Current trends in development

ICT4D: Context, Strategies, and Impacts

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

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

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)

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

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)

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?

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 . . .

End of Washington consensus

Experience of 1990s

1. Collapse of output in transition economies

2. Limited and fragile growth in Sub-Saharan Africa

3. Financial crises in Latin America, East Asia, Russia, Turkey

4. 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

Learning from reform

World Bank Economic Growth in the 1990s: Learning from a Decade of Reform (2005)

1. Conventional reforms focus on static efficiency not dynamics of growth

2. Objectives of reform (market incentives, macro stability) don’t imply any unique policy actions

3. Different contexts require different solutions to same problems: can’t just copy policy reforms

4. Exaggeration of rules over discretion in government behavior

5. Reform efforts should be selective, focus on binding constraints in growth, not laundry list of reforms

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

New and old Washington consensus

Original W. Consensus

1. Fiscal discipline2. Reorient public spending3. Tax reform4. Financial liberalization5. Competitive exchange rate6. Trade liberalization7. Openness to foreign invest.8. Privatization9. Deregulation10. Secure property rights

Augmented W. Consensus

1. Corporate governance2. Anti-corruption3. Flexible labor markets4. WTO agreements5. Financial standards6. Capital-account opening7. Exchange rate regime full8. Independent central bank9. Social safety nets10. Targeted poverty reduction

Limits of institutional fundamentalism

1. No strong causal connection between institutions and economic growth in researchCompare 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 rateRapid growth starts in China in late 1970s and India in early 1980s with minimal institutional change; significant institutional reform after growth begins

Alternative II: Foreign aid

United Nations Millennium Project (2005) Sachs et al1. 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.”

2. 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”

Practical agenda for growth strategies

A more cautious, experimentalist approach consisting of three sequential elements:

1. Diagnostic analysis of significant constraints on growth in particular setting

2. Design policy to target the identified constraints appropriately (requires creativity and imagination)

3. 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)

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.

New approaches to development

Challenge: How to fit these alternatives into a broader view of long term development?– Microfinance– Social capital– ICT4D

Microfinance & microenterprise

2005 “The International Year of Microcredit” UNMicrocredit (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

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

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?

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