Lessons of History

Past strategies failed to give sufficient prominence to this transformative role of society. The development models popular in the 1960s saw development as simply solving a complicated dynamic problem, which would improve the efficiency of the allocation of resources, and lead to accumulation of capital (either through transfers from abroad or through higher savings rates at home). Less-developed countries were portrayed as identical to more-developed countries, except for this lack of capital and possibly certain inefficiencies in resource allocation.

The same fallacy pervaded the philosophies of the 1970s and 1980s. The central role that government played in planning and programming was seen as part of the problem of development rather than as part of the solution. This perspective held that governments claimed too large a role for themselves, one for which they were intrinsically unsuited. The solution, then, was to rely heavily on markets and, in particular, elimination of government-imposed distortions associated with protectionism, government subsidies, and government ownership. In the 1980s, the focus shifted to macroeconomic problems, to "adjustment" of fiscal imbalances and misguided monetary policies. Given the macroeconomic imbalances, it was impossible for markets to function properly.

All three of these development strategies saw development as a technical problem requiring technical solutions—better planning algorithms, better trade and pricing policies, better macroeconomic frameworks. They did not reach deep down into society, nor were they based on a belief that a participatory approach was necessary. The laws of economics were universal: demand and supply curves and the fundamental theorems of welfare economics applied as well to Africa and Asia as they did to Europe and North America. Time and space, in the view of these strategies, did not bind these scientific laws; therefore the technical approach was the appropriate one.

As remarkable as the narrow focus of these approaches was their lack of historic context. They failed to recognize that:

Defining Events

Three events of the past quarter-century are beginning to shape views on development strategies:

Second, many countries that followed the dictums of liberalization, stabilization, and privatization but still did not grow. The technical solutions were evidently not enough. An economy needs an institutional infrastructure. While the banks in East Asia lacked adequate supervision, the banks in Russia not only lacked that supervision, they did not even perform their core function of providing capital to new and growing enterprises. Russia turned ordinary economic laws on their head, managing to reverse the usual tradeoffs between equity and efficiency. Moving from inefficient central planning to decentralized market mechanisms, shifting from inefficient state ownership to private property, introducing the profit motive, and similar reforms should have increased output, though perhaps at the price of a slight increase in inequality.

Instead, Russia achieved a huge increase in inequality, at the same time that it managed to shrink the economy, by up to a third according to some estimates. Living standards collapsed with GDP levels, as life spans became shorter and health worsened. All too late, it was recognized that without the right institutional infrastructure, the profit motive—combined with full capital market liberalization—could fail to provide incentives for wealth creation and could instead spark a drive to strip assets and ship wealth abroad.

Third, the rapid growth of the countries of East Asia, which showed that a reduction of poverty, widespread improvements in living standards, and even a process of democratization could accompany successful development. East Asian governments failed to follow many of the dictums of the usual consensus early in their development. Rather than giving the economy over to an untrammeled private sector, for example, governments started some highly productive steel mills, and, more generally they pursued industrial policies to promote particular sectors. Governments intervened in trade, though more to promote exports than to inhibit particular imports. And they regulated financial markets, engaging in mild financial restraint, lowering interest rates, and increasing the profitability of banks and firms. They put heavy emphasis on education and technology, to close the knowledge gap between them and the more advanced countries. While the impact of individual policies remains a subject of dispute, the mix of policies clearly worked well.

Indeed, the present crisis notwithstanding, it is clear that East Asian countries have succeeded in transforming their societies over a span of several decades. Even with a few years of zero or even negative growth, their per capita GDPs at the turn of the century will be a multiple of what it was a half-century ago, and far higher than those of countries that have pursued alternative development strategies. Moreover, poverty rates will be a fraction of what they were a half-century ago, literacy will remain nearly universal, and health standards will continue to be high.

Keys to Success

These defining events have led to a recognition that the old technical solutions are sorely lacking. Policies that are imposed from outside may be grudgingly accepted on a superficial basis, but will rarely be implemented as intended. Development cannot be just a matter of negotiations between a donor and the government. Excessive conditionality of foreign donors reinforces traditional hierarchical relationships, rather than involving large segments of society in a discussion of change—and thereby catalyzing change in ways of thinking. Development must involve and support groups in civil society; these groups are part of the social capital that needs to be strengthened, and they give voice to often-excluded members of society, facilitating their participation. Our research shows that development projects with higher levels of participation are in fact more successful, probably in part because those projects make fewer erroneous assumptions about the needs and capabilities of beneficiaries.

Given limits on resources—including the administrative capacities of the Bank and of developing countries—we need to identify areas where the government’s limited actions can have large-scale effects, and areas where lack of action can have disastrous effects. Although the priorities will differ from country to country, there are some common elements:

Many of these elements have begun already to take shape. Within the World Bank and the development community more broadly, there has been increasing attention in recent decades to issues of health and education, and a move beyond measures of GDP to look at life spans and literacy rates. We have recognized the importance of economic security, and stressed the creation of safety nets.

There has been a growing consensus on the objective of democratic, equitable, and sustainable development. Here, I have tried to argue that the whole is greater than the sum of these parts, and that successful development must focus on the whole—the transformation of society.