o o o o
88 Slovak Republic 41 34 13 17 45 49 52 59 1 .3 o o o o
89 Venezuela 4 4 20 20 76 75 83 93 3.3 20 29 16 27
90 Botswana 45 45 54 54 15 31 8.4 o o o o
. Upper middle income
- - . 30 w , 32,w 63 w 60 w 64 w 73 w. i.8 �: 38 w 38 w 28.'Y
91 South Africa II 11 67 67 22 23 48 51 2.7 23 38 11 19
92 Croatia 29 22 28 20 42 59 50 64 2.0 o o o o
93 Mexico 13 13 39 39 48 48 66 75 3.1 41 37 27 28
94 Mauritius 53 52 3 44 44 42 41 0.6 o o o o
95 Gabon 2 2 18 18 80 80 36 50 5.4 o o o o
96 Brazil 6 6 20 22 74 72 66 78 3.0 42 42 27 33
97 Trinidad and Tobago 23 24 2 2 75 74 63 68 1 .7 o o o o
98 Czech Republic 41 44 13 12 45 45 64 65 0.2 18 18 12 12
99 Malaysia 15 23 85 76 42 54 4.3 16 11 7 6
1 00 Hungary 58 54 14 12 28 34 57 65 0.5 34 30 19 20
101 Chile 6 6 17 18 77 76 81 86 2.0 41 41 33 36
1 02 Oman o 0 5 5 95 95 8 13 8.6 o o o o
1 03 Uruguay 7 78 77 14 15 85 90 1 .0 49 46 42 42
1 04 Saudi Arabia 2 40 56 60 42 67 79 6.0 28 27 19 21
1 05 Argentina 10 10 52 52 38 38 83 88 1 .8 42 44 35 39
1 06 Slovenia 14 25 61 48 64 2.2 o o o o
107 Greece 30 27 41 41 29 32 58 65 1.4 54 54 31 35
Low- and middle-income 10 w II w 29 w 27 w 60 w 63 � 32 w 39 w 3.3 w 32 w 33 w lO w 1 3 w'l
Sub-Saharan Africa 6w 7w 34 w 34 w 60 w 59 w 23 w 31 w 5.0 w 23 w 26 w 5 w 8w
w! Asia and Pacific II w 12 w 30 w 34 w 59 w 54 w 21 w 31 w 4.2 w 37 w 34 w 8 w II w
Sou!h Asia 44 w 45 w II w lO w 45 w 45 w 22 w 26 w 3.4 w 27 w 38 w 6w lO w
Europe and Cen!ra1 Asia 13 w I3 w 16 w 71 w 58 w 65 w 1 .6 w 24 w 25 w 14 w 16 w
Middle w! and N. Afrio 5 w 6w 21 w 24 w 74 w 70 w 48 w 56 w 4.2 w 36 w 36 w 17 w 20 w
La!in America and Caribbean 7w 7w 28 w 29 w 65 w 63 w 65 w 74 w 2.8 w 37 w 38 w 24 w 28 w
High-income economles 12 w , 12 w 25 w 24 w 62 w 63 w 75 w 75 w 0.7 w 41 w 43 w 31 w 33 w .
1 08 Korea, Rep. 22 21 I 1 77 78 57 81 3.5 65 64 37 52
1 09 PorlUgal 34 32 9 11 57 58 29 36 1.3 46 53 13 19
110 Spain 41 40 22 21 37 38 73 77 0.6 27 23 20 18
III New Zealand 13 14 53 50 34 35 83 84 1.0 o o o o
1 12 Ireland 16 19 67 45 17 36 55 58 0.5 o o o o
1 13 t Israel 20 21 6 7 74 72 89 41 37 35
1 14 t Kuwai! 0 o 8 92 92 90 97 0.9 67 68 60 66
1I 5 t U niled Arab Emirales 0 o 2 2 97 97 72 84 5.8 o o o o
116 U niled Kingdom 29 25 47 46 24 29 89 90 0.3 28 26 25 23
1 17 Australia 6 6 57 54 37 40 86 85 1.3 55 68 47 58
118 Italy 42 38 17 15 40 47 67 66 0.1 39 30 26 20
1 19 Canada 5 5 3 3 92 92 76 77 1.4 38 47 29 36
1 20 Finland 8 9 o 91 91 60 63 0.8 o o o o
1 21 t Hong Kong 7 7 92 92 92 95 1.5 100 95 91 90
1 22 Sweden 7 7 2 91 92 83 83 0.4 20 21 17 17
123 N«her!ands 24 28 35 31 41 41 88 89 0.6 16 7 14
124 Belgium 24 21 55 95 97 0.3 13 11 12 11
1 25 France 34 35 23 19 42 45 73 73 0.5 29 28 21 21
1 26 t Singapore 13 2 o o 87 98 1 00 100 1.8 106 95 106 95
1 27 Austria 20 18 25 24 56 57 55 56 0.5 49 46 27 26

1 28 Uniled S!ales 21 21 26 26 53 53 74 76 1 .2 49 51 36 39
1 29 Germany 36 34 17 15 47 51 83 87 0.6 46 47 38 41

130 Denmark 63 56 6 7 31 37 84 85 0.2 32 30 27 25

1 31 Norway 3 3 o o 97 97 71 73 0.7 o o o o
132 Japan 13 12 2 2 85 87 76 78 0.6 44 48 34 37

133 Swi!zer!and 10 11 40 29 49 60 57 61 1.2 o o o o

\
World Il w II w 28 w 26 w 60 w 63 w 40 w 45 '; 2.5 w 35 w 36 w 14 w 16 w
232 WORLD D EVE L O P M E NT R E P O RT 1 997

Table 1 0 . Forest a n d water reso u rces

Forest areas
Annual freshwater withdrawal, 1995b
Ann. deforestation, 1980-90 Nationally protected areas, 1994" As % of
Total area
Per capita leu. ml
(thousand sq. kml Thousand % Thousand As % of Total total water
1990 sq. km change sq. km Number land area leu. kmJ resources Domestic Other
'K
'(ow-income economies 7,9 1 6 I 65.5 I 0.8 w 2,00 1 . 1 I 1,842 I 5.2 w
Excluding C;:;hina and India 6,152 I , 53.3 I 0.8 w. . 1 ,276.9 I 795 I 4.9 w
1 Mozambique 173 1 .4 0.8 0.0 1 0.0 0.6 0.4' 13 42
2 Elhiopia 142 0.4 0.3 60.2 23 6.0 2.2 2.0 6 45
3 Tanzania 336 4.4 1.2 139.4 31 1 5.8 1.2 1 .3' 7 28
4 Burundi 2 0.0 0.6 0.9 3 3.5 0.1 2.8 7 13
5 Malawi 35 0.5 1 .4 10.6 9 1 1 .3 0.9 5.0' 7 13
6 Chad 1 14 0.9 0.7 1 1 4.9 9 9.1 0.2 004' 6 29
7 Rwanda 2 0.0 0.2 3.3 2 13.3 0.8 1 2 .2 6 18
8 Sierra Leone 19 0. 1 0.6 0.8 2 1.1 0.4 0.2 7 92
9 Nepal 50 0.5 1 .0 11.1 12 8.1 2.7 1 .6 6 144
10 Niger 24 0.1 004 84.2 5 6.6 0.5 0.9' 9 33
11 Burkina Faso 44 0.3 0.7 26.6 12 9.7 0.4 1 .4 13
12 Madagascar 158 1 .3 0.8 1 1 .2 36 1 .9 16.3 4.8' 16 1 ,568
13 Bangladesh 8 0.4 4.1 1.0 8 0.7 22.5 1 .0' 7 213
14 Uganda 63 0.6 1.0 19.1 31 9.6 0.2 0.3' 7 14
15 Vietnam 83 1 .4 1 .5 13.3 52 4.1 28.9 7.7 54 361
16 Guinea-Bissau 20 0.2 0.8 0.0 0.0' 3 8
17 Haiti o 0.0 5.1 0.1 3 0.4 0.0 0.4 2 5
18 Mali 121 1.1 0.8 40. 1 11 3.3 1.4 l A' 3 1 59
19 Nigeria 1 56 1.2 0.7 29.7 19 3.3 3.6 1 .3 13 28
20 Yemen, Rep. 41 0.0 0.0 0.0 o 0.0 3.4 1 36.0 17 318
21 Cambodia 1 22 1.3 1.0 30.0 20 17.0 0.5 0.1 3 61
22 Kenya 12 0. 1 0.6 35.0 36 6.2 2.1 7.0' 14 37
23 Mongolia 139 1 .3 0.9 6 1 .7 15 3.9 0.6 2.2 30 243
24 Togo 14 0.2 1.5 6.5 11 1 1 .9 0. 1 0.8' 17 11
25 Gambia, The 1 0.0 0.8 0.2 5 2.3 0.0 0.3' 2 27
26 Central African Republic 306 1.3 0.4 61.1 13 9.8 0.1 0.0 5 20
27 India 517 3.4 0.6 143.4 339 4.8 380.0 1 8.2' 18 594
28 Lao PDR 132 1 .3 0.9 1 .0 0.4 21 239
29 Benin 49 0.7 1 .3 7.8 2 7.0 0.1 0.4' 7 19
30 Nicaragua 60 1.2 1.9 9.0 59 7.4 0.9 0.5 92 275
31 Ghana 96 1 .4 1 .4 1 1 .0 9 4.9 0.3 0.6' 12 23
32 Zambia 323 3.6 1.1 63.6 21 8.6 1.7 IS 54 32
33 Angola 231 1 .7 0.7 26.4 5 2.1 0.5 0.3 8 49
34 Georgia 28 0.2 0.7 1.9 15 2.7 4.0 6.5 156 586
35 Pakislan 19 0.8 3.5 37.2 55 4.8 1 53.4 32.8' 21 2,032
36 Mauritania 6 0.0 0.0 17.5 4 1.7 1.6 1 4 . 0' 59 436
37 Azerbaijan 10 0.1 1.3 1.9 12 2.2 1 5.8 56.4' 90 2,158
38 Zimbabwe 89 0.6 0.7 30.7 25 7.9 1 .2 6.1' 19 117
39 Guinea 67 0.9 1 .2 1.6 3 0.7 0.7 0.3 14 126
40 Honduras 46 1.1 2.2 8.6 43 7.7 1.5 2.1' 12 282
41 Senegal 75 0.5 0.7 21.8 9 1 1 .3 1 04 3.5' 10 191
42 China 1,247 8.8 0.7 580.8 463 6.2 460.0 16.4 28 433
43 Cameroon 204 1 .2 0.6 20.5 14 4.4 0.4 0.1 17 20
44 COle d'Ivoire 1 09 1.2 1.0 1 9.9 12 6.3 0.7 0.9 15 52
45 Albania 14 0.0 0.0 0.3 I I 1 .2 0.2 0.9' 6 88
46 Congo 199 0.3 0.2 1 1 .8 10 3.4 0.0 0.0' 12 7
47 Kyrgyz Republic 7 0.1 1 .2 2.8 5 1.5 1 1 .7 24.0 82 2,647
48 Sri Lanka 17 0.3 1 .4 8.0 56 1 2.3 6.3 14.6 10 493
49 Armenia 3 0.2 3.9 2.1 4 7.6 3.8 45.8' 1 49 996
Middle-income economics 20,9 13 I 1 14.4 1 0.5 w 2,994.3 I 2,662 I 5.0 W
. '..
Lower-l11iddle;;inco)11c , 13,525 h 65,6 I -4,,'" ,Rj ...
",
�", ..--,=e
2,..:.99 .7
1,-, "--'
1_ .,6
. .::'
1::.:
=-=
6
:£;l,-,
. t�_- 5;,,:
.6-, \'�
L �_ �C- _' - �� �
--' � �
� -,, : � --:: � ----c:
..,,-
50 Lesolho o 0.0 0.0 0.1 1 0.2 0.1 1.0 7 24
51 Egypt, Arab Rep. o 0.0 0.0 7.9 12 0.8 56.4 97.1' 67 889
52 Bolivia 493 6.3 1 .2 92.3 25 8.5 1 .2 0.4 20 181
53 Macedonia, FYR 9 0.0 0.1 2.2 16 8.5
54 Moldova 4 -0.2 -� �1 3 M 3.7 29. 1 ' 60 793
55 Uzbekistan 14 1 .0 5.5 2.4 10 0.6 82.2 76.4' 1 65 3,956
56 Indonesia 1 ,095 1 2. 1 1.1 1 85.6 168 1 0.2 1 6.6 0.7 12 83
57 Philippines 78 3.2 3.4 6.1 27 2.0 29.5 9. 1 123 562
58 Morocco 90 -1.2 - 1 .4 3.7 11 0.8 10.9 36.2 23 404
59 Syrian Arab Republic 7 -0.3 -4.3 0.0 0 0.0 3.3 9.4 30 405
60 Papua New Guinea 360 1.1 0.3 0.8 5 0.2 0.1 0.0 8 20
61 Bulgaria 37 -0 . 1 -0.2 3.7 46 3.3 13.9 6.8' 43 1 ,501
62 Kazakslan o 0.0 0.0 9.9 20 0.4 37.9 30.2 92 2,202
63 Gualemala 42 0.8 1.8 1 3.3 18 12.3 0.7 0.6 13 127
64 Ecuador 1 20 2.4 1.8 1 1 1.1 15 40. 1 5.6 1 .8 41 541
65 Dominican Republic 11 0.4 2.9 1 0. 5 17 2 1 .7 3.0 1 4.9 22 423
66 Romania 63 0.0 0.0 1 0. 7 39 4.7 26.0 12.5' 91 1 ,044
67 Jamaica 2 0.3 7.8 0.0 1 0.2 0.3 3.9 11 148
68 Jordan 1 0.0 -1.0 2.9 10 3.3 0.5 32.1 50 1 23
69 Algeria 41 0.3 0.8 1 1 9.2 19 5.0 4.5 30.4' 35 125
70 El Salvador 1 0.0 2.3 0.1 2 0.2 1.0 5.3 17 228
71 Ukraine 92 -0.2 -0.3 4.9 19 0.8 34.7 40.0' 108 565
72 Paraguay 129 4.0 2.8 1 5.0 20 3.8 0.4 0.1' 16 93
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CTE D WDRLD D EVELD PM E NT I N D I CATD R S 2 3 3

Forest areas Annual freshwater withdrawal, 1995b

Ann. deforestation, 1980-90 Nationally protected areas, 1994'
Total area As % of
Per capita (cu. ml
(thousand sq. kml Thousand % Thousand As % of Total total water
1990 sq. km change sq. km Number land area (cu. kml resources Domestic Other
73 Tunisia 7 -0.1 -1.9 0.4 6 0.3 3.1 79.5' 41 276
74 Lithuania 20 0.0 0.0 6.3 76 9.6 4.4 1 9.0' 83 1 , 1 07
75 Colombia 541 3.7 0.7 93.8 80 9.0 5.3 0.5 71 103
76 Namibia 1 26 0.4 0.3 102.2 12 1 2.4 0.2 0.3' 7 103
77 Belarus 63 -0.3 -0.4 2.7 11 1.3 3.0 5.4' 94 200
78 Russian Federation 7,681 1 5.5 0.2 705.4 209 4.2 1 1 7.0 2.7' 1 34 656
79 Latvia 28 -0.1 -0.2 7.8 45 12.5 0.7 2.2' J lO 1 52
80 Peru 679 2.7 0.4 41.8 22 3.3 6.1 1 5.3 57 243
81 Costa Rica 14 0.5 3.0 6.5 28 12.7 1 .4 1 .4 31 749
82 Lebanon 1 0.0 0.6 0.0 0.4 0.8 1 5.6 30 241
83 Thailand 127 5.2 3.5 70.2 111 1 3.7 31.9 17.8' 24 578
84 Panama 31 0.6 1.9 1 3.3 14 1 7.8 1.3 0.9 91 664
85 Turkey 202 0.0 0.0 10.7 49 1 .4 33.5 17.3' 140 445
86 Poland 87 -0.1 -0.1 30.7 III 10.1 12.3 2 1 .9' 42 279
87 Estonia 19 -0.2 - 1 .2 4.1 38 9.7 3.3 2 1 .2 105 1 ,992
88 Slovak Republic 18 0.0 0.1 10.2 40 21.1 1 .8 5.8
89 Botswana 143 0.8 0.5 106.6 1 8.8 0.1 0.6' 5 94
90 Venezuela 457 6.0 1.2 263.2 100 29.8 4.1 0.3' 1 64 218
Upper-middJe-income_ 7.387 t 48.8 t 0.6 w 794.6 t 998 t 3.9 w
91 South Africa 45 -0.4 -0.8 69.7 238 5.7 1 3.3 26.6' 47 348
92 Croatia 20 0.0 0.1 3.9 30 7.0
93 Mexico 486 6.8 1.3 98.5 68 5.2 77.6 2 1 .7 54 845
94 Mauritius 0.0 0.2 0.0 1 2.0 0.4 16.4 66 344
95 Gabon 1 82 1 .2 0.6 10.5 6 4.1 0.1 0.0 41 16
96 Brazil 5,6 1 1 36.7 0.6 3 2 1 .9 272 3.8 36.5 0.5' 54 191
97 Trinidad and Tobago 2 0.0 -2.1 0.2 5 3.1 0.2 2.9 40 108
98 Czech Republic 26 0.0 0.0 10.7 34 1 3.8 2.7 4.7 109 1 57
99 Malaysia 176 4.0 2.1 14.8 51 4.5 9.4 2.1 177 592
100 Hungary 17 -0.1 -0.5 5.7 53 6.2 6.8 5.7' 59 601
101 Chile 88 -0.1 -0.1 1 37.3 66 1 8.3 16.8 3.6 98 1 ,528
102 Oman 41 0.0 0.0 9.9 28 4.6 0.5 24.0 17 547
103 Uruguay 7 0.0 -0.6 0.3 0.2 0.7 0.5' 14 227
104 Saudi Arabia 12 0.0 0.0 62.0 10 2.9 3.6 163.6 224 273
1 05 Argen tina 592 0.9 0.1 43.7 84 1 .6 27.6 2.8' 94 949
106 Slovenia 10 0.0 0.0 1.1 10 5.4
1 07
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Low- and middle-income '28.828 t 179.8 t 0.6 w 4.995.4 t 4.504 [ 5 . 1 w'
Sub-Sabaran Africa 5,322 t 40.7 t 0.7 w 1.362.5 t 673 t 5.8 w
East Asia and Pacific 3,986 t 43.5 t 1.0 w 966.3 t 1 .172 t 6.2 w
South Asia 658 t 5.5 t 0.8 w 2 1 2.4 t 485 t 4.4 w
Europe and Central Asia 8,630 t 16.6 t 0.2 w 860.0 t 964 t 3.6 w
Middle Ean and N. Africa 446 t -1.4 t -{).3 w 290.8 t 170 t 3.0 w
Latin America and Caribbean 9,786 t 74.8 t 0.7 w 1 ,303.4 t 1 ,040 t 6.5 w
High-income econqmies 10,766 t -46.4 t -{).5 w 3,607.9 t 5.506 t 1 1 .9 w
108 Korea, Rep. 65 0.1 0.1 6.9 27 7.0 27.6 41.8 117 515
109 Portugal 31 -0.1 -0.5 5.8 24 6.3 7.3 10.5' 111 628
110 Spain 256 0.0 0.0 42.5 214 8.5 30.8 27.6' 94 687
1 11 New Zealand 75 0.0 0.0 60.7 1 82 22.6 2.0 0.6 271 318
1 12 Ireland 4 0.0 -1.2 0.5 11 0.7 0.8 1 .6' 37 1 96
113 t Israel 0.0 -0.3 3.1 15 14.9 1 .9 84.1' 65 343
1 14 t Kuwait 0 0.0 0.0 0.3 2 1.5 0.5 336 189
1 15 t United Arab Emirates 0 0.0 0.0 0.0 o 0.0 0.9 300.0 97 787
1 16 United Kingdom 24 -0.2 -1.1 51.1 168 21.1 1 1 .8 16.6 41 164
117 Australia 1,456 0.0 0.0 940.8 889 12.3 14.6 4.3 607 327
1 18 Italy 86 0.0 0.0 22.8 171 7.7 56.2 33.7' 1 38 848
1 19 Canada 4,533 -47 . 1 -1 . 1 823.6 627 8.9 45.1 1 .6 288 1 ,3 1 4
1 20 Finland 234 -0.1 0.0 27.4 81 9.0 2.2 1 .9' 53 387
121 t Hong Kong 0 0.0 -0.5
1 22 Sweden 280 -0.1 0.0 29.8 1 97 7.2 2.9 1 .6' 123 218
1 23 Netherlands 3 0.0 -0.3 4.3 85 12.6 7.8 8.7' 26 492
1 24 Belgium 6 0.0 -0.3 0.8 3 2.3 9.0 72.2' 101 816
125 France 135 -0.1 -0.1 56.0 102 10.2 37.7 1 9. 1 ' 106 559
1 26 t Singapore 0 0.0 2.3 0.0 1 4.9 0.2 3 1 .7 38 46
1 27 Austria 39 -0.1 -0.4 20.8 170 25.2 2.4 2.6' 101 203
1 28 United States 2,960 3.2 0.1 1 ,302.1 1,585 14.2 467.3 18.9' 244 1 ,626
1 29 Germany 107 -0.5 -0.4 9 1 .9 497 26.3 46.3 27. 1 ' 64 518
1 30 Denmark 5 0.0 0.0 1 3.9 114 32.8 1 .2 9.2' 70 163
131 Norway 96 - 1 .2 - 1 .4 55.4 113 1 8.0 2.0 0.5' 98 390
1 32 Japan 238 0.0 0.0 27.6 80 7.3 90.8 16.6 125 610

133 Switzerland 12 -0.1 -0.6 7.3 109 1 8.5 1.2 2.4' 40 1 33

�-. I
" . World 39,595 t 1 33.4 t 0.3 w 8,603.2 t 10,010 t 6.7 w

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a. Data may refer o earlier years and are the most recent reported by the World Conservation Monitoring Centre b. Refers to any year from 1970 to 1995. c. Total water
resources include river flows from other countries.
2 34 W O R L. D D E V E L. O P M E N T R E P O RT 1 997

Table 1 1 . Growth of the economy

Average annual growth rate (%1

Expor1sof goods Gross domestic

GDP GDP dellator AgrIculture IndusiJy SeIYices" and services investment
19811-90 19911-95 19811-90 1990-95 19811-90 19911-95 19811-90 1990-95 198D-90 19911-95 19811-90 19911-95 19811-90 1990-95
Low-income economies 6.0 w 13.4 w 62.0 w 3.6 w 3.1 w 7.7 w 1 1 .6 w 6.9 w 6.4 w 6. 1 w 1 1 .0 w 6.2 w 10.5 W'
Excluding China and India 2.7 w 28.4 w 170.8 w q
2. w
,
.),.9 w ... 2.9 w . 2.8 w 2.5 w 4A w -1 .3 w 3.6 w
1 Mozambique -0.2 7.1 38.4 48.6 1.6 2.4 -9.8 -2.4 -0. 1 1 5.0 -5.0 7.2 -2.5 8.6
2 Erhiopiab 2.3 3.4 1.4 1.8 3.1 0.3 3.5
3 Tanzania 3.8 3.2 35.7 22.4 4.9 4.1 3.4 8.4 1.6 1.7
4 Burundi 4.4 -2.3 4.4 8.5 3. 1 -4.1 4.5 -5.0 5.4 -1.5 4.5 -2.6 4.5 -5.0
5 Malawi 2.3 0.7 15.0 30.4 2.0 1 .7 2.9 0.4 3.4 -1.0 2.5 2.3 -2.8 - 1 1.2
6 Chad 6.3 1.9 1.1 8.9 2.7 6.9 8.0 -9.9 9.9 1.2 7.7 -15.8 19.0 -2.9
7 Rwanda 2.3 -12.8 3.9 1 8.2 0.7 -10.8 1 .8 -17.0 5.4 - 12.3 3.5 17.8 3.7 -6.3
8 Sierra Leone 1 .6 -4.2 62.2 39.6 4.4 -2.8 5.7 -2.8 -1.1 -5.9 2.8 -1 5.2 --6.5 -20.0
9 Nepal 4.6 5.1 1 1.1 1 1 .0 4.0 1.5 6.0 9.3 4.8 7.2 1.1 25.8 1.8 6.3
10 Niger -1.1 0.5 2.9 6.5 1.8 -3.3 -5.2 -4.6 -5.2 -5.9 0.3
11 Burkina Paso 3.7 2.6 3.1 6.2 3.1 4.6 3.7 1 .4 4.7 1.7 -0.6 - 1 .2 8.6 -5.8
12 Madagascar 1 .3 0.1 16.9 23.5 2.5 1.6 0.9 0.5 0.8 -0.6 -2.0 4.9 4.9 -4.5
13 Bangladesh 4.3 4.1 9.5 4.6 2.7 1.1 4.9 7.3 5.7 5.4 7.7 14.2 1 .4 8.2
14 Uganda 3.1 6.6 125.6 23.7 2.3 3.8 6.0 1 1 .0 3.0 8.2 2.3 1 1 .7 9.6 7.9
15 Vietnam 8.3 2 10.7 26.3 5.2
16 Guinea-Bissau 4.5 3.5 56.1 49.5 6.7 4.8 0.4 1.9 3.3 2.2 -1.7 1 1 .3 5.8 1.2
17 Haiti -0.2 --6.5 7.5 22.4 1 .2 - 1 9.0 -0.6 -45.7
18 Mali 1.8 2.5 5.3 10. 1 4.3 3.1 2.7 5.3 -1.7 1.2 5.2 5.3 5.4 6. 1
19 Nigeria 1 .6 1 .6 16.6 47.1 3.3 2.3 -1.0 -1.2 3.2 4.5 -0.3 1.1 -8.6 1.2
20 Yemen, Rep.
21 Cambodia 6.4 56.2 2.1 1 1 .3 8.3
22 Kenya 4.2 1 .4 9.0 1 8.5 3.3 -0.4 3.9 1.5 4.9 3.1 4.3 3.0 0.8 0.0
23 Mongolia 5.5 -3.3 -1.2 1 26.7 2.9 4.6 3.1 12.8 1.7
24 Togo 1.8 -3.4 4.7 4.9 5.6 3.3 1.1 -6.0 -0.3 -8.6 0.6 -10.6 2.9 -16.4
25 Gambia, The 3.4 1.6 18.7 5.0 0.4 2.6 6.0 0.4 3.9 2.5 0.6 -0.8 0.8 3.0
26 Central African Republic 1.7 1.0 5.6 8.5 2.7 1.5 3.1 -4.6 -0. 1 -1.6 -3.7 4.4 4.8 -8.7
27 India' 5.8 4.6 8.0 10. 1 3.1 3.1 7.1 5.1 6.7 6.1 5.9 12 . 5 6.5 5.3
28 Lao PDR 6.5 37.8 10.1 5.9
29 Benin 2.6 4.1 1.6 7.9 5.1 4.9 2.1 3.5 1.2 3.5 -2.7 6.3 --6.2 12.1
30 Nicaragua -2.0 1.1 422.6 98.3 -2.2 0.3 -1.7 -4.4 -2.0 2.2 -3.8 7.2 -4.7 4.1
31 Ghana 3.0 4.3 42.4 23.8 1.0 2.4 3.3 4.4 6.4 6.5 2.5 6.7 4.5 0.9
32 Zambia 0.8 -0.2 42.4 107.8 3.6 -0.5 1.0 -1.2 0. 1 0.7 -3.3 10.8 -2.7 -10.2
33 Angola 3.7 -4. 1 5.9 774.5 0.5 -1.8 6.4 0.9 2.2 -10.8 13.3 2.9 -6.8 0. 1
34 Georgia 0.5 -26.9 1.9 2,280.2 0.7 -31.4 1.8 -34 . 1 -1.4 -22.3 0.3 -21.2
35 Pakisran 6.3 4.6 6.7 1 1 .2 4.3 3.4 7.3 5.7 6.8 5.0 8.1 7.7 5.9 4.0
36 Maurirania 1 .7 4.0 8.6 6.8 1.7 4.9 4.9 3.9 0.4 3.2 3.4 - 1 .0 -4.1 -1.3
37 Azerbaijan -20.2 747.6
38 Zimbabwe 3.5 1 .0 1 1 .5 27.6 2.4 1 .6 3.6 -3.6 2.9 1.7 5.4 5.5 1 .3 1.5
39 Guinea 3.8 10. 1 4.5 2.3 4.5 1 .3 0.6
40 Honduras 2.7 3.5 5.7 19.2 2.7 2.9 3.3 4.9 2.5 1.3 1.1 0.2 2.9 10.0
41 Senegal 3.1 1 .9 6.5 7.6 2.8 1.3 3.7 2.0 3.0 2.0 3.9 -0.9 3.9 4.7
42 China 10.2 12.8 5.8 12.4 5.9 4.3 11.1 18.1 13.6 10.0 1 1 .5 1 5.6 1 1 .0 15.5
43 Cameroon 3.1 -1.8 5.9 5.1 2.2 2.2 5.9 --6.8 2.1 -1.4 5.9 2.2 -2.7 -4.1
44 Core d'Ivoire 0.1 0.7 3.4 10.4 -0.5 0.3 4.4 1 .7 -1.3 0.2 1.9 -0.9 -28.8 138.3
45 Albania 3.0 1 .4 -1.9 76.4 2.4 7.6 3.2 -15.6 3.2 5.9 -0.3 38.4
46 Congo 3.6 -0.6 0.3 7.8 3.4 -0.9 5.2 1.2 2.5 -2.1 4.8 4.0 -1 1.9 -7.9
47 Kyrgyz Republic -14.7 337.3 -7.6
48 Sri Lanka 4.2 4.8 10.8 10.4 2.2 2.4 4.6 6.5 4.7 6.3 6.8 1 1 .0 0.6 6.8
49 Armenia 3.3 -21 .2 0.3 896.6 -3.9 -0.6 5.1 -28.7 4.6 -19. 7 6.2 -17.7
'Middle-income economies 1.9 w 0. 1 w 298.8 w 0.9 w 2.6 w 3.9 w
Lower-middle-income _ 2.3 w ,. -t. 5, w 286.7 ,VJ 0.5 w
50 Lesotho 4.3 7.5 13.6 1 1 .0 2.6 -3.4 7.2 1 2.3 5.2 6. 1 4.1 1 1 .4 6.9 12.1
51 Egypt, Arab Rep. 5.0 1.3 1 1 .7 13.3 1.5 2.1 2.6 0.4 8.4 1.5 5.2 4.2 2.7 -1.5
52 Bolivia 0.0 3.8 3 16.7 10.5 2.0 -2.9 -0.1 3.5 6.7 -9.9 4.2
53 Macedonia, FYR
54 Moldova
55 Uzbekistan -4.4 628.4 -0.9 --6.7 --6.6 -9.2
56 Indonesia 6.1 7.6 8.5 7.6 3.4 2.9 6.9 10.1 7.0 7.4 2.9 10.8 7.0 16.3
57 Philippines 1.0 2.3 14.9 9.2 1.0 1.6 -0.9 2.2 2.8 2.7 3.5 9.4 -2.1 3.2
58 Morocco 4.2 1 .2 7.2 3.9 6.7 -5.9 3.0 1 .7 4.2 2.8 6.8 3.1 2.5 -2.5
59 Syrian Arab Republic 1.5 7.4 15.3 8.5 -0.6 6.6 3.6 -7.0
60 Papua New Guinea 1 .9 9.3 5.3 5.7 1.8 4.7 1 .9 17.8 2.0 4.8 3.3 13.3 -0.9 0.4
61 Bulgaria 4.0 -4.3 1.2 8 1 .2 -2.1 - 1 .9 5.2 -7.5 7.2 -20.7 -3.5 -0.7 2.4 -7. 1
62 Kazal<Stan -1 1 .9 805.5 -1 8.0 19.2 6.1 -16.7
63 Guatemala 0.8 4.0 14.6 14.2 2.3 2.5 2.1 4.2 2.1 4.9 -2. 1 4.8 -1.8 10.7
64 Ecuador 2.0 3.4 36.4 37.2 4.4 2.5 1 .2 4.9 1.8 2.7 5.4 7.4 -3.8 5.3
65 Dominican Republic 2.7 3.9 21.5 1 1 .7 0.4 2.5 2.2 3.3 3.7 4.5 2.8 4.6 3.7 4.9
66 Romania 0.5 -1.4 2.5 1 58.4 -0.4 -2.1 -2.8 -10.0
67 J amaica 2.0 2.9 1 8.6 38.5 0.6 8.3 2.4 -0.5 1.9 6.0 5.4 -1.0 -0.1 5.8
68 Jordan -1.5 8.2 7.0 4.7 13.2 10.2 - 1 .3 7.9 -8.2 6.2 5.9 8.2 7.3 6.5
69 Algeria 2.8 0. 1 8.0 25.8 4.6 1.3 2.3 -1 . 1 3.8 1.3 4.1 0.2 -2.3 -4.7
70 EI Salvador 0.2 6.3 16.4 1 1 .2 -1 . 1 1.2 0. 1 2.9 0.7 9.3 -3.4 13.6 2.2 14.7
71 Ukraine -14.3 . . 1 ,040.5 -9.7 -21.6
72 Paraguay 2.5 3.1 24.4 18.0 3.6 1 .4 -0.3 1.9 3.4 4.1 1 1 .5 13.8 -0.8 2.6
Note: For data comparability and coverage, see the technical notes. Figures i n italics are for years other than those specified.
 S E L E CTE D W O R L D D EVE L O P M E N T I N D I C AT O R S 2 3 5

Average annual growth rate 1%1

Exports of goods Gross domestic
GDP GDP deflator Agriculture Industll' Services' and services investment
1980-90 1990-95 1980-90 1990-95 1980-90 1990-95 1980-90 1990-95 1980-90 1990-95 1980-90 1990-95 1980-90 1990-95
73 Tunisia 3.3 3.9 7.4 5.4 2.8 -2.1 3.1 4.0 3.6 5.6 5.6 5.6 - 1 .8 1 .4
74 Lithuania -9.7 2 4 1 .4
75 Colombia 3.7 4.6 24.6 23.3 2.9 1.4 5.0 3.0 3.1 6.4 7.5 7.2 0.5 19.0
76 Namibia 1.1 3.8 13.6 9.3 1.8 6.8 -1.1 2.9 2.7 4.6 1.5 6.9 1 1 .9 -2.8
77 Belarus -9.3 878.8 - 1 1.2 -10.9 -6.9 -17.0
78 Russian Federation 1.9 -9.8 3.2 5 1 7.0
79 Latvia 3.4 -13.7 149 . 1 2.3 -16.4 4.3 -25.1 3.1 -2.1 3.4 -37. 1
80 Peru -0.2 5.3 229.6 62.4 - 1 .7 8.3 -4.2 7.4
81 Costa Rica 3.0 5.1 23.5 19.1 3.1 3.6 2.8 5.2 3.1 5.6 6.1 9.5 5.3 6.G
82 Lebanon
83 Thailand 7.6 8.4 3.9 4.6 4.0 3.1 9.9 10.8 7.3 7.8 14.0 14.2 9.4 10.2
84 Panama 0.3 6.3 2.4 1 .8 4.4 14.9 5.5 4.3 1 5.3
85 Turkey 5.3 3.2 45.3 75.6 1 .3 0.9 7.8 4.2 4.4 3.3 16.9 9.4 5.3 2.0
86 Poland 1 .9 2.4 53.7 34.9 -0.1 -2.0 -0.9 3.7 5.1 2.4 4.5 9.4 0.9 1.1
87 Estonia 2.1 -9.2 2.4 1 5 1.4 -8.9 -14.9 -3.8 -13.4
88 Slovak Republic 2.0 -2.8 1.8 16.0 1.6 1.0 2.0 -10.4 0.8 6.2 17.8 1.1 -7.7
89 Botswana 10.3 4.2 13.1 9.2 2.2 0.7 1 1 .4 1 .4 1 1 .0 7.7
90 Venezuela 1.1 2.4 19.3 38.4 3.0 1.9 1 .6 3.4 0.5 1 .7 2.8 4.9 -5.3 3.8
Upper-middle-income 1 .3 W., 2.6 w 138.0 w 320.5'w 2.4 w l .8 w 0.7 w . 2.6 w 2.0 w 3.4 ,. 5.9 )Y 7.4 w - 1 .4 w 5.6 ",,1
91 South Mrica 1.3 0.6 14.8 l l .5 3.0 -0.3 -1.1 -0.1 3.1 0.9 1.9 2.4 -4.8 4.7
92 Croatia
93 Mexico 1.0 1.1 70.4 1 5.5 0.6 0.4 1 .0 0.5 1.1 1.5 6.6 6.8 -3. 1 - 1 .2
94 Mauritius 6.2 4.9 9.4 6.7 2.9 -1.4 10.3 5.6 5.4 6.4 10.4 4.8 1 0.2 1 .7
95 Gabon 0.5 -2.5 1.9 13.0 1 .7 -0.2 1 .0 2.7 -0.3 -10.0 2.8 4.1 -4.6 -0.5
96 Brazil 2.7 2.7 284.5 965.3 2.8 3.7 2.0 1 .7 3.5 3.6 7.5 7.4 0.2 3.5
97 Trinidad and Tobago -2.5 1.0 4.1 7.2 -5.8 1.3 -5.5 0.2 -3.3 -0.1 8.9 12.5 -10.1 1.0
98 Czech Republic I .7 -2.6 1.5 1 8.3 2.3 0.9
99 Malaysia 5.2 8.7 1.7 3.9 3.8 2.6 7.2 1 1 .0 4.2 8.6 10.9 14.4 2.6 16.0
] 00 Hungary 1.6 -1.0 8.6 22.3 0.6 -7.0 -2.6 0.5 3.6 -4.6 4.0 -1.5 -0.4 6.6
101 Chile 4.1 7.3 20.9 14.7 5.6 5.2 3.7 6.1 4.2 8.4 7.0 9.2 9.6 1 1 .9
102 Oman 8.3 6.0 -3.6 -2.9 7.9 10.3 6.0
103 Uruguay 0.4 4.0 6 1 .3 55.6 0.0 4.5 -0.2 0.1 0.9 6.2 4.3 4.4 -7.8 12.9
1 04 Saudi Arabia - 1 .2 1 .7 -3.7 1.0 13.4 -2.3 - 1 .2
105 Argentina -0.3 5.7 389.0 20.5 0.9 0.5 -0.9 5.9 0.0 6.4 3.7 6.9 -4.7 16.0
1 06 Slovenia
1 07 Greece 1 .4 1.1 18.3 13.1 -0.1 3.1 1 .3 -0.8 4.9 0.6 7.1 4.5 -0.9 1.9
Low- and middle-income 2.8 w 2.1 w 50.6 w 235.8 w 3.1 w 2.0 w 3.9 w 4. 9 w 3.6 w 4.5 w 1 .8 w 6.5 w
Sub-Saharan Africa 1.7 w 1.4 w 19.0 w 47.4 w 1.9 w 1.5 w 0.6 w 0.2 w 2.5 w 1.5 w 1.9 w 2.5 w -4.0 w 3.4 w
East Asia and Pacific 7.6 w 10.3 w 10.1 w 1 1 .5 w 4.8 w 3.9 w 8.9 w 15.0 w 9.0 w 8.4 w 8.8 w 13.9 w 8.5 w 14.4 w
South Asia 5.7 w 4.6 w 8.0 w 9.9 w 3.2 w 3.0 w 6.9 w 5.3 w 6.6 w 6.0 w 6.4 w 1 1 .9 w 6.1 w 5.3 w
Europe and Central Asia 2.3 w -6.5 w 12.2 w 461.5 w
Middle East and N. Africa 0.2 w 2.3 w 8.2 w 19.4 w 4.5 w 3.3 w 1.1 w 1 .2 w
Latin America and Caribbean 1.7 w 3.2 w 179.4 w 380.9 w 2.0 w 2.3 w 1.4 w 2.5 w 1.9 w 3.8 w 5.4 w 7.0 w -1.5 w 5.7 w
High-income economies 3.2 w 2.0 w 4.8 w 2.4 w 2.3 w 0.6 w 3.2 w 0.7 w 3.4 w 2.3 w 5.2 w 6.4 w 4. 1 w -0.2 \}j
1 08 Korea. Rep. 9.4 7.2 5.9 6.2 2.8 1 .3 13.1 7.3 8.2 7.9 12.0 13.4 1 1 .9 7.2
1 09 Portugal 2.9 0.8 18.1 8.7 8.7 3.3
1 10 Spain 3.2 1.1 9.3 5.2 -1.7 5.7 10.1 5.7 -2.6
111 New Zealand 1.8 3.6 10.8 0.6 4.4 0.9 1 .3 3.8 1 .7 3.5 4.1 5.2 1 .7 12.4
1 12 Ireland 3.1 4.7 6.6 2.2 8.9 10.7 -3.8
1 13 t Israel 3.5 6.4 1 0 1 .5 12.2 5.5 9.5 2.2 l J .5
1 14 t Kuwait 0.9 1 2.2 -2.4 -2.0 14.7 1.0 0.9 -2.3 -4.5
1 15 t United Arab Emirates -2.0 0.7 9.6 9.3 -4.2 - 1 .8 3.4 4.9 0.0 -8.7
1 16 United Kingdom 3.2 1 .4 5.7 3.6 3.9 4.3 6.4
1 17 Australia 3.4 3.5 7.3 1.3 3.3 -2.4 2.8 3.3 3.7 3.7 7.0 6.8 2.7 5.8
1 18 Italy 2.4 1.0 9.9 4.7 0.6 1.6 4.1 8.1 2.1 -3.2
1 19 Canada 3.4 1.8 4.4 1.5 1.5 0.3 2.9 1 .2 3.7 1.8 6.0 9.5 5.2 2.3
] 20 Finland 3.3 -0.5 6.8 1 .8 -0.2 0.0 3.3 - 1 .2 5.3 -2.7 2.2 9.8 3.0 -8.3
121 t Hong Kong 6.9 5.6 7.7 8.1 14.4 13.5 4.0 1 1 .7
122 Sweden 2.3 -0.1 7.4 3.2 1.5 -1.9 2.8 -0.7 2.5 -0.1 4.3 6.7 4.3 -7.2
123 Netherlands 2.3 1.8 1.6 2.2 3.4 3.0 1 .6 0.4 2.6 2.1 4.5 3.7 3.1 -0.3
1 24 Belgium 1.9 1.1 4.4 3. 1 1 .8 4.0 2.2 1.8 4.6 4.6 3.2 -0.9
1 25 France 2.4 1 .0 6.0 2.1 2.0 -1.1 1.1 -1.0 3.0 1.5 3.7 4.0 2.8 -2.8
126 t Singapore 6.4 8.7 2.0 3.7 -6.2 0.5 5.4 9.2 7.2 8.4 10.0 3.7 6.0
127 Austria 2.1 1 .9 3.7 3.5 1.1 -1.8 1.9 1 .7 2.3 2.2 4.6 2.5 2.5 3.6
128 United States 3.0 2.6 4.1 2.4 4.0 3.6 2.8 1 .2 3.1 2.1 5.2 7.3 3.4 4.1
129 Germany d 2.2 2.6 1.7 1.2 2.9 4.4 2.0
130 Denmatk 2.4 2.0 5.5 1.8 3.1 0.3 2.9 1 .6 2.3 1 .3 4.4 2.8 4.0 -1.1
131 Norway 2.9 3.5 5.5 1.3 0.9 3.5 2.6 5.0 5.1 0.6
132 Japan 4.0 1 .0 1 .7 0.9 1.3 -2.2 4.2 0.0 3.9 2.3 4.5 3.4 5.3 -0.8
1 33 Switzerland 2.2 0.1 3.7 2.3 3.4 1.5 4.9 0.0
World 3.1 w 2.0 w 1 5.0 w 56.6 w 2.8 w 1.3 w 3.3 w 1.4 w 3.4 w
"
2.6 w 5.3 w 6.8 w 3.7 w 0.8 ",j
fi
a. Services include unallocated items. h. Data prior to 1992 include Eritrea. c. GOP growth rates were revised after the statistics for this publication were nalized. d. Data
prior to 1990 refer to the Federal Republic of Germany before unification.
236 WO R LD D EV E L O PM E NT R E P O RT 1 997

Ta ble 12. Structu re of the economy: prod uction

DIstribution of gross dOllleStic prodad (%1
Agriculture Indusby (Mlnufacturine') Semces�
GDP (million $) value added value added value added vllue added
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
t Low.. incomeeconomies 739.236 I 1 .352,256 t 34 w 25 w 32 w 38 w 21 w 27 w 32 w 35 w7
, .Excluding China and India , 3,90,472 1 3 16,889 t 33 w 25 w I3 w 41 w,
1 Mozambique 2.028 1 ,469 37 33 31 12 32 55
2 Ethiopia' 5. 179 5,287 56 57 12 /0 6 3 31 33
3 Tanzania 5.702 3 ,602 46 58 18 17 II 8 37 24
4 Burundi 920 1 ,062 62 56 13 18 7 12 25 26
5 Malawi 1,238 1 ,465 37 42 19 27 12 18 44 31
6 Chad 727 1 , 1 38 54 44 12 22 16 34 35
7 Rwanda 1 , 163 1 , 1 28 50 37 23 17 16 3 27 46
8 Sierra Leone 1 . 1 66 824 33 42 21 27 5 6 47 31
9 Nepal 1 ,946 4.232 62 42 12 22 4 10 26 36
10 Niger 2.538 1 .860 43 39 23 18 4 35 44
11 Burkina Faso 1 .709 2,325 33 34 22 27 16 21 45 39
12 Madagascar 4.042 3. 1 9 8 30 34 16 13 13 54 53
13 Bangladesh 12,950 29.J 1 0 50 31 16 18 11 10 34 52
14 Uganda 1 ,267 5,655 72 50 4 14 4 6 23 36
15 Vietnam 20,351 28 30 22 42
16 Guinea-Bissau 105 257 44 46 20 24 7 36 30
17 Haiti 1 ,462 2,043 44 12 9 44
18 Mali 1 ,629 2,431 61 46 10 17 4 6 29 37
19 Nigeria 93.082 26,8 1 7 27 28 40 53 8 5 32 18
20 Yemen. Rep. 4,790 22 27 14 51
21 Cambodia 2,771 51 14 6 34
22 Kenya 7,265 9.095 33 29 21 17 13 11 47 54
23 Mongolia 2.328 861
24 Togo 1 , 1 36 981 27 38 25 21 8 9 48 41
25 Gambia. The 233 384 30 28 16 15 7 7 53 58
26 Central African Republic 797 J , 128 40 44 20 13 7 40 43
27 India 1 72.321 324,082 38 29 26 29 18 19 36 41
28 Lao PDR 1,760 52 18 14 30
29 Benin 1 ,405 1,522 35 34 12 12 8 7 52 53
30 Nicaragua 2.144 1 ,9 1 1 23 33 31 20 26 16 45 46
31 Ghana 4.445 6,3 1 5 58 46 12 16 8 6 30 38
32 Zambia 3.884 4,073 14 22 41 40 18 30 44 37
33 Angola 3,722 12 59 3 28
34 Georgia 2,325 67 22 18 11
35 Pakistan 23.690 60,649 30 26 25 24 16 17 46 50
36 Mauritania 709 1.068 30 27 26 30 13 44 43
37 Azerbaijan 3,475 27 32 41
38 Zimbabwe 5.355 6.522 14 15 34 36 25 30 52 48
39 Guinea 3.686 24 31 5 45
40 Honduras 2.566 3.937 24 21 24 33 15 18 52 46
41 Senegal 3,0 1 6 4,867 19 20 25 18 15 12 57 62
42 China 2 0 1 ,688 697,647 30 21 49 48 41 38 21 31
43 Cameroon 6,741 7,931 29 39 23 23 9 10 48 38
44 Cote d'Ivoire 1 0, 1 75 10,069 27 31 20 20 13 18 53 50
45 Albania 2 . 1 92 56 21 23
46 Congo 1,706 2 , 1 63 12 10 47 38 7 6 42 51
47 Kyrgyz Republic 3,028 44 24 32
48 Sri Lanka 4.024 12,9 1 5 28 23 30 25 18 16 43 52
49 Armenia 2,05R 44 35 25 20
Middle-income economies 2,461,307 I 4,033,376 t IIw 18 w 52 w'
. Lower-middle-income .,2,025, 85 3 I, 13 w. 49 w,
50 Lesotho 368 1 .029 24 10 29 56 7 18 47 34
51 Egypt. Arab Rep. 22,9 1 3 47.349 18 20 37 21 12 15 45 59
52 Bolivia 3,074 6. 1 3 1 18 35 15 47
53 Macedonia. FYR 1,975
54 Moldova 3, 5 1 8 50 28 26 22
55 Uzbekistan 2 1 ,590 33 34 18 34
56 Indonesia 78,0 1 3 1 98,079 24 17 42 42 13 24 34 41
57 Philippines 32,500 74, 180 25 22 39 32 26 23 36 46
58 Morocco 1 8,821 32,41 2 18 14 31 33 17 19 51 53
59 Syrian Arab Republic 1 3 ,062 16,783 20 23 56
60 Papua New Guinea 2,548 4,901 33 26 27 38 10 8 40 34
61 Bulgaria 20.040 12,366 14 13 54 34 32 53
62 Kazaks,an 21,413 12 30 6 57
63 Guatemala 7.879 14,489 25 19 56
64 Ecuador 1 1 ,733 17,939 12 12 38 36 18 21 50 52
65 Dominican Republic 6,631 1 1 .277 20 15 28 22 15 15 52 64
66 Romania 35.533 21 40 39
67 Jamaica 2.679 4,406 8 9 38 38 17 18 54 53
68 Jordan 6,/05 8 27 14 65
69 Algeria 42.345 4 1 ,435 10 13 54 47 9 9 36 41
70 El Salvador 3.574 9,471 38 14 22 22 16 40 65
71 Ukraine 80. 1 27 18 42 37 41
72 Paraguay 4.579 7.743 29 24 27 22 J6 16 44 54
Noce: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E LE CTED WO R LD DEVE L O PM E NT I N D I C AT O R S 237

Distribution 01 gross domestic product (%)

Agriculture Industry (Manufacturing') Servicesb

GDP (million $) value added value added value added value added
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
73 Tunisia 8,743 1 8 ,035 14 12 31 29 12 19 55 59
74 Lithuania 7,089 II 36 30 53
75 Colombia 33,399 76, 1 1 2 19 14 32 32 23 18 49 54
76 Namibia 2,190 3,033 12 14 53 29 5 9 35 56
77 Belarus 20,561 13 35 22 52
78 Russian Federation 344,7 1 1 7 38 31 55
79 Latvia 6,034 9 31 18 60
80 Peru 20,661 57,424 10 7 42 38 20 24 48 55
81 Costa Rica 4,831 9,233 18 17 27 24 19 19 55 58
82 Lebanon 1 1 ,143 7 24 10 69
83 Thailand 32,354 167,056 23 II 29 40 22 29 48 49
84 Panama 3,592 7,413 11 15 74
85 Turkey 68,790 164,789 26 16 22 31 14 21 51 53
86 Poland 57,068 1 17,663 6 39 26 54
87 Estonia 4,007 8 28 17 64
88 Slovak Republic 17,414 6 33 61
89 Botswana 971 4,318 13 44 46 4 4 43 48
90 Venezuela 69,377 75,0 1 6 5 46 38 16 17 49 56
Upper'miQ4le-mcome 989,317 t i ,9 8 1 ,5 1 1 t 8 w 9� 47 w 2 0 ;w 18 �
91 South Mrica 78,744 136,035 7 5 50 31 23 24 43
92 Croatia 18,08 1 12 25 20
93 Mexico 194,914 250,038 8 33 26 22 19 59
94 Mauritius 1,132 3,919 12 9 26 33 15 23 62
95 Gabon 4,285 4,691 7 60 5 33
96 Brazil 235,025 688,085 II 14 44 37 33 24 45 49
97 Trinidad and Tobago 6,236 5,327 2 3 60 42 9 9 38 54
98 Czech Republic 29,123 44,772 7 6 63 39 30 55
99 Malaysia 24,488 85,3 1 1 22 13 38 43 21 33 40 44
1 00 Hungary 22,163 43,712 8 33 24 59
101 Chile 27,572 67,297 7 37 21 55
1 02 Oman 5,982 1 2 , 1 02 3 69 I 28
1 03 Uruguay 1 0 , 1 32 1 7,847 14 9 34 26 26 18 53 65
1 04 Saudi Arabia 1 56,487 125,501 I 81 5 18
1 05 Argentina 76,962 28 \ '060 6 6 4J 31 29 20 52 63
1 06 Slovenia 18,550 39 I 57
1�
�07
� � G7re cr
e� 4�
0 ' I�
47 9�
0� 50
,5� 27 21 48 36 2 24 43
� � � � � � == � � � � � � � � � �====��� � � ���� �==�� = ===
==��
= _=
_��
,�
"�
.� 1� . ?�
S
Low- a�d miJdl�-"lcomc ' qlj ' 3)92;729 t " 5,393,14
.2"t- - - ' r:r �: ��-'" 36 �; � '; �' -.-..
20 48 w,
Sub-Saharan Mrica 292,557 t 296,748 t 24 w 20 w 36 w 30 w 12 w 15 w 38 w 48 w
East Asia and Pacific 464,719 t 1 ,341,265 t 27 w 18 w 39 w 44 w 27 w 32 w 32 w 38 w
South Asia 21 9,283 t 439,203 t 39 w 30 w 24 w 27 w 15 w 17w 35 w 41 w
Europe and Central Asia 1 , 1 03,330 t
Middle East and N, Mrica 463,031 t 9w 57 w 7w 32 w
. , }..atin America and Caribbean 758,569 t 1,688,195 t lO w lO w 37 w 33 w 25 w 21 w 51 w 55 w ,
l;-I...,,@ j,qcome.economies
.. 7,758,074 t 22,485,�48 t 3w 2w 37 w 32 w 24 w 21 w 58 w
1 08 Korea, Rep� 63,661 455.476 15 7 40 43 29 27 45 50
109 Portugal 28,526 102,337
110 Spain 2 1 1 ,543 558,6 1 7 3
III Now Zealand 22,469 57,070 1l 31 22 58
1 12 Ireland 20,080 60,780
1 13 t Israei 22,579 9 1 ,965
114 t Kuwait 28,639 26,650 ° ° 75 53 6 1l 25 46
115 t United Arab Emirates 29,625 39, 1 07 I 2 77 57 4 8 22 40
116 United Kingdom 537,382 1 , 1 05,822 2 2 43 32 27 21 54 66
1 17 Australia 1 60 , 1 09 348,782 5 3 36 28 19 15 58 70

1 18 Italy 452,648 1,086,932 6 3 39 31 28 21 55 66

1 19 Canada 263 , 1 93 568,928 40 22 55
1 20 Finland 5 \ ,306 125,432 12 6 49 37 35 28 39 57
121 t Hong Kong 28,495 143,669 I o 32 17 24 9 67 83
J 22 Sweden 125,557 228,679 4 2 37 32 25 23 59 66

123 Netherlands 1 7 1 ,8 6 1 395,900 3 3 32 27 J8 18 64 70

1 24 Belgium 1 1 8,022 269,081 2 2 34 24 64
125 France 664,597 1 ,536,089 4 2 34 27 24 19 62 71
1 26 t Singapore 1 1 ,7 1 8 83,695 1 ° 38 36 29 27 61 64
1 27 Austria 76,882 233,427 4 2 40 34 28 24 56 63

128 United States 2,708, 1 50 6,952,020 2 34 26 22 18 64 72

129 Germany 2,4 1 5 ,764
1 30 Denmark 66,322 172,220 6 4 33 29 22 21 61 67

131 Norway 63,283 145,954 4 36 15 60

\ '059,253 5, I 08,540 4 42 29 24 54 60
J 32 Japan 2 38
133 Switzerland 1 0 1 ,646 300,508
�orld 10,768,090 t '"' 2')',846,241 t .. • - 21 'W " 53 w
unallocated items. c. Data prior to
a. Because manufacturing is generally the most dynamic part of the industrial sector, its share is shown separately. b. Services include
1992 include Eritrea,
2 3 8 WO R LD D E V E L O P M E NT R E P O RT 1 997

Ta ble 1 3 . Structure of the economy: d e m a n d

Distribution of gross domestic product (%)
General govt. Private Gross domestic Gross domestic Exports of goods Resource
consumption consumption Investment saving and services balance

1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
' Low·income economies 12 w 12 w 66 w 59 w 24 32 w , 22 w 30 w 13 w 19 w -2 w -I oN
. .. .
Excluding China al}d India 13 w " 80 w 20 w lO w 24 w -8 w . . . -6. "
1 Mozambique 21 20 78 75 22 60 5 20 23 -22 -))
2 Ethiopia 14' 12 83' 81 9' 17 3' 7 II' 15 -6 ' -11
3 Tanzania 12 10 69 97 29 31 19 -7 14 30 -10 -38
4 Burundi 9 12 92 95 14 11 -1 -7 9 12 -15 -18
5 Malawi 19 20 70 76 25 15 11 4 25 29 -14 -11
6 Chad 8 17 99 93 4 9 -6 -10 24 13 -17 -19
7 Rwanda 12 14 83 93 16 13 5 -7 15 6 -11 -20
8 Sierra Leone 8 11 91 98 18 6 2 -9 23 13 -16 -15
9 Nepal 7 8 82 79 18 23 11 12 12 24 -7 -12
10 Niger 10 17 67 82 37 6 23 1 24 13 -14 -4
11 Burkina Faso 10 16 95 78 17 22 -6 6 10 14 -23 -16
12 Madagascar 12 7 89 91 15 11 -1 3 13 23 -16 -8
13 Bangladesh 6 14 92 78 15 17 2 8 6 14 -13 -8
14 Uganda II 10 89 83 6 16 o 7 19 12 -6 -9
15 Vietnam 7 77 27 16 36 -11
16 Guinea-Bissau 29 8 77 98 30 16 -6 -5 8 13 -36 -22
17 Haiti 10 6 82 101 17 2 8 -7 22 4 -9 -9
18 Mali 10 11 91 79 17 26 -2 10 16 22 -19 -16
19 Nigeria 12 10 56 69 22 18 32 20 29 25 10 4
20 Yemen, Rep. 29 61 12 10 43 -2
21 Cambodia II 82 19 6 II -13
22 Kenya 20 15 62 72 29 19 18 13 28 33 -11 -6
24 Togo 22 11 53 80 30 14 25 9 51 31 -5 -4
23 Mongolia b 74 46 27 19 -36 2
25 Gambia, The 20 19 79 76 26 21 1 5 47 53 -26 -15
26 Central Mrican Republic 15 13 94 80 7 15 -10 6 26 18 -17 -9
27 India 10 10 73 68 21 25 17 22 7 12 -4 -2
28 Lao PDR
29 Benin 9 9 96 82 15 20 -5 9 23 27 -20 -6
30 Nicaragua 20 14 83 95 17 18 -2 -9 24 24 -19 -27
31 Ghana 11 12 84 77 6 19 5 10 8 25 -1 -8
32 Zambia 26 9 55 88 23 12 19 3 41 31 -4 -7
33 Angola 47 9 27 43 74 33
34 Georgia 13 7 56 103 29 3 -9 17 -1
35 Pakistan 10 12 83 73 18 19 7 16 12 16 -12 -3
36 Mauritania 25 9 68 80 36 15 7 11 37 50 -29 -3
37 Azerbaijan b 96 16 4 27 -16
38 Zimbabwe 20 19 64 64 19 22 16 17 30 34 -3 -6
39 Guinea 8 81 15 11 21 -4
40 Honduras 13 14 70 73 25 23 17 14 36 36 -8 -10
41 Senegal 22 11 78 79 15 16 o 10 28 32 -16 -5
42 China 15 12 51 46 35 40 35 42 6 21 o 2
43 Cameroon 10 9 70 71 21 15 20 21 27 26 -1 6
44 Cote d'Ivoire 17 12 63 67 27 13 20 20 35 41 -6 7
45 Albania 9 15 56 93 35 16 -8 14 -24
46 Congo 18 12 47 64 36 27 36 23 60 62 o -4
47 Kyrgyz Republic 23 67 16 10 26 -18
48 Sri Lanka 9 12 80 74 34 25 11 14 32 36 -23 -11
49 Armenia 16 13 47 1 16 29 9 -29 24 -53
Middle-income economies 14 w 59 w 25 w 25 w 24 w -1,
Lower-middle-income " 't! J
50 Lesotho 36 23 124 85 42 87 -60 -9 20 21 - 1 02 -96
51 Egypt, Arab Rep. 16 13 69 81 28 17 15 6 31 21 -12 -3
52 Bolivia 14 13 67 79 15 15 19 8 21 20 4 -7
53 Macedonia, FYR 14 82 15 4 37 -1 1
54 Moldova 20 81 7 -1 35 -7
55 Uzbekistan 25 59 23 24 63 o
56 Indonesia 11 8 52 56 24 38 37 36 33 25 13 1
57 Philippines 9 11 67 74 29 23 24 15 24 36 -5 -8
58 Morocco 18 15 68 71 24 21 14 13 17 27 -10 -8
59 Syrian Arab Republic 23 67 28 10 18 -17
60 Papua New Guinea 24 12 61 48 25 24 15 39 43 61 -10 15
61 Bulgaria 6 15 55 61 34 21 39 25 36 49 5 2
62 Kazakstan 15 65 22 19 34 -3
63 Guatemala 8 6 79 86 16 17 13 8 22 19 -3 -6
64 Ecuador 15 13 60 67 26 19 26 21 25 29 o 2
65 Dominican Republic 4 77 80 25 20 15 16 19 26 -10 0
66 Romania 12 60 66 40 26 35 21 35 28 -5
67 Jamaica 20 9 64 80 16 17 16 10 51 69 o -7
68 Jordan 22 75 26 3 49 -24
69 Algeria 14 16 43 56 39 32 43 29 34 27 4 -3
70 El Salvador 14 8 72 86 13 19 14 6 34 21 -16
71 Ukraine -3
72 Paraguay 6 7 76 79 32 23 18 14 15 36 -13 -19
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L ECTED WORLD D EV E L O P M E N T I N D I C AT O R S 239

Distribution of gross domestic product 1%1

General govt. Private Gross domestic Gross domestic Exports of goods Resource
consumption consumption investment saving and services balance
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
73 Tunisia 14 16 62 63 29 24 24 20 40 45 -5 -4
74 Lithuania 20 63 19 16 58 -3
75 Colombia 10 9 70 75 19 20 20 16 16 15 -3
76 Namibia 17 31 44 52 29 20 39 11 76 53 10 -7
77 Belarus 22 58 25 20 43 -5
78 Russian Federation 15 16 62 58 22 25 26 22
79 Latvia 20 60 65 26 21 16 43 -5
80 Peru II 6 57 83 29 17 32 II 22 12 3 -5
81 Costa Rica 18 17 66 60 27 25 16 24 26 41 -10 -I
82 Lebanon 12 110 29 -22 10 -62
83 Thailand 12 10 65 54 29 43 23 36 24 42 -6 -7
84 Panama 15 64 24 22 39 -2
85 Turkey 10 10 78 70 18 25 11 20 20 -7 -5
86 Poland 9 18 67 63 26 17 23 19 28 28 -3 2
87 Estonia 23 58 27 18 75 -9
88 Slovak Republic 20 50 28 30 63 2
89 Botswana 19 32 53 45 38 25 28 23 53 49 -10 -2
90 Venezuela 12 6 55 73 26 16 33 21 29 27 7 5
.'
Upper:;�).iddk-income 12,� 15 w 56 w 25· 32 w 23 w 27 � 7w '- l Jj
91 South Africa 13 21 50 61 28 18 36 18 36 22 o
92 Croatia 33 66 14 1 40 -13
93 Mexico 10 10 65 71 27 15 25 19 11 25 -2 3
94 Mauritius 14 12 75 65 21 25 10 22 51 58 -10 -3
95 Gabon 13 10 26 42 28 26 61 48 65 61 33 22
96 Brazil 9 17 70 62 23 22 21 21 9 7 -2 -I
97 Trinidad and Tobago 12 13 46 62 31 14 42 25 50 39 II 11
98 Czech Republic 20 60 25 20 52 -5
99 Malaysia 17 12 51 51 30 41 33 37 58 96 3 -3
1 00 Hungary 10 11 61 68 31 23 29 21 39 35 -2 -2
101 Chile 12 9 67 62 25 27 20 29 23 29 -4 2
102 Oman 25 31 28 42 22 17 47 27 63 49 25 10
103 Uruguay 12 13 76 74 17 14 12 13 15 19 -6 -1
1 04 Saudi Arabia 16 27 22 43 22 20 62 30 71 40 41 10
1 05 Argentina b b 76 82 25 18 24 18 5 9 -1 o
106 Slovenia 21 58 22 21 56 -1
107 Greece 16 19 60 74 29 19 23 7 21 22 -5 -12
Low- inl:! middl:;inW'me 14 w 14'w - 57 w 63 W 2(!' 27 w' 30 w 22 w 2 3 w' 22 w 2 ", -I �i
Sub-Saharan Africa 14 w 17 w 60 w 67 w 23 19 w 27 w 16 w 31 w 28 w 3w -3 w '
East Asia and Pacific 12 w 11 w 58 w 51 w 28 39 w 28 w 38 w 16 w 29 w Iw -I w
South Asia 9w 11 w 75 w 69 w 20 23 w 15 w 20 w 8w 14 w -6 w -3 w
Europe and Central kia
Middle East and N. Africa 16 w 39 w 26 45 w 47 w 16 w
Latin America and Caribbean 11 w 12 w 67 w 67 w 25 20 w 23 w 19 w 16 w 17 w -2 w -2 w ,
High�ia�ql)1e eS9nOl1)ies l?� 15 w 60 w 63 w 23 2 1 "" . 23 ": 21 w 22 w 22,� Ow 2 wI
108 Korea, Rep. 12 10 64 54 32 37 25 36 34 33 -7 -1
109 Portugal 14 17 65 65 34 28' 21 18 24 28 -13 -9
1 10 Spain 13 16 66 62 23 21 21 22 16 24 -2 0
III New Zealand 18 15 62 60 21 24 20 26 30 32 -I 2
1 12 Ireland 19 15 67 57 27 13 14 27 48 75 -13 15
1 13 t Israei 39 29 50 58 22 24 II 13 40 29 -1 1 -10
1 14 t Kuwait 11 33 31 49 14 12 58 18 78 55 44 6
115 t United Arab Emirates II 18 17 54 28 27 72 27 78 70 43
116 United Kingdom 22 21 59 64 17 1 6' 19 15 27 28 2 -I
117 Australia 18 17 59 60 25 23 24 22 16 20 -2 -1
1 18 Italy 15 16 61 62 27 18 24 22 22 26 -3 3
1 19 Canada 19 19 55 60 24 19 25 21 28 37 2 2
1 20 Finland 18 21 54 54 29 16 28 24 33 38 -I 8
121 t Hong Kong 6 9 60 59 35 35 34 33 90 147 -1 -2
1 22 Sweden 29 26 51 55 21 14 19 19 29 41 -2 4
123 Netherlands 17 14 61 57 22 22 22 29 51 53 o 7
124 Belgium 18 15 63 62 22 18 19 24 63 74 -3 6
1 25 France 18 20 59 60 24 18 23 20 22 23 -1 2
126 t Singapore 10 9 53 40 46 33 38 207 -9
127 Austria 18 19 56 55 28 27 26 26 37 38 -2 -1
128 United States 18 16 63 68 20 16 19 15 10 II -1 2
1 29 Germany 20 58 21 23 23 1
1 30 Denmark 27 25 56 54 19 16 17 21 33 35 -1 6
131 Norway 18 21 51 50 25 23' 31 29 43 38 6 6
1 32 Japan 10 10 59 60 32 29 31 31 14 9 -1 2

133 Switzerland 13 14 67 59 24 23 20 27 37 36 -4 4
'
. 16 w 15 w ' 59 w 63 w 24 23 w 25 w 21 w 22 w 22 w Iw I v,v,
a. Includes Eritrea. b. General government consumption figures are not available separatelYi they are included in private consumption. c. Includes statistical discrepancy.
240 WORLD D EVE L O P M E NT R E P O RT 1 997

Table 1 4 . Central government bu dget

Pen:entage of GDP
Overall
Total revenue" Total expenditure Percentage of total expenditureb deficit/surplus·
Tax Nontax Current Capital Defense Social servicesd (% of GDPJ
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
, tow-income economies
Excluding China and India
1 Mozambique
2 Ethiopia 12.8' 1 1 .9 3.7' 18.0' 3.3' 35.5' 19.6' -3.1' -8.5
3 Tanzania 171 9.4 19.2 10.4 9.2 35.0 -70
4 Burundi 1 3.2 3.5 11.5 11.0 -3.9
5 Malawi 16.6 5.9 18.0 1 6.6 12.8 30.7 -1 5.9
6 Chad
7 Rwanda 1 1 .0 2.5 9.3 5.0 - \ .7 -6.9
8 Sierra Leone 14.0 12.5 2.5 4.5 19.6 1 3 .3 5.0 65 -12.1 -5.0
9 Nepal 6.6 9.1 2.9 4.3 6.7 -3.0
10 Niger 1 2.2 2.6 9.4 9.0 3.8 50.5 -4.7
11 Burkina Faso 10.4 1 .9 9.8 2.3 17.0 36.0 0.2
12 Madagascar 12.9 8.2 5.2 2.2 1 1 .3 75 34.6 -4.8
13 Bangladesh 7.7 2.9 9.4 2.5
14 Uganda 3.0 1.3 5.3 0.8 25.2 24. 1 -3.1
15 Vietnam
16 Guinea-Bissau
17 Haiti 9.3 1.6 1 3 .9 3.5 -4.7
18 Mali 9.5 4.0 1 2.3 1 .9 1 1 .0 37.8 -4.6
19 Nigeria
20 Yemen, Rep. 13.0 2.6 34.7 3.8 30.3 30.8 -17.3
21 Cambodia
22 Kenya 19.1 19.6 8.5 10.0 1 9.4 22. 1 5.9 5.3 16.4 62 36.0 27 1 -4.5 -3.2
23 Mongolia 20.3 5.0 18.1 3.3 11.5 38.8 -1.9
24 Togo 27.0 4.6 23.7 8.9 71 56.2 -2.0
25 Gambia, The 20.0 2 1 .8 0.8 75 16.7 15.8 15.5 4.6 38.2 -4.5 3.5
26 Central African Republic 15.0 3.4 18.5 1.3 9.7 34.5 -3.5
27 India 9.8 9.6 5.0 4. 1 1 1 .7 14.2 1 .6 1 .8 19.8 14.5 8.8 1 1 .9 -6.5 -5.4
28 Lao PDR
29 Benin
30 Nicaragua 20.3 23.6 8.7 1 0.7 24.8 22.0 4.7 8.4 7.7 0.0 4 1 .3 63.5 -7.2 -4.3
31 Ghana 6.4 12.9 1 .9 5.6 9.8 176 1.1 3.0 3.7 4.9 38.3 42.3 -4.2 -2.5
32 Zambia 23. 1 13.4 10.8 7.0 33.0 1 0.7 4.0 6.1 0.0 23.4 59.0 -18.5 -2.9
33 Angola
34 Georgia
35 Pakistan 13.3 1 5. 3 5.5 7.2 14.5 19.1 3.1 4.1 -5.7 -4.8
36 Mauritania
37 Azerbaijan
38 Zimbabwe 19.2 6.7 33.0 1.8 25.0 30.2 -10.9
39 Guinea
40 Honduras 13.6 3.5 -0.2
41 Senegal 20.7 6.3 22.3 1 .9 16.8 38.5 0.9 0.0
42 China 5.7 4.6 12.4 -1.9
43 Cameroon 15.0 9.5 2.9 2.8 10.5 14.0 5.2 1.5 9.1 9.4 38.2 29.0 0.5 -1.7
44 Cote d'Ivoire 21.1 5.7 19.1 9.0 -10.8
45 Albania 1 8.3 9.2 28.0 6.1 7.1 40.2 -9.9
46 Congo 27.0 2.7 21.8 17.7 16.1 12.6 -5.2 -0.1
47 Kyrgyz Republic
48 Sri Lanka 19.1 1 8.0 5.4 10.8 24.7 22.1 1 6.6 6.5 1 .7 2.6 40.5 46.2 -18.3 -0.1
49 Armenia
, Middle-income economies
Lower-middle-income
50 Lesotho 29.5 44.4 3.5 75 32.9 33.3 31.4
51 Egypt, Arab Rep. 28.9 26.3 4.0 5.6 36.6 34.8 9. 0 8.0 13.5 8.7 32. 1 39. 1 -6.3 2.0
52 Bolivia 1 1 .8 7.1 1 8.7 5.4 8.2 52.3 -3.6
53 Macedonia, FYR
54 Moldova
55 Uzbekistan
56 Indonesia 20.2 16.4 1.8 62 1 1 .7 8.4 10.4 7.8 13.5 62 23.7 70.4 -2.3 0.6
57 Philippines 12.5 1 6.0 5.9 4.9 9.9 15.4 3.5 3.0 1 5 .7 10.6 25.4 263 - 1 .4 - 1.5
58 Morocco 20.4 8.1 22.8 10.3 17.9 39.5 -9.7
59 Syrian Arab Republic 10.5 17.8 l .1 8.2 30.3 15.5 17.9 1 1. 1 35.8 28.2 28.0 26.8 -9.7 -3.8
60 Papua New Guinea 20.5 1 8.9 2.8 2.3 29.2 26. 1 5.2 3.3 4.4 3.3 29.8 30.5 - 1 .9 -4. 1
61 Bulgaria 29.0 10.4 41.4 1.6 6.3 35.0 -5 . 5
62 Kazaksran
63 Guatemala 8.7 6.8 2.9 3.7 7.3 6.9 5.1 2.3 10.6 15.2 47.5 38.4 -3.4 -1.2
64 Ecuador 1 2.2 13.9 2.2 4. 1 1 1 .9 12.4 2.3 3.3 1 2. 5 52.5 -1.4 0.0
65 Dominican Republic 1 1.1 14.9 3.1 5.5 1 1 .4 8.2 5.2 8.7 7.8 4.7 53.0 87 1 -2.6 0.0
66 Romania 10.1 26.3 0.0 69 29.8 27.7 1 5 .0 4.3 3.8 6.2 28.3 54.8 0.5 0.0
67 Jamaica 27.9 14.3 -15.5
68 Jordan 20.4 65 24.7 6. 1 25.3 20.7 38.5 468 1. 1
69 Algeria
70 EI Salvador 11.1 12.1 3.4 6.4 1 1 .7 11.2 2.8 3.7 8.8 5.2 47.0 372 -5.7 0.0
71 Ukraine
72 Paraguay 9.8 9.1 1 .9 5.0 7.5 11.1 2.4 1.9 12.4 10.7 47.0 54. 1 0.3 1.2
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CT E D WORLD D EV E L O P M E N T I N D I C ATO R S 24 1

Percentage of GDP
Overall
Total revenue" Total expenclHure Pen:entage of total expendHureb deficit/surplus·
Tax Nontax Cunent CapHal Defense Social services" (I' "' GOP)
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
73 Tunisia 23.9 7.5 22. 1 9.4 12.2 53.7 -2.8
74 Lithuania 24.4 12.6 24.7 2.7 1.9 53.2
75 Colombia 1 0. 3 14.0 2.7 68 10.4 11.9 4.1 2.5 67 8.7 58.5 40.8 - 1 .8 -0.5
76 Namibia 3 1 .4 fO. 1 34.6 61 -4.8
77 Belarus
78 Russian Federation 16.1 6.3 25.8 I.3 16. 4 34.6 -10.5
79 Latvia 23. 1 10.9 29.2 1.2 2.6 63.7 -4.2
80 Peru 1 5 .8 14.4 6.4 7.7 1 5 .0 1 5 .8 4.4 3. 1 2 1 .0 27.4 0.0 -2.4 0.0
81 Costa Rica 16.8 22.0 5.4 8.4 21.3 26.0 5.2 2.4 2.6 0.0 73.9 63.0 -7.4 -2.9
82 Lebanon 10.8 1.1 25.8
83 Thailand 13.2 1 7. 1 6.6 7.4 14.4 10.5 4.4 2 1 .7 37.8 57.7 -4.9 1.8
84 Panama 1 9.7 20.1 4.5 4.8 26.5 25.4 5.9 2.9 5.4 48.5 69.6 -5.5 4.3
85 Twkey 14.3 14.3 3.6 7.3 1 5 .5 20.9 5.9 6.1 1 5.2 1 5 .8 33.0 2 1 .6 -3.1 0.0
86 Poland 36.7 1 1 .6 41.9 1.5 -2.3
87 Estonia 33.2 13.6 3. 1 1.4
88 Slovak Republic
89 Botswana 24.9 28.1 0.3 1.7 23. 1 38.3 1 0.8 9.8 41.5 35. 6 -0.2
90 Venezuela 1 8.9 14.8 0.9 4.0 14.9 163 4.0 2.5 5.8 48.0 0.0 -4. 1
Upper-middle-income
91 South Africa 20.5 25.2 5.6 10.0 19.1 31.0 3.0 2.2 -2.3 -6.2
92 Croatia 43.0 1 8.7 42.8 3.7 21.1 60.9 -0.9
93 Mexico 14.3 14.8 4.4 8.0 1 1 .3 14.3 5.5 2.3 57.6 65. 7 -3.0
94 Mauritius 1 8.4 18.2 3.6 5.5 22.7 19.1 4.6 4.2 0.8 1.5 55.9 60.0 -10.3 -1.4
95 Gabon 23.6 1 .7 6.1
96 Brazil 17.8 1 8.6 7.3 4.9 18.6 39. 0 2.2 43.5 34.5 -2.2
97 Trinidad and Tobago 35.7 1.6 1 8.4 12.0 7.2
98 Czech Republic 37.5 13.0 36.9 5.1 5.7 65.7 0.5
99 Malaysia 23.4 20.6 4.4 6.6 1 9 .2 18.1 9.9 5.1 1 4.8 1 2.7 45.3 48.0 -6.0 0.8
1 00 Hungary 44.9 20.5 48.7 7.5 4.4 31.0 -2.8
101 Chile 25.6 17.8 1 1 .4 9.7 25.3 16.2 2.7 3.3 12.4 8.8 65.3 77.9 5.4 1.6
1 02 Oman 1 0.7 8.5 0.2 0.4 30.3 36.0 8.2 69 5 1 .2 365 9.7 26.3 0.4 - I 1.2
1 03 Uruguay 21.0 27.6 9.6 9.6 20.1 29.2 1 .7 2.6 13.4 7.3 67.6 79.8 0.0 -2.8
1 04 Saudi Arabia
1 05 Argentina 10.4 2.6 1 8.2 2.7 14.3 28.6 -2.6 0.0
1 06 Slovenia
1 07 Greece 27.4 26.0 9.7 17.8 31.1 38.8 5.5 4.4 1 2.6 8.9 58.8 34. 1 -5.0 -15.7
Low- and middle-income
Sub-Saharan Africa
Us, Asia and Pacific
South Asia
Europe and Central Asia
Middle East and N. Africa
latin America and Caribbean
High-income economies
1 08 Korea, Rep. 1 5. 3 17.7 8.0 6.5 14.6 14.2 2.4 3.6 34.3 18.1 30.0 42.1 -2.2 -0.2
109 Portugal 24.3 30.9 8.8 12.8 28.9 37.7 4.4 7.4 55.9 -8.5
110 Spain 22.2 28.7 3.1 65 23.8 368 3.0 2.6 4.3 6.8 77.4 54.0 -4.2 0.0
111 New Zealand 30.6 34.4 6.1 1 0.8 35.7 35.0 2.4 1 .2 5.1 3.6 63.8 70. 1 -6.7 0.1
112 Ireland 30.9 35. 1 10.4 1 1.4 40.4 39.3 4.6 3.2 3.4 3.0 57.7 61.6 -1 2.5 -0.2
1 13 t lsrael 43.3 33.4 1 2.4 1 3.0 67.2 40.9 2.8 4.3 39.8 19.4 29.0 57.5 -1 5.6 -2.9
1 14 t Kuwait 2.7 1 .2 0.2 0.0 1 8.9 44.1 8.9 7.3 12.2 25.5 39. 1 44.2 58.7
115 t United Arab Emirates 0.0 0.6 0.0 0.6 1 1 .2 11.3 0.9 0.5 47.5 37. I 24.0 29.2 2.1 0.2
1 16 United Kingdom 30.6 33.5 9.8 1 1 .8 36.4 39.6 1.8 4.4 1 3.8 48.2 54.5 -4.6 0. 1
1 17 Ausrralia 1 9.6 22.3 5.1 5.2 21.1 26.6 1.5 2.5 9.4 16.8 50.1 58.0 -1.5 -0.1
118 !raly 29. 1 38.4 7.7 11.2 37.6 48.0 2.2 1.9 3.4 55.3 -10.7 -10.5
1 19 Canada 1 6.2 3.1 2 1 .0 0.3 7.7 10.8 46. 1 -3.5
1 20 Finland 25.1 29.3 1 3. 3 14.2 25.2 42.0 3.0 1.7 5.6 3.9 59.7 63.5 -2.2 - 13. 4
121 t Hong Kong
1 22 Sweden 30.1 32.8 10.2 1 1 .2 37.5 43.6 1 .8 1 .4 7.7 5.6 67.0 64.6 -8. 1 -6.9
1 23 Netherlands 44.2 42.9 1 0.3 10.5 48.2 48.3 4.6 2.5 5.6 3.9 70.5 68.7 -4.6 -4.9
124 Belgium 41.7 43.7 10.5 11.4 46.6 47.9 4.3 5.5 5.7 7.0 67.0 7.2 -8.2 -0.5
1 25 France 36.7 38. 1 12.2 1 1 .5 37.4 44.4 2.1 2.4 7.4 74.1 72.5 -0.1 -5.5
126 t Singapore 1 7.5 17.2 4.0 4.6 15.6 10.7 4.5 4.2 25.2 37.4 37.5 48.5 2.1 0.0
1 27 Ausrria 32.0 32.9 8.8 9. I 34.0 37.5 3.4 2.9 3.0 3.7 78.8 77.8 -3.4 -0.1
128 United States 1 8.5 1 9 .0 0.9 0.8 20.7 22. 1 1 .4 0.8 2 1 .2 18.1 54.2 55.0 -2.8 -2.3
1 29 Germany 30.0 7.3 32.2 1.7 9.1 74.9 -2.5
1 30 Denmark 31.3 35.4 16.7 1 6.5 36.7 42.0 2.7 1.5 6.5 4.0 6 1 .2 56.9 -2.7 -2.0
131 Norway 33.9 3 1 .6 14.8 15.4 33.4 39. 1 1 .2 7.7 55.9 51. 1 - 1 .7
132 Japan 1 1 .0 17.6 2.4 3.0 14.8 3.6 4. 1 -7.0 0.0
133 Switzerland 1 8. 3 21.5 3.8 3.4 1 8.9 25.9 1 .4 I.2 10.2 1 5 .2 69.0 75.2 -0.2 0.1

World
a. Refers t o current revenue. b. Includes lending minus repayments. c . Includes grants. d. Refers to education, health, social security, welfare, housing. and community
amenities. e. Includes Eritrea.
242 WO R LD D EV E L O P M E NT R E PO RT 1 997

Ta ble 1 5 . Ex ports a n d i m ports of merc h a n d ise

Total Manufacbns Total Food Fuel Avenge annual growth rate (%1
(mYllon $1 (% of totall (miUIon $1 (% of totall (% of totall Export volume Import volume
1980 1995 1980 1993 1980 1995 1980 1993 1980 1993 1980-90 1990-95 1980-90 1990-95
Low-income economies 84,204 t 245,456 t 97,748 t 2 5 1 , 806 t 5.3 w 8.3 w 1.6 w I3.0 wl
Excluding China and India 58,817 t 64,769 t 65,465.t .86,058 t 1.4 w 2. 7 w -4.2 'Y 5.0w
1 Mozambique 281 1 69 2 20 800 784 -10.5 -0.3 -1.0 2.9
2 Ethiopia' 425 423 0 4 717 1,033 8 6 25 11 1 .2 -9.4 3.3 -3.3
3 Tanzania 511 639 14 1,250 1,619 13 21 -1.8 10.0 -3.3 12.7
4 Burundi 65 106 3 30 1 68 234 7.4 -4.8 1 .4 - 14.6
5 Malawi 295 325 7 6 439 491 15 0.1 -1.8 1.3 -1.6
6 Chad 71 156 74 220 5.4 -10. 0 1 0.5 -12. 1
7 Rwanda 72 45 0 243 235 12 13 5.6 -19.6 1.3 -1.9
8 Sima Leone 224 42 40 27 427 135 24 2 -2. 1 -4.3 -9.9 -1. 1
9 Nepal 80 348 31 84 342 1,374 4 18 7.8 22. 1 4.9 6.8
10 Niger 566 225 2 594 309 14 26 -6.4 -2.0 -4.5 2.5
11 Burkina Faso 161 274 359 549 5.4 1.3 2.1 8.3
12 Madagascar 401 364 6 20 600 499 9 11 15 12 -0.1 -6.8 -4.6 -5.6
13 Bangladesh 793 3,173 69 81 2,600 6,496 24 15 10 14 7.5 12.7 1 .8 5.3
14 Uganda 345 461 3 1 293 1 ,058 8 30 - 1 .4 3.9 -0.6 28.7
15 Vietnam 339 5,026 1 ,3 1 0 7,272
16 Guinea-Bissau 11 23 55 70 20 6 -5.1 - 18.3 1.3 -5.4
17 Haiti 226 110 375 653 24 13 -2.9 - 1 1.2 -4.4 -6.8
18 Mali 205 326 9 439 529 19 35 2.6 -3.7 1 .2 -3.4
19 Nigeria 26,000 1 1 ,670 0 3 16,700 7,900 17 2 -2.4 -1.9 - 1 7.5 7.6
20 Yemen, Rep. 1 ,937 51 1,962 28 7 1.5 7.2 -5.9 1 1. 1
21 Cambodia 855 1,213
22 Kenya 1 ,250 1 ,878 12 18 2 , 1 20 2,949 8 8 34 33 2.6 16.6 1.1 -5.6
23 Mongolia 324 223
24 Togo 338 209 11 6 551 386 17 23 23 10 4.9 9.0 1 .1 - 1 1.2
25 Gambia, The 31 16 9 37 1 65 140 23 11 2.3 26.9 1 .0 9. 0
26 Cenrral Mrican Republic 116 1 87 29 81 174 21 2 2.5 3.5 6.0 -3.3
27 India 8,590 30,764 59 75 14,900 34,522 9 4 45 30 6.3 7.0 4.5 2.7
28 Lao PDR 31 348 8 29 587
29 Benin 63 163 8 331 493 26 8 7.7 -0.3 -6.3 29.4
30 Nicaragua 451 520 14 7 887 962 15 23 20 15 -4.4 -8.7 -4. 1 7.3
31 Ghana 1 ,260 1,227 23 1 , 1 30 1,580 10 27 3.9 9. 1 1 .6 12.8
32 Zambia 1 ,300 781 1 ,340 1,258 5 22 -3.5 26.9 -5.0 -6.2
33 Angola 1 ,880 3,508 13 1 ,330 1,748 24 1 1 1.3 4.2 -3.4 -4. 1
34 Georgia 347 687
35 Pakistan 2,620 7,992 49 85 5,350 1 1 ,461 13 14 27 17 9.5 8.8 2.1 10.3
36 Mauritania 1 94 404 2 286 700 30 14 7.8 3.5 1.1 4.4
37 Azerbaijan 612 955
38 Zimbabwe 1 ,4 1 5 1,885 38 37 1 ,448 2,241 3 18 12 2.2 -6.6 -2.2 -5. 1
39 Guinea 401 583 270 690 -3.6 -8.6 -2.9 -2.8
40 Honduras 830 1,061 13 13 1,010 1 ,2 1 9 10 11 16 13 1.3 10.7 -1.0 7.0
41 Senegal 477 340 15 21 1,050 704 25 29 25 11 2.6 3.6 1 .0 6. 1
42 China' 1 8 , 1 00 148,797 48 81 19,900 1 2 9, 1 1 3 3 6 1 1 .4 14.3 1 0.0 24.8
43 Cameroon 1 ,380 2,331 4 13 1 ,600 1 ,241 9 16 12 3 4.5 -1.7 - 1 .4 - 1 1.2
44 Cote d'Ivoire 3,130 3,939 17 2,970 2,808 13 16 3.3 -7.5 -4.0 5.4
45 Albania 367 205 354 679
46 Congo 911 952 7 580 670 19 14 5.5 9.7 -2.0 2.5
47 Kyrgyz Republic 409 610
48 Sri Lanka 1 ,070 3,798 16 73 2,040 5,185 20 16 24 9 6.3 17.0 2.0 15.0
49 Armenia 271 674
Middle-income economies 5 86,567 t 893,33 1 t 455,925 t 987,309 t 2.6 w 6.9 w 0.2 w 11:0YJ
Lower-middle-income
50 Lesotho 58 143 464 821
51 Egypt, Arab Rep. 3,050 3,435 11 33 4,860 1 1 ,739 32 24 2 -0.2 -0.1 -0.7 -2.9
52 Bolivia 942 1,101 3 19 665 1,424 19 9 5 1 .7 -5.4 -2.8 18.9
53 Macedonia, FYR 1,244 1 ,420
54 Moldova 746 841
55 Uzbekistan 3,805 3,598
56 Indonesia 2 1 ,900 45,417 2 53 10,800 40,918 13 7 16 8 5.3 21.3 1 .2 9. 1
57 Philippines 5,740 17,502 37 76 8,300 28,337 8 8 28 12 2.9 10.2 2.4 15.2
58 Morocco 2,490 4,802 24 57 4, 1 60 8,563 20 17 24 14 4.2 0.8 2.9 1.7
59 Syrian Arab Republic 2, 1 1 0 3,970 6 9 4,120 4,6 1 6 14 19 26 4 6.4 -3.2 -9.3 22.3
60 Papua New Guinea 1 ,030 2,644 3 12 1 , 1 80 1 ,451 21 15 4.5 19.3 -0.2 2.1
61 Bulgaria 10,400 5 , 1 00 9,650 5,0 1 5 8 36
62 Kazakstan 5 , 1 97 5,692
63 Guatemala 1 ,520 2 , 1 56 24 30 1,600 3,293 11 24 14 -1.3 8.2 -0.6 19.3
64 Ecuador 2,480 4,307 3 7 2,250 4 , 1 93 5 1 2 3.0 8.9 -3.9 10.0
65 Dominican Republic 962 765 24 52 1 ,640 2,976 17 25 - 1 .0 -10.2 2.6 8.9
66 Romania 1 1 ,200 7,548 77 12,800 9,424 14 26 -6.8 -4.7 -0.9 -5.3
67 Jamaica 963 1,414 63 65 1 , 100 2,757 20 14 38 19 1.2 1.3 3.1 7.0
68 Jordan 574 1 ,769 34 51 2,400 3,698 18 20 17 13 7.4 7. 1 -3.1 13.0
69 Algeria 1 3,900 8,594 0 3 1 0,600 9,570 21 29 3 1 2.5 -0.8 -5. 1 -5.7
70 EI Salvador 967 998 35 48 966 2,853 18 15 18 14 -2.8 13.0 1.3 16.2
71 Ukraine 1 3,647 1 5,945
72 Paraguay 310 817 12 17 615 2,370 11 12 9.9 - 1.9 3.2 7.3
Data for Taiwan, China 1 9,800 1 1 1 ,585 88 93 19,700 1 03,698 6 25 8 1 1 .6 5.9 12.8 14. 1
Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.
 S E L E CT E D W O R LD DEVE L O PM E N T I N D I C ATO R S 243

Exports Imports
Total Manufactures Total Food Fuel Average annual growth rate (%)
(million $) (% of total) (million $) (% of total) (% of total) Export volume Import volume
1980 1995 1980 1993 1980 1995 1980 1993 1980 1993 1980-90 1990-95 1980-90 1990-95
73 Tunisia 2,200 5,475 36 75 3,540 7,903 14 21 8 6,2 7,7 L3 6.4
74 Lithuania 2,707 64 3,083 11 45
75 Colombia 3,920 9,764 20 40 4,740 1 3,853 12 8 12 4 9,7 4, 8 - 1 ,9 223
76 Namibia 1 ,353 1,1%
77 Belarus 4,621 5 , 1 49
78 Russian Federation 8 1 ,500 5 8 ,900
79 Latvia 1 ,305 1,818
80 Peru 3,900 5,575 18 17 2,500 9,224 20 20 2 -1,9 11.0 -1 .0 12.1
81 Costa Rica 1 ,000 2,6 1 1 34 33 1,540 3,253 9 8 15 9 4.9 10.1 2.8 15.1
82 Lebanon 868 982 65 3,650 6,721 16 15 -\.2 -7.8 -7.4 23.5
83 Thailand 6,5 1 0 56,459 28 73 9,2 1 0 70,776 5 30 1 4.3 21.6 12.1 12.7
84 Panama 358 625 9 16 1 ,450 2,5 1 1 10 10 31 13 2.6 233 -4.1 143
85 Turkey 2,9 1 0 2 1 ,600 27 72 7,910 3 5 ,7 1 0 4 6 48 14 12.0 8.8 1 1 ,3 11.2
86 Poland 14,200 22,892 71 60 16,700 29,050 14 12 18 17 4.8 3.9 1,5 26.4
87 Estonia 1 ,847 2,539
88 Slovak Republic 8,585 9,070
89 Botswana 502 2 , 1 30 692 1,907 1 1 ,4 -0.8 7,7 -5.6
90 Venezuela 19,221 1 8,457 2 14 1 1 ,827 1 1 ,968 15 11 2 1 ,6 -0.1 -6.1 19.3
Upper-middle-income 246,329 t 372,898 t 161 ,848 t 379,450 t 1,7 w 7.3 w -0.6 w 12.6w.
91 South Africa 25,500 27,860 39 74 1 9 ,600 30, 5 5 5 6 o 0.9 2.8 -0.8 53
92 Croatia 4,633 71 7,582 9 10
93 Mexico 1 5 ,600 79,543 12 75 19,500 72,500 16 8 2 2 12.2 14.7 5.7 18.7
94 Mauritius 431 1 , 537 27 67 609 1 ,959 26 13 14 9 8.6 2.0 1 1 ,0 2.5
95 Gabon 2,170 2,713 4 674 882 19 1 0.6 5.7 -2.0 2.0
96 Brazil 20,100 46,506 39 60 25,000 53,783 10 10 43 16 6.1 6.6 -1,5 8.5
97 Trinidad and Tobago 3,960 2,455 4 34 3,160 1,714 11 15 38 16 -4.3 4.9 -12.1 8.1
98 Czech Republic 2 1 ,654 26,523
99 Malaysia 1 3,000 74,037 19 65 10,800 77,75 1 12 7 15 4 1 1,5 17.8 6.0 15.7
100 Hungary 8,670 12,540 66 68 9,220 1 5,073 8 6 16 13 3.0 -1.8 0,7 7.9
101 Chile 4,710 16,039 10 18 5,800 1 5, 9 1 4 15 6 18 10 5.7 10.5 1 ,4 14.5
1 02 Oman 2,390 6,065 3 70 1,730 4,248 15 19 11 3 1 3. 1 9.8 - 1 ,6 18.5
103 Uruguay 1 ,060 2 , 1 06 38 43 1,680 2,867 8 29 9 2.9 -3. 1 -2.0 21.7
104 Saudi Arabia 109,000 46,624 9 30,200 27.458 14 -8.2 4.0 -8.4 5.9
105 Argentina 8,020 20,967 23 32 10,500 20,122 6 10 2 3.1 -1.0 -8.6 45.8
106 Slovenia 8,286 86 9,452 11
107 Greece 5,150 9,384 47 48 10,500 21,466 9 6 23 25 5.1 11.9 5.8 12.8
,Low- and middle-income 660,833't 'J',1 52,249 t 547,417 " 1,233,749 t ' 3:0 � • 1.2';' 0.2 w 11.4w.
Sub-Saharan Africa 77,237 t 72,847 t 66,593 t 77,574 t 0.9 w O.9 w -3.8 w I.9 w
East Asia and Pacific 69,623 t 359,102 t 65,139 t 368,683 t 9.3 w I7. 8 w 7.1 w I7. 0 w
Soutb Asia 13,848 t 46,455 t 25,863 t 60,512 t 6.6 w 8.6w 3.5 w 53 w
Europe and Central Asia
Middle East and N. Africa 203,379 t 106,441 t 1 03,850 t 1 1 0,841 t -2.0 w 1.1 w -5.8 w 5.9 w·
Latin America and Caribbean 98,589 t 22 1 ,2 1 0 t 1 07,971 t 237,576 t 5.2 w 6.6w -0.5 w 15.1 w
High-income economies 1 ,393,926 t 3,997,288 ! 1,503,743 .t 4,037,671 t 5. 2 w 5.4 w 6.2 w � ,4§ w
108 Korea, Rep. 17,500 125,058 90 93 22,300 1 35 , 1 19 10 6 30 18 1 3,7 7.4 1 1 .2 7 .7
109 Portugal 4,640 22,621 72 78 9,3 1 0 32,339 14 19 24 24 12.2 0.5 9.8 2.4
1 10 Spain 20,700 9 1 ,7 1 6 72 78 34,100 1 1 5,019 13 14 39 11 6.9 11.2 10.1 5.3
III New Zealand 5,420 1 3,738 20 27 5,470 1 3,958 6 23 7 3.6 5.4 4.6 5.5
1 12 Ireland 8,400 44, 1 9 1 58 75 1 1,200 32,568 12 10 15 5 9.3 11.4 4.7 5.6
1 13 t Israei 5,540 19,046 82 91 9,780 29,579 11 7 27 7 5.9 10.0 4.6 12.3
114 t Kuwait 19,700 12,977 10 88 6,530 7,784 15 13 -2.0 42.3 -6.3 23.0
115 t United Atab Emirates 20,700 25,650 3 8,750 21,024 11 11 6. 1 6.3 - L3 21.0
116 United Kingdom 1 1 0,000 242,042 74 82 1 16,000 263,719 13 11 14 4.4 1.8 6.3 0.9
117 Australia 2 1 ,900 52,692 20 35 22,400 6 1 , 280 5 5 14 6 5.8 8.1 4.9 5. 1
1 18 Italy 78, 1 00 2 3 1 ,336 85 89 1 0 1 ,000 204,062 13 13 28 10 4.3 6.0 5.3 -1.7
1 19 Canada 67,700 192,198 49 66 62,500 168,426 8 6 12 4 5.7 8.4 6.2 6.3
1 20 Finland 14,200 39,573 70 83 1 5 ,600 28, 1 14 7 7 29 13 2.3 8.7 4.4 -1.9
121 t Hong Kong 19,800 173,754 92 95 22,400 1 92,774 12 6 6 2 1 5.4 153 1 1 ,0 15.8
122 Sweden 30,900 79,908 79 85 33,400 64,438 7 24 9 4.6 7.4 4.9 5.0
123 Netherlands 74,000 1 9 5 ,9 1 2 51 63 76,600 1 76,420 15 15 24 9 4.5 5.8 4.6 4.3
124 Belgiumb 64,500 136,864 71,900 125,297 4.4 4.2 4.0 03
125 France 1 16,000 286,738 74 78 1 35,000 275,275 10 11 27 9 4.1 23 5.0 0.8
126 t Singapore 19,400 1 1 8,268 50 80 24,000 124,507 9 6 29 11 12.2 16.2 8.6 12. 1
1 27 Austria 17,500 45,200 83 89 24,400 55,300 6 16 5 6.4 3.9 5.8 1.9
128 United States 226,000 584,743 68 82 257,000 770,852 33 10 3.6 5.6 7.2 7.4
129 Germany' 193,000 523,743 86 90 188,000 464,220 12 10 23 8 4.6 2.2 4.9 2. 9
1 30 Denmark 16,700 49,036 56 66 19,300 43,223 12 13 22 6 4.4 5.4 3.6 3.4
131 Norway 1 8,600 4 1 ,746 32 31 16,900 32,702 8 7 17 6.8 6.5 4.2 0.7

1 32 Japan 130,000 443, 1 16 96 97 1 4 1 ,000 335,882 12 18 50 21 5.0 0.4 6.5 4.0

1 33 Switzerland 29,600 77,649 91 94 36,300 76,985 8 7 11 4 6.0 3.3 4.9 -6.7
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,0_ t_
8_ 5�
,2
�
j_ 6�
,3�6_
2_ t____ --__ __ -- -- 4-
- .7_
w __ _6�
. O_w
__�4 .9
_ � W�__5,
� �j[
� � � �
a. Data prior to 1992 include Eritrea. b. Includes Luxembourg. c. Data prior to 1990 refer to the Federal Republic of Germany before unification.
244 WORLD D EV E L O P M E NT R E P O RT 1 997

Ta ble 1 6 . Balance of payments

Exports of Imports of Current transfers
eoods. services, goods, services, Net workers' Other net Current account Gross international
and Income and income remittances transfers balance reserves
(million $) (million $) (million $) (million $) (million $) (million $)
�:--
� ��c---
� - ��-,1=-=98:.::0 1!'9�===� ;;;;1980;;;c��.,;1;:;99,;;.5;;..,.,�;,;1980:.;;,;;,, 1995 1980 1995��1980=��19=9,,-5�c-v-=1=980=-_-,1=99=5�
Low-income economies
"= ;;';':;
,.,;=; " w.
Excluding China and India
I Mozambique 452 490 875 1 , 3 68 o 56 -367
2 Ethiopia' 590 828 797 1,400 80 532 -126 -93 262 815
3 Tanzania 762 1 ,253 1,412 2,236 o o 1 28 354 -522 -629 20 270
4 Burundi 139 297 o 151 -6 105 216
5 Malawi 315 419 638 937 o o 63 124 -260 -450 76 115
6 Chad 71 274 83 540 -4 -15 25 206 9 -38 12 147
7 Rwanda 1 82 91 335 338 -14 -7 1 18 1% -48 -129 187 126
8 Sierra Leone 276 1 37 494 374 -2 o 54 47 - 1 65 -89 31 52
9 Nepal 239 1 , 1 10 368 1 ,592 36 108 -93 -375 272 646
10 Niger 644 291 1 ,0 1 6 496 -47 -41 143 108 -277 -126 132 99
II Burkina Paso 225 356 596 652 1 00 29 223 226 -49 15 75 352
12 Madagascar 518 756 1,121 1 , 1 61 -30 -2 77 131 -556 -276 9 1 09
13 Bangladesh 976 4,292 2,622 6,747 802 1,426 -844 -1 ,029 331 2,376
14 Uganda 331 642 450 1,440 o 36 370 -83 -428 3 459
15 Vietnam 7,368 9,865 477 -792 -2,021 o 3
16 Guinea-Bissau 17 24 83 95 -14 -I 31 -80 -41 20
17 Haiti 309 209 498 780 52 o 36 505 -101 -67 27 1 06
18 Mali 263 533 537 967 40 69 104 162 - 1 30 -164 26 330
19 Nigeria 27,759 9,879 22,005 50,427 -4 10 2,567 - 1 66 - 1 , 894 5 , 178 -510 1 0 ,640 1 ,709
20 Yemen, Rep. 2 , 1 54 3,075 1,067 146 638
21 Cambodia 979 1 ,442 10 267 - 1 86 192
22 Kenya 2,061 2,974 3,095 3,874 o -4 1 56 503 -878 -400 539 384
23 Mongolia 476 511 1,283 550 o o o 77 -808 39 1 58
24 Togo 570 520 752 655 I 5 85 25 -95 -57 85 1 35
25 Gambia, The 66 181 181 24 1 o o 28 52 -87 -8 6 106
26 Central Mrican Republic 205 234 329 319 -19 -27 1 00 91 -43 -25 62 238
27 India 1 2,348 40,995 1 8, 1 3 0 54,303 2,860 7,478 -2,922 -5,830 12,010 22,865
28 Lao PDR 453 673 o -3 -224 99
29 Benin 24 1 489 428 769 75 65 76 84 -36 36 15 202
30 Nicaragua 514 655 1 ,049 1 ,436 o 75 124 o -4 1 1 -706 75 142
31 Ghana 1,213 1 ,586 1 ,264 2,264 -4 12 84 264 30 -414 330 804
32 Zambia 1 ,625 1,500 1,987 1 ,691 -61 -93 -5 1 6 206 192
33 Angola 3,655 4,701 -83 249 -769
34 Georgia
35 Pakistan 3,0 1 1 8,403 6,042 12,758 1 ,895 2,390 - 1 , 1 37 -1,965 1 , 568 2,528
36 Mauritania 270 533 493 636 -27 -20 1 17 76 - 1 34 -27 146 90
37 Azerbaijan 1 , 273 110 -379 84
38 Zimbabwe 1 ,7 1 4 2,372 1 ,895 2,836 8 -2 23 41 -149 -425 419 888
39 Guinea 714 1 ,090 -10 189 -197 87
40 Honduras 967 1 ,667 1,306 2, 1 1 0 o 120 22 123 -3 1 7 -201 159 270
41 Senegal 830 1,501 1,337 1,898 -1 5 13 135 375 -387 3 25 283
42 China ' 24,729 1 52,431 19,541 1 52,248 538 350 -52 \,085 5,674 1,618 10,091 80,288
43 Cameroon 1 ,8 1 3 2,070 2,478 2,250 -17 9 -682 -\71 206 15
44 Cote d' Ivoire 3,640 4,527 4,761 4,502 -716 -449 10 1 55 - 1 ,826 -269 46 546
45 Albania 386 376 375 865 o 385 6 93 16 -12 265
46 Congo 1,029 1 ,252 1 , 195 1,825 -38 -27 37 29 -167 -570 93 64
47 Kyrgyz Republic 340 490 43 -288
48 Sri Lanka 1,340 4,843 2,269 6,041 1 52 715 121 75 -657 -546 283 2,088
49 Armenia 301 741 12 148 -279
Middle-income economies
Lower-middle-income
50 Lesotho 363 663 482 1,02 1 o o 175 471 56 J08 50 457
51 Egypt, Arab Rep. 6,5 1 6 J I ,337 9.745 17,353 2,696 3,417 95 5,060 -438 -956 2,480 1 7, 1 22
52 Bolivia 1 ,046 1,283 1,1 12 1 ,794 o -/ 60 226 -6 -218 553 1,005
53 Macedonia, FYR 1,321 2 , 1 84 275
54 Moldova 865 999 40 -95 240
55 Uzbekistan 3,746 3,253 -8
56 Indonesia 24,878 52, 505 25,694 60,367 o 629 250 210 -566 -7,023 6,803 14,908
57 Philippines 7,997 32,862 1 0,348 35,722 202 296 232 584 -1,917 -1,980 3,978 7,757
58 Morocco 3,270 9, 1 1 8 5,807 12,900 989 1 ,890 141 371 - 1 ,407 - 1 ,5 2 1 814 3,874
59 Syrian Arab Republic 2,568 5,929 4,61 0 6,406 774 385 1,520 532 251 440 828
60 Papua New Guinea 1,089 3,0 1 4 1,561 2,4 1 5 o o 184 75 -289 674 458 267
61 Bulgaria 9,443 6,680 8,547 6,478 o o 58 132 954 334
62 Kazakstan 5,296 5,874 59 -519 1,660
63 Guatemala 1 ,834 2,868 2 , 1 07 3,933 o 350 110 144 - 163 -572 753 783
64 Ecuador 2,975 5,298 3,647 6,351 o o 30 23 1 -642 -822 1 ,257 1,788
65 Dominican Republic 1 ,3 1 3 5,106 2,237 6,100 183 795 21 -266 -720 - 1 25 279 373
66 Romania 1 2 , 1 60 9,094 14,580 10,799 o 3 o 360 -2,420 -1 ,342 2,5 1 1 2,624
67 Jamaica 1,422 3,327 1 ,678 4,107 51 414 70 121 - 1 36 -245 105 68 1
68 Jordan 1,782 3,606 3,3 1 8 5,200 594 1,118 -942 -476 1,745 2,279
69 Algeria 1 4,500 10,954 14,552 12,5 1 2 24 1 60 1 68 249 -2,3 1 0 7,064 4 , 1 64
70 EI Salvador 1 ,271 2,103 1,289 3,562 11 1 ,0 6 1 41 328 34 -70 382 940
71 Ukraine 17,337 18,96 1 472 - 1 , 1 52 1 ,069
72 Paraguay 781 1 ,399 4 , 1 73 2 -2 42 -6 1 8 -1 ,473 783 1,040
Data for Taiwan, China 22,627 1 34,484 23,445 1 26,626 -95 -2,202 -9 1 3 5,656 4,055 95,559
Note: For data comparability and coverage, see the technical notes. Figures in italics arc for years other than those specified.
 S E L E CTE D WO R LD D EV E L O P M E NT I N D I C AT O R S 245

Exports of Imports of Current transfers

gOOds, sen/ices, goods, services, Net workers' Other net Current account Gross international
and Income and income remittances transfers balance resenleS
(million $) (million $) (million $) (million $) (million $) (million $)
1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995
73 Tunisia 3,356 8,098 4, 1 1 9 9,646 304 659 106 152 -353 -737 700 1,689
74 Lithuania 3,242 3,966 I 109 -614 829
75 Colombia 5,860 14, 794 6,231 19,588 68 172 97 506 -206 -4, 1 1 6 6,474 8,205
76 Namibia 1 ,899 2,082 4 230 50 225
77 Belarus 2,773 3,209 182 -254 377
78 Russian Federation 9 5 , 1 00 85,800 304 9,604 1 8,024
79 Latvia 2,151 2,246 68 -27 602
80 Peru 4,832 7,382 5,080 12,097 o 334 147 157 -101 -4,223 2,804 8,653
81 Costa Rica 1,219 3,945 1,897 4,241 o o 15 1 54 -664 -143 197 1 ,060
82 Lebanon 1,512 6,953 350 -5,092 7,025 8,100
83 Thailand 8, 575 74,093 10,861 88,134 o o 210 487 -2,076 - 1 3,554 3,026 36,939
84 Panama 7,853 9,542 8,225 9,584 -36 -7 76 210 -331 -141 1 17 782
85 Turkey 3,672 38,069 9,251 44,904 2,071 3,327 100 1 , 1 69 -3,408 -2,339 3,298 1 3,891
86 Poland 16,200 33,169 20,338 36,929 o 35 721 -520 -3,417 -4,245 574 1 4 ,957
87 Estonia 2,801 3,1 1 2 -I 1 27 - 1 84 583
88 Slovak Republic 1 1 ,185 10,629 o 93 648 3,863
89 Botswana 748 2,908 954 2,539 -17 - 1 57 72 1 29 -151 342 344 4,764
90 Venezuela 22,232 22,406 1 7,065 20,262 -418 - 1 73 -21 284 4,728 2,255 1 3,360 1 0 ,7 1 5
Upper-middle-income
- ---- �--�-. - -- ---- -------

91 South Africa 29,258 33,471 25,989 36,994 o o 239 23 3,508 -3,500 7,888 4,464
92 Croatia 7,375 9,733 646 -1,712 2,036
93 Mexico 23,987 93,529 35,243 98, 1 4 5 687 3,672 147 290 - 1 0,422 -654 4,175 17,046
94 Mauritius 579 2,402 718 2,525 o o 22 101 -1 l 7 -22 113 887
95 Gabon 2,434 2,793 1,926 2,4 1 5 -143 -152 19 o 384 378 115 1 53
96 Brazil 23,275 56,098 36,250 77,855 -80 2,773 224 848 - 1 2,831 - 1 8,136 6,875 5 1 ,477
97 Trinidad and Tobago 3,371 2,875 2,972 2,577 30 -43 -35 357 294 2,8 1 3 379
98 Czech Republic 29,399 3 1 ,345 o 572 -1,374 14,6 1 3
99 Malaysia 14,836 84,2 1 2 1 5 , 1 00 92,440 o o -2 163 -266 -4,147 5,755 24,699
1 00 Hungary 9,780 17,933 10,374 2 1 ,528 o -14 63 1 ,073 -531 -2,535 12,095
101 Chile 6,276 20,014 8,360 20,214 o 0 1 13 357 - 1 ,971 1 57 4, 1 28 14,860
102 Oman 3,852 6,403 2,650 5,671 -362 - 1 ,740 102 29 942 -979 704 1 ,2 5 1
1 03 Uruguay 1,594 3,679 2,3 1 2 4,069 o 0 9 32 -709 -358 2,401 1 ,8 1 3
1 04 Saudi Arabia 1 1 4,208 55,091 62,710 45,583 -4,094 -16,616 -5,901 -1 ,000 4 1 ,503 -8,108 26,129 10,399
1 05 Argentina 1 1 ,202 28,052 1 5,999 30,874 o 0 23 432 -4 ,774 -2,390 9,297 1 5 ,979
1 06 Slovenia 10,731 10,8 1 2 53 -8 -37 1 ,8 2 1
107 Greece 8,374 16,835 1 1 ,670 27,707 1,066 2,982 21 5,026 -2,209 2,864 3,607 16,1 1 9
;;-
Low- and middle�in� orit'�
Sub-Saharan Africa
East Asia and Pacific
South Asia
Europe and Central Asia
Middle East and N. Africa
Latin America and Caribbean
High-income economies
108 Korea, Rep. 22,477 1 5 1,826 28,342 160,490 96 486 496 -73 -5,273 -8,251 3,101 32,804
1 09 Portugal 6,846 35,666 10,916 43,026 2,928 3,348 78 3,783 -1 ,064 -229 13,863 22,063
1 10 Spain 33,863 146,042 4 1 ,089 149,863 1 ,647 2,1 1 9 -1 2,983 -5,580 1,280 20,474 40,531
III New Zealand 6,561 1 8 ,572 7,630 22,428 143 1 74 -47 -96 -973 -3,778 365 4,4 1 0
1 12 Ireland 10,4 1 8 53, 1 26 13,754 53,530 o 1 ,204 1,782 -2, 1 3 2 ] , 379 3,071 8,770
113 t Israei 9,858 28,659 13,458 39,750 o o 2,729 5,600 -871 -5,491 4,055 8 , 1 23
1 14 t Kuwait 27,344 19,276 1 0,463 1 3 ,232 -692 - 1 ,347 -888 -499 1 5 ,302 4 , 1 98 5,425 4,543
115 t United Arab Emirates 2,355 7,778
116 United Kingdom 201 , 1 37 458,728 1 89,683 452,359 o -4,592 - 1 1 ,001 6,862 -4,632 3 1 ,755 49, 144
117 Australia 26,668 74,417 30,702 93,535 -4 1 6 -67 -4,774 - 1 9 , 1 84 6,366 14,952
1 18 Italy 1 04,979 330,286 1 16,668 299,954 1,609 98 -507 -4,724 -10,587 25,706 62,428 60,690
1 19 Canada 77,980 224, 1 3 5 79,845 232,458 173 - 370 -1,691 -8,693 1 5,462 1 6 ,369
1 20 Finland 17,332 50,798 1 8,620 44,8 1 3 o -1 14 -343 -1,403 5,642 2,451 10,657
121 t Hong Kong 24,190 219,346 25,448 2 1 9,500 -1,258
1 22 Sweden 39,388 109,063 42,495 1 0 1 ,439 o 106 -1 ,224 -3,098 -4,331 4,633 6,996 25,909
1 23 Netherlands 1 03,143 250,990 102,850 228,460 -320 -423 -828 -5,916 -855 16,191 37,549 47,162
124 Belgiumb 88,925 305,0 1 0 92,625 286,809 -270 -393 -961 -2,848 -4,931 1 4,960 27,974 24, 1 20
1 25 France 174, 1 1 8 498,203 174,156 475,234 -2,591 -1,364 -1 ,578 -5,162 -4,208 1 6,443 75,592 58,5 1 0
126 t Singapore 25,239 1 59,437 26,695 143,456 o o -106 -888 - 1 ,563 1 5 ,093 6,567 68,695
1 27 Austria 29, 1 52 1 06,474 32,951 1 10,085 -67 28 -1,531 -3,865 -5, 1 13 17,725 23.369

128 United States 344,470 969,220 333,820 1 ,082,260 -8 1 0 -12,230 -7,690 -22,960 2,150 -1 48,230 1 7 1 ,4 1 3 1 75,996
1 29 Germany' 238, 1 77 706,502 238,524 686,5 1 2 -4,437 -5,305 -8,422 -35,661 -13,205 -20,976 104,702 1 21 ,8 1 6

1 30 Denmark 23,176 92,772 24,891 90,398 o o -161 -96 1 -1,875 1,413 4,347 1 1 ,652

131 Norway 28,252 50,837 26,658 45,573 -23 -236 -493 -1,384 1 ,079 3,645 6,746 22,976

1 32 Japan 1 58,230 687,136 167,450 568,143 o . . -1 ,530 -7,747 - 10,750 1 1 1,246 38,9 1 9 192,620

1 33 Switzerland 59,462 1 54,840 58,524 129, 1 13 -603 -2, 5 1 9 -537 -1 ,586 -201 2 1 ,622 64,748 68,620

World

a. Data pnor to 1992 include Eritrea. b. Includes Luxembourg. c. Data prior to 1990 refer to the Federal Republic of Germany before unification.
246 WO R LD D EV E LO P M E N T R E P O RT 1 997

Table 1 7 . Extern a l debt

External debt a s percentage of Debt service Ratio of present Multilateral debt as
Total external debt Exports of goods as % of exports of value to nominal % of total external
Imlillon $) GNP and services goods and services value of debt (%) debt
1980 1995 1980 1995 1980 1995 1980 1995 1995 1980 1995
Low�i�come eco'norrii'es 1 06,109" i- 534,i'1i4 t 16. 3 w u311.7 '" 96.8 W 183_9 w
"
9_6 w 1 SA w 1 7_ 2 w 25_5 W
, Excluding China and India
1 Mozambique 5,781 443.6 1 , 1 92-5 353 76.6 22-7
2 Ethiopia:! 824 5,221 99_9 134_5 4582 7.3 13_6 65.8 412 453
3 Tanzania 2,460 7,333 207A 323_0 5852 2 Ll 17A 73.5 13.0 39_1
4 Burundi 166 1,157 182 1 10_1 8293 27_7 45.2 35] 80_1
5 Malawi 821 2, 140 72-1 166_8 260_8 499.6 27] 25_9 47.6 26] 78_8
6 Chad 285 908 395 8 1 .4 399.6 339.0 8A 5_9 48.7 26_1 no
7 Rwanda 190 1 ,008 163 89_1 103.5 6573 4_1 47.6 47_8 80A
8 Sierra Leone 435 1 ,226 383 1 59] 157] 1 , 163.5 232 603 62.6 142 343
9 Nepal 205 2,398 lOA 533 85A 198_0 33 7_8 49.2 61.0 8 13
10 Niger 863 1,633 345 912 131.8 57L7 2 1 .7 19_8 62.2 16_5 532
11 Burkina Faso 330 1 ,267 195 55_0 88_0 346_1 5_9 I Ll 5 1 .0 41.8 77.6
12 Madagascar 1,241 4,302 3 Ll 1 4 1 .7 2393 561.2 203 9.2 74_1 14-7 392
13 Bangladesh 4,230 1 6,370 31.6 563 360.4 298.2 23.7 133 55_9 302 59]
14 Uganda 689 3,564 54_6 63] 208 . 1 555.1 173 213 52A 1 1 .5 61.8
15 Vietnam 26,495 130.2 396.0 5.2 88.0 12
16 Guinea-Bissau 145 894 137_8 353.7 1 , 8743 66_9 65 . 1 20. 1 56. 1
17 Haiti 302 807 20_9 39_8 72-8 386.8 62 452 49. 1 43.8 75.7
18 Mali 732 3,066 45A 1 3 1 .9 227.3 467.1 5_1 12.6 58.9 23.7 452
19 Nigeria 8,921 35,005 10_1 140_5 32.1 274.5 4_1 123 94.1 6A 14_1
20 Yemen, Rep_ 1,684 6,212 1552 192.1 32 82.2 1 4.9 20.6
21 Cambodia 2,031 73.5 205A 0.6 70.7 5_8
22 Kenya 3,383 7,3 8 1 48_ 1 97] 164 . 1 248.2 2 1 .0 25.7 74.1 1 8.6 395
23 Mongolia 512 61.5 100.2 9_1 64.2 332
24 Togo 1 ,052 1,486 95.9 1 2 1 .2 1 8 13 464_5 9.0 5.7 61.7 1 13 48A
25 Gambia, The 137 426 6 1 .5 206.6 235 . 1 6.2 14.0 503 29_9 76_0
26 India 20,581 93,766 1 1 .9 28.2 136.0 2012 93 27_9 80.0 29.5 32.0
27 Central African Republic 195 944 24A 94.8 403.9 4.9 6.8 53A 27A 67.2
28 Lao PDR 350 2,165 124.9 4783 5_8 343 5_9 28.7
29 Benin 424 1 ,646 30.2 8 1 .8 133.1 285_6 6.3 8A 55.9 245 523
30 Nicaragua 2,192 9,287 1085 589] 426.5 1 ,272-7 223 38.7 882 19.2 16.0
31 Ghana 1 ,398 5,874 3 1 .6 95.1 1 1 5.2 366.5 13.1 23.1 643 19.9 50.8
32 Zambia 3,261 6,853 90.7 1 9 13 200.7 528.7 253 174A 72A 1 2.2 3 1 .9
33 Angola 1 1 ,482 274.9 3 143 11.5 94.6 1 .7
34 Georgia 1 , 1 89 5 1.6 85.9 19]
35 Pakistan 9,930 30,152 42A 49_5 208.7 257.9 1 83 35.3 77.6 15A 405
36 Mauritania 843 2,467 125_5 2433 306.1 458.5 173 2 1 .5 683 14.8 36_8
37 Azerbaijan 321 9.2 863 30_8
38 Zimbabwe 786 4,885 14_9 78.9 45.6 3.8 25.6 82.2 OA 33.1
39 Guinea 1,134 3,242 9 12 453A 253 64.9 1 1 .5 452
40 Honduras 1 ,473 4,567 60_6 1 24.6 1 52.2 255.5 2 1 .4 3 1 .0 8 1 .2 31.1 473
41 Senegal 1 ,473 3,845 50.5 823 162-7 2243 28.7 1 8.7 653 17_8 48A
42 China 4,504 1 1 8,090 2.2 17.2 773 9.9 9 1 .4 0.0 13.8
43 Cameroon 2,588 9,350 37.9 1 24.4 140.7 3383 1 5.2 20.1 80_0 16.7 17.9
44 Cote d'ivoire 7,462 18,952 77. 1 25 1 .7 205.0 41 8_6 38.7 23.1 87_6 7.0 20.6
45 Albania 709 3 1 .6 932 1 .0 1 0 1 .6 1 5.6
46 Congo 1 ,526 6,032 99.0 365.8 1482 481.8 10_6 14A 88.8 7] 1 1 .7
47 Kyrgyz Republic 610 20.2 4.8 73.9 29_9
48 Sri Lanka 1 ,841 8,230 46_1 64A 123A 1403 11.0 73 67.7 1 1 .7 34.7
49 Armenia 374 17.6 1 19.1 2.9 77.9 55.7
, Middle-income economies ',o9,503 t C530,883 t 22 A w 39_9 w 84.6 w- 14 2.6 w 13_6 w 17 A w 5,6 w 1 0 .4 -';
Lower-middle-income
50 Lesotho 72 659 1 1 .4 44_6 19.8 108.8 1 .5 6_0 58A 56.0 69_6
51 Egypt, Arab Rep_ 19,131 34, 1 16 892 733 207] 208 . 1 13A 14.6 75_8 13] 12A
52 Bolivia 2,702 5,266 93A 90.6 258.4 410.1 35_0 28.9 74.0 16.5 48.9
53 Macedonia, FYR 1,213 65.8 79.9 1 1 .8 86. 1 24.0
54 Moldova 691 17.8 79.9 8.0 90_0 3 13
55 Uzbekistan 1 ,630 7.5 353 6.0 9 1 .7 15.1
56 Indonesia 20,938 107,831 28.0 56.9 202.9 30.9 95.7 8.8 1 8.6
57 Philippines 17,417 39,445 53.7 5 1 .5 212.4 1 2 1 .7 26.6 16.0 95.8 7.5 2 1 .5
58 Morocco 9,247 22,147 50.7 7 1 .0 213_9 200.9 33A 32. 1 90_0 7.8 30.8
59 Syrian Arab Republic 3,552 2 1 ,3 1 8 27.2 134.8 1063 336_8 1 1 .4 4.6 87] 8.8 4.8
60 Papua New Guinea 719 2,431 28_9 533 66_0 80_6 13.8 20.8 84.6 212 383
61 Bulgaria 10,887 923 163.0 18.8 94_6 16.8
62 KazaI<Stan 3,712 13.5 60.8 4.6 92.6 10_6
63 Guatemala 1 , 1 66 3,275 14.9 223 63.6 101.5 7.9 10_6 85A 30_0 28_8
64 Ecuador 5,997 13,957 53.8 84_1 201.6 263A 33_9 26.7 90. 1 5A 2 1 .4
65 Dominican Republic 2,002 4,259 3 12 36_5 133.8 128.5 253 7_8 90.5 102 24_0
66 Romania 9,762 6,653 195 803 73.1 11.6 10_6 94_0 83 25_5
67 Jamaica 1 ,9 1 3 4,270 7 8_0 134.9 129.9 1 1 3.2 19_0 17_9 912 14.9 285
68 Jordan 1 ,971 7,944 126.2 79.0 163.8 8A 11.6 85.9 8.0 14_9
69 Algeria 19,365 32,610 47_1 83.1 129.9 264.2 27A 38] 76.9 1 .5 1 1 .6
70 El Salvador 911 2,583 26. 1 27.0 7 Ll 8 1 .6 7.5 8.9 8 1 .4 283 52A
71 Ukraine 8,434 10.7 48_6 53 93A 7.3
72 Paraguay 955 2,288 20.7 29.4 1 22.2 53_8 1 8.6 92-7 20.2 34_0
Note: For data comparability and coverage. see the technical notes. Figures in italics are for years other than those specified.
 S E LE CTED W O R LD DEVE LO P M E NT I N D I C AT O R S 247

External debt as percentage of Debt service Ratio of present Multilateral debt as

Total external debt Exports of goods as % of exports of value to nominal % of total external
(million $) GNP and services goods and services value of debt (%) _
debt _ _
____
1980 1995 1980 1995 1980 1995 1980 1995 1995 1980 1995
73 Tunisia 3,527 9,938 4 1 .6 57.3 96.0 1 1 3.2 14.8 17.0 89.8 1 2.3 37.2
74 Lithuania 802 10.1 24.7 1 .4 87.9 20.7
75 Colombia 6,941 20,760 20.9 28.2 1 17 . 1 138.7 1 6.0 25.2 95.8 1 9.5 25.6
76 Namibia
77 Belarus 1 ,648 7.9 33.3 80.7 1 1 .4
78 Russian Federation 1 20,461 37.6 126.7 6.6 92.7 1.7
79 Latvia 462 7.6 2 1 .5 1.6 93. 1 30.3
80 Peru 9,386 30,831 47.6 54.1 194.2 399.5 44.5 1 5 .3 96.5 5.5 1 2. 1
81 Costa Rica 2,744 3,800 59.7 42.5 225.2 96.3 29.1 16.4 93.0 1 6.4 35.5
82 Lebanon 510 2,966 25.5 1 52.7 13.1 97.2 15.2 6.7
83 Thailand 8,297 56,789 25.9 34.9 96.8 76.6 1 8.9 10.2 1 0 1 .2 1 2.0 5.6
84 Panama 2,975 7 , 1 80 81.8 1 0 1 .4 37.5 74.7 6.2 3.9 97.2 1 1 .0 8.5
85 Turkey 19,131 73,592 27.4 44.1 333.1 177.8 28.0 27.7 9 1 .3 1 1 .2 1 2.2
86 Poland 42,291 36. 1 1 27.3 1 2.2 84.5 4.9
87 Estonia 309 6.7 1 1 .0 0.8 92.6 42.2
88 Slovak Republic 5,827 33.5 52.1 9.7 93.2 1 6. 3
89 Botswana 147 699 1 6.3 1 6.3 1 9.6 24.0 2.1 3.2 80.0 57.4 68.0
90 Venezuela 29,34 4 35,842 42.1 49.0 1 32.0 160.0 27.2 2 1 .7 95.5 0.7 9.2
Upper-middle-income
91 South Africa
92 Croatia 3,662 20.3 49.7 5.7 88.9 14.4
93 Mexico 57,378 165 ,743 30.5 69.9 232.4 1 70.5 44.4 24.2 96.1 5.6 1 1 .2
94 Mauritius 467 1,801 4 1 .6 45.9 80.8 75.0 9.0 9.0 90.6 16.6 15.0
95 Gabon 1,514 4,492 39.2 121.6 62.2 1 60.3 1 7.7 1 5.8 79.8 2.7 14.8
96 Brazil 7 1 ,520 1 59 , 1 30 3 1 .2 24.0 306.5 269.S 63.3 37.9 95.4 4.3 5.9
97 Trinidad and Tobago 829 2,556 14.0 53.6 24.6 87.9 6.8 14.8 97.4 8.6 20.7
98 Czech Republic 1 6,576 37.0 67.4 8.7 97.2 6.1
99 Malaysia 6,6 1 1 34,352 28.0 42.6 44.6 40.8 6.3 7.8 90.5 1 1 .3 4.8
100 Hungary 9,764 3 1 ,248 44.8 72.S 174.2 39.1 99.4 0.0 10.5
101 Chile 12,081 25,562 45.5 43.3 1 92.5 127.7 43. 1 25.7 95.5 2.9 1 1 .2
102 Oman 599 3 , 1 07 1 1 .2 29.5 1 5.4 48.2 6.4 7.5 94.9 5.8 5.7
103 Uruguay 1 ,660 5,307 17.0 32.4 104.1 144.3 1 8.8 23.5 96.4 1 1 .0 23.7
104 Saudi Arabia
105 Argentina 27,157 89,747 35.6 33.1 242.4 320.2 37.3 34.7 92.5 4.0 10.5
106 Slovenia 3,489 IS.7 33.3 6.7 96.5 1 5.4
107 Greece
Low- and midale-t'nt"me ' '1) 1 5 ;7 1 1 t 2',065,676 t' l ui w 39.6 w 86.5 w 1 5 1.4·w " 13.0 w 17.0 � - 7.6 w 14.}tt:
Sub-Saharan Africa 84, 1 1 9 t 226,483 t 30.6 w 8 1 .3 w 9 1 .7 w 24 1 .7 w 9.8 w 14.5 w 9.0 w 24.3 "i
East Asia and Pacific 64,600 t 404,458 t 17.3 w 32.9 w 8 1 .8 w 98.3 w 1 1 .5 w 12.8 w 8.4 w 13 .3 w
South Asia 38,014 t 1 56,778 t 17.4 w 30.5 w 160.5 w 218.7 w 1 1 .7 w 24.6 w 24.6 w 36.4 w
Europe and Central Asia 87,919 t 425,319 t 9.9 w 39.9 w 47.1 w 130.7 w 7.4 w 13.8 w 5.4 w 7.9 W
Middle East and N. Africa 83,793 t 2 1 6,046 t IS.3 w 37.3 w 41.1 w 133.4 w 5.7 w 14.9 w 6.7 w 10.6 w
Latin America and Caribbean 257,266 t 636,594 t 36.0 w 4 1 .0 w 201.8 w 2 1 2.0 w 36.3 w 26.1 w 5.5 w 1 1 .4 w
High-income economics
108 Korea, Rep.
109 Portugal
1 10 Spain
III New Zealand
1 12 Ireland
113 t Israel
114 t Kuwait
115 t United Arab Emirates
116 United Kingdom
1 17 Australia
1 18 Italy
119 Canada
120 Finland
121 t Hong Kong
122 Sweden
123 Netherlands
1 24 Belgium
1 25 France
1 26 t Singapore
127 Austria
128 United States
1 29 Germany
1 30 Denmark
1 31 Norway
132 Japan
133 Switzerland
World

a. Includes Eritrea.
248 WORLD D EVE L O P M E NT R E P O RT 1 997

Ta ble l a . Basic i n d i cators for other economies

GNP per capita" ppp estimates of GNPPoverty
per c:apIta� % of people Life
Populatioll Surface area AYJ. am. IlYIng on less than expectancy at Adult
Ithousandsl IlIIousands DoIars growth 1%1 US.100 Cunent inn $ $1 a day IPPPI birth (yearsl iliteracy (%1
mid·1995 III sq. kml 1995 1985-95 1987 1995 1995 1981-95 1995 1995
1 Afghanistan 23,481 652.09 44 69
2 American Samoa 57 0.20 d
3 Andorra 0.45
4 Antigua and Barbuda 65 0.44 d 75
5 Aruba 0. 1 9
6 Bahamas, The 276 1 3.88 1 \ ,940 -0.8 68.8 54.5 14,7\0' 73 2
7 Bahrain 577 0.68 7,840 0.2 54.2 49.7 \3,400r 72 15
Barbados 266 0.43 6,560 0.8 45.1 39.4 1O,620r 3
Belize 216 22.96 2,630 3.9 17.0 20.0 5,400r 70
10 Bermuda 63 0.50
11 Bhutan 695 47.00 420 4.9 4.5 4.7 1 ,260' 58
12 Bosnia and Herzegovina 4,383 51.13
13 Brunei 285 5.77 75 12
14 Cape Verde 380 4.03 960 6.6 6.9 1 ,870r 65 28
15 Cayman Islands 0.26
16 Channel Islands 142 0.20 e 78
17 Comoros 499 2.23 470 - 1 .4 6.5 4.9 1 ,320r 56 43
18 Cuba 1 1 ,01 1 1 1 0.86 g 76 4
19 Cyprus 734 9.25 44.5 78
20 Djibouti 634 23.20 50 54
�
21 Dominica 73 0.75 2,990 4.1 73
22 Equatorial Guinea 400 28.05 380 49
23 Eritrea 3,57 4 1 24.80 48
24 Faeroe Islands 1 .40 e
25 Fiji 775 18.27 2,440 2.0 19. 1 2 1 .4 5,780r 72 8
26 French Guiana 90.00
27 French Polynesia 225 4.00 70
28 Greenland 341 .70 e 68
29 Grenada 91 0.34 2,980
30 Guadeloupe 424 1 .7 1 d 75
31 Guam 149 0.55 73
32 Guyana 835 214.97 590 0.6 8.2 9.0 2,420f 66 2
33 Iceland 268 1 03.00 24,950 1.0 88.1 75.8 20,460 79
34 Iran, Islamic Rep. 64,120 1 ,648.00 g -1.5 2 1 .6 20.3 68 28
35 Iraq 20,097 438.32 g 66 42
36 Isle of Man 0.59 d
37 Kiribati 79 0. 73 920 -0.6
38 Korea, Oem. Rep. 23,867 120.54 g 70
39 Liberia 2,733 97.75 c 7.0 54
40 Libya 5,407 1 ,759.54 d 43.9 65
41 Liechtens£cin 0. 1 6 e
42 Luxembourg 410 2.59 4 1 ,2 1 0 0.9 1 54.1 1 40.6 37,930 76 h
43 Macao 450 0.Q2 e
44 Maldives 253 0.30 990 5.9 7.5 1 1 .4 3,080r 63 7
45 Malta 372 0.32 d 38.2 77
46 Marshall Islands 0.18 g
47 Martinique 380 1.\0 e 77
48 Mayotte 0.37 d
49 Micronesia, Fed. Sts. 1 07 0.70 g
50 Monaco 0.20
51 Myanmar 45, 1 06 676.58 59 17
52 Netherlands Antilles 200 0.80 77
53 New Caledonia 185 1 8.58
54 Northern Mariana Islands 0.48 e
55 Pueno Rico 3,7 1 7 8.90 d 41.8 75
56 Qatar 642 1 1 .00 1 1 .600 -4.2 85.4 65.6 17,690 r 72 21
57 Reunion 653 2.51 74
58 Sao Tome and Principe 1 29 0.96 350 -2.1 69
59 Seychelles 74 0.45 6,620 72 21
60 Solomon Islands 375 28.90 910 3.2 7.9 8.1 2 , 1 90r 63
61 Somalia 9,491 637.66 c 2.3 49
62 St. Kitts and Nevis 41 0.36 5 . 1 70 4.8 28.2 34.9 9,4 \ Of 69
63 Sf. Lucia 1 58 0.62 3,370 3.9 71
64 Sf. Vincent and the Grenadines 111 0.39 2.280 3.8 72
65 Sudan 26,707 2.505.81 8.1 54 54
66 Suriname 410 1 63.27 880 3.5 1 1 .9 8.3 2,250' 70 7
67 Swaziland 900 17.36 1 , 170 - 1 .4 12.5 10.7 2,880 58 23
68 Tajikistani 5,836 143 . \ 0 340 12.1 3.4 920 67
69 Tonga 104 0.75 1 ,630 0.5 69
70 Turkmenistan i 4,508 488 . 1 0 920 4.9
71 Vanuatu 1 69 12.19 1,200 -1.1 9.4 8.5 2,290f
72 Virgin Islands (U.S.) 99 0.34 0.0 76
73 West Bank and Gaza 6.10 g
74 Western Samoa 1 65 2.84 1 , 120 0.2 8.9 7.5 2,030f 68
75 Yugoslavia, Fed. Rep. (Serb.lMont.) 1 0.5 1 8 102. 1 7 g
76 Zaire 1 20 490r
a. Atlas method; see the technical notes. b. Purchasing power parity; see the technical notes. c. Estimated to be low income ($765 or less). d. Upper middle income
($3.036 to $9.385). e. Estimated to be high income ($9,386 or more). f. The estimate is based on regression; others are extrapolated from the latest International
Comparison Programme benchmark estimates. g. Estimated to be lower middle income ($766 to $3,035). h. According to UNESCO, illiteracy is less than 5 percent.
i. Estimates for economies of the former Soviet Union are preliminary; their classification will be kept under review.
T E C H N I CAL

N O T E S

HESE TECHNICAL NOTES DISCUSS THE SOURCES AND in the Key and Primary Data Documentation table and in
methods used to compile the 1 24 indicators the notes below.
included in the 1 997 Selected World Development Indi­
Data consistency and reliability
cators. The notes are organized by table and, within each
table, by indicator in order of appearance in the table. Considerable effort has been made to standardize the data,
The 1 3 3 economies covered in the main tables are but full comparability cannot be assured, and care must be
listed in ascending order of gross national product (GNP) taken in interpreting the indicators. Many factors affect
per capita. A separate table (Table 1 a) shows basic indica­ availability, comparability, and reliability: statistical sys­
tors for an additional 76 economies that have sparse data tems in many developing economies are still weak; statis­
or populations of fewer than 1 million. tical methods, coverage, practices, and definitions differ
widely; and cross-country and intertemporal comparisons
Sources
involve complex technical and conceptual problems that
The data in the Selected World Development Indicators cannot be unequivocally resolved. For these reasons, al­
are taken from World Development Indicators 1997. Ex­ though the data are drawn from the sources thought to be
cept for a few corrections made to the data base after that most authoritative, they should be construed only as indi­
volume went to press, they are identical in source and vin­ cating trends and characterizing major differences among
tage to the data published there. Although some countries economies rather than offering precise quantitative mea­
have produced revised statistical series since the publica­ sures of those differences. Also, national statistical agencies
tion of World Development Indicators 1997, those revi­ tend to revise their historical data, particularly for recent
sions are not included here. They will appear in the next years. Thus, data of different vintages may be published in
edition of the World Development Indicators. different editions of World Bank publications. Readers are
The World Bank draws on a variety of sources for the advised not to compare such data from different editions.
indicators published in the World Development Indicators. Consistent time series are available on the World Develop­
Data on external debt are reported directly to the World ment Indicators 1997 CD-ROM. In addition, data issues
Bank by developing member countries, through the have yet to be resolved for the fifteen economies of the for­
Debtor Reporting System. Other data are drawn mainly mer Soviet Union: coverage is sparse, and the data are sub­
from the United Nations, its specialized agencies, the ject to more than the normal range of uncertainty.
International Monetary Fund (IMF) , and country reports Data in italics are for years or periods other than those
to the World Bank. Bank staff estimates are also used to specified: up to two years before or after the date shown
improve currentness or consistency. For most countries, for economic indicators, and up to three years for social
national accounts estimates are obtained from member indicators, because the latter tend to be collected less reg­
governments through World Bank economic missions. In ularly and change less dramatically over short periods.
some instances these are adjusted by Bank staff to ensure
Ratios and growth rates
conformity with international defmitions and concepts.
Most social data from national sources are drawn from For ease of reference, data are often presented as ratios or
regular administrative files, special surveys, or periodic rates of growth. The underlying absolute data are available
census inquiries. Citations of specific sources are included on the World Development Indicators 1997 CD-ROM.
2 50 WO R LD D EV E L O P M E N T R E P O RT 1 997

Unless otherwise noted, period-average growth rates are weighting process may result III discrepancies between
computed using the least-squares regression method (see subgroup and overall totals.
Statistical methods below) . Because this method takes
Table 1. Basic indicators
into account all available observations in a period, the
resulting growth rates reflect general trends and are not Basic indicators for economies with sparse data or with
unduly influenced by exceptional values. To exclude the populations offewer than 1 million are shown in Table 1a.
effects of inflation, constant-price economic indicators are Population estimates for mid- 1 995 are based on the de
used in calculating growth rates. facto definition of population, which counts all residents
regardless of legal status or citizenship. Refugees not per­
Constant-price series
manently settled in the country of asylum are generally
To facilitate international comparisons and capture the considered to be part of the population of their country of
effects of changes in intersectoral relative prices for the ongill.
national accounts aggregates, constant-price data for most Population estimates are derived from national cen­
economies are first partially rebased to three sequential suses. Precensus and postcensus estimates are often based
base years and then "chain-linked" together and expressed on interpolations or projections. The international com­
in prices of a common base year, 1 987. The year 1 970 is parability of population indicators is limited by differ­
the base year for the period from 1 960 to 1 975 , 1 980 for ences in the concepts, definitions, data collection proce­
1 976 to 1 982, and 1 987 for 1 983 and beyond. dures, and estimation methods used by national statistical
During the chain-linking procedure, components of agencies and other organizations that collect the data. In
GDP by industrial origin are individually rescaled and addition, the frequency and quality of coverage of popu­
summed to provide the rescaled GDP. In this process a lation censuses vary by country and region. For more
rescaling deviation may occur between constant-price information on the compilation of population data, see
GDP as measured by industrial origin and constant-price the notes to Table 4.
GDP as measured by expenditure. Such rescaling devia­ Surface area is measured in square kilometers and com­
tions are absorbed in private consumption expenditures, prises land area and inland waters. Data on surface area
on the assumption that GDP by industrial origin is the come from the Food and Agriculture Organization (FAO)
more reliable estimate. Independent of the rescaling, value and are published in the FAO Production Yearbook.
added in the services sector also includes a statistical dis­ Gross national product (GNP) per capita is the sum of
crepancy as reported by the original source. gross value added by all resident producers, plus any taxes
(less subsidies) that are not included in the valuation of
Summary measures
output, plus net receipts of primary income (employee
The summary measures across countries for regions and compensation and property income) from nonresident
income groups, presented in the blue bands in the tables, sources, divided by the midyear population and con­
are calculated by simple addition when they are expressed verted to U.S. dollars using the World Bank's Atlas
as levels. Growth rates and ratios are usually combined by method. This involves using a three-year average of ex­
a base-year value-weighting scheme. The summary mea­ change rates to smooth the effects of transitory exchange
sures for social indicators are weighted by population or rate fluctuations. For further discussion of the Atlas
subgroups of population, except for infant mortality, method see Statistical methods below. The growth rate of
which is weighted by the number of births. See the notes GNP per capita is computed from GNP measured in
on specific indicators for more information. constant 1 987 prices using the least-squares growth rate
For summary measures that cover many years, calcula­ method.
tions are based on a uniform group of economies so that GNP per capita is estimated by World Bank staff based
changes in the composition of the aggregate do not pro­ on national accounts data collected by World Bank staff
duce spurious changes in the indicator. Group measures during economic missions or reported by national statisti­
are compiled only if data are available for a given year cal offices to other international organizations such as the
for at least two-thirds of the full group, as defined by the Organization for Economic Cooperation and Develop­
1 987 benchmarks. As long as that criterion is met, coun­ ment (OECD). For high-income OECD economies the
tries with missing data are assumed to behave like those data come from the OECD. GNP per capita in U.S. dol­
that provided estimates. Readers should keep in mind that lars is used by the World Bank to classify countries for
the summary measures are estimates of representative analytical purposes and to determine eligibility for bor­
aggregates for each topic, and that nothing meaningful rowing. For definitions of the income groups used in this
can be deduced about behavior at the country level by book, see the table on Classification of Economies by
working back from group indicators. In addition, the Income and Region.
 S E LECTED WORLD DEVE L O P M E NT I N D I C AT O R S 2 5 1

PPP estimates of GNP per capita are calculated by con­ are available, the average level of income has been adjusted
verting GNP to U.S. dollars using purchasing power par­ to accord with either a survey-based estimate of mean con­
ities (PPP) instead of exchange rates as conversion factors. sumption (when available) or an estimate based on con­
The resulting estimates are expressed in international dol­ sumption data from national accounts.
lars, a unit of account that has the same purchasing power Poverty measures are prepared by the Poverty and
over total GNP as the U.S. dollar in a given year. The Human Resources Division of the World Bank's Policy
denominator is the midyear population estimate for the Research Department. International poverty lines are
year shown. based on primary household survey data obtained from
Relative prices of goods and services not traded on government statistical agencies and World Bank country
international markets tend to vary substantially from one departments. The poverty measures are based on the most
country to another, leading to large differences in the rel­ recent PPP estimates, from the latest version of the Penn
ative purchasing power of currencies and thus in welfare World Tables (Mark 5.6a) .
as measured by GNP per capita. The use of PPP conver­ Lift expectancy at birth is the number of years a new­
sion factors corrects for these differences and may there­ born infant would live if prevailing patterns of mortality
fore provide a better comparison of average income or at the time of its birth were to stay the same throughout
consumption between economies. However, caution its life. Estimates of life expectancy are derived from vital
should be used in interpreting PPP-based indicators. PPP registration systems or, in their absence, from demo­
estimates employ price comparisons of comparable items, graphic and household surveys using models to obtain
but not all items can be matched perfectly in quality age-specific mortality rates.
across countries and over time. Services are particularly Adult illiteracy is the proportion of adults age 1 5 and
difficult to compare, in part because of differences in pro­ above who cannot, with understanding, read and write a
ductivity. Many services-for example, government ser­ short, simple statement on their everyday life. Literacy
vices-are not sold in markets in all countries, so they are and illiteracy are difficult both to define and to measure.
compared using input prices (mostly wages) . Because this The definition here is based on the concept of "func­
approach ignores productivity differences, it may inflate tional" literacy. To measure literacy using such a defini­
estimates of real quantities in lower-income countries. tion requires census or sample survey measurements
The source of PPP data is the International Compari­ under controlled conditions. In practice, many countries
son Programme (ICP), coordinated by the U.N. Statisti­ estimate the number of illiterate adults from self-reported
cal Division. The World Bank collects detailed ICP data or from estimates of school completion. Because of
benchmark data from regional sources, establishes global these problems, comparisons across countries-and even
consistency across the regional data sets, and computes over time for one country-should be made with caution.
regression-based estimates for nonbenchmark countries. Data on illiteracy rates are supplied by UNESCO (United
For detailed information on the regional sources and com­ Nations Educational, Scientific, and Cultural Organiza­
pilation of benchmark data see World Bank 1 993. For in­ tion) and published in its Statistical Yearbook.
formation on how regression-based PPP estimates are
Table 2. Macroeconomic indicators
derived see Ahmad 1 992.
The percentage ofpeople living on less than $1 a day Centralgovernment current deficit/surplus is defined as cur­
(PPP) at 1985 international (purchasing power parity) rent revenue of the central government less current expen­
prices is a widely used measure of poverty. A person is said diture. Grants are not included in revenue. This is a use­
to be poor if he or she lives in a household whose total ful measure of the government's own fiscal capacity. The
income or consumption per person is less than the poverty overall deficit or surplus, including grants and the capital
line. Although it is impossible to create an indicator of account, is shown in Table 14. The data come from the
poverty that is strictly comparable across countries, the use IMF's Government Finance Statistics Yearbook.
of a standard, international poverty line helps to reduce Money and quasi money comprise most liabilities of a
comparability problems in several ways. In estimating liv­ country's monetary institutions to residents other than
ing standards, nationally representative surveys have been the central government. This definition of the money
used, conducted either by national statistical offices or by supply is sometimes referred to as M2. Money comprises
private agencies under government or international agency currency held outside banks and demand deposits other
supervision. Whenever possible, consumption has been than those of the central government. Quasi money com­
used as the welfare indicator for deciding who is poor. The prises time and savings deposits and similar bank accounts
measure of consumption is generally comprehensive, that the issuer can exchange for money with little, if any,
including that from own production as well as all food and delay or penalty, and foreign currency deposits of resi­
nonfood goods purchased. When only household incomes dents other than those of the central government. Where
252 WORLD D E VE L O P M E NT R E P O RT 1 997

nonmonetary financial institutions are important issuers Net present value of external debt is the value of short­
of quasi-monetary liabilities, their liabilities may be term debt plus the discounted sum of all debt service pay­
included in quasi money. ments due over the life of existing loans, at current prices.
The source of data on the money supply is the IMF's The debt figures are converted into U.S. dollars from cur­
International Financial Statistics. Money and quasi money rencies of repayment at end-of-year official exchange rates.
are the sum of IFS lines 34 and 35. To calculate the ratio of debt to GNP, GNP is converted
The average annual nominal growth rate of the money at official exchange rates or, in exceptional cases, by an
supply is calculated from year-end figures using the least­ alternative, single-year conversion factor determined by
squares method. The average of the year-end figures for World Bank staff. (See also the notes to Tables 1 2 and 1 7.)
the specified year and the previous year is used to calculate
Table 3. External economic indicators
the average outstanding as a percentage of GDP.
Nominal interest rates of banks show the deposit rate Net barter terms of trade measures the relative movement
paid by commercial or similar banks for demand, time, or of export prices against that of import prices. Calculated
savings deposits and the lending rate charged by these as the ratio of a country's average export price index to its
banks on loans to prime customers. The data are of lim­ average import price index, this indicator shows changes
ited international comparability, partly because coverage relative to a base year ( 1 987). The data come from the
and definitions vary. Interest rates are expressed in nomi­ U.N. Conference on Trade and Development (UNC­
nal terms; therefore much of the variation among coun­ TAD) data base, the IMF's International Financial Statis­
tries stems from differences in inflation. The data come tics, and World Bank staff estimates. (See also Table 1 5 .)
from International Financial Statistics, lines 601 and 60p. Trade is measured as the ratio of the sum of exports
Average annual inflation is measured by the rate of and imports of goods and services to the current value of
change in the GDP implicit deflator. The implicit defla­ GDP. The trade-GDP ratio is a commonly used measure
tor is calculated by dividing annual GDP at current prices of the openness of an economy or its integration with the
by the corresponding value of GDP at constant prices, global economy. The data come from the World Bank's
both in national currency. The least-squares method is national accounts data files.
used to calculate the growth rate of the GDP deflator for Aggregate net resource flows is the sum of net flows
the period. of long-term debt (excluding use of IMF credits), official
The GDP implicit deflator is the broadest-based mea­ grants (excluding technical assistance) , net foreign direct
sure of inflation, showing price movements for all goods investment, and net portfolio equity flows. Total net flows
and services produced in the economy, but like all price of long-term debt are disbursements less repayments of
indexes it is subject to conceptual and practical limita­ principal on public, publicly guaranteed, and private non­
tions. Deflators for developing economies are estimated guaranteed long-term debt. Official grants are transfers
from national accounts data collected by the World Bank. made by an official agency in cash or in kind, in respect of
Data for high-income economies are derived from data which no legal debt is incurred by the recipient. The data
provided by the OECD. are taken from the World Bank's Debtor Reporting Sys­
Current account balance is the sum of net exports of tem and from the IMF's International Financial Statistics.
goods, services, and income and net current transfers. Cap­ Net private capital flows consists of private debt and
ital transfers are excluded. (See also Table 1 6.) The data nondebt flows and bank and trade-related lending. Private
come from the IMF's International Financial Statistics and debt flows include commercial bank lending, bonds, and
from estimates provided by World Bank country teams. other private credits. Nondebt private flows are made up
Gross international reserves comprises holdings of mon­ of net foreign direct investment and portfolio investment.
etary gold, special drawing rights (SDRs), the reserve posi­ Foreign direct investment is investment made to acquire a
tion of members with the IMF, and holdings of foreign lasting management interest in an enterprise operating in
exchange under the control of monetary authorities. Gross an economy other than that of the investor. It is the sum
international reserves in U.S. dollars are shown in Table of net flows of equity capital, reinvested earnings, other
16. Reserve holdings as months of import coverage are long-term capital, and short-term capital as shown in the
calculated as the ratio of gross international reserves to the balance of payments. Portfolio investment flows include
current U.S. dollar value of imports of goods and services, net non-debt-creating portfolio equity flows (the sum of
multiplied by 1 2 . country funds, depository receipts, and direct purchases of
The summary measures in this table are computed as shares by foreign investors) and net portfolio debt flows
the ratio of group aggregates for gross international re­ (bond issues purchased by foreign investors) .
serves and total imports of goods and services in current The principal source of data on private capital flows is
dollars. the World Bank's Debtor Reporting System. Additional
 S E L E CT E D W O R LD D EVE L O P M E N T I N D I C AT O R S 253

data come from International Financial Statistics and time workers, in general the labor force includes the
World Bank data files. armed forces, the unemployed, and first-time job-seekers,
Aid comprises financial assistance classified as official but excludes homemakers and other unpaid caregivers
development assistance (ODA) or official aid (OA) by the and workers in the informal sector.
Development Assistance Committee (DAC) of the Average annual growth rate of the labor force is com­
OECD. ODA comprises loans and grants made on con­ puted using the exponential end-point method. See the
cessional financial terms by all bilateral official agencies section on Statistical methods for more information.
and multilateral sources to promote economic develop­ Females as a percentage of the labor force shows the
ment and welfare. Net disbursements equal gross dis­ extent to which women are active in the labor force. Labor
bursements less payments to the originators of aid for force estimates are derived by applying participation rates
amortization of past aid receipts. To qualifY as ODA, a from the International Labour Organization to World
transaction must meet the following tests: it is adminis­ Bank population estimates.
tered with the promotion of the economic development Agricultural labor force includes people engaged in
and welfare of developing countries as its main objective, farming, forestry, hunting, and fishing.
and it is concessional in character and conveys a grant ele­ Industrial labor force includes people working in the
ment of at least 25 percent. OA comprises assistance pro­ mining, manufacturing, construction, and electricity,
vided on ODA-like terms to the countries of Eastern water, and gas industries.
Europe, the former Soviet Union, and other economies on Activity rates or labor force participation rates of the
the DAC's "part II" list. The data on aid are provided by economically active population are compiled by the Inter­
the DAC and published in its annual report, Development national Labour Organization from the latest national
Co-operation. Data for GNP are World Bank estimates. censuses or surveys and are published in its Yearbook of
Summary measures for aid as a percentage of GNP are Labour Statistics. Labor force numbers in some develop­
computed from the ratio of group totals for aid and for ing countries reflect a significant underestimation of
GNP in current U.S. dollars. female participation rates. Estimates of the rural labor
force may also fail to capture the extent of family and sea­
Table 4. Population and labor force
sonal labor.
Population estimates for mid- 1 995 come from a variety of All summary measures are country data weighted by
sources, including the U.N. Population Division, national population or population subgroup.
statistical offices, and World Bank country departments.
Table 5. Distribution of income or consumption
The World Bank uses the de facto definition of a country's
population, which counts all residents regardless of legal Survey year is the year in which the underlying data were
status or citizenship. However, refugees not permanently collected.
settled in the country of asylum are generally considered to The Gini index measures the extent to which the dis­
be part of the population of their country of origin. tribution of income (or, in some cases, consumption
The notes to Table 1 provide additional information expenditures) among individuals or households within an
about population estimates. The Key and Primary Data economy deviates from a perfectly equal distribution. A
Documentation table lists the date of the most recent cen­ Lorenz curve plots the cumulative percentages of total
sus or demographic survey. income received against the cumulative number of recipi­
Average annual growth rate ofpopulation is computed ents, starting with the poorest individual or household.
using the exponential end-point method. See the section The Gini index measures the area between the Lorenz
on Statistical methods for more information. curve and a hypothetical line of absolute equality, and is
Population aged 15-64 is the age group generally con­ expressed as a percentage of the maximum area under the
sidered to be the most economically active. In many line. Thus a Gini index of zero represents perfect equality,
developing economies, however, many children under 1 5 and an index of 1 00 percent perfect inequality.
work full or part time. And in some high-income eco­ Percentage share of income or consumption is the share
nomies many workers postpone retirement past age 65. that accrues to subgroups of population indicated by
Total labor force comprises those people who meet the deciles or quintiles. Percentage shares by quintiles may
International Labour Organization's definition of the eco­ not sum to 1 00 because of rounding.
nomically active population: all people who supply labor Inequality in the distribution of income is reflected in
for the production of goods and services during a specified the percentage share of income or consumption accruing
period. It includes both the employed and the unem­ to segments of the population ranked by income or con­
ployed. Although national practices vary in the treatment sumption levels. The segments ranked lowest by personal
of such groups as the armed forces and seasonal or part- or family income typically receive the smallest share of
2 54 WORLD D EV E L O P M E N T R E PO RT 1 997

total income. The Gini index provides a convenient sum­ has been used rather than income. Households have been
mary measure of the degree of inequality. ranked by consumption or income per capita in forming
Data on personal or household income or consump­ the percentiles, and the percentiles are based on popula­
tion come from nationally representative household sur­ tion, not households. The comparability of the data for
veys. The data sets refer to different years between 1 985 high-income economies is more limited, because the unit
and 1 994. Footnotes to the survey year indicate whether of observation is usually a household unadjusted for size,
the rankings are based on income or consumption per and households are ranked according to total household
capita or, in the case of high-income economies, house­ income rather than income per household member. These
hold income. Where the original data from the household data are presented pending the publication of improved
survey were available, they have been used to directly cal­ data from the Luxembourg Income Study, which ranks
culate the income (or consumption) shares by quintile. households by the average disposable income per adult
Otherwise, shares have been estimated from the best avail­ equivalent. The estimates in the table should therefore be
able grouped data. treated with considerable caution.
The distribution indicators for low- and middle­ Data on distribution for low- and middle-income eco­
income economies have been adjusted for household size, nomies are compiled by the Poverty and Human
providing a more consistent measure of income or con­ Resources Division of the World Bank's Policy Research
sumption per capita. No adjustment has been made for Department, using primary household survey data
geographic differences in the cost of living within coun­ obtained from government statistical agencies and World
tries, because the data needed for such calculations are Bank country departments. Data for high-income eco­
generally unavailable. For further details on the estimation nomies are from national sources, supplemented by the
method for low- and middle-income economies, see Luxembourg Income Study 1 990 data base, the Eurostat
Ravallion and Chen 1 996. Statistical Yearbook, and the United Nations' National
Because the underlying household surveys differ in Accounts Statistics: Compendium of Income Distribution
method and in the type of data collected, the distribution Statistics ( 1 985).
indicators are not strictly comparable across countries.
Table 6 . Health
These problems are diminishing as survey methods im­
prove and become more standardized, but strict compara­ Access to health care is measured by the share of the popu­
bility is still impossible. lation for whom treatment of common diseases and in­
The following sources of noncomparability should be j uries, including essential drugs on the national list, is
noted. First, the surveys differ as to whether they use available within one hour's walk or travel. Facilities tend
income or consumption expenditure as the living stan­ to be concentrated in urban areas.
dard indicator. For thirty-seven of the sixty-six low- and Access to safe water shows the percentage of the popula­
middle-income economies for which data are available, tion with reasonable access to adequate amounts of safe
the data refer to consumption expenditure. Income is water (including treated surface waters or untreated but
typically more unequally distributed than consumption. uncontaminated water from sources such as springs, sani­
In addition, the definitions of income used in the surveys tary wells, and protected boreholes). In an urban area such
are usually very different from the economic definition of a source may be a public fountain or standpost located not
income (the maximum level of consumption consistent more than 200 meters away. In rural areas access implies
with keeping productive capacity unchanged). For these that members of the household do not have to spend a
reasons, consumption is usually a much better measure. disproportionate part of the day fetching water. The defi­
Second, the surveys differ as to whether they use the nition of safe water has changed over time.
household or the individual as their unit of observation. Access to sanitation refers to the percentage of the pop­
Furthermore, household units differ in size and in the ulation with at least adequate excreta disposal facilities
extent to which income is shared among members. Indi­ that can effectively prevent human, animal, and insect
viduals differ in age and consumption needs. Where contact with excreta.
households are used as the observation unit, the deciles or The infant mortality rate is the number of deaths of
quintiles refer to the percentage of households rather than infants under 1 year of age per thousand live births in a
of population. Third, the surveys differ according to given year. The data are a combination of observed values
whether they rank the units of observation by household and interpolated and projected estimates.
or per capita income (or consumption) . Prevalence ofmalnutrition is the percentage of children
World Bank staff have made an effort to ensure that under age 5 whose weight for age is more than 2 standard
the data for low- and middle-income economies are as deviations below the mean of the reference population.
comparable as possible. Whenever possible, consumption Weight for age is a composite indicator of weight for
 S E LE CT E D WORLD D EV E L O P M E N T I N D I CATO R S 2 5 5

height (wasting) and height for age (stunting) . Although many countries consider primary school age to be 6 to 1 1
this indicator does not distinguish wasting from stunting, years, others use different age groups. Gross enrollment
it is useful for comparisons with earlier surveys, as weight ratios may exceed 100 percent because some pupils are
for age was the first anthropometric measure in general younger or older than the country's standard primary
use. The reference population, adopted by the World school age.
Health Organization (WHO) in 1 983, consists of chil­ Secondary school enrollment data are calculated in the
dren in the United States who are assumed to be well same manner, and again the definition of secondary
nourished. For some countries, if weight for age cannot be school age differs among countries. It is most commonly
estimated, the prevalence assessment for the country was considered to be 1 2 to 1 7 years. Late entry of students as
estimated from survey data by the WHO. This approach well as repetition and the phenomenon of "bunching" in
has minor effects on the estimated rates, which the WHO final grades can influence these ratios.
considers generally comparable across countries. Tertiary enrollment data are calculated by dividing the
Contraceptive prevalence rate is the proportion of number of pupils enrolled in all postsecondary schools
women who are practicing, or whose husbands are prac­ and universities by the population age 20 to 24, although
ticing, any form of contraception. Contraceptive usage is people above and below this age group may be registered
generally measured for married women age 1 5 to 49. A in tertiary institutions.
few countries use measures relating to other age groups, Percentage of cohort reaching grade 4 is the proportion
especially 1 5 to 44. Data are mainly derived from demo­ of children starting primary school in 1 980 and 1 988 who
graphic, health, and contraceptive prevalence surveys. continued to the fourth grade by 1 983 and 1 9 9 1 , respec­
The total flrtility rate represents the number of chil­ tively. Figures in italics represent earlier or later cohorts.
dren that would be born to a woman were she to live to Data on enrollment flows are compiled by UNESCO
the end of her childbearing years and bear children at each from reports by national authorities.
age in accordance with prevailing age-specific fertiliry Adult illiteracy is defined as the proportion of the pop­
rates. The data are a combination of observed, interpo­ ulation age 1 5 years and older who cannot, with under­
lated, and projected estimates. standing, read and write a short, simple statement on their
The maternal mortality ratio is the number of female everyday life. This is only one of three widely accepted
deaths that occur during pregnancy and childbirth per definitions, and its application is subject to qualifiers in a
1 00,000 live births. Because deaths during childbirth are number of countries. The data are from the illiteracy esti­
defined more widely in some countries, to include com­ mates and projections prepared by UNESCO.
plications of pregnancy or the period after childbirth or of The summary enrollment measures in this table are
abortion, and because many pregnant women die from weighted by population.
lack of suitable health care, maternal mortaliry is difficult
Table 8. Commercial energy use
to measure consistently and reliably across countries.
Clearly, many maternal deaths go unrecorded, particularly Total energy use refers to domestic primary energy use
in countries with remote rural populations. This may before transformation to other end-use fuels (such as elec­
account for some of the low estimates shown in the table, tricity and refined petroleum products) and is calculated
especially for several African countries. The data are drawn as indigenous production plus imports and stock changes,
from diverse national sources. Where national administra­ minus exports and international marine bunkers. Energy
tive systems are weak, estimates are derived from demo­ consumption also includes products for nonenergy uses,
graphic and health surveys using indirect estimation tech­ mainly derived from petroleum. The use of firewood,
niques or from other national sample surveys. For a dried animal excrement, and other traditional fuels,
number of developing countries, maternal mortaliry esti­ although substantial in some developing countries, is not
mates are derived by the WHO and the United Nations taken into account, because reliable and comprehensive
Children's Fund (UNICEF) using statistical modeling data are not available.
techniques. Energy use per capita is based on total population esti­
All summary measures, except for infant mortaliry, are mates in the years shown.
weighted by population or by subgroups of the popula­ GDPper kilogram of commercial energy use is the U.S.
tion. Infant mortaliry is weighted by the number of births. dollar estimate of GDP produced (at constant 1 987
prices) per kilogram of oil equivalent.
Table 7. Education
To calculate net energy imports as a percentage ofenergy
Primary school enrollment data are estimates of the ratio of consumption, both imports and consumption are mea­
children of all ages enrolled in primary school to the coun­ sured in oil equivalents. A negative sign indicates that the
try's population of primary school-age children. Although country is a net exporter.
256 WORLD D EV E L O P M E N T R E P O RT 1 997

Data on commercial energy use come primarily from Other land includes forest and woodland and the land
the International Energy Agency and the U.N. Energy under natural or planted stands of trees, as well as logged­
Statistics Yearbook. They refer to commercial forms of over areas that will be forested in the near future. It also
primary energy-petroleum (crude oil, natural gas liq­ includes uncultivated land, grassland not used for pasture,
uids, and oil from unconventional sources) , natural gas, wetlands, wastelands, and built-up areas. Built-up areas
solid fuels (coal, lignite, and other derived fuels), and pri­ are residential, recreational, and industrial lands and areas
mary electricity (nuclear, hydroelectric, geothermal, and covered by roads and other fabricated infrastructure.
other)-all converted into oil equivalents. For converting Data on land use are from the Food and Agriculture
nuclear electricity into oil equivalents, a notional thermal Organization (FAO) , which gathers these data from
efficiency of 33 percent is assumed; hydroelectric power is national agencies through annual questionnaires and
represented at 100 percent efficiency. national agricultural censuses. However, countries some­
Carbon dioxide emissions measures industrial contribu­ times use different definitions of land use. The FAO often
tions to the carbon dioxide flux from solid fuels, liquid adjusts the definitions of land use categories and some­
fuels, gas fuels, gas flaring, and cement manufacture. The times substantially revises earlier data. Because data on
data are based on several sources as reported by the World land use reflect changes in data reporting procedures as
Resources Institute. The main source is the Carbon Diox­ well as actual land use changes, apparent trends should be
ide Information Analysis Center (CDIAC), Environmen­ interpreted with caution. Most land use data are from
tal Science Division, Oak Ridge National Laboratory. 1 994.
CDIAC annually calculates emissions of carbon diox­ Urban population is the midyear population of areas
ide from the burning of fossil fuels and the manufacture defined as urban in each country. The definition varies
of cement for most countries of the world. These calcula­ slightly from country to country.
tions are based on data on the net apparent consumption Population in urban agglomerations of 1 million or more
of fossil fuels from the World Energy Data Set maintained is expressed as the percentage of a country's population
by the U.N. Statistical Division, and from data on world living in metropolitan areas that in 1 990 had a population
cement manufacture based on the Cement Manufacturing of 1 million or more people.
Data Set maintained by the U.S. Bureau of Mines. Emis­ Estimates of the urban population come from the
sions are calculated using global average fuel chemistry United Nations' World Urbanization Prospects: The 1994
and usage. Estimates do not include bunker fuels used in Revision. To compute the growth rate of the urban popu­
international transport because of the difficulty of appor­ lation, the United Nations' ratio of urban to total popu­
tioning these fuels among the countries benefiting from lation is first applied to the World Bank's estimates of
that transport. Although the estimates of world emissions total population (Table 4). The resulting series of urban
are probably within 10 percent of actual emissions, esti­ population estimates are also used to compute the popu­
mates for individual countries may have larger error lation in urban agglomerations as a percentage of the
bounds. urban population. Because the estimates in this table are
Summary measures for total energy use and carbon based on different national definitions of what is urban,
dioxide emissions are simple totals. The summary growth cross-country comparisons should be made with caution.
rates are computed from the group totals using the least­ The summary measures for urban population as a per­
squares method. For energy consumption per capita and centage of total population are calculated from country
carbon dioxide emissions per capita, population weights percentages weighted by each country's share in the aggre­
are used to compute group averages. gate population . The other summary measures are
weighted in the same fashion, using the urban population.
Table 9. Land use and urbanization
Table 10. Forest and water resources
Cropland includes land used to cultivate temporary and
permanent crops, temporary meadows, market and Forest areas refers to natural stands of woody vegetation in
kitchen gardens, and land that is temporarily fallow. Per­ which trees predominate.
manent crops are those that do not need to be replanted Annual deforestation refers to the permanent conver­
after each harvest, excluding land used to grow trees for sion of forestland to other uses, including shifting cultiva­
wood or timber. tion, permanent agriculture, ranching, settlements, or in­
Permanent pasture is land used for five or more years frastructure development. Deforested areas do not include
for forage, including natural crops and cultivated crops. areas logged but intended for regeneration or areas de­
Only a few countries regularly report data on permanent graded by fuelwood gathering, acid precipitation, or forest
pasture, as this category is difficult to assess because it fires. The extent and percentage of total area shown refer
includes wild land used for pasture. to the average annual deforestation of natural forest area.
 S E L E CT E D W O R LD D EV E L O P M E N T I N D I C AT O R S 257

Estimates of forest area are derived from country sta­ mercial establishments, and homes. Other withdrawals are
tistics assembled by the FAO and the United Nations those for direct industrial use, including withdrawals for
Economic Commission for Europe (UNECE) . In 1 993 cooling thermoelectric plants and for agriculture (irriga­
new assessments were published for tropical countries by tion and livestock production).
the FAO and for temperate zones jointly by the UNECE Data on annual freshwater withdrawal are subject to
and the FAO-but with different definitions. The FAO variation in collection and estimation methods but are
defines natural forest in tropical countries either as closed indicative of the magnitude of water use in both total and
forest, where trees cover a large portion of the ground per capita terms. These data, however, also hide what can
with no continuous grass cover, or as open forest, a mix of be significant variations in total renewable water
forest and grassland with at least 1 0 percent tree cover and resources from one year to another. They also fail to dis­
a continuous grass layer on the forest floor. The UNECE­ tinguish the seasonal and geographic variations in water
FAO assessment defines a forest as land where tree crowns availability within a country. Because freshwater
cover more than 20 percent of the area. Also included are resources are based on long-term averages, their estima­
open forest formations; forest roads and firebreaks; small, tion explicitly excludes decade-long cycles of wet and dry.
temporarily cleared areas; young stands expected to The data for water indicators were compiled by the
achieve at least 20 percent crown cover on maturity; and World Resources Institute from various sources and pub­
windbreaks and shelter belts. lished in World Resources 1996-97. The Oepartement
Nationally protected areas refers to areas of at least Hydrogeologie in Orleans, France, compiles water
1 ,000 hectares that /all into one of five management cate­ resource and withdrawal data from published documents,
gories: scientific reserves and strict nature reserves; na­ including national, U.N., and professional literature. The
tional parks of national or international significance (not Institute of Geography at the National Academy of Sci­
materially affected by human activity) ; natural monu­ ences in Moscow also compiles global water data on the
ments and natural landscapes with some unique aspects; basis of published work and, where necessary, estimates
managed nature reserves and wildlife sanctuaries; and pro­ water resources and consumption from models that use
tected landscapes and seascapes (which may include cul­ other data, such as area under irrigation, livestock popu­
tural landscapes). This table does not include sites pro­ lations, and precipitation. Data for small countries and
tected under local or provincial law or areas where countries in arid and semiarid zones are less reliable than
consumptive uses of wildlife are allowed. The data are those for larger countries and countries with more
subject to variations in definition and in reporting to the rainfall.
organizations, such as the World Conservation Monitor­
Table 11. Growth of the economy
ing Centre, that compile and disseminate them.
Annual freshwater withdrawal refers to total water Gross domestic product at purchasers' prices is the sum of
withdrawal, not counting evaporation losses from storage the gross value added by all resident and nonresident pro­
basins. Withdrawals also include water from desalination ducers in the economy plus any taxes and minus any sub­
plants in countries where that source is a significant part sidies not included in the value of the products. It is cal­
of all water withdrawal. Withdrawal data are for single culated without making deductions for depreciation of
years between 1 970 and 1 99 5 . Withdrawals can exceed fabricated assets or for depletion and degradation of nat­
1 0 0 percent of renewable supplies when extractions from ural resources.
nonrenewable aquifers or desalination plants are consider­ The GDP deflator is calculated implicitly as the ratio of
able or if there is significant water reuse. Data are ex­ current-price GOP to constant-price GOP. The GOP
pressed as totals and as a percentage of total freshwater deflator is the most broadly based measure of changes in
resources, which include both internal renewable the overall price level. (See also the note to Table 2.)
resources and, where noted in the table, river flows from Agriculture comprises value added from forestry, hunt­
other countries. Internal renewable water resources ing, and fishing as well as cultivation of crops and live­
include flows of rivers and groundwater from rainfall in stock production. In developing countries with high lev­
the country. els of subsistence farming, much agricultural production
Freshwater withdrawalper capita is calculated by divid­ is either not exchanged or not exchanged for money. This
ing a country's total withdrawal by its population in the increases the difficulty of measuring the contribution of
year for which withdrawal estimates are available. For agriculture to GOP and reduces the reliability and com­
most countries, data on sectoral withdrawal per capita are parability of such numbers.
calculated using sectoral withdrawal percentages estimated Industry comprises value added in mining, manufac­
for 1 987 to 1 995. Domestic use includes drinking water, turing (also reported as a separate subgroup), construc­
municipal use or supply, and use for public services, com- tion, electricity, water, and gas.
2 58 WORLD D EV E L O P M E NT R E P O RT 1 997

Manufacturing refers to industries belonging to divi­ For information on the OEeD national accounts series
sions 1 5-37 in the International Standard Industrial Clas­ see OECD, National Accounts, 1960-1994, volumes 1
sification, Revision 2. and 2. The complete set of national accounts time series is
Services includes value added in all other branches of available on the World Development Indicators CD-ROM
economic activity, such as wholesale and retail trade World Bank staff review the quality of national
(including hotels and restaurants), transport, and govern­ accounts data and, in some instances, adjust national
ment, financial, professional, and personal services such as series. Because of the sometimes limited capabilities of
education, health care, and real estate services. Also in­ statistical offices and basic data problems, strict interna­
cluded are imputed bank service charges, import duties, tional comparability cannot be achieved, especially in eco­
and any statistical discrepancies noted by national com­ nomic activities that are difficult to measure, such as par­
pilers as well as discrepancies arising from rescaling. allel market transactions, the informal sector, and
Exports ofgoods and services represents the value of all subsistence agriculture.
goods and other market services provided to the world. The figures for GDP are U.S. dollar values converted
Included is the value of merchandise, freight, insurance, from domestic currencies using single-year official ex­
travel, and other nonfactor services. Factor and property change rates. For a few countries where the official
income (formerly called factor services) , such as invest­ exchange rate does not reflect the rate effectively applied
ment income, interest, and labor income, is excluded. to actual foreign exchange transactions, an alternative
Transfer payments are excluded from the calculation conversion factor is used. Note that the table does not use
of GDP. the three-year averaging ("Atlas") technique applied to
Growth rates of GDP and its components are calcu­ GNP per capita in Table 1 .
lated using constant-price data in the local currency. Summary measures are computed from group aggre­
Regional and income group growth rates are calculated gates of sectoral GDP in current U.S. dollars.
after converting local currencies to U.S. dollars using the
Table 13. Structure of the economy: demand
World Bank's International Economics Department
(IEC) conversion factor. Growth rates are estimated by General government consumption includes all current
fitting a linear trend line to the logarithmic annual values expenditures for purchases of goods and services by all lev­
of the given variable using the least-squares growth rate els of government, but excluding most government enter­
method. This produces an average growth rate that corre­ prises. Most capital expenditures on national defense and
sponds to a model of periodic compound growth. The security are regarded as a general government consump­
least-squares growth rate method and the IEC conversion tion expenditure.
factor are described in the section on Statistical methods. Private consumption is the market value of all goods
In calculating the summary measures, constant 1 987 and services, including durable products (such as cars,
U.S. dollar values for each indicator are calculated for washing machines, and home computers) , purchased or
each year of the periods covered, and the values are aggre­ received as income in kind by households and nonprofit
gated across countries for each year. The least-squares pro­ institutions. It excludes purchases of dwellings but in­
cedure is used to compute the aggregate growth rates. cludes imputed rent for owner-occupied dwellings. In
practice, it may include any statistical discrepancy in the
Table 12. Structure of the economy: production
use of resources.
The definitions of GDP and its components are those of Gross domestic investment consists of outlays on addi­
the U.N. System of National Accounts (SNA), Series F, tions to the fixed assets of the economy plus net changes
No. 2, Version 3. Version 4 of the SNA was completed in the level of inventories.
only in 1 993, and it is likely that many countries will con­ Gross domestic saving is calculated by deducting total
tinue to use the recommendations of Version 3 for the consumption from GDP.
next few years. Estimates are obtained from national Exports ofgoods and services represents the value of all
sources, sometimes reaching the World Bank through goods and other market services provided to the world.
other international agencies but more often collected by Included is the value of merchandise, freight, insurance,
World Bank staff. For definitions of specific components, travel, and other nonfactor services. Factor and property
see the technical note to Table 1 1 . income (formerly called factor services) , such as investment
National accounts data for developing countries are income, interest, and labor income, is excluded. Transfer
collected from national statistical organizations and cen­ payments are excluded from the calculation of GDP.
tral banks by visiting and resident World Bank missions. Resource balance is the difference between exports of
Data for industrial countries come from OECD data files. goods and services and imports of goods and services.
 S E L E CTE D W O R LD D EV E L O P M E NT I N D I C AT O R S 2 5 9

Summary measures in this table are computed from portrayal of the allocation of resources for various pur­
group aggregates of sectoral GDP in current U.S. dollars. poses, especially in countries where lower levels of gov­
ernment have considerable autonomy and are responsible
Table 14. Central government budget
for many economic and social services. In addition, "cen­
Total revenue is derived from tax and nontax sources. Tax tral government" can mean either of two accounting con­
revenue comprises compulsory, unrequited, nonrepayable cepts: consolidated or budgetary. For most countries, cen­
receipts for public purposes. It includes interest collected tral government finance data have been consolidated into
on tax arrears and penalties collected on nonpayment or one overall account, but for others only the budgetary
late payment of taxes, and is shown net of refunds and central government accounts are available. Because bud­
other corrective transactions. Nontax revenue comprises getary accounts do not always include all central govern­
receipts that are not compulsory, nonrepayable payments ment units, the overall picture of central government
for public purposes, such as fines, administrative fees, or activities is usually incomplete. The concept employed by
entrepreneurial income from government ownership of the reporting country is noted in the Key and Primary
property. Proceeds of grants and borrowing, funds arising Data Documentation table.
from the repayment of previous lending by governments, In general, the data presented, especially those for
incurrence of liabilities, and proceeds from the sale of cap­ social services, are not comparable across countries. In
ital assets are not included. many economies, private health and education services are
Total expenditure comprises expenditures by all gov­ substantial; in others, public services represent the major
ernment offices, departments, establishments, and other component of total expenditure but may be financed by
bodies that are agencies or instruments of the central lower levels of government. Caution should therefore be
authority of a country. It includes both current and capi­ exercised in using the data for cross-country comparisons.
tal (development) expenditures. Data on central government revenues and expendi­
Defense comprises all expenditures, whether by defense tures are from the IMP's Government Finance Statistics
or other departments, on the maintenance of military Yearbook ( 1 995) and IMF data files. The accounts of each
forces, including the purchase of military supplies and country are reported using the system of common defini­
equipment, construction, recruiting, and training. Also in tions and classifications found in the IMP's A Manual on
this category are closely related items such as military aid Government Finance Statistics (1 986) . For complete and
programs. Defense does not include expenditure on pub­ authoritative explanations of concepts, definitions, and
lic order and safety, which is classified separately. data sources, see these IMF sources.
Social services comprises expenditures on health, educa­
Table 15. Exports and imports of merchandise
tion, housing, welfare, social security, and community
amenities. It also covers compensation for loss of income Merchandise exports and imports, with some exceptions,
to the sick and temporarily disabled; payments to the covers international movements of goods across customs'
elderly, the permanently disabled, and the unemployed; borders; trade in services is not included. Exports are val­
family, maternity, and child allowances; and the cost of ued f.o.b. (free on board) and imports c.Lf. (cost plus
welfare services, such as care of the aged, the disabled, and insurance and freight) unless otherwise specified in the
children. Many expenditures relevant to environmental foregoing sources. These values are in current U.S. dollars.
defense, such as pollution abatement, water supply, sani­ The categorization of exports and imports follows the
tary affairs, and refuse collection, are included indistin­ Standard International Trade Classification (SITC), Series
guishably in this category. M, No. 34, Revision l . Manufactures are commodities
Overall deficit/surplus is defined as current and capital classified in Sections 5 through 9, excluding Division 68
revenue and official grants received, less total expenditure (nonferrous metals). Food commodities are those in SITC
and lending minus repayments. This is a broader concept Sections 0, 1 , and 4 and Division 22 (food and live ani­
than the current government deficit or surplus shown in mals, beverages and tobacco, animal and vegetable oils and
Table 2 . fats, oilseeds, oil nuts, and oil kernels) . Fuels are the com­
Because o f differences i n coverage o f available data, the modities in SITC Section 3 (mineral fuels, lubricants, and
individual components of central government expendi­ related materials) . For some countries, data for certain
ture and revenue shown may not be strictly comparable commodity categories are unavailable.
across all economies. Average annual growth rates of exports and imports are
Inadequate statistical coverage of state, provincial, and calculated from values at constant prices, which are de­
local governments requires the use of central government rived from current values deflated by the relevant price
data; this may seriously understate or distort the statistical index. The World Bank uses the price indexes produced
260 WORLD D EV E L O P M E N T R E P O RT 1 997

by UNCTAD for low- and middle-income economies, the definition of international reserves, in the valuation of
and those presented in the IMP's International Financial gold, and in reserve management practices, the levels of
Statistics for high-income economies. These growth rates reserve holdings published in national sources may not be
can differ from those derived from national sources be­ strictly comparable. The reserve levels for 1 980 and 1 995
cause national price indexes may use different base years refer to the end of the year indicated and are in current
and weighting procedures from those used by UNCTAD U.S. dollars at prevailing exchange rates. See Table 2 for
or the IMF. reserve holdings expressed as months of import coverage.
The main source of current trade values is the UNC­ The data for this table are based upon IMF data files.
TAD trade data base, supplemented by the data from the World Bank staff also make estimates and, in rare
IMF's International Financial Statistics, the U.N.'s Com­ instances, adjust coverage or classification to enhance
modity Trade (COMTRADE) data base, and World comparability between the national accounts and the bal­
Bank estimates. The shares in these tables are derived ance of payments. Definitions and concepts are based on
from trade values in current dollars reported in the the IMF's Balance of Payments Manual, Fifth Edition
UNCTAD trade data system, supplemented by data from ( 1 993). Values are in U.S. dollars converted at official
the U.N. COMTRADE system. exchange rates.
The summary measures for the growth rates are calcu­ The summary measures are computed from group
lated by aggregating the 1 987 constant U.S. dollar price aggregates for gross international reserves.
series for each year and then applying the least-squares
Table 17. External debt
growth rate procedure for the periods shown.
Total external debt is the sum of public, publicly guaran­
Table 16. Balance of payments
teed, and private nonguaranteed long-term debt, use of
Exports and imports ofgoods, services, and income comprise IMF credit, and short-term debt. Long-term debt has
all transactions involving a change of ownership of goods three components: public, publicly guaranteed, and pri­
and services between residents of a country and the rest of vate non guaranteed loans. Public loans are external obli­
the world, including merchandise, services, and income. gations of public debtors, including the national govern­
Receipts of compensation to employees by, and invest­ ment, its agencies, and autonomous public bodies.
ment income from, nonresident entities are treated as ex­ Publicly guaranteed loans are external obligations of pri­
ports; payments to residents by nonresidents are treated as vate debtors that are guaranteed for repayment by a pub­
imports. lic entity. Private nonguaranteed loans are external obliga­
Net workers' remittances covers payments and receipts tions of private debtors that are not guaranteed for
of income by migrants who are employed or expect to be repayment by a public entity. Use of IMF credit denotes
employed for more than a year in their new economy, repurchase obligations to the IMF for all uses of IMF
where they are considered residents. These remittances are resources, excluding those resulting from drawings in the
classified as private unrequited transfers, whereas those reserve tranche. It comprises purchases outstanding under
derived from shorter-term stays are included in services as the credit tranches, including enlarged access resources,
labor income. The distinction accords with internation­ and all special facilities (the buffer stock, compensatory
ally agreed guidelines, but some developing countries clas­ financing, extended fund, and oil facilities), trust fund
sifY workers' remittances as a factor income receipt (hence loans, and operations under the enhanced structural
a component of GNP) . The World Bank adheres to inter­ adjustment facilities. Use of IMF credit outstanding at
national guidelines in defining GNP, and therefore its year-end (a stock) is converted to U.S. dollars at the
definitions may differ from national practices. dollar-SDR exchange rate then in effect. Short-term debt
Other net transftrs comprises net unrequited transfers is debt with an original maturity of one year or less. It
other than workers' remittances. includes interest arrears on long-term debt outstanding
The current account balance is the sum of net exports of and disbursed that are due but not paid on a cumulative
goods and services and net transfers. basis. Available data permit no distinction between public
Gross international reserves comprises holdings of mon­ and private nonguaranteed short-term debt.
etary gold, special drawing rights (SDRs), the reserve posi­ External debt as a percentage of GNP and of exports of
tion of members in the IMF, and holdings of foreign goods and services are calculated in U.S. dollars. Workers'
exchange under the control of monetary authorities. The remittances are included in exports of goods and services.
gold component of these reserves is valued at year-end Debt service as a percentage ofexports ofgoods and services
(December 3 1 ) London prices ($589.50 an ounce in 1 980 is the sum of principal repayments and interest payments
and $386.75 an ounce in 1 995). Because of differences in on total external debt. It is one of several conventional
 S E LECTED WORLD D EV E L O P M E N T I N D I C AT O R S 26 1

measures used to assess a country's ability to service debt. Statistical methods

Workers' remittances are included in exports of goods and This section describes the calculation of the least-squares
services. growth rate, the exponential (end-point) growth rate, the
The ratio ofpresent value to nominal value ofdebt is the Gini index, and the World Bank's Arias methodology for
discounted value of future debt service payments divided estimating the conversion factor used to estimate GNP
by the face value of total external debt. The present value and GNP per capita in U.S. dollars.
of external debt is the discounted sum of all debt service
payments due over the life of existing loans. The present Least-squares growth rate
value can be higher or lower than the nominal value of The least-squares growth rate, r, is estimated by fitting a
debt. The determining factors for the present value being least-squares linear regression trend line to the logarithmic
above or below par are the interest rates on loans and the annual values of the variable in the relevant period. The
discount rate used in the present value calculation. A loan regression equation takes the form:
with an interest rate higher than the discount rate yields a
present value that is larger than the nominal value of debt; log � = a + bt,
the opposite holds for loans with an interest rate lower
than the discount rate. which is equivalent to the logarithmic transformation of
The discount rates used to calculate the present value the geometric growth rate equation:
are interest rates charged by OECD countries for officially
supported export credits. The rates are specified for the
Group of Seven (G-7) currencies: British pounds, Cana­
dian dollars, French francs, German marks, Italian lire, In these equations, Xis the variable, t is time, and a log
=

Japanese yen, and U.S. dollars. International Bank for Re­ Xo and b log (1 + r) are the parameters to be estimated.
=

construction and Development (IBRD) loans and Inter­ If b* is the least-squares estimate of b, then the average
national Development Association (IDA) credits are dis­ annual growth rate, r, is obtained as [antilog (b*) - 1 ] and
counted at the most recent IBRD lending rate, and IMF is multiplied by 1 00 to express it as a percentage.
loans are discounted at the SDR lending rate. For debt The calculated growth rate is an average rate that is rep­
denominated in other currencies, discount rates are the resentative of the available observations over the period. It
average of interest rates on export credits charged by other does not necessarily match the actual growth rate between
OECD countries. For variable rate loans, for which future any two periods. Assuming that geometric growth is the
debt service payments cannot be precisely determined, appropriate way of modeling the data, the least-squares
debt service is calculated using the end- 1 994 rates for the estimate of the growth rate is consistent and efficient.
base period specified for the loan.
Multilateral debt as a percentage of total external debt Exponential end-point growth rate
conveys information about the borrower's receipt of The growth rate between two points in time for certain
aid from the World Bank, regional development banks, demographic data, notably labor force and population, is
and other multilateral and intergovernmental agencies. calculated from the equation:
Excluded are loans from funds administered by an in­
ternational organization on behalf of a single donor
government.
The data on debt in this table come from the World where pn and PI are the last and first observations in the
Bank Debtor Reporting System, supplemented by World period, respectively, n is the number of years in the
Bank estimates. The system is concerned solely with de­ period, and In is the natural logarithm operator.
veloping economies and does not collect data on external This growth rate is based on a model of continuous,
debt for other groups of borrowers or for economies that exponential growth. To obtain a growth rate for discrete
are not members of the World Bank. Debt is stated in periods comparable to the least-squares growth rate, one
U.S. dollars converted at official exchange rates. The data takes the antilog of the calculated growth rate and sub­
on debt include private nonguaranteed debt reported by tracts 1 .
thirty developing countries and complete or partial esti­
mates for an additional twenty that do not report but for The Gini index
which this type of debt is known to be significant. The Gini index measures the extent to which the distrib­
The summary measures are taken from the World ution of income (or, in some cases, consumption expen­
Bank's Global Development Finance 1997. diture) among individuals or households within an econ-
262 WORLD DEVELO PM ENT R E PO RT 1 997

omy deviates from a perfectly equal distribution. A Lorenz

curve plots the cumulative percentages of total income *
el _

--
1
[ [
et-2
PI
S$
Pt
j [
-- 1 5"$ + el _ 1
PI PI
-- I Ss
S$ j 1
+ el
received against the cumulative percentage of recipients, 3 PI-2 PI-2 PI- l PI- 1
starting with the poorest individual or household. The
Gini index measures the area between the Lorenz curve
and a hypothetical line of absolute equality, expressed as a and for calculating GNP per capita in U.S. dollars for
percentage of the maximum area under the line. Thus a year t:
Gini index of zero presents perfect equality, whereas an
index of 1 00 percent implies maximum inequality.
The World Bank employs a numerical analysis pro­ where:
gram, POVCAL, to estimate values of the Gini index; see � = current GNP (in local currency) for year t;
Chen, Dart, and Ravallion 1 992. PI = GNP deflator for year t;
el = average annual exchange rate (units of national
World Bank Atlas method currency per U.S. dollar) for year t;
The Arias conversion factor for any year is the average of NI = midyear population for year t;
a country's exchange rate (or alrernative conversion factor) pf$ = SDR deflator in U.S. dollar terms for year t.
for that year and its exchange rates for the two preceding
years, after adjustment for differences in rates of inflation Alternative conversion factors
between the country in question and the G-5 countries The World Bank systematically assesses the appropriate­
(France, Germany, Japan, the United Kingdom, and the ness of official exchange rates as conversion factors. An
United States) . The inflation rate for the G-5 countries is alrernative conversion factor is used when the official
represented by changes in the SDR deflators. This three­ exchange rate is judged to diverge by an exceptionally
year averaging smoothes annual fluctuations in prices and large margin from the rate effectively applied to domestic
exchange rates for each country. The Arias conversion fac­ transactions of foreign currencies and traded products;
tor is applied to the country's GNP. The resulting GNP this is the case for only a small number of countries (see
in U.S. dollars is divided by the midyear population for the Key and Primary Data Documentation table) . Alter­
the latest of the three years to derive GNP per capita. native conversion factors are used in the Arias method and
The following formulas describe the procedures for elsewhere in the World Development Indicators as single­
computing the conversion factor for year t: year conversion factors.
 D ATA S O U R C E S

Ahmad, Sultan. 1 992. "Regression Eslimales of Per CapiIa GDP Based on UNCTAD (Uniled Nalions Conference on Trade and Developmem).
Purchasing Power PaIilies." Policy Research Working Paper 956. Various years. Handbook ofInternational Trade and Development Sta­
World Bank, Imernalionai Economics Depanmem, Washington, D.C. tistics. Geneva.
Bos, Eduard, My T. Vu, Ernesl Massiah, and Rodolfo A. BulaIao. UNESCO (Uniled Nalions Educalional, Sciemific, and CullUral Orga­
1 994. World Population Projections, 1994-95 Edition. Baltimore, nizalion). Various years. Statistical Yearbook. Paris.
Md.: Johns Hopkins University Press. UNICEF (Uniled Nalions Children's Fund) . 1 997. The State of the
Council of Europe. 1 99 5 . Recent Demographic Developments in Europe World's Children 1997. Oxford: Oxford University Press.
and North America. Council of Europe Press. UNIDO (Uniled NaIions Indumial Developmem OrganizaIion).
EUroSIaI (SIalislicai Office of the European CommuniIies). Various 1 9 96. International Yearbook of Industrial Statistics 1996.
years. Statistical Yearbook. Luxembourg. Vienna.
FAO (Food and Agriculture Organizalion). Various years. Production Uniled Nalions. 1 968. A System ofNational Accounts: Studies and Meth­
Yearbook. FAO Slalislics Series. Rome. ods. Series F. No. 2. Rev. 3. New York.
lEA (Imernalionai Energy Agency) . 1 996. Energy Statistics and Balances ---. 1 9 8 5 . National Accounts Statistics: Compendium ofIncome Dis-
ofNon-DECD CountrieJ 1993-94. Paris. tribution Statistics. New York.
--- . 1 996. Energy Statistics of DECD Countries 1993-94. Paris. --- . 1 994. World Urbanization Prospects, 1994 Revision. New York.
ILO. (Imernalional Labour OrganisaIion). 1 995. Year Book of Labour --- . 1 996. World Population Prospects: The 1996 Edition. New York.
Statistics. Geneva. ---. Various years. Energy Statistics Yearbook. New York.
---. 1 995. Labour Force Estimates and Projections, 1950-2010. ---. Various years. Levels and Trends ofContraceptive Use. New York.
Geneva. ---. Various issues. Monthly Bulletin ofStatistics. New York.
--- . 1 995. Estimates o f the Economically Active Population by Sex ---. Various years. Population and Vital Statistics Report. New York.
and Age Group and by Main Sectors ofEconomic Activity. Geneva. ---. Various years. Statistical Yearbook. New York.
IMF. (Imernalional MoneIaty Fund) . 1 986. A Manual on Government ---. Various years. Update on the Nutrition Situation. Adminima-
Finance Statistics. WashinglOn, D.C. live Commillee on Co-ordinalion. Subcommillee on NUlrilion.
---
. 1 993. Balance ofPayments Manual. 5th ed. Washingron, D.C. Geneva.
---. Various years. Government Finance Statistics Yearbook. Wash- ---. Various yealS. Yearbook of International Trade Statistics. New
inglOn, D.C. York.
--- . VaIious years. International Financial Statistics. Washington, WHO. (World Heallh Organizalion). 199 1 . Maternal Mortality: A
D.C. Global Factbook. Geneva.
OECD. (Organizalion for Economic CooperaIion and Developmem). --- . Various years. World Health Statistics. Geneva.
1 988. Geographical Distribution of Financial Flows to Developing ---. Various yealS. World Health Statistics Report. Geneva.
Countries. Paris. World Bank. 1 993. Purchasing Power ofCurrencies: Comparing National
--- . 1 996. Development Co-operation: 1995 Report. Paris. Incomes Using ICP Data. WashinglOn, D.C.
---. 1 996. NationaiAccounts 1960-1994. Vol. 1 , Main Aggregates. ---. 1 997. Global Development Finance 1997. WashinglOn.
Paris. D.C.
---. 1 996. National Accounts 1960-1994. Vol. 2, Detailed Tables. World Resources InslilUle in collaboraIion Wilh UNEP (Uniled
Paris. Nalions Environmem Programme) and UNDP (Uniled Nalions
--- . Various years. Development Co-operation. PaIis. Developmem Programme) . 1 994. World Resources 1994-95: A
Ravallion, Marlin, and Shaohua, Chen. 1 996. "Whal Can New Survey Guide to the Global Environment. New York: Oxford University
Dala Tell Us AboUl Recem Changes in Living Slandards in Devel­ Press.
oping and Transilionai Economies?" World Bank, Policy Research World Resources InslilUle. UNEP (Uniled Nalions Environmem Pro­
Deparlmenl, Washington, D.C. gramme) . UNDP (Uniled Nalions Developmem Programme), and
U. S . Bureau of Ihe Census. 1 996. World Population Profile. Washing­ World Bank. 1 996. World Resources 1996-97: A Guide to the Global
lOn, D.C.: U.S. Governmem Priming Office. Environment. New York: Oxford University Press.
264 WO R LD D EV E LO P M E NT R E PO RT 1 997

Table 1 . Classification of economies by income and region, 1 997

Sub-Saharan Africa Europe and Central Asia
East and Asia Eastern Middle East and North Africa
Income Southern East Asia Europe and Rest of Middle North
group Subgroup Africa West Africa and Pacific South Asia Central Asia Europe East Africa Americas
Angola Benin Cambodia Afghanistan Albania Yemen, Rep. Guyana
Burundi Burkina Faso China Bangladesh Armenia Haiti
Comoros Cameroon Lao PDR Bhutan Azerbaijan Honduras
Eri trea Cen tral African Mongolia India Bosnia and N icaragua

Ethiopia Republic Myanmar Nepal Herzegovina

Kenya Chad Vietnam Pakistan Georgia
Madagascar Congo Sri Lanka Kyrgyz
Malawi Cote d'Ivoire Republic
Mozambique Equatorial Tajikistan
Rwanda Guinea
Somalia Gambia, The
Low- Sudan Ghana
income Tanzania Guinea
Uganda Guinea-Bissau
Zaire Liberia
Zambia Mali
Zimbabwe Mauritania
Niger
Nigeria
Sao Tome
and
Principe
Senegal
Sierra Leone
Togo

Botswana Cape Verde Fiji Maldives Belarus Turkey Iran, Islamic Algeria Belize
Djibouti Indonesia Bulgaria Rep. Egypt, Arab Bolivia
Lesotho Kiribati Estonia Iraq Rep. Colombia
Namibia Korea, Dem. Kazakstan Jordan Morocco Costa Rica
Swaziland Rep. Latvia Lebanon Tunisia Cuba
Marshall Lithuania Syrian Arab Dominica
Islands Macedonia, Republic Dominican
Micronesia, FYR' West Bank Republic
Fed. Sts. Moldova and Gaza Ecuador
Papua New Poland El Salvador
Lower Guinea Romania Grenada
Philippines Russian Guatemala
Solomon Federation Jamaica
Islands Slovak Panama
Thailand Republic Paraguay
Tonga Turkmenistan Peru
Vanuatu Ukraine St. Vincent
Middle- Western Uzbekistan and the
Income Samoa Yugoslavia, Grenadines
Fed. Rep b Suriname
Venezuela

Mauritius Gabon American Croatia Greece Bahrain Libya Antigua and

Mayotte Samoa Czech Isle of Man Oman Barbuda
Seychelles Malaysia Republic Malta Saudi Arabia Argentina
South Africa Hungary Barbados
Slovenia Brazil
Chile
Guadeloupe
Mexico
Puerto Rico
Upper St. Kitts and
Nevis
St. Lucia
Trinidad and
Tobago
Uruguay

SubtotaL- 158 26 23 21 8 27 4 10 5 34
 S E LE CTED WORLD D EV E L O P M E NT I N D I CATO R S 2 6 5

Table 1 . (continued)

Sub-Saharan Africa EuroE.e and Central Asia

East and Asia Eastern Middle East and North Africa
Income Southern East Asia and Europe and Rest of Middle North
group Subgroup Africa West Africa Pacific South Asia Central Asia Europe East Africa Americas
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Korea, Rep. Finland
France
Germany
Iceland
Ireland
GECD Italy
countries Luxembourg
Netherlands
High- Norway
income Portugal
Spain
Sweden
Switzerland
United
Kingdom

Reunion Brunei Andorra Israel Aruba

French Channel Kuwait Bahamas, The
Polynesia Islands Qatar Bermuda
Guam Cyprus United Arab Cayman
Non-GECD
Hong Kong Faeroe Islands Emirates Islands
countries
Macao Greenland French
New Liech tenstein Guiana
Caledonia Monaco Martinique
N. Mariana Netherlands
Islands Antilles
Singapore Virgin Islands
OAE' (U.S.)

Total: 210 27 23 34 8 27 28 14 5 44

a. Former Yugoslav Republic of Macedonia.

b. Federal Republic of Yugoslavia (Serbia/Montenegro).
c. Other Asian economies---Taiwan, China.

For operational and analytical purposes, the World Definitions of groups

Bank's main criterion for classifYing economies is gross
These tables classifY all World Bank member countries
national product (GNP) per capita. Every economy is
and all other economies with populations of more than
classified as low-income, middle-income (subdivided into
30,000.
lower-middle and upper-middle) , or high-income. Other
analytical groups, based on geographic regions, exports,
Income group: Economies are divided according to 1 995
and levels of external debt, are also used.
GNP per capita, calculated using the World Bank Atlas
method. The groups are: low-income, $765 or less; lower­
Low-income and middle-income economies are some­
middle-income, $766-$3,035; upper-middle-income,
times referred to as developing economies. The use of the
$3,036-$9,385; and high-income, $9,386 or more.
term is convenient; it is not intended to imply that all
economies in the group are experiencing similar develop­
The estimates for the republics of the former Soviet
ment or that other economies have reached a preferred or
Union are preliminary and their classification will be kept
final stage of development. Classification by income does
under review.
not necessarily reflect development status.
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 One of the Bank's most popular offerings, theAtlas has been redesigned as a companion to the World Development
Indicators. Tables, charts, and 21 colorful maps address the development themes of people, economy, environment,
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an ideal reference for office or classroom. Text, maps, and references appear in English, French, and Spanish.
��.lIIIilillili"'''' 48 Pages Stock no . 1 3576 (ISBN 0-821 3-3576-6) $1 5.00

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