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World development report 1990.

World Development Report 1990

More than 1 billion people - at least one quarter of the global population - live on less than $ 370 a year. What can be done to reduce the absolute poverty still rampant in many developing countries? This question at the core of development is the theme of the World Bank's 13th annual World Development Report.

Its key conclusion is that the number of poor people could drop by 400 million by the end of the decade. To reach this ambitious goal, the report recommends that countries adopt a two-part strategy to generate income-earning opportunities for the poor and provide them with basic social services so they are able to respond more to new employment possibilities. Policies promoting this dual approach would open the way for the poor to contribute to-as well as benefit from-economic growth. But this will happen only if the donor community supports those countries making serious efforts to reduce poverty. The report also stresses that progress in the developing world will depend on the soundness of economic policies industrial countries pursue in the 1990s.

The World Economy

Despite a healthy 3.6 per cent growth in industrial countries for 1989, external imbalances were slow to narrow. The US deficit dwindled to $ 106 billion-down $ 20 billion - while the Japanese current account surplus fell by 27 per cent, to $ 58 billion. West Germany's surplus at $ 56 billion - up 14 per cent - neared Japan's. Many industrial countries, including the United States, still have low savings and absorb a large share of the global capital supply, which contributes to high interest rates. Developing countries' growth slowed to 3.3 per cent in 1989, compared to the decade's 4.3 per cent average. Growth was strongest in South and East Asia-both regions with the largest concentration of poor people - but was lower than the average for recent years.

Prospects for the 1990s

A 3 per cent annual growth is projected for the industrial countries. Real commodity prices are expected to dip in the short term, but record an average 0.2 per cent growth rate for the decade. Real interest rates should ease to between 3 per cent and 4 per cent, compared to almost 5.5 per cent in the 1980s. Developing countries should reach an average annual 5.1 per cent growth against 4.3 per cent for the 1980s. Though all regions should have positive per capita income growth, Latin America and Sub-Saharan Africa are unlikely to achieve their potential. The number of poor in Latin America is expected to remain the same. And in Sub-Saharan Africa, even with a projected annual GDP growth of 3.7 per cent, high fertility rates point to a rapid rise in the number of poor.

The outlook is brighter for the other developing regions. Per capita incomes in South Asia should keep growing at an annual 3.2 per cent-nearly three times the 1965-1980 rate. East Asian countries should continue their successful macro-economic policies to reach an annual 5.1 per cent per capita income growth rate. By 2000, average incomes in East Asia are expected to be 65 per cent higher, virtually eliminating poverty. While China's economy should perform well, per capita income growth is expected to fall from an annual 8.7 per cent to 5.4 per cent.

For Eastern Europe, the outlook is cloudy as economic reforms and strong anti-inflationary measures will first depress growth - even with generous external assistance. In the medium term, a 1.5 per cent annual per capita income growth is projected, with a strong pickup due by the end of the decade.

The report cautions that continued low savings would slow the industrial world's growth rate by about 0.5 per cent and maintain interest rates at roughly 5.5 per cent. For the developing nations, an economic downturn in the industrial world would mean less demand for their exports, a heavier debt burden, a possible weakening of commodity prices, and probably less aid from the industrial countries. The report also stresses the need for a successful end to the Uruguay Round to set the stage for a "truly global trade regime," to the benefit of both rich and poor nations.

Progress Against Poverty

Though the number of poor people remains staggering, much progress has been made. Between 1965 and 1985, per capita consumption in the developing countries rose from $ 590 to $ 985 (1985 dollars). Some countries saw dramatic improvements, especially in Asia. In most countries, social indicators - health and education - moved up, even where incomes did not rise. Life expectancy lengthened from 51 years to 62 years, and primary school enrollment rose from 73 per cent to 84 per cent. But despite this progress, some 15 million children under five in developing countries die from causes not normally fatal in the industrial world. And some 110 million children still do not go to school at all.

A Strategy that Works

Countries that have reduced poverty adopted a two-part strategy enabling the poor to contribute to and benefit from growth. The first part promotes the productive use of the poor's most abundant asset -their labour-through policies that harness market incentives, social and political institutions, infrastructure and technology. The second aims at providing basic social services to the poor-primary health care, family planning, nutrition and primary education. "The main tradeoff," according to the report, "is not between growth and reducing poverty; it is between the interests of the poor and of the nonpoor."

Growth that improves income-earning opportunities for the poor requires policies to stimulate rural development and to create jobs in urban areas. Many past policies meant to benefit the rural poor have failed: land reform barely helped the poor, except after wars or revolutions; subsidized credit programmes. not only benefited the rich much more than the poor but ran into serious debt-repayment problems; and excessive taxation of agriculture contributed to poor results.

There are more promising avenues, says the report, such as providing incentives, strong public support to develop rural infrastructure, giving small farmers more access to technical innovations via improved agricultural extension programmes, cementing the links between farm and nonfarm economies and developing rural financial institutions. Similarly, government intervention to help the urban poor-via minimum wage legislation, job security regulations, etc. - has often led to less formal employment and hindered investment and job creation. To help create jobs, governments should avoid distorting the product, labour and capital markets and provide urban infrastructure

Improved health and education would attack both the causes and consequences of poverty. Such progress depends on government policies and efforts-the main ingredients being political commitment, budgetary provisioning and developing institutions - including decentralization and building infrastructure.

Governments can take credit for progress achieved so far, but they are also responsible for failures, according to the report. Developing countries allocate an estimated 70 per cent to 85 per cent of their health spending on treatment, which mainly benefits the nonpoor, rather than on preventive care, which would make a real difference for the poor. The same holds true for education, where governments generally favour higher-level training over services to help the poor. Policies to improve the poor's health and education would benefit the entire economy due to the tight links between education and economic growth, between education and agricultural productivity and between workers' health and productivity. Family planning services are also vital for poverty reduction, especially where a high population growth rate, such as the 3 per cent to 4 per cent in Sub-Saharan Africa, depresses per capita income figures and results in low wages and growing poverty. Where strong family programmes were implemented, birthrates and poverty fell sharply.

Not all the poor will benefit from the strategy. Governments should give extra help to the weakest members of the poor population - the old, the disabled, widows, orphans; many others, while benefiting from it, will remain vulnerable to natural catastrophes and macroeconomic shocks. A system of income transfers and safety nets is thus required, but the mechanisms need to be carefully selected. Formal social security schemes, for example, rarely benefit the poor. But experience has shown that targeted food subsidies often work better than general food price subsidies, and public employment schemes have also proved effective.

The shocks of the early 1980s forced most developing countries to restructure their economies-from adjusting their fiscal policies and exchange rates to liberalizing their trade regime, deregulating industry and privatizing state enterprises. Ultimately, this is consistent with the dual strategy. But in the short run, some poor people may be hurt, especially the urban poor if labour demand declines. Some countries, including some that restructured public expenditures, put national policies in place consistent with reducing poverty even in the short run. Generalizations about the adverse effects of adjustment on the poor are thus difficult to sustain, the report notes.

The International Environment: Trade, Debt and Aid

Many trade barriers put up by industrial countries harm the developing countries, but the immediate impact of trade liberalization would vary considerably. Most middle-income countries would gain, but many poor countries-mainly exporters of primary commodities-would not, and might even first lose because of supply, rigidities, loss of current preferences and because the price of imported food might go up. But over the longer term, trade liberalization would benefit even low-income countries, provided they adopt policies to encourage diversification. As this shift will take time, continued external assistance over the next decade is critical.

Severely indebted low-income countries with large numbers of poor people are still struggling under their debt burden, despite the recent international debt-reduction initiatives. Additional relief would help, but not much. Increased concessional assistance will be required.

The report recommends that aid be more tightly linked to a country's efforts to reduce poverty. In countries not making serious efforts, external assistance should be kept to a minimum. But these are the countries where poverty is due to increase, so limited amounts of aid should be targeted to the most vulnerable groups through support to health clinics serving poor women and children, immunization programmes for children, or targeted feeding programmes. A solid case for a greater volume of aid can be made, but only if more countries are serious about poverty reduction and if donors learn from the lessons of experience. In 1988, aid amounted to $51 billion. It is projected to increase 2 per cent a year in real terms, according to the OECD's Development Assistance Committee, which would amount to only $ 64 billion by 2000. But it could increase to as much as $ 144 billion if all donors attained the widely accepted 0.7 per cent aid-to-GNP ratio.

Prospects for the Poor

The report projects a sharp decline of poverty - from 33 per cent in 1985 to 18 per cent by 2000. The number of people in absolute poverty would drop from 1.1 billion to 825 million. The sharpest fall by far - of close to 400 million-would occur in Asia. In Africa, however, the number of poor could swell by as many as 100 million. Africa needs to grow at an annual 5.5 per cent growth rate-almost 2 per cent higher than projected - to stop the number of poor from increasing. This will require extraordinary efforts by both the African governments and the donor community.

Though these estimates are based on many variables and the risk of a downturn is high, the report maintains that lifting 400 million people out of poverty - which includes preventing poverty in Africa from spreading - is a realistic goal for the end of the century.
COPYRIGHT 1990 Economic and Industrial Publications
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:global outlook
Publication:Economic Review
Date:Jul 1, 1990
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