Current trends in development

1. Current trends in development ICT4D: Context, Strategies, and Impacts

2. The economic development challengePopulation living on less than $1 PPP a day 1993 # of people (million) share of popln • East Asia & Pacific 450 28% • Europe & Ctrl Asia 5 4 • Latin Amer & Caribbean 90 23 • Middle East & N Africa 3 4 • South Asia 500 42 • Sub-Saharan Africa 200 38 Note: PPP, purchasing power parity; Source: World Bank, 1998

3. Evolution of development thinking GOALS OF DEVELOPMENT • GDP • GDP per capital • Non-monetary indicators (Human development Index) • Mitigation of poverty • Entitlements & capabilities • Freedom • Sustainable development

4. Evolution of development thinkingECONOMIC SOURCES OF GROWTH • Natural resource endowments • Factor endowments: labor, physical capital, human capital • Technology: learning-by-doing GROWTH AS A FUNCTION OF 3 FACTORS: • Physical capital accumulation • Human capital accumulation • Productivity growth (technological change)

5. Evolution of development thinkingSOURCES OF CHANGE • Learning: empirical and theoretical • Changes in ideology & political elites • Changes in international institutions • Changes in domestic institutions, constraints, and aspirations • Culture of economics discipline: KISS “keep it simple stupid” --demands simple explanations and universally valid propositions

6. Deeper (institutional) determinants SOURCES OF GROWTH • Geography: location • Integration: trade, migration, capital flows • Institutions: socio-political arrangements, formal and informal • Organization of production => No simple correlations => Multiple feedback effects & unclear direction of causality Dani Rodrik,ed. In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton U Press, 2003)

7. Evolution of development thinking: GOVERNMENT ROLE • Keynesianism and planning: 1940s-1970s • Minimalist government: 1980s & 1990s • Government and market complementary: 2000s • Focus on “getting institutions right” • Secure and enforceable property rights • End corruption & establish independent judiciary • Improve bureaucratic capacity & reduce regulation BUT HOW?? What about distributive conflicts?

8. The Washington consensus John Williamson, Latin American adjustment: How much has happened? 1990 • Wave of reforms in Latin America, Sub-saharan Africa, later in Eastern Europe • Massive privatization of state owned enterprises, deregulation, trade liberalization--“market fundamentalism” (getting the prices right) Growth below expectations in all cases, “transition crisis” deepened in former socialist economies . . .

9. End of Washington consensus Experience of 1990s • Collapse of output in transition economies • Limited and fragile growth in Sub-Saharan Africa • Financial crises in Latin America, East Asia, Russia, Turkey • Latin American growth slows, Argentina crashes BUT at same time • India, China and East Asian rapid growth w/out WC • Absolute reduction in # living in extreme poverty

10. Learning from reform World Bank Economic Growth in the 1990s: Learning from a Decade of Reform (2005) • Conventional reforms focus on static efficiency not dynamics of growth • Objectives of reform (market incentives, macro stability) don’t imply any unique policy actions • Different contexts require different solutions to same problems: can’t just copy policy reforms • Exaggeration of rules over discretion in government behavior • Reform efforts should be selective, focus on binding constraints in growth, not laundry list of reforms

11. Alternative I: Institutions Need for deeper institutional change to achieve goals => “Second generation” reforms “Institutions fundamentalism” getting institutions right BUT Institutions are by definition deeply embedded in society, so very difficult and slow to change—except in aftermath of war, civil war, revolution, or other major political upheaval Largely unverifiable, impossible to fulfill policy agenda

12. Original W. Consensus Fiscal discipline Reorient public spending Tax reform Financial liberalization Competitive exchange rate Trade liberalization Openness to foreign invest. Privatization Deregulation Secure property rights Augmented W. Consensus Corporate governance Anti-corruption Flexible labor markets WTO agreements Financial standards Capital-account opening Exchange rate regime full Independent central bank Social safety nets Targeted poverty reduction New and old Washington consensus

13. Limits of institutional fundamentalism 1. No strong causal connection between institutions and economic growth in research Compare growth, investment rates, in Russia (Western style private ownership) and China (state ownership, TVEs) in 1990s 2. Research focuses on long-term economic performance, level of income, not growth rate Rapid growth starts in China in late 1970s and India in early 1980s with minimal institutional change; significant institutional reform after growth begins

14. Alternative II: Foreign aid United Nations Millennium Project (2005) Sachs et al • Comprehensive and simultaneous increase in “public investments, capacity building, domestic resource mobilization, and official development assistance” along with “a framework for strengthening governance, promoting human rights, engaging civil society, and promoting private sector.” • Significant increase in foreign aid –doubling of annual offiical development assistance to $135 b. in 2006—to finance investments in human capital, infrastructure, develop technologies to transform health and agriculture => need for a “big push” due to low-level equilibrium “poverty trap”

15. Practical agenda for growth strategies A more cautious, experimentalist approach consisting of three sequential elements: • Diagnostic analysis of significant constraints on growth in particular setting • Design policy to target the identified constraints appropriately (requires creativity and imagination) • Institutionalize the process of diagnosis and policy response to ensure continued growth (esp. Need to maintain productivity growth and to strengthen institutions for conflict management)

16. Growth diagnostics Problem:Low levels of private investment and entrepreneurship Possible causes: Low returns to econ activity Low social returns Low appropriability (govt failure? Mkt failure?) High cost of finance Bad international finance Bad local finance (low saving? poor banks?) Etc.

17. New approaches to development Challenge: How to fit these alternatives into a broader view of long term development? • Microfinance • Social capital • ICT4D

18. Microfinance & microenterprise 2005 “The International Year of Microcredit” UN Microcredit (mI-[*]Kro'kre-dit); noun; programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families. - Microcredit Summit http://www.gdrc.org/icm/ The Grameen Bank in Bangladesh aims to provide credit to those in extreme poverty. 94 per cent of those who meet the bank's criteria and take up loans are women. Grameen borrowers keep up repayments at a rate of around 98 per cent. The Bank lends US$30 million a month to 1.8 million borrowers. World Bank estimates at there are now over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion

19. Social capital Social capital refers to the norms and networks that enable collective action. Increasing evidence shows that social cohesion — social capital — is critical for poverty alleviation and sustainable human and economic development. Sources of social capital: families, firms, communities, public sector, associations http://www1.worldbank.org/prem/poverty/scapital/home.htm

20. ICT4D A new way to fight poverty A response to the “digital divide” A money-making opportunity for firms Can technology help reduce poverty? How can it best serve the poor?

21. The “new” institutionalism Hernando DeSoto The Other Path: The Invisible Revolution in the Third World (1989) • Poor can become engines of growth, but free market not sufficient; requires “modern” political and legal/judicial institutions • Third world “mercantilism” is main obstacle to liberating the energy of the informal sector Mercantilism: bureaucratic and excessive regulation that benefits an elite & discourages wealth creation by sanctioning red tape, corruption & kills incentives