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Enteringthe _ st

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Summary

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Enteringthe St21 Century

Summary

The World BankWashington, D.C.

©) 2000 The International Bank for Reconstruction andDevelopment / The World Bank1818 H Street, N.W., Washington, D.C. 20433, U.S.A.

Cover design by W. Drew Fasick, ULTRAdesigns.Illustration/calligraphy by Jun Ma. The cover depicts the Chinesecharacter for gate or door.Inside design and typesetting byBarton Matheson Willse & Worthington, Baltimore.

Manufactured in the United States of AmericaFirst printing September 1999

This document summarizes World Development Report 1999/2000,published by Oxford University Press for the World Bank. It is a productof the staff of the World Bank, and the judgments made herein do notnecessarily reflect the views of its Board of Executive Directors or thecountries they represent. The World Bank does not guarantee theaccuracy of the data included in this publication and accepts noresponsibility whatsoever for any consequence of their use.

ISBN 0-8213-4389-0

Text printed on recycled paper thar conforms to the American Standardfor Permanence of Paper for Printed Library Material Z39.48-1984.

Contents of World DevelopmentReport 1999/2000

OverviewThe frontiers of development t-hinkingGlobalization and localizationSupranational issuesSubnational issuesTranslating policies into actions

Introduction New Directions in Development ThinkingBuilding on past development experiencesThe many goals of developmentThe role of institutions in developmentThe record and outlook for comprehensive developmentA changing world

Chapter 1 The Changing WorldInternational tradeInternational financial flowsInternational migrationGlobal environmental challengesNew political tendencies in developing countriesEmerging subnational dynamicsUrban imperativesImplications for development policy

Chapter 2 The World Trading System: The Road AheadHow the global trading system benefits developing countriesWTO mechanisms for promoting and maintaining liberal trade regimesSustaining the momentum for trade reformInternational trade and development policy: the next 25 years

Chapter 3 Developing Countries and the Global Financial SystemThe gathering pace of international financial integrationToward a more robust and diversified banking systemThe orderly sequencing of capital account liberalizationAttracting foreign investmentRevitalizing international macroeconomic cooperation

Chapter 4 Protecting the Global CommonsThe link between national and global environmental issuesMoving from national to international actionThe ozone treaties: a success story

iIII

IV WORLD DEVELOPMENT REPORT 1999/2000

Climate changeBiodiversityExploiting the links between global environmental problems

Chapter 5 Decentralization: Rethinking GovernmentWhat is at stake?From centralized to decentralized governanceBalancing political power between central and local interestsThe structure, functions, and resources of subnational governmentsMaking subnational governments accountablePolicies for the transitionWhat lessons for the future?

Chapter 6 Dynamic Cities as Engines of GrowthWhat makes cities grow?The national government's role in urbanizationLocal policies for urban economic growth

Chapter 7 Making Cities LivableThe unfinished urban agendaLearning from the pastService provision in developing countriesLooking ahead

Chapter 8 Case Studies and RecommendationsMaking the most of trade liberalization: EgyptReforming weak banking systems: HungaryMacromanagement under fiscal decentralization: BrazilImproving urban living conditions: KarachiCultivating rural-urban synergies: TanzaniaThe shifting development landscape at the dawn of the 21st century

Bibliographical NoteAppendix Selected Indicators on Decentralization, Urbanization, and the EnvironmentSelected World Development IndicatorsIndex

Summary

he development landscape is being to reducing poverty, these challengestransformed, presenting policymakers include issues of food security, waterwith new challenges at the global and scarcity, aging populations, cultural loss,local levels. This report charts the way and environmental degradation.forward by analyzing the contours of These challenges must be confrontedthe new landscape and distilling lessons even as manv forces reshape the devel-from the past. It examines the unfold- opment terrain: innovations in technol-ing dynamic at the supranational and ogy, the spread of knowledge, the growthsubnational levels. And it proposes new of population and its concentration inrules and structures to serve as a foun- cities, the financial integration of thedation for development policy in the world, and rising demands for political2 1 st century. and human rights. Some of these forces,

Fifty years of development experi- like population growth, will work theirence have yielded four critical lessons. way gradually, giving policymakers timeFirst, macroeconomic stability is an es- to respond. Others, such as financial con-sential prerequisite for achieving the tagion, could batter apparently healthygrowth needed for development. Sec- economies without warning unless pre-ond, growth does not trickle down; de- emptive measures are in place. Some willvelopment must address human needs give rise to challenges, like social wel-directly. Third, no one policy will trig- fare funding, that most nation-states canger development; a comprehensive ap- cope with on their own. Others, such asproach is needed. Fourth, institutions global climate change, will be beyondmatter; sustained development should the reach of any one state and will callbe rooted in processes that are socially for international agreements.inclusive and responsive to changing If they are managed well, these forcescircumstances. could revolutionize the prospects for

These insights are central to how the development and human welfare. How-World Bank envisions its work in the ever, the same forces are also capable of21st century and to the way in which it generating instability and human suf-proposes to tackle the principal devel- fering that are beyond the ability of in-opment challenges ahead. In addition dividual nation-states to remedy.

2 WORLD DEVELOPMENT REPORT 1999/2000

This report views the changes that have been set in countries in the world, has had remarkable economicmotion as contributing to-and as manifestations of- success with a development strategy that involves only atwo phenomena: globalization and localization. Global- limited dose of market liberalization and privatization.ization, which reflects the progressive integration of the The failure of centrally planned economies to keepworld's economies, requires national governments to pace with their market-oriented counterparts has dem-reach out to international partners as the best way to onstrated clearly enough that planning entire economiesmanage changes affecting trade, financial flows, and the at the central government level is not a productive pathglobal environment. Localization, which reflects the to long-term development. But the experiences ofgrowing desire of people for a greater say in their govern- Japan, East Asia, and China make clear that it is possi-ment, manifests itself in the assertion of regional identi- ble for a country to have an interventionist governmentties. It pushes national governments to reach down to re- and still enjoy extremely rapid economic growth over agions and cities as the best way to manage changes period of decades.affecting domestic politics and patterns of growth. At Brazil also grew very rapidly in the 196 0 s, in part byboth the supranational and subnational levels, institu- making widespread use of import-substitution policies.tions of governance, negotiation, coordination, and regu- These policies certainlv appeared helpful to Brazil at thelation will play a critical role in promoting a new equilib- time-at a minimum, they did not prevent a surge ofrium between and within countries-and in abetting the rapid growth-but this success does not mean that sim-creation of the stable environment that will make possi- ilar policies would make sense in other countries, or evenble the implementation of development programs. in Brazil three decades later. Similarly, certain policiesThe frontiers of development thinking that helped Japan develop in the 1 950s and 1 960s, gen-

erated growth in East Asia in the 1970s and 1980s, andAs the 20th century draws to a close, mainstream devel- sparked China's economic boom in the 1 980s and 1 990sopment thinking has evolved toward a broad pragma- were specific to the time and place. They may not havetism. As with many subjects, a deeper understanding of worked well in other countries, nor are thev likely to bedevelopment involves a recognition that sweeping be- appropriate in the opening decades of the 21st century.liefs are often incomplete, that layers of complexity are In any given country, progress depends on a constel-buried not far beneath the surface, and that wisdom is lation of factors, and on shifts in their configuration t-hatoften contingent on the particular conditions of time take place over time. What is required is to step beyondand place. In recent decades both experience and intel- the debates over the roles of governments and markets,lectual insight have pushed development thinking away recognizing that they need to complement each other,from debates over the role of states and markets, and the and to put to rest claims that any particular policy in-search for a single, overarching policy prescription. tervention-in education, health, capital markets, or

Investment in physical and human capital, for exam- elsewhere-is the magic formula that will inspire devel-ple, should encourage economic growth, and as a gen- opment in all times and places. This shift in develop-eral rule, empirical evidence supports this proposition. ment thinking can be summarized in four propositions:But in a number of cases, high rates of investment and Sustainable development has many objectives. Raisingeducation have not been enough to deliver rapid growth. per capita incomes is only one among many develop-A similar lesson holds true for industrial policies. Many ment objectives. Improving quality of life involves morecountries decided, after experimenting with export sub- specific goals: better health services and educational op-sidies, that the subsidies enriched business owners but portunities, greater participation in public life, a cleandid little to speed economic growth. They saw well- environment, intergenerational equitn, and more.intended industrial subsidies turn into a costly form of Development policies are interdependent. No singlecorporate welfare, an expensive way of providing tax- development policy can make much of a difference inpayer support for private jobs in a narrow range of in- an unfavorable policy regime. Countries need inte-dustries. Yet East Asian economies, making active use of grated policy packages and institutional environmentsexport subsidies and credit allocation, experienced the that reward good outcomes, minimize perverse incen-most powerful sustained surge of economic development tives, encourage initiative, and facilitate participation.the world had seen in decades. And China, which alone Governments play a vital role in development, but thereincludes 40 percent of all the inhabitants of low-income is no simple set of rules that tells them what to do. Beyond

SUMMARY 3

generally accepted rules, the role of government in the These items do not constitute an exhaustive list ofeconomy varies, depending on capacity. capabilities, all the concerns development should embrace. Issues ofthe country's level of development, external conditions, gender and equity are integral to every part of theand a host of other factors. framework. Moreover, as mentioned earlier, macroeco-

Processes a re just as imnportanr as policies. Outcomes nomic stability is a necessary condition for the successof policies based on consensual, participatory, and of development initiatives. How important each oftransparent processes are more easily sustained. Institu- these concerns is to individual countries depends on thetions of good governance that embody such processes particulars of time and place. Every country will bene-are critical for development and should encompass fit from identifying and prioritizing its needs-an ex-partnerships among all elements of civil societv. ercise that reveals the economic or governmental weak-

nesses and institutional failures that stand in the wayCreating new guidelines for development of full development.In light of these propositions, the World Bank is intro-ducing a comprehensive development framework to Building institutions andpartnershipsserve a number of purposes: to sharpen the focus on the Effective development requires partnerships among dif-major goals of development. to highlight the integrated ferent levels of government, the private sector, donornature of policymaking, to emphasize the institutional groups, and civil societv. A comprehensive strategy isprocesses required to sustain development, and to co- simply too demanding for any one level or area of gov-ordinate development efforts. ernment or for a single donor. National governments

The framework underscores the growing realization need to provide the guidance that agencies and organi-that the many elements that make up the development zations require to coordinate their efforts to removeprocess must be planned together and coordinated in bottlenecks to development.order to obtain the best results--and sometimes in order A solid foundation of effective organizations and en-to arrive at any results at all. A school-building project abling institutions is a necessary precondition to devel-is a good example. Physically putting up the building is opment. In this context ;'institutions" are sets of rulesonly a start. Raising educational levels will depend on governing the actions of individuals and organizations,many other things, such as effective mechanisms for se- and the interaction of all relevant parties and the nego-lecting, training, and remunerating teachers adequately tiations among the participants. Specifically, countriesand sufficient resources to buy enough textbooks and need institutions that strengthen organizations and pro-supplies. mote good governance, whether through laws and regu-

What is true of a school-building project is also true lations or by coordinating the actions of many players,of privatization programs, social safety nets, and sus- as international treaties and public-private partnershipstainable energy programs. The complementarities be- do. Rule-based processes increase the transparency oftween projects and processes are vital to success. A com- policies designed to create desired outcomes and of or-prehensive framework makes these complementarities ganizations used to implement them.explicit by emphasizing the relationships among the The message of this report is that new institutionalhuman, physical, sectoral. and structural aspects of responses are needed in a globalizing and localizingdevelopment. world. Globalization requires national governments to

The human and physical aspects of development are seek agreements with partners-other national govern-well known. Sectoral aspects stress the importance of inents, international organizations, nongovernmentalcross-cutting elements such as coordination, manage- organizations (NGOs), and multinational corpora-ment, and maintenance of an effective enabling envi- tions-through supranational institutions. Localizationronment for private business and community initia- requires national governments to reach agreementstives. Structural aspects focus on the need for good with regions and cities through subnational institutionsgovernance, transparent decisionmaking, efficient legal on issues such as sharing responsibility for raising rev-and judicial processes, and sound regulatorv systems. enues. Both globalization and localization often requireThis identification of rules and processes as a critical responses that are beyond the control of a single na-foundation for sustained development adds a new di- tional government. Yet national governments will re-mension to mainstream development thinking. main pivotal in shaping development policies in an en-

4 WORLD DEVELOPMENT REPORT 1999/2000

vironment that circumscribes, constrains, and redefines Figure 2their role. In an interconnected world in which coun- All but a few democracies have decentralizedtries may continue to fragment, development agendas some political powermust respond to both global and local imperatives. Number of countries

Globalization and localization 75 -

Technological advances in communication have madeit possible to know in an instant what is happening in a 50 -

household or factory or on a stock market half a worldaway. The growing importance of services and informa-tion in the world economy means that an increasing 25

proportion of economic value is weightless-that is, itcan be transmitted over fiber-optic cable rather thantransported in a container ship. At the same time im- Without With

provements in transportation networks and technology subnational elections subnational elections

are reducing the costs of shipping goods by water, Note: Figure shows ai courtries classified as multiparty demccracies

ground, and air, and improvements in information for wh ch dawre vve available.Source: Freedom House, Freedom m the IVorld, 998 asopendix

technology have made it easier to manage the new in- tab e A 1

terconnections (figure 1). Multinational companies - -

now rely on production chains that straddle manvcountries. Raw materials and components may comefrom two different countries and be assembled in an- Rising educational levels, technological innovationsother, while marketing and distribution take place in that allow ideas to circulate, and the economic failurestill other venues. Consumers' decisions in, say, London of most centrally planned economies have all con-or Tokyo become information that has an almost im- tributed to the push for localization. National govern-mediate impact on the products that are being made- ments have responded to this push in various ways.and the styles that influence them-all over the globe. More countries have become democracies, and politi-

cal participation through elections has expanded atFigure 1 both the national and subnational levels. National gov-Computers are linking the world ernments are increasingly sharing responsibilities and

revenues with subnational levels of government that areInternet hosts worldwide z(millionse closer to the people affected by policy decisions (figure

50 - 2). People are also forming NGOs to pursue objectivessuch as political reform, environmental protection,cgender equality, and better education.

40 - Globalization and localization are terms that provoke

35 - : 5 strong reactions, positive and negative. Globalization is30 - praised for the new opportunities it brings, such asac-25 - cess to markets and technology transfer-opportunities20 - that hold out the promise of increased productivity and15 higher living standards. But globalization is also feared10 - and often condemned because it sometimes brings in-5m .E hIIIII stability and unwelcome change. It exposes workers too - s * * * I * * | competition from imports, which can threaten their

Jan. July Jan. July Jan. July Jan, July Jan. July Jan. July Jan. jobs; it undermines banks and even entire economiesl99i3 1994 1995 1996 1997 1998 1999 when flows of foreign capital overwhelm them.

Source: Network W zards, Internet Domnair Survey, January 1999 Localization is praised for raising levels of participa-(vI,vW. nw. comr). tion in decisionmaking and for giving people more of

a chance to shape the context of their own lives. By de-

SUMMARY 5

centralizing government so that more decisions are to the best practices of foreign firms and to the demandsmade at subnational levels, closer to the voters, local- of discerning customers, encouraging greater efficiency.ization nourishes responsive and efficient governance. Trade gives firms access to improved capital inputs suchBut it can also jeopardize macroeconomic stability. as machine tools, boosting productivity as well. TradeLocal governments that have borrowed heavily and encourages the redistribution of labor and capital tospent unwisely, for example, may have to be bailed out relatively more productive sectors. In particular, it hasby the national government. contributed to the ongoing shift of some manufactur-

This report does not praise or condemn globaliza- ing and service activities from industrial to developingtion and localization. Rather, it sees them as phenom- countries, providing new opportunities for growth.ena that no development agenda can afford to ignore. The creation of the World Trade OrganizationWhile national governments rernain central to the de- (WTO) in 1995 built on the General Agreement onvelopment effort, globalization and localization require Tariffs and Trade (GATT) and is the latest multilateralthat they engage in essential institution-building at step toward creating an environment conducive to theboth the supra- and suboationial levels in order to cap- exchange of goods and services (figure 4). A number ofture the benefits of growth in the 21st century. other important measures must follow, so that the mo-

mentum for reform is not lost.Supranational issues Fuituire trade talks will require a forward-lookingNational governments will inevitably face frustrations agenda for broader trade liberalizationz if they are to repeatin dealing with globalization, and these frustrations will their past successes in opening markets. The Millenniumbe magnified for small developing economies. But such Round, which is scheduled to start in November 1999countries stand to gain more from international trade under WTO auspices, may be the first test of suchand finance than their larger counterparts, since they an agenda. Reducing trade barriers in agriculture andface tighter resource and mark-et-size constraints. At the services should be high on the list of priorities. Trade insame time these economies may feel any disruption the agricultural products is one area that offers many devel-global economy generates far more intensely. An eco- oping economies real opportunities-if these opportu-nomic shock that may feel like only a ripple to an enor- nities are not blocked by trade barriers in wealthy coun-mous economv like the United States, or even to a rela- tries. Trade in services is another issue that must betively large developing economy like Brazil, is a tidalwave for an economy the size of Ghana or Bangladesh. Figure 3When it comes to environmental issues, national gov- Trade is growing much faster than nationalernments can strike their own balance on domestic income in developing countriesproblems by, for example, determining how to apply i

pollution standards to regions that lie entirely within (percentage of GDP)

the country. But unless developing countries work 50 -

through international agreements, they have little abil-ity to address global environmental problems like the 45 - E

threat of climate change. This report considers three di- Industrial countries

mensions of globalization: trade, financial flows, andenvironmental challenges. 35 -

Trade 30 - Developing countries

Foreign trade has grown more quickly than the worldeconomy in recent years, a trend that is likely to con- 25 -

tinue (figure 3). For developing countries, trade is theprimary vehicle for realizing the benefits of globaliza- 1981 1983 1985 1987 1989 1991 1993 1995 1997

tion. Imports bring additional competition and varietyto domestic markets, benefiting consumers, and exports serv ces.

enlarge foreign markets, benefiting businesses. But per- Source World Bank, Word Development Irdicators, 1999

haps even more important, trade exposes domestic firms

6 WORLD DEVELOPMENT REPORT 1999 /Z00O

Figure 4 ucts are not sold below what is considered a "fair" priceCountries are joining the WTO in increasing on domestic markets. But such rules can easily be turnednumbers

into barriers to imports, diluting market access and re-

Number o7f member countries in GATT/WTO versing the gains from previous trade agreements. One140 - 134 solution is to treat the pricing decisions of importers

and domestic firms according to the same criteria. UJnder120 - this approach only antitrust issues such as predation are

100 - 100 remedied directly.85 :

80 F Financialflows

Financial flows across national borders have risen far60 - - - - more quickly than trade in recent years. These capital

40 - flows can be divided into foreign direct investment, for-eign portfolio investment, bank loans, and official de-

20 - velopment flows. Foreign direct investment is ma(le up

0 - 1980_of flows intended to purchase a stake in the manage-1980 1990 1999 ment of a company or factory. Foreign portfolio invest-

Soorce 7TO, Arnua, Report, var ous years. ment includes purchases of "paper" assets like equitiesand bonds (below the threshold required to give own-ers managerial control of physical assets). The increase

in foreign direct investment and portfolio flows is par-addressed. Driven by advances in information and com- ticularly striking (figure 5).munications technology, it is growing explosivelv- Flows of foreign capital offer substantial economic25 percent between 1994 and 1997 alone. This type gains to all parties. Foreign investors diversify their risksof trade offers another opportunity for developing outside their home market and gain access to profirablecountries, which can readily supply many sought-after opportunities throughout the world. Economies receiv-services. ing inflows of capital benefit in many ways. Initially,

Countries must make greater use of WTO mechanisms. inflows raise the level of investment. When foreign di-For example, a country that wants to strengthen its com- rect investment is involved, management expertise,mitment to reducing (and maintaining) low trade barri- training programs, and important linkages to suppliersers can "bind" its tariffs by incorporating the decision to and international markets often accompany the capi-lower them into its international obligations at the tal. Yet international capital flows, especially flows ofWTO. The more countries view the WTO and interna- volatile short-term investments, also expose developingtional trade rules as mechanisms for advancing national countries to certain dangers. Among these are sharpgoals (rather than as obstacles to self-determination), the changes in investor sentiment and waves of speculationgreater will be the support for such institutions, that can upset exchange rate regimes, imperil banks and

Public policies must take into account the plight of large firms, and wreak havoc on economies. Putting theworker-s displaced by the forces of trade. These policies genie of foreign capital back in the bottle is not possi-must address the concerns of displaced workers in gen- ble-and ultimately not desirable. But such capitaleral, since many workers will blame foreign trade for comes with a challenge: to devise policies and institu-job losses and wage cuts whether it is responsible or tions that tip the balance so that capital mobility bene-not. Augmenting trade liberalization with labor market fits developing economies rather than injuring therm.policies that ease workers' adjustment to the effects of Governments of developing countries can begin thisglobal trade will reduce pressure to close domestic mar- process by reforming their banking sectors and nurtur-kets to foreign goods. ing capital markets. The paucity of mutual and pension

Gov)ernments must change policies that are still allowed funds and the weakness of stock and bond markets inunder existing trade rules but that hinder rather than pro- developing countries make banks the primary providers

mote trade. For example, antidumping laws are allowed of financial intermediation. Creating a robust bankingunder the \X5 TO. They are intended to ensure that prod- regulatory framework offers a substantial economic

SUM,MARY 7

Figure 5 Countries can hedge these risks to some extent, but reg-Private capital flows to developing countries ulations are needed to moderate the demand for short-have increased dramatically term foreign borrowing in the first place. One such

Net capital flows measure could require that a part of all capital inflows(billions of U.S. dollars) not intended to purchase productive physical assets be

160 - set aside for a specified period, therebv raising the cost

140 - of short-term borrowing from abroad.S 1990 In a world where financial markets continue to ;'go

120 U 1998 global," developing countries need to work toward be-

100* coming good homes for long-term foreign investment.

80 * Building an investment-friendly environment requiresa commitment to a transparent regime of investors'

60 _ _ * rights and regulations, a legal system tbat offers equal

40- treatment and protection to foreign and domestic in-*i * *vestors, sound macroeconomic fundamentals, and in-

20 I_ '_-*' vestment in human capital. When investment is inte-0- grated into a well-functioning local economv, other

Official Private debt Portfolio Foreign . 3flows flows equity direct 'vestors will alwavs be ready to step in should one in-

flows investment vestor decide to withdraw.

Note: Private debt ficos nclode bank cans and :onods The Reoubic International institutions have a role to play in help-of Korea is inc uded in the I gu,es for deve op ng countries in, developing countries promote financial stabilitv andSource Wenord BarK GPIoca,Deveopreotr Finance 1999 . p

investment. International banking agreements such asthe Basle Accords can serve as models for local bank ac-counting standards. The International Monetary Fund

payoff. An effective regulatory regime creates an envi- (IMF) can monitor economic performance and coordi-ronment that encourages prudent risk-taking. A regu- nate short-term relief for liquidity problems, dampen-latory structure for banking also sets out the conditions ing the severity of a financial crisis. Trade agreementsfor establishing banks, the services they can provide, the can help keep responses to financial shocks from turn-level of capital they must hold, and the amount of in- ing into a beggar-thy-neighbor cycle of protectionism.formation they must disclose. And a sound regulatory Regional and international talks on coordinating macro-framework specifies the prudential steps regulators are economic policies can seek ways to avoid actions thatrequired to take if these standards are nor met. favor one economy at the expense of its neighbors.

Increased competition in the financial sector im-proves incentives for both banks and their customers. Global environmental challengesCompetition increases as the domestic financial sector Just as a country's economy can be swamped by globaldevelops and securities, stock markets, and other inter- economic forces it has little power to control or deflect,mediaries begin playing larger roles. Allowing foreign its environment can be threatened by activities takingbanks to enter a country, especially when their home place beyond its borders and its control. In somc low-countries have sound regulatory systems in place, boosts income countries the threats may be severe enough toregulation by importing high-quality risk-management jeopardize furrher sustainable development. Climatestandards, regulatory practices, and trained managers. changes, for example, could raise ocean levels, swamp-

Banks in developing countries must balance two ing the homes of millions of people in low-lying coun-risks. Banks often raise short-term money on global tries like Bangladesh. Governments acting alone, andmarkets in one currency, such as U.S. dollars or Japan- even regional organizations, cannot respond effectivelyese yen, and then loan that money out for longer peri- to this kind of environmental problem. The responseods in domestic currency. These bank-s run the risk of must be global. Industrial countries are responsible forlosing their supply of short-term foreign money if the most of the existing global environmental problems-market dries up. as well as the risk of losing much of especiallv man-made greenhouse gases-but develop-the value of their assets if the exchange rare depreciates. ing countries arc catchiitg up rapidly. Tlleir capacity to

8 WORLD DEVELOPMENT REPORT I9992-000

contribute to future environmental damage increases as on Climate Change created at the 1992 Rio Earth Sum-they grow. mit form a basis for moving forward. The Global En-

The world has already seen one genuine environ- vironment Facility (GEF) is a joint initiative of themental success story in the Montreal Protocol of 1987, United Nations Development Programme, the Unitedwhich brought all countries together to address a com- Nations Environment Programme, and the World Bank.mon environmental threat. The Montreal Protocol at- The GEF provides grants and concessional funds totempts to solve the problem of chlorofluorocarbon cover additional costs countries incur when a develop-emissions, which reduce ozone concentrations in the ment project aLso targets one or more of four global en-upper atmosphere. In the 1 980s scientists realized that vironmental issues: climate change, biodiversity loss,allowing these emissions to continue unchecked would the pollution of international waters, and depletion ofdangerously increase ultraviolet radiation in the higher the ozone layer. National governments can take a num-latitudes, raising rates of skin cancer and cataracts and ber of actions that improve domestic welfare whiledamaging the environment. Thanks to the Montreal helping preserve the global commons. Removing fuelProtocol and follow-on agreements, global interna- subsidies and improving public transportation, for ex-tional production of chlorofluorocarbons has fallen ample, not only are in the best interest of individualsteeply, and global cooperation to reduce ozone deple- economies but also contribute to reducing global car-tion appears to be succeeding. bon dioxide emissions that affect other countries.

The world faces a number of other pressing environ-mental problems that threaten the global commons. Per-haps the best known is climate change, which is associ- Even as globalization directs the attention of nationalated with increasing emissions of carbon dioxide into the governments to events, forces, and ideas outside theiratmosphere. Others include biodiversity loss, which is borders, localization highlights the opinions and aspira-occurring at an alarming rate; desertification; the deple- tions of groups and communities at home. Two aspectstion of fish stocks; the spread of persistent organic pol- of localization receive particular attention in this report:lutants; and threats to the ecologv of Antarctica. decentralization and urbanization.

The ozone success story provides a model for futureinternational agreements on global environmental is- Political pluralism and decentralizationsues. The scientific case for addressing the risk of en- Localization has generated political pluralism and self-vironmental damage needs to be made forcefully in determination around the world. One of its manifes-open and robust public debate. The world's peoples and tations is the increase in the number of the world'stheir governments must share the belief that the costs countries, which has climbed as regions win their inde-of environmental damage are heavy enough to justify pendence. Another is the change in countries' choice ofimmediate action. Alternatives to current behavior governments. As recently as 25 years ago, less than one-must be technically feasible and reasonably inexpensive, third of the world's countries were democracies. In theand all countries must be willing to participate in inter- late 1990s that proportion has risen to more than 60national accords. Sometimes this willingness will come percent (figure 6).at a price, with high-income countries paying low- The ability of people to participate in making the de-income economies to comply with an agreement and cisions that affect them is a key ingredient in the processgroups of signatories imposing penalties on countries of improving living standards-and thus in effective de-that fail to meet the standards the agreement sets. Fi- velopment, But political responses to localization, suchnally, the standards themselves must be flexible, because as decentralization, can be successful or unsuccessful,very rarely is there a "one size fits all" solution to global depending on how they are implemented. The follow-problems. ing are several important lessons for governments to

The conditions surrounding biodiversity and cli- consider when embarking upon decentralization.mate change suggest that reaching international agree- Decentralization is a/most always politically. motivated.ment on these issues will be more complex than it was Often its primary objective is to maintain political sta-with ozone depletion. But the international community bility and reduce the risk of violent conflict by bringinghas already begun seeking solutions. The Convention a wide range of groups together in a formal, rule-boundon Biological Diversity and the Framework Convention bargaining process. Arguing about whether decentral-

SUMMARY 9

ization should happen is largely irrelevant; the way it is hastily, and granting local elections is a relatively fastimplemented will determine how successful it is. and easy step to take. But devising new regulatory rela-

Devising a successfil decentralization strategy is com- tionships between central and subnational governmentsplex because decisionymakers do not always filly control the is a slow and difficult task, as is the transfer of assetsdecentralization process. Decentralization requires chang- and staff from the central to the local level. Equally dif-ing the system of governance and establishing new po- ficult is the conversion of a svstem based on annuallitical, fiscal, regulatory, and administrative institutions. budgetary transfers between units of a centralized ad-It involves not simply the decision to permit local elec- ministration to one based on the assignment of taxestions but also a series of choices about electoral rules and expenditures at different levels of government.and party practices that will affect the options available National governments need to demonstrate their^ com-to voters. It involves more than a decision to devolve a mitment to the new rules of the intergovernmental rela-certain type of responsibility-for education, say-to tionship at the very outset. Precedents matter, becausethe local level. It requires deciding which level of gov- they affect expectations. One of the most importanteinment will be responsible for financing education precedents a central government can set for newly de-(particularly in poor regions), which level will establish mocratized subnational governments is to keep the cen-curricula and develop instruction materials, and which tral budget constraint hard. Local governments mustlevel will be responsible for the day-to-day management know that if they overspend, the national governmentof the schools, including hiring, promoting, and dis- will not bail them out and that local taxpayers andmissing teachers. So that decentralization does not politicians will bear the burden of adjustment.occur at the expense of equity, it requires granting rev-enue sources to subnational authorities and designing a Urbanizationsystem of intergovernmental fiscal transfers to comple- More and more of the world's population is movingment local resources. It demands rules governing sub- from rural to urban areas. Twenty-five years ago lessnational borrowing. And finally, it must include steps than 40 percent of the world's population lived into build the capability of subnational governments to urban areas; 25 years in the future this share couldcarry out their new responsibilities. reach nearly 60 percent. Of the urban dwellers of the

The elements of reform must be synchronized. The po- future, nearly 90 percent will be living in developinglitical impetus that is often behind decentralization countries. Half a century ago just 41 of the world's 100prompts central governments to make concessions largest cities were in developing countries. By 1995 that

Figure 6There are more countries .. . ... and more democracies

Democratic countriesNumber of countries in the world (percentage of total countries)

200 - 100 -

180 - 90 -

160 - 80 -

140 - 70 -

120- 60

100 - 50 -

80 - 40 -

60 - 30 -

40- 20 -

20- 10 -

1974 1990 1998 1974 1990 1998

Source-Freedom House Freedom in the World, 1998; Larry Darmond, "Is the Third Wave Over0 " Journal of Democracy. 1996.

10 WORLD DEVELOPMENT REPORT 1999/2000

number had risen to 64, and the proportion keeps ris- equate legal framexvork and a firm central governmenting (figure 7). commitment against bailouts. Land use planning is an

Some national governments tax rural areas or place important and useful tool, but the rules need to be spe-restrictions on the prices of rural products as a way of cific to local circumstances.supporting cities, on the grounds that such policies Countries do not need to wait until they becomeencourage a "modern" economy. Other governments, wealthy to improve urban services. Innovative institu-concerned about the growing population of urban poor, tional arrangements can result in much better servicehave tried to discourage rural-urban migration, some- provision, even at low levels of income. Recent trendstimes by requiring official permission to move to a city. in providing essential services point to the potential ofNeither course of action has worked especially well. Pre- public-private partnerships.venting individuals from moving in response to incen-tives generally fails, as national governments have not * Housing. Private developers, voluntary agencies, com-proven adept at deciding where households and firms muniry organizations, and NGOs need to provide anshould locate. Governments will be better off if they increased share. For its part, the public sector mustpursue development policies that benefit both urban and focus on property rights, financing and subsidies,rural areas, recognize that the process of development building regulations, and trunk infrastructure.will spur urbanization over time, and plan accordingly. u Water. Large cities are moving to private sector pro-

Local governments can take steps to make their vision. Private concessions have already replaced pub-cities more hospitable venues for economic develop- lic providers in Buenos Aires, Jakarta, and Manila.ment. One important step is to maintain a sufficient The role of government is to regulate this industrylevel of investment in essential infrastructure, includ- and foster competition.ing water, sanitation, roads, telephones, electricity, and m Sewerage. Governments are often unable to fund thehousing. Increasingly, local governments are working heavy initial investment required for citvsvide solu-with the private sector, which has an important role to tions. But communities are managing, with the as-play in housing, on-site infrastructure, and municipal sistance of NGOs, to implement affordable solu-utilities. But municipalities will still be required to raise tions, providing a model for future efforts.substantial sums to finance capital investment, particu- m Transportation. Public education and creative part-larly during the rural-urban transition. Private capital nerships can reduce air pollution. But the greatestmarkets are a promising source, but they require an ad- payoff is likely to come from channeling urban

Figure 7Urban population is growing-primarily in developing countries

World urban population Location of the world's 100 largest cities(percentage of total population) (number of cities)

60-80-

50 _-

40- 60 - * In evlpigcountries

30 -

- I40- * Inindustrialcountries

20-

20 -10 -

0- 0-1975 2000 2025 1950 1995 2015

Source: Jrited Nations Department of lnte'national Ecornonics ard Social Affairs, /lorld Urban!zation Prospects, 1998.

SUMMARY II

growth along public transit routes to create more ef- processes of globalization and localization will evolve.ficient transportation corridors. The report presents five case studies that illustrate how

governments and organizations can capture some of theIt is sometimes argued that poverty alleviation is benefits of these two phenomena and respond to poten-

purely the national government's responsibility. While tial disruptions. The studies cover trade liberalizationthe national government should play a prominent role in the Arab Republic of Egypt; the reform of Hungary'sin providing subsidies to the poor, many services that banking sector; Brazil's efforts to structure the fiscal re-affect the poor most-water, health, education, and lationships between regional and national government;transportation-are best managed at the local level in efforts of community groups and local developers toways that respond effectively to local needs. improve living standards in Karachi, Pakistan; and the

creation of an urban-rural synergy in Tanzania.The challenges for development are many: poverty,

Globalization and localization offer exceptional oppor- hunger, ill health, lack of housing, and illiteracy, to nametunities, but can also have destabilizing effects. This re- a few. Much progress has been made, so that people inport identifies some steps governments can take, singly some regions such as East Asia are far better off thanand together, to minimize potential crises. National they were several decades ago. Even in Sub-Saharangovernments have a leading role, but international orga- Africa, where economic performance has been dismal innizations, subnational levels of government (including recent decades, life expectancies and educational levelsurban governments), the private sector, NGOs, and have risen. Still, the number of people living on less thandonor organizations all play vital supporting parts. $1 per day is rising. This trend can be reversed, to theThese organizations are building the institutions-the benefit of the world's people, by harnessing the forces offormal and informal rules-that shape the way the globalization and localization in the 21st century.

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G0" ,)-0 lobalization and localization-the integration of the worldeconomy and the increasing demand for local autonomy-aretwo of the most important forces shaping development as weenter the 2 1st century. These forces will affect trade, capitalflows, the global environment, decentralization, and urbandevelopment, and will require countries to seek a dynamicequilibrium at both international and subnational levels.

This summary of the 22nd edition of the World DevelopmentReport analyzes how these forces could reshape the inter-<Inatnal landscape in the new millennium. The full reportproposes rules and structures on which to build a moreefftive, comprehensive approach to development; pro-vides valuable insight into how current viewpoints can beadapted to fit evolving development concerns; and offersguidance for decisionmakers, researchers, and others withan interest in development.

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