Thanks, Dean Hellman, for the introduction. It’s a pleasure to be back at Georgetown University, both because of the important topics you are putting on the table; and also because I studied here in 1983. I was a Mid-Career Fellow in the MSFS program at the School of Foreign Service. Some of you know the then-dean, Allan Goodman. And many of you know Dr. Madeleine Albright. I was privileged to take her famous American Foreign Policy course well before she became the U.S. Secretary of State.
I’d like to speak to you today about the need to make more progress on development. Earlier this week, I hosted a townhall for staff of the World Bank Group. It was on Monday, which was Veterans Day in the U.S. and Armistice Day or Remembrance Day in many other countries.
As it happens, the occasion for honoring those who served comes two days after the anniversary of the fall of the Berlin Wall. It’s been just over 30 years since the people of Germany tore through the Iron Curtain, allowing the reunification of the country. A quote written on a remnant of the wall put it well: “Many small people, who in many small places do many small things, can alter the face of the world.” Both the November 9th and 11th milestones are vital in understanding the history of political and economic development in the 20th century and the foundations of the 21stcentury. It’s hard to remember today, but the fall of the Berlin Wall caused truly global celebrations--hundreds of millions of people finding a path to freedom.
When I was at Georgetown in 1983, the wall was a still very powerful barrier. One of the major development problems was the drag on growth caused by communism and authoritarianism. The people of the Soviet Union and the Comecon nations of Eastern Europe faced censorship and state control not only of the means of production but also of their very freedoms. This left a system that was unable to generate economic progress or make effective connections to the booming market-based democracies of the West. It was a time when the U.S., western Europe and Japan were inventing their prosperity through the rule of law, market prices and private-sector growth.
In contrast, one of my classes at Georgetown in 1983 focused on what was called “barter trade,” in which Soviet-bloc countries and state-owned enterprises swapped goods based on negotiated trades rather than prices and quality. It was highly inefficient, due to the giant misallocation of capital, the inability to create and protect intellectual property, and inappropriate incentives. The related development challenge was to mitigate the cost of the global inefficiencies caused by the barter-trade system, which lasted until roughly 1990.
We have major development challenges today, but I’m hopeful that we can make progress using the shared knowledge from decades of better experiences. Since 1990, we’ve seen impressive gains in poverty reduction and income growth. Over a billion people rose out of extreme poverty through 2015, many of them in China. Between 2010 and 2015, people in the bottom 40 percent of the population saw their incomes increase in 70 out of 91 economies we tracked. Market-based reforms, trade liberalization and freer flows of capital across borders have enabled extraordinary progress and enhanced the livelihoods of hundreds of millions of people in many developing countries. That’s all very encouraging to us at the World Bank Group, where the mission is to reduce extreme poverty and boost shared prosperity.
Still, 700 million people are living in extreme poverty—that’s about one in 12 people on the planet. And in too many countries, growth is slow and median incomes are barely increasing. We’re seeing protests in many economies, including Bolivia, Chile, Iraq and Lebanon. The frustrations and catalysts are different, but the sentiments have much in common: people aren’t seeing their living standards or freedoms improve in the way they had hoped. And governments aren’t acting in the best interests of the people in some cases.
The end of the Cold War created a path to a more open, peaceful world, where people could build democratic systems based on equality of opportunity and greater prosperity. But that promise has yet to become a reality for too many people. The lack of growth for lower income levels and the resulting inequality are key factors in the civil unrest we’re seeing around the world. Many people aren’t getting ahead and see a system that favors a small group of elites. Hence, my topic today: the need for more progress on development.
I’d like to share with you some thoughts on the drivers of inequality and steps that could help deliver broad-based growth. My hope is that the current environment can lead to better systems and a peaceful de-escalation in all the countries experiencing unrest--a constructive way forward.
The world economic slowdown is certainly a factor in the frustrations. Europe’s manufacturing activity has plunged and investment in developing countries has been sluggish at best--the topic of the World Bank’s mid-2019 downgrade of the growth outlook. Of concern, governments were already using elevated government spending and central-bank bond buying in the hope of providing stimulus. Unfortunately, the policies have done more to distort markets and raise asset prices than to stimulate broad-based growth. Central-bank stimulus has mostly relied on an expansion of short-term liabilities to fund their ownership of long-term assets. The hope of that policy, called quantitative easing, is that the price appreciation of long-term assets--bonds, stocks and real estate–will spur consumption and productive investment. The problem is that the transmission mechanism for this stimulus is limited to the upper-end of the income distribution--those who own large assets or issue bonds.
Some countries have also used improvements in their tax and regulatory systems to encourage broad-based growth, but for other countries, stimulus has ended up in a dramatic concentration of wealth and rising inequality, a key factor behind many of the economic and election protests.
Of course, a host of other global trends are affecting both developing countries and advanced economies in new ways, from climate change to disruptive technologies such as automation, digital currencies and big data. Anxiety about the effect of trade on jobs has prompted an increase in protectionism, creating investment uncertainty and slowing growth. When the gains from economic openness aren’t broadly shared, there’s a risk that the people, whether on the streets or in voting booths, blame the market system rather than the obstacles. The result is that, in too many places around the world including several countries where protests have erupted, illiberal policies are preventing markets from working, which makes it harder to generate the growth needed to lift incomes.
In my first seven months as World Bank Group president, I’ve stressed the importance of building strong country programs tailored to the unique circumstances of each economy. I recently returned from a trip that included visits to Pakistan and India. In Pakistan, there are some basic steps they could take to boost their growth rate. The labor-force participation rate for women is only 25 percent. Pakistani women face many barriers to joining the work force. There are steps that could help: keeping girls in schools; changing social norms around early marriage, work and household duties; providing support for child care; and ensuring safe transportation. Addressing the gender gap would increase broad-based growth. So would harmonizing their tax system and liberalizing trade and investment. Country by country and region by region, we’re encouraging growth-friendly policies that would raise median incomes.
At the same time, we need to make sure growth is sustainable and inclusive. We need growth that benefits not just those in positions of power, but everyone. To address this challenge, we enable investments in individuals and households in the bottom 40 percent of the income ladder. In some places, that means investing in productive assets, such as infrastructure or livestock, that benefit the poor. In others, it means investing in improving health and education outcomes, so countries can build human capital.
At the same time, we need to recognize that economic reforms can be hard. One of the reasons for declining trust in government is the capture of public services by elites and the failure of some countries to provide effective basic services to the majority of the people. We work closely with countries to ensure their fiscal-reform efforts don’t undermine broad-based prosperity and trust in institutions.
We’re also seeing poverty become more deeply entrenched in countries affected by fragility, conflict and violence. That makes our task of reducing poverty even harder. Many poor households live in remote rural areas, cut off from the infrastructure and commercial opportunities that could improve their lives. In the worst cases, they’re being targeted by hostile organizations or predatory governments. We’re working hard to support these people by building better social safety nets and helping them cope with the impact of natural disasters and pandemics. We’re helping these communities become more resilient to the impacts of climate change.
I’ve talked mostly about helping countries put in place the right technical policies to foster broad-based growth. But we need to recognize that corruption remains a persistent problem across the developing world. Encouraging good policies and making strategic investments is important, and we need to help countries build strong institutions. In many of the countries where we’re seeing unrest, the basic social contract between citizens and the state is coming undone. States that are weak or predatory too often use their limited resources to protect established insiders and their allies, and to intimidate or punish their opponents. Citizens are caught in the middle, unable to trust the government to deliver basic services and create the conditions for broad prosperity. This creates a vicious circle of disenchantment and poor governance that, as we’re seeing, can boil over into the streets. The stagnation of median incomes is increasingly incompatible with democracy and political stability.
That’s why we’re helping countries improve their institutional capacity for broad-based growth. A key step is to strengthen the rule of law. We do so in many ways, such as through targeted interventions that improve specialist functions within a country’s justice system, and by empowering women, the poor and other marginalized groups to address their legal problems. We work with countries to help them build capable, transparent and accountable institutions, as well as design and implement programs to root out corruption.
Another aspect of our approach is to invest in human capital. More than half of all 10-year-olds in developing countries can’t read, which is unacceptable. At our recent Annual Meetings, we set a target for cutting the learning deficit in half by 2030. We’re also focused on health, including tackling preventable maternal and child mortality, ensuring that women and children can access health services, and reducing childhood stunting. Investing in human capital not only boosts economic growth but ensures that a broader group of people have an opportunity to participate in such growth.
We’re pressing countries to improve their debt management and debt transparency. The external debt of low- and middle-income countries hit a record $7.8 trillion last year--more than double the amount they owed in 2007. Increasingly, that debt is being borrowed from non-traditional creditors, including non-Paris Club creditors and commercial creditors. Often, these non-traditional creditors are imposing non-disclosure agreements on borrowers, making it harder to assess a country’s overall debt load. Better transparency delivers real dividends for countries: those that improve in this area enjoy better credit ratings, lower borrowing costs, and greater attractiveness to foreign direct investment. It’s also the right thing to do. People deserve to know the terms under which their governments are borrowing.
That’s just an overview of the work we’re doing to enable the broad-based growth necessary to ensure social inclusion and support a market-based and open economic order. As I said, the unrest we’re seeing is being driven by a unique set of forces, such as the adoption of new technologies and the shifting expectations of the middle class that recently emerged in some countries. It’s crucial that countries come up with a set of policies capable of responding to the evolving needs of their people. One opportunity is the development of digital payments. They offer the opportunity for lower transaction costs and for fuller inclusion of people who otherwise are excluded through the current financial system. For example, through lower transaction costs, women, new businesses, and the poor can interact with others in a non-barter way, an actual cash economy that is much more effective than their current alternative.
I’d like to leave you with a quote from one of my predecessors as World Bank Group president, James Wolfensohn. It’s from a speech he gave in 1997, called “The Challenge of Inclusion.” “As a development community,” he said, “we face a critical choice. We can continue business as usual, focusing on a project here, a project there, all too often running behind the poverty curve. We can continue making international agreements that we then ignore. We can continue engaging in turf battles, competing for the moral high ground. Or we can decide to make a real difference.”
At the World Bank Group, we’re working hard to meet the challenge of the complex global landscape I’ve described today. We’re staying focused on our mission of reducing extreme poverty and promoting shared prosperity. We’re not giving up on the idea that, by breaking down barriers and giving everyone an opportunity to succeed, countries can build more open, safe and prosperous societies. I believe deeply that people around the world deserve true progress and can achieve it.