'l'vttt

THE SPRtrAD OF

ECONOMIC PROSPERITY

i:, n" move from universal poverty to varying degrees of prosperiry

rr. has happened rapidly in the span of human history. TWo hundred

years ago the idea that we could potentially achieve the end of extreme

poverq/ would have been unimaginable. Just about everybody was poor,

with the exception of a very small minority of rulers and large land-

owners. Life was as difficult in much of Europe as it was in India orChina. Our great-great-grandparents were, with very few exceptions,

most likely poor and living on a farm. One leading economic historian,

Angus Maddison, puts the average income per person in Western Eu-

rope in 1820 at around 90 percent of the average income of Africa to-

day. Life expectancy in Western Europe andJapan as of 1800 r'vas about

forty years.

A f-ew centuries ago, vast divides in wealth and poverty around the

world did not exist. China, India, Europe, andJapan all had sirnilar in-

come levels at the time of European discoveries of the sea routes to Asia,

Aliica, and the Americas. Marco Polo marveled at the sumptuous won-

ders of China, not at is poverty. Cort6s and his conquistadores ex-

pressed astonishment at the riches of Tenochtitl6n, the capital of the

Aztecs. The early Portuguese explorers were impressed with the well-

orderecl towns of West Afiica.

l'lll,: N (t \'1,. l, I \' () l, Nl (l l) I,. lt N

1,,(:()N()l\l I (i (; li()\\1 I ll

ll n'r' :rtc lo rrrtrlt'ts(ltrtrl wlty it \'itsl llitl) ltt'lwt't'tt ri< lr :trrrl ;xrot cxirls lrt

rl,rr'. rvc nnrsl r'('lllln (o lltt'v('ly r('(('ttl 1tt'r'iorl ol Ittttttlttt lrislotl' 1v111'1;

tlrrs rli'"'irlc crrr<'r'gt'<1.'l'lrr' lxrst lwo < t'ttlttt'it's, sittt t'lttottttrl lli(X), r orrstr

trrlc lr rrrritlut't'r':r irr ccorrorrric lrisl.oly, lt 1lt'tiorl tlrc grcltl ccoltotttir lris

rori:ur Sirrrorr I1.rrznct.s larnotrsly lcrrrtc<l llrr'1lt'r'iorl ol ttto<lct tt clorrornir

1,r,rvtlr. l]<'lirrt: thctr, itrdcccl lilr t.hotrszrnrls ol y('ilrs, tll('r'('ltlrrl lr< t'rr tirtrr;rlly rro srrsl.ained economic crowth irr [ltc: worltl, arrrl orrly tt;trlttltl irr

( r(';rs('s irr thc human population. TItc w<trl<l ltopttl:tliorr ltltrl rist'rr

lir rrrlrrirlly li'om around 230 million people zrt tltc stltlt ol llt<' lirsl rrrillcrr

rrirrrrt in A.D. 1, to perhaps 270 million by n.rl. l(XX), rrrrtl 1)O0 rrrilliorr

pcoplt'by.t.o. 1800. Real living standards werc cvctt slowt't to t lrltttgr'.

\r cor tlins to Maddison, there was no discerniblc risc itt lirritt!{ sl:tr tr l;tt t lr,,rr ;r global scale during the first millennium, and pcrlralts :r 50 l)('r( ( rrl

Figure l: World Population

0 100 200 300 400 500 600 700 800 900 10001100120013001'10015001600 t700 1i]o{r1,1}0 :r(i(xr

\,'tt, t lhta liom Mad.disort (200 1 ).

irr<'r'ease in per capita income in the eight-hundred-year periorl liorrr'r. n. I000 to A.D. 1800.

In the period of modern economic growth, howevel both poprrlrr.

tion and per capita income came unstuck, soaring at rates never l)(:li)r ('

s('cn or even imagined. As shown on figure 1, the global populatiorr lost'

r r rore than sixfold in just tlvo centuries, reaching an astounding 6. I I ri I

E:!

liotr 1r<'oplr' :tl lltt'sl:ttI ol llrc tlrirrl rrrillcrrrrirrrrr, rr,rtlr plt'rrlv ol rrrorrrcrr

ttittt lot titl)i(l l)()l)rtl;t(iotr gtorvllr still:tlrr':rrl. Ilrl u,,rrlrl's:rvcritll('l)('lc?lpit.a ittt:otttc 11)s('('v('r) lirslt'r, slrowrr irr ligrrrt'f, inr rr.lrsirrH lry 11,,,r,,,,,

nine times between 1820 anrl Z(XX). lrr to<liry's riclr torrrrtrics, llrt.t't'r>nomic growth was even more astounding. Thc U.S. 1rcr.r'ltpilir intorrrt:increased almost twenty-five-folcl during this period, and Wcstcr'n llu-rope's increased fifteen-fold. Total worldwide food production morethan kept up with the booming world population (though large num-bers of chronically hungry people remain until today). Vastly improvedfarm yields were achieved on the basis of technological advances. If wecombine the increases in world population and world output per per-son, we find that total economic activity in the world (the gross worldproduct, or G\,!IP) rose an astounding forty-nine times during the past180 years.

Figure 2: World Average per Capita Income

6000

€ .60{)o?

€ 4000

I

E 3ooo

3 zooo

I000

0| 12001300 t400 1500 1600 17001800 1900 2000

Yea

Saurce: Datu fiom Mad.di.\on (2001 ).

The gulf between today's rich and poor countries is therefore a newphenomenon, a yawning gap that opened during the period of moderneconomic growth. As of 1820, the biggest gap between the rich andpoor-specifically, between the world's leading economy of the day, theUnited Kingdom, and the world's poorest region, Africa-was a ratio offour to one in per capita income (even after adjusting for differences inpurchasing power). By 1998, the gap between the richest economy, theUnited States, and the poorest region, Africa, had widened to twenty

lo ()tt(', Sirrrr':rll l)itlls ol lltc tvorlrl lrrrrl;t r,rtrlilrlr'(r)nrl):u:rl)l('\t.ntnrl'pruttrl ttt lll20 (ltll v('ty l)oor lrV crrllr.t)l sllut(l:nrls), lorl:r\,'s r';rst irtcr;rr,rlrlils rr'llcr'l llrc l:rr I llr:rl s()nl(. l)iu ls ol llr<' r,vollrl lrclriclt'rl rrrorlr.rrrt't ottotttit glowllr wlril<' olltt'r's rlirl rtol. 'lirrl:rv's vlrsl irrcorrrr, irrr.rlrr:rlitrt's illrtlrritrrtl(' Iw() t't'ltlttt'i<'s ol lriglrly lln('v('ll I):tll('r'ns ol cr orrorrrir

l,,i()rv(ll.

l,'igurc 3: GDP per Capita by Rcgion in ltl2() arr(l tl)1)8

i{)t)(,(,

:,,,( )( )( )

''':,ttt)txt;ll)a.

l1

i1 ,',,u,,]Y

,!:J;r, Io{)00

,,0tx)

o

I --l Wcstern Eastcrn Fonner U.S., Canada, Latin .]apanIx l8'lri J Europe Europe USSR Oreania Americat t Irlrx

I

Asiit \lr i, ,r

(exr lrrrlirrg

.layrirrr )

\1, I t t r: t h.la Jro m Maddison (2001 ): atuage annltal grcuth rate in pamLheses

This inequality is evident in the bar chart in figure 3. The ht.iglrr olthe lirst bar indicates the level of per capita income in 1820, and tll(^ li('(ond in 1998, using Maddison's estimates. The number in parenlll('ri(.s :tt

the top of the second bar is the average annual growth rate ol'tlrt. r'r,.

gion (between 1820 and 1998). Three main poinrs stand our:

. All regions were poor in 1820

. AJI regions experienced economic progress

. Today's rich regions experienced by far the greatest econorrritprogress

Wlrlrt rlo I rrrt'lrrt lrv "lriHlrly un('\,('lr" r'rolrorrrir grorvllr :r( r()ss r(.

girlrrs lrt'twt'('tl l,rt20 lllt(l l1)'l)tli l'lt,r'rt srrr:rll rlil'li'rcrrlcs irr lrrrrrrurl r^r'o-

r)ollli(: gl'()wtll nlt()s, il susl.lilrc(l lor' <lccttrlcs ()t' ( ('lllln i('s, ('v('nluitllylead to huge difl'erellces ilr thc lcvcls ol cc:onorrrir: wr:ll-lx:irrg (as rrrt:ir-sured here by the average per capita income in a socie ty) . The perr:apita gross national product of the United States, fbr example, grew atan annual rate ofaround 1.7 percent per year during the period 1820 to1998. This led to a twenty-five-fold increase in living standards, with percapita incomes rising from around $1,200 per person in 1820 to around$30,000 today (in 1990 dollars). The key for the United States to be-

come the world's richest major economy was not spectacularly fastgrowth, such as China's recent achievement of B percent growth peryear, but rather steady growth at a much more modest 1.7 percent peryear. The key was consistency, the fact that the United States maintainedthat income growth rate for almost two centuries.

By contrast, the economies of Africa have grown at an average of0.7 percent per year. This difference may not seem like much comparedwith 1.7 percent per year in the United States, but over a period of180 years a small difference in annual growth leads to huge differencesin income levels. With growth of 0.7 percent per annum, Africa's initialincome (roughly $400 per capita) increased by little more than three-fold, to roughly $1,300 per capita as of the year 1998, compared with analrnost twenty-five-fold increase in the United States. Today's twenty-foldgap in income between the United States and Africa, therefore, resultsfrom a three-fold gap as of 1820, which was magnified seven times by thedifference in annual growth rates of 1.7 percent in the United States

versus 0.7 percent in Africa.T'he crucial puzzle for understanding today's vast inequalities,

therefore, is to understand why different regions of the world havegrown at different rates during the period of modern economic growth.Every region began the period in extreme poverty. Only one sixth of ther,vorld's population achieved high-income status through consistent eco-

nornic growth. Another two thirds have risen to middle-irlcome status

with more modest rates of economic growth. One sixth of humanity is

stuck in extreme poverty, with very low rates of economic growth duringthe whole period. Firstwe must understand why growth rates differ overlong periods of time so that we can identify the key ways to raise eco-

nomic growth in today's lagging regions.

l,t'l tttt'rlislrosc ol ottl irlt';r riglrt lronr llrc sl;rrl. l\'l;rrrt'1rlrr1rlr.:rsflrrr('llr;rl llrc tirlt lurvc goll<'tt ticlt lutrttr.tr' llr< 1root lr;rvc ll()ll('n l)()(,r.

lrr o(ltt't wottls, llrcy :tsstttnt' tlr:rt l'irrlopc lttrrl llrr' []rrilcrl Sllrlcs rrsrrlrrrilil;rlylirtcr':ttttIlloliti<irl slr'('ugllrrlrrlirrglrrrrl;rllcrllrccrir,rl rolorri;rlistrt lo ('xllr( l wcirltlr llrrtn llrt' l)()()t('ril rtgiorrs, lrlrrl llt<.r't.lr)' l() Bt()wrrr lr.'l'ltis irrtt'r-prctrttiott ol <:vt'ttts worrl<l llt'lrllrrrsilrlc il gross wollrl prorlrrr'l lurrl x:rnlrirrt:<l trlrrgltly corrslirrrt, witlr :r rising slrlrx'going lo llrr. ;rorvt'r lr rl xrgiorrs alt(l a clcclinilrg slrarc g<lirrg lo tlrt' lloor'<:r' rtgior rs. I lr rwcr,r'r,

tlr;rl is r)()t 2ll all what lrappencd. (l.ross wot'l<l prrrrlrrcl lost'rrt^lrr'ly liltvIoltl. l'lvcryrcgionof theworldexperiertcerlsorrrt't'r trrrorrrit gr owllr (lxrllritt 1t't'rns of the overall size of the econouly, arrcl <:vcn wlrt'rr rnt';rsrrrcrl pt'r

p<'t's<ltr), but some regions experience(l much rrr<lrc growtlr lllrn otlrt'rs.'l'ltc key fact of modern times is not the trunqfbr ol'inr'orrrt' liorrr orrr, rtgiott t<-r another, byforce or other-wise, blrt rathcr tlrc: ovcrirll itrtti'rt.s,'irr

lvor'ld income, but at a different rate in diffelent rcsi()rrs.'I'his is not to say that the rich are innocent of thc chitrg<' oI Ir;rvirrg

cxploited the poor. They surely have, and the poor ccxrulrit's corrtinrr<'

lo strffer as a result in countless ways, including chronic prolrlt'rrrs ol po-

litical instability. However, the real story of modern econorrrit ,lr)\,vtlllrirs been the ability of some regions to achieve unprcct:<lt:nlt'rl lorrgIcrrn increases in total production to levels never belitrc: sr'<.rr irr llrt.world, while other regions stagnated, at least by comparisorr. 'li.r'lrrrol

ogy has been the main lorce behind the long-term incrt'ascs irr irrr orrrt'

irr the rich world, not exploitation of the poor. That news is vt.r'y goo<l

irrdeed because it suggests that all of the world, including to<l:ry's l:rg

gard regions, has a reasonable hope of reaping the benefits ol tt.r'lrrroIogical advance. Economic development is not a zero-sun) glrrrrt. irr

which the winnings of some are inevitably mirrored by the l<;ssr.s oI oI lr

crs. This game is one that everybody can win.

On the Eue of Thkeolf

Until the mid-l700s, the world was remarkably poor by any ol lorlrri'sstandards. Life expectancy was extremely low; children diecl irr vrrst

numbers in the now rich countries as well as the poor countrics. Mlrrry

waves of disease and epidemics, from the black death of Errrrr;rc losmallpox and measles, regularly washed through society and kilk:<l rrurss

numbers of people. Episodes of hunger and extreme weather arr<l cli-

rn:rl('llrrr'1rr:rliorrsstrrlsoriclilstr:rslritrg. l'lrtisr':rtrrllltllol lltt'ltottltttl)rrrPin', lilr Itrrrrt'<l lwt'nlicllr-r'r'rrlrrry lrisloli:rtr At rrrlrl 'liryrrllct'. wrrs

much likc thc rist: irrt<l <lc<:litrt'ol itll ollrcr civilizirtiorts lrclirtt'lttt<l sitt< t:.

Economic history had long bccn onc ol rrps an<l <krwrrs, with grr>wtlr lirl-lowed by decline rather than sustained econonric p11)grcss.

John Maynard Keynes wrote about this virtual stagnation of'humaneconomic progress in his 1930 essay on the Economic Possibilities for OurGrandchildren:

From the earliest times from which we have record, that, say, the

two thousand years before Christ, down to the beginning of the

eighteenth century there was no really great change in the stan-

dard of living of the average man living in the civilized centers ofthe earth. Ups and downs, certainly visitations of plague, famine

and war, golden intervals, but no progressive violent change. Some

periods perhaps fifqz percent better than others, at the utmost a

hundred percent better in the four thousand years that ended, say,

in e.rr. 1700.

He also pinpointed technology as the reason for this long-term stasis:

The absence of important technological inventions between the

prehistoric age and comparatively modern times is truly remark-

able. Almost everything which really matters, and which the world

possessed at the commencement of the modern age, was already

known to man at the dawn of history: language, fire, the same do-

mestic animals which we have today, wheat, barley, the vine and the

olive, the plow and the wheel, the oaq the sail, leather, linen and

cloth, bricks and pots, gold and silver, coppeq tin, and lead-andiron was added to the list before one thousand B.c.-banking, state-

craft, mathematics, astronomy, and religion. There is no record

when we first possessed these . . .

What changed was the onset of the Industrial Revolution, supported by

a rise in agricultural productivity in northwestern Europe. Food yields

rose with systematic improvements in agronomic practice, including themanagement of soil nutrients through improved crop rotations. Thedramatic breakthrough came in England around 1750, when Britain'snascent industry first mobilized new forms of energy for production at

sr:rlts lllrt lr:rrl rrr'\'r'r' lrclolt' lrrcrr lrr lrilvcrl. 'l'ltr slllttn t'ttgittt' nt:ttlit'rlllr'<lt'r'isivr'lrrrrrirrg poinl ol rtrorlcnt lristory. lly nrolrilizinll ir v:tsl rl()r('ol plirrr:rlv ('n('r'llv, lirssil lrrcls, llrc slclrrn cttl;int'ttttlor'licrl lltt nt:tss ptrrrlrrr'(ion ol gootls ltrrrlst'r'vi<t's ()n ir stirlt'lr<'yottrl tlrt'wilrlr'sl rllcltttts ol

llr<'llrtirt<[rrslt'iltl ctit. M<lrlt't'tt ('tl('t'l]y lirt'lt'tl ('v('t'y rlsl)('('l rtl lltc ccrr

rrorrric lirkt'olI. lioorl llrorlrrclion soirrr:<l irs Iirssil firt'l crrclgyw:rs rrsr'<l lo

lrrrr<lut:r: <:lrcnri<::rl li:r.tilizcrs; inrlrrslr'ial lrrrrtlrt< tiott skyrot kclr'<l its vltsl

inptrts o1'Iirssil lirel cncrgy crcat.ed eqtrally vasl lrow<'r1l()lr.i('s ol slccl,

transport equipment, chemicals zrnd ph;rnn?rcouticals, tcxtilt' ltttrl :rp=

parels, and every other modern manufactttring scctor-. lly tlrc t'ltrly twcrr-

tieth century the service industries, includir-rg modcrn irrlirrrnlrliorr lrrt<l

r:ommunications technologies, were powered by electrili<'ttlir>rr, itscll lr

lrreakthrough of the fossil-fuel age.

As coal fueled industry, so, too, industry fuelecl politicirl powt'r'. 'l'lr<'

Ilritish Empire became the global political manifestation o['tltt' ltttltts-trial Revolution. Britain's industrial breakthrough, uniqrte in llrt'woll<lirs of the early nineteenth century created a huge military and lirrar rt itt I

zrdvantage that allowed Britain to expand its control over olt(: sixllr ol

humanity at the peak of the empire during the Victorian era.

\,Vhy was Britain first? \A/hy not China, which was the world's lct lt r x r-

logical leader for about a thousand years, between A.D. 500 un<l ,t.tr.

1500? \ttrhy not other centers of power on the European contirl(:nl ()r' in

Asia? This question is much debated among economic historiarrs, lrrrl :r

f'ew good answers are evident, and they provide clues to the rlt:t:pt'r' tttr-

derpinnings of the Industrial Revolution.First, British societywas relatively open, with more scope firr in<livitl-

ual initiative and social mobility than most other societies of thc woll<1.

The fixed social orders of the feudal era had weakened enormottsly ot

disappeared entirely by 1500, at a time when serfdom was still thc I trlt'

through much of Europe. Even more rigid social hierarchies, such rts I t t-

dia's caste system, were common in other parts of the world.Second, Britain had strengthening institutions of political lilrcr ly^

Britain's parliament and its traditions of free speech and open dt'lltlr'were powerful contributors to the uptake of new ideas. They wc'rt: itls<r

increasingly powerful protectors of private property rights, whi<:lr itt

turn underpinned individual initiative.Third, and critically, Britain became one of the leading cenlcl's ()l

Europe's scientific revolution. After centuries in which Europt: wlts

mainly the importer of scientific ideas from Asia, European st:it'ttt <'

lrrir(l(' l)ivollrl ;rrlvlrrrt cs lrt'girrrrirrg irr llrt' ltctt:tiss:tttr r'. l\4orlcr rl lrlrvsir s

c11()lu(.(l ll 6rl lltt. lrsllouorrriclrl rlis< ovltit's ol ( irpclrtit rrs, lltlrlrt', ltt'p'

ler, and Galilco. Wittr llritain's lx)liti( irl ()l)('nn('rli, spct ttlltlivc sci<'rrlilir

thinking was given opportultity to thrivc, iul(l Ill(' st'it'rrtilit ittlv:tttt t's otl

the Continenr stimulated an explosiolt nl'scicn[i{it: <liscovt'r'y irr l'.n-

gland. The decisive break'.hrough came with Isaac Newtott's Prin,ci,pia

Mathematica in 1687, one of the most important books ever writtell. By

showing that physical phenomena could be described by mathematical

laws, and by providing the tools of calculus to discover those laws, l'Jew-

ton set the stage for hundreds of years of scientific and technological

discovery and for the Industrial Revolution that would follow the scien-

tific revolution.Fourth, Blitain had several crucial geographical advantages. First, as

an island economy close to continental Europe, Britain enjoyed low-

cost sea-based trade with all parts of Europe. Britain also had extensive

navigable river ways for internal trade and enjoyed a highly favorable

environment for agriculture, with a combination of plentiful rainfall, an

ample growing season, and good soils. Another crucial geographical ad-

vantage was Britain's proximity to North America. The new settlements

in North America provided vast new territories for food production and

raw materials such as cotton for British industry, and they wcre the

safety valve that facilitated the exodus of impoverished people from the

British countryside. As England's own agricultural productivity grew

with more food produced by fewer people, millions of landless poor

went to North.A.merica.In his serninal 1776 work, The Wealth of Nat'ions, Adam Smith re-

ferred to Britain's natural advantages:

England, on account of the natural fertility of the soii, of the great

extent of the sea-coast in proportion to that of the whole country

and of the many navigable rivers which r-un through it and afford

the conveniency of water carriage to some of the most inland parts

of it, is perhaps as well fitted by nature as any large country in F'rr-

rope to be the seat of fbreign commerce: of manufactures for dis-

tant sale and of ali the improvements which these can occasion.

Fifth, Britain remained sovereign and faced lesser risk of invasion than its

neighbors. Being an island helped considerably, much the same way that

.fapan's insular geography allowed it to escape invasion despite numerous

,rll('url)ls lrorrt llrc Asilrrt ttutittlltttrl. lrrrlcrrl, willt ;r oll('( ('ltltltt'l;r;i, l,rJr.rrr

\v;t\l()plrrllr rol<'sirnillrt lollrilltirr's:tslltclr':trllt ol r\slt'slrrlit'oll lortrttl('r n ('( orrorrric grrrwllt ott llrc olltct sir[r'ol llrt'l',trt:tsi;trr lltttrl trrltss.

Sixtlr, llr it;rirr lurrl co:rl, lrrrrl willr llrc irrvt'rrliorr ol llrt'slr';tnt lttlltttt',r o:rl lrccrl socit'ly liorrr <'rrclgy r'orrslt:ritrls llltl llttl lirrritt'tl lltc sr;tlr ol

r'< orronrir' l)l()(lll( li()n tltrortgltottl ltttttutn ltistory. Ilt'lirlt' t o:tl, t't trrr,rnrir'prrr<lrrt'liorr was lirnitr:tl lry t:rrt:r'gy inl)ul.s, rtltttosl lrll ol wlrir lr rlr'

lrcrrrlt'<l orr Ilrt: Jrrorltrction ol'biotttass: loo<l lirl ltttttuttts;tttrl l;tttrt

:rrrirrurls atrd lircl w()ocl Ii)r' lreatittg ?u)(l (:oltrtin irrrltrslli:rl l)r'()(('ss('s.Win<l power could also be harnessecl for sca Il'zlnsJx)r't, itrr<lwirr<l rttt<l wrt

t('r'lx)wcr could be harnessed fbr some indtrsl.r'ial I)t'()('('ss('s. Nottt'ollltt'sc energy sources, howeveq could unleash thc polt'rrtiltl lirt ltt:tss

plo<luction that coal did.Britain's advantages, in summary, were marked by a t:otltlrittltliott ol

so< ial, political, and geographical factors. British socicty wlts It'lrrtivcll'litt: and politically stable. Scientific thinking was dyrlarr)it:. (it'oglrrplrl'

crrabled Britain to benefit from trade, productive agrictlll.tll'(:, rttttl t'tr('r'gy resources in vast stocks of coal. Other parts of the worl(l wCl (' ll()l :ts

lirrtunate to have this confluence of favorable factors. f'lrcir ('ltlry irrl()rrrodern economic growth would be delayed. In the most clislt<lvitttlltgcrl

t'rrvironments, modern economic growth has been delayed ttrrlil lorlrrv.

' l'he. Great Transformation

'l'he combination of new industrial technologies, coal powe I', lttttl tttrttl<ct lbrces created the Industrial Revolution. The Industriirl l{t'voltrlion,in turn, led to the most revolutionary economic events in httttuttt lrislor 1

since the start of agriculture ten thousand years earlier. Stt<l<l<'trly. r'.,,rromies could grow beyond long-accustomed bounds without hit t irrg tlrr'

lriological constraints of food and timber production. Inclrrstriirl pro

<ltrction grew rapidly, and the power of economic growth spillctl orrt

li'om Great Britain to all parts of the world. Societies the wotltl ovct

were fundamentally changed, often tumultuously.The Industrial Revolution, and the modern economic srowllr llrlrl

Iirllowed, has changed the way people live in every fundamctttal s('tni(':

where and how they live, what kind of work or economic activity tlrr'1'

lrerform, how they form families. In Britain first, and then elsewltt'tr'. it I

rlustrialization meant a shift of people from overwhehningly :tgt:rti:ttr

irctivities to industrial activities, giving rise to urbanization, socirtl rtrolril

ily, rrcr,v gcrrrlcr :rtrrl l;rrrrily rolt's, lr rlctrrogt:rlrlrir lltttsilir)rt,lur(lslrt'r ilrlizutiorr irr lirlror'.

Moclenr cc()rr()lnic g'11)wtll is rr< r'orrrlllrrrit'<l lir sl lur<l lirt ctttosl l>y ro'

ban'ization, that is, by a rising sharc o1'a nilti()ll's Jr<llltrlrttiotr livirrg irr rrr-

ban areas. There are two basic reasons why ecotrotrtic growth arrd

urbanization go hand in hand. The first is rising agricultttral procluctiv-ity. As food production per farmer rises, an economy needs fewer and

fewer farmers to feed the overall population. As food production perfarmer rises, food prices fall, inducing farmers and especially their chil-dren to seek employment in nonfarm activities. The second is the ad-

vantage of high-density urban life for most nonfarm economic activities,

especially the face-to-face demands of commerce and other parts of the

service sector. Sparsely populated rural areas make good economicsense when each household needs a lot of land for farm production.But they make little sense when people are engaged mainly in manufac-

turing, finance, commerce, and the like. Once the labor force is no

longer engaged mainly in footl production, it is natural that the bulk ofthe population will relocate to cities, drawn by higher wages that in turnreflect the higher productivity of work in densely settled urban areas.

Modern economic growth has also produced a revolution in social

mobili\s. Established social rankings-such as the fixed hierarchical divi-

sions between peasants and gentry or within the Indian caste structure,or in the social orders of nobility, priests, merchants, and farmers thatcharacterized many traditional Asian societies-all unravel under the

forces of market-based modern economic growth. Fixed social orders

depend on a static and largely agrarian economic setting where littlechanges in living standards or technologies from one generation to the

next. They cannot withstand the sudden and dramatic bursts of techno-logical change that occur during modern economic growth, in whichoccupations and social roles shift dramatically from one generation tothe next, rather than being inherited by sons from fathers and daugh-

ters from mothers.One aspect of changing social mobiliq, requires special note, the

change in gender rolns. Traditional societies tend to be strongly differenti-ated in gender roles, with women almost always getting the short end ofthe deal. In settings where the total fertility rate-the average numberof children per woman-is qpically at least five, and often much higher,

women spend most of their adult lives rearing children. Traditionally

Irorrrclrorrrrtl, worrrcrr liv<'livcs ol lltt li. lrrr':rltitrg l;tlrot ,rtt lltt'l:ttttt, t'tttllcss wlrlliirrg lo toll<'r'l lttcl woorl lttttl w:tllt, ;rrrrl t lrilrl rclrrirrg. Witlrrrrorlclrr ccorrorrric growllr, llris rlyrutrrrir r lr:rttgt's. Wotttt'tt t:trt :tlltil llt<'ttt

sclvcs ol rrllxrrr-lrirsr'<l t'rrrployrrtt'rtl,lrs itr tltc cltst'ol lltc y()tttrg wotttctt ttt

tlrr' ;rplxrrt'l lir<'torics <ll l)lrrl<ir, It'lrrlirrg llr<'rrr rrllirrrlrlt'ly lowltrrl sor iltl

:rr rtI polit i<'al cttt1lowcrt'tttcttl.'l'ltc r:lrangcs irr livirrg c:orrrliliorrs urrrl ct:onorrric at livilics lt'itrl lrr

rr<'w rcalitir:s in.fo.milry slruclurc irs wc:ll.'flrt: agc ol tttlttriltgt' is tylti< lrlly

<lt'layed, and sexual relations are transfbrmed, with gr('itlct st'xtrtl lir'<'

rkrrn much less directly linked to child rezrring. Fcwcr gcttt't'ittirttts ol

lirrnily rnembers live under one roof. And crucially, thc dt:sirt'<l tttttttlrt't

ol'children changes remarkably as families move liom rttral lo tttlxtttst'ttings. In rural societies, large families are almost always lht: ttot ttt. Ittrrrban societies, families choose to have fewer children. This is llrt' t lrrxo1'the demographic transition, one of the most fundarnettlal ol ltll so-

<'ial changes during the era of modern economic growth.One more crucial element occurs with deep structural chattgt': llrr'

d,iais'ion of laborincreases, as people become more and more spc<:ializt'rl

in their skills. The talents of a poor rural farmer in Africa toclay, ol irr

Scotland at the time of Adam Smith, are truly marvelous. Thesc fltt'rttct s

typically know how to build their own houses, grow and cook foorl, lt'rrtlto animals, and make their own clothing. They are, therefore, collsll u( -

tion workers, veterinarians and agronomists, and apparel mattttllt< ttu'crs. They do it all, and their abilities are deeply impressive.

They are also deeply inefficient. Adam Smith pointed olrt ll)itl sl)('

cialization, where each of us learns just one of those skills, lea<ls to rr

general improvement of everybody's well-being. The idea is sitrtplc rur<l

powerful. By specializing in just one activity-such as food rlisirrg.clothing production, or home construction-each worker gaitrs rtuts

tery over the particular activity. Specialization makes sense, howt'vt't,

only if the specialist can subsequently trade his or her output witlr tlrr'output of specialists in other lines of activity. It would make no scl)ri(' l( )

produce more food than a household needs unless there is a ttuu kt'l

outlet to trade that excess food for clothing, shelter, and so forth. At tlrr'same time, without the ability to buy food on the market, itwould nol lx'possible to be a specialist home builder or clothing maker, sirrct' it

would be necessary to farm for one's own sulvival. Thus Smith rcalizt'tlthat the division of labor is limited by the extent of the market (tlrirt is,

111, 11'.. lrlrility lo lrlrrlr'), wlrcrllrs llrt'r'slt'trt ol llrc ttt:ttlicl is rlllcttttitrctllry llrt'<lt'gt.ct'ol spcci;tlizlr(iort (:rrrrl ltt'ttr t', prorlrrt livily).

THE SPRI]AD O}' MOI)I.]IINECONOMIC GROWT'H

Modern economic growth first emerged in England because of the con-

fluence of favorable conditions. However, these conditions were notunique to Englancl, and once the Industrial Revolution was under way,

the same combination of modern technologies and social organization

coulcl spread to other parts of the world. What started in one corner ofNorthern Europe rvould eventually reach almost the entire planet. Indoing so, the forces of modern economic growth propelled a general

increase in global production of unprecedented dimensions.

On paper, the transition to modern economic growth might appear

to be an unambiguous and straightforwar<i benefit for the world. Afterall, new technologies enabled society to harness energy and ideas that

raised labor productivity (economic output per person) to levels never

before imagined. T'his productivity brought about a rise in living stan-

dards of unprecedented scale. Yet the transition was more tumultuous

than not, involving vast social struggles and often war. Before turning tothe historical record, it is worth considering for a moment why the tran-

sition was so difficult in so many places.

Most important, modern economic growth was not only a question

of "more" (output per person) but also "change'" The transition tornodern ecoiromic growth involved urbanization, changing gender

roles, increased social mobility, changing family structure, and increas-

ing specializatiort. These were difficult transitions, involving multipleupheavals in social organization and in cultural beliefs. In addition, the

spread of modern economic growth was also marked by a systematic

and repeated confrontation between the world's newly rich countries

and the world's still poor countries. Since modern economic growth oc-

curred at such different rates in different places, it created an extent ofinequaliq, of global wealth and power thatwas unique in human history.

Britain's industrial dominance-the result of Britain's lead in industrial-

ization-gave it a unique military dominance as well, which it. in turnconverted to empire. More generally, Europe's early industrialization in

lltt'ttittt'lclttlltrcttltnYctrrlcrlrrplrrclirrg:rr';rsl l,,rrr()lx'iurcrrrlrirr. llrrorrpilrortl i\si;r, r\lr ir';r,;rrrrl llrr.r\rrrcr ir;rs.

liirrlrlly, llrt'vrtsl rlilli'rt'rrccs itt powcr r orrlr ilrrrtt'rl lo llrulty sot irrl I lrr.otics ol llrcst'rlilli'r'r'rrccs llr:rt lrr'<'still rvitlr rrs lorl;ry. Wlx.rr:r sor ir.t\ rs

t'tottotttitltlly tlotttittrttrl, il is t'lrsy lirr its rrrt'rrrlrt'r's l() itssulu(,llrirl srrr lrrlolttittlttt< <' r't'Ilccts :t <lt'cltcl strlrt'r'iority-wlrt.llrt'r' r't.ligi91s, r':rt i:rl, gr.

rtt'tir', t'ttllttt'ltl, ot'ittslitt11i1;11iql-1'111ltcr llrirrr irn trcci<lt'rrl ol lirrrirrg or gt.

oglltlllty.'['lrrrsllrcint:rltrirlit"yol'powcrlrrr<l r:r'orrorrritsol llr<.rrirrr.lccrrllr( ('ttlllry it't lhvor ol'litrrrtpc wus a( c()nlparric<l lry llrt'slrrtlr<l ol rrr.rv lolrrrsol rirt:ism and "culttrrism," whicl-r ofl'erecl pst:urloscicrrtili<'irrstilicirlionslirr lhe vast inequalities that had opened. Thcsc thcorit's irr trrrrr.irrsrilit'<l brutal forms of exploitation of the poor throtrglr r'olorriirl I ul<', <lis

llosscssion of the properties and lands of the poor lty (lrc rir.lt,lrrrrl r.r,r'n

slavery.

Still, despite these difficulties, the basic underlyinu lirn't.s llrrrr pro

1>r:lled the Industrial Revolution could be and were rcltli<.trtt'rl r.lsr.

wlrere. As they were replicated, multiple sites of indtrstri:rlizirliorr :rrrrl

t't'onomic growth took hold. Like a chaiu reaction, the rnorc pllrcr.s tllrtwcre undergoing this change, the more they interacted with t:rrclr o(lrr.rlrlrd thereby created the bases foryet more innovations, n)()l'(: c< orlorrrirgrowth, and more technological activity. Britain's industrializatiorr s1 rr'rrrllo other markets in several ways: by stimulating the demarrcl Iirr.r'xpor ts

liom Britain's trading partners, by supplying those traclins parl n(.r.s witlrllritish capital to make investments in infrastructure (for exarnlrlt., lror ts

irnd railroads), and by spreading technologies first pioneercrl irr lil ir:rirr.This diffusion of nrodern economic growth occurred irr llrn't'rrr:rirr

lbrms. The first, and in some ways, most direct spread of th<: lrr<lrrstr i:rl

l{evolution was from Britain to its colonies in North Americ:a, Arrsrrirli.r,irrrd New Zealand. All three regions are in temperate zoncs witlr < orrrlitions for farming and other economic activities similar in rrrarry wlrvs t()those of Britain. It was therefore relatively straightforward to I urrrsplr rr I

llritish technologies, food crops, and even legal institutions inlo llr<.sc

rrew settings. These new homes of modern economic growth wt'r' lilcr;rllr,ir "New England," in the case of the North funerican seacoasl., or. tr "Wi,sl-

t:rn offshoots" in the phrase of Angus Maddison. Ideologiciilly, rlrt. irrrpr.rial powers and colonizers considered North America ancl ()ce:irrrilr to lrr.cmpty places, despite the presence of native inhabitants irr lrotlr lr.gions. By slaughtering, cornering, or removing these native ilrlurlrit;rrrts

liorrr llrt.il l:rrrrls, l,lrrglirrrrl's nln'r olorrizrts lrtlllrl :r lrrrlic t'xP:tttsiott ol

ltoltrrlirliorr trrr<l srrlrst'r;lrcltl cronotrtir gtor,vllt ol Notllr Atttctit:r:ttttlOceania.

A second form of'clillirsion (ook lllu<'t: witlrirr l,)tttrrpt' itst'll, llrolr<lly

in a process that ran from Western Europe to Iraste rn l')trroltt'lttt<l lrorn

Northern Europe to Southern Europe during the ninetecnth celltury.

Northwestern Europe started with certain advantages over Eastern and

Southern Europe. First, northwestern Europe is on the Atlantic side ofthe continent, and therefore had benefited more than Eastern Europe

from the great explosion of ocean-based trade with the Americas and

Asia. Second, northwestern Europe generally had more favorable natu-

ral resources, including coal, timber, rivers (for water-powered mills),

and rainfall. Third, northwestern Europe generally benefited from a

more benign disease environment, less r,'ulnerable to tropical and sub-

tropical diseases like malaria. Fourth, for a host of reasons, some under-

stood and others much debated, the political and social conditions were

more favorable. Serfdom had essentially disappeared in much of north-

western Europe by the seventeenth century whereas serfdom and other

social rigidities were far more intact in the south and east' Germany and

Italy were still not nation states by the start of the Industrial Revolution,

and they suffered from extremely high barriers to trade among compet-

ing principalities.\Alhen the Industrial Revolution began, and especially when it began

to spread in the midst of and after the Napoleonic Wars, the obstacles to

development in Southern and Eastern Europe began to diminish. Serf-

dom was abolished, fitfully, often violently, across Europe. Constitutionalgovernance was introduced. Railways were established to link European

regions. Ideas and technologies flowed with ever greater speed and

were backed by ever larger amounts of financial capital. By the end ofthe nineteenth century industrialization was making itself felt through-

out all ofEurope.The third diffusion involved the spread of modern economic

growth from Europe to Latin America, Africa, and Asia. The process was

tumultuous everywhere, involving the confrontation of an increasingly

industrialized and rich Europe with nonindustrialized, largely rural,

and militarily weak societies in other parts of the world. Some were

ancient civilizations with grand traditions, like China or Japan; some

were sparsely populated regions like those in much of tropical Africa.

But the great drama that ensued almost everywhere was the turmoil of

r ollrottlltliotr lrclwr'<'n tlrt'sr' <lilli'r'('nl :ior iclics, r'r ononrics, :tttrl r ttlIrrrrs. I,,t,r'n wlrcrr il lltistrl livirrB sllrrtrllrtrls, trrorlcr n ('( ()notrrir' lirotvllrlrrorrglrl littrrlirrtrcnlirl clritrrgt'lo soci;rl otgiutiz:rliorr lrtrtl lxrinlrtl lllrslrt'srvi t I r t I rr' I n( )r'(' I x)w('r'li rl l,ltt tr rl lt'ltrrs.

'l'lrr' <'orrll orrlaliorr lrclwt't'rr riclr lrrrtl l)()()r' wirs v('l y sllu k lrcr';rrrsr'

tlrc glrp ol wt'ltlllr itls<l rrtt'irrtt tlr<: g:r;r ol'lrowcr',:rrr<[ llowt't r'orrlrl lrc rrscrl

lirl t'xploitirtiorr. litrrrrpc's srrpcrior l)()wcl wirs trst'<l rr'pt'lrlcrlly lo t our-

pcl rr< lions lly thc wt:akr:t'socictics on bt:hall'<>l llrt' r'i< lr<'r'ov<'r'lolrls. l'lrr-

r()lx'1rr) irnpcri:rl p()wers forced Aliicans t() gr()w r':tslr r-r'o1rs tlrcy clrosr'.( jokrrrial authorities imposed head taxes, conrpclling Ali'icrrns lo worliirr rrrincs and on plantations, often hunclrecls o['rnilt:s [i'orrr tlrcir lirrrrilit's and homes. European investors and governlncnts r'<lttrrrrirnrlccrcrl

nirtrrral resources, including mineral wealth and vast w<lo<lllur<ls in

Ali'ica and Asia. Private European companies maintainccl privlrlt' rrlrrrit'sirr the colonies to ensure compliance with company "law," krrowirrg :rsw<'ll that their national governments would back them rrp witlr rrrilit:rr ylirrce in extremis.

'l'he Ca,scade of Tbchnological Change

Living standards began to rise in many parts of the worlcl, <'vcrr willr rrlltlris brutality and suffering in places that had succumberl lo r'olorrilrlnrle, and even in places where colonial masters, rather than tht' lor':rl poprrlations, grabbed much of the increased economic outpul. ()licrr tlrr'climb out of extreme poverty was very gradual and fitful, scl lrir< h lry w:rr

rrud famine. Occasionally it was rapid, such asJapan's econorrri< llrl<r'oll

rrnd industrialization in the last quarter of the nineteenth cr:n ( r r rv.

I believe that the single most important reason why plospt'r'ilvspread, and why it continues to spread, is the transmission <ll'l<'< lrrrologies and the ideas underlying them. Even more important tharr lrlrving

specific resources in the ground, such as coal, was the ability 1<l rrst' rrrorI

r:rn, science-based ideas to organize production. The beauty ol i<l<'rrs is

that they can be used over and over again, without ever being <lt'plclcrl.Economists call ideas nonrival in the sense that one person's rrsc ol rrrr

iclea does not diminish the ability of others to use it as well. 'l'lris is wlry

we can envision a world in which everybody achieves prospr:rity.'l'lrr'essence of the first Industrial Revolution was not the coal; it w:rs lrow lrruse the coal. Even more generally, it was about how to use a n('w lirrrrr oI

energy. The lessons of coal eventually became the basis for rnuny ollrcr

('n('l!l)/ r1ysl('rrri irs \,v('ll, ltottt lryrlt()l)()\!('1, oil ltllrl pi;ts,:rtrrl ttttt lt';ll l)('\'v('l

t.() 1sw lirrnrs ol l('lt('\,vltl)l(' ('n('t'lly sttr'lt :ts wittrl lttttl sol:tt pr)!v('l ( ()ll.

verted to clect.r'icity.'l'lrcsc lcssorrs ilt('ilv:rilitl)lt'lo ltll ol ltrttttltrrily, trot

just for the first indivicluals who tlist:tlvuI'c(l ll)(:l)1.

The first wave of the Industrial Revolution was tho tlcvt:l<11>rtlt:ttl ol'

the steam engine and related technologies, including the orgzrniz.atiorl

of large-scale factory production, new machinery in the textile and ap-

parel sector, and new techniques to produce steel. A second wave oftech-

nological breakthroughs came in the middle of the nineteenth century

with the rail, and even more notably the telegraph, which offered the

first instantaneous telecommunications around the world, a phenome-

nal breakthrough in the ability to diffuse information on a large scale.

The secontX technological wave also included ocean steamers, global-

scale trade, and two huge infrastructure projects: the Suez Canal, com-

pleted in 1869, which significantly shorrened the trade time between

Europe andAsia, and the Panama Canal, completed in 1914, which dra-

matically reduced the trade time between the U.S. eastern seaboard and

destinations in the western United States, much of Latin funerica, and

East Asia. Epidr:mics of yellow fever and malaria that killed thousands ofworkers delayed the first attempt to build the canal in the 1880s. Once

scientists undel:stood that mosquitoes were transmitting those killer dis-

eases, the canal builders made a full-fledged effort to control the mos-

quito breeding alongside the construction of the canal and thereby

completed the project in 1914.

The third rdave of technological advance involved electrification ofindustry and urban society at the end of the nineteenth century includ-

ing Edison's invention of the incandescent bulb and other electronic

appliances. Edison, Westinghouse, and others championed large power

plants t.hat could bring electricity into homes, office buildings, and fac-

tories by wire, which was the defining new infrastructure of the early

twentieth century. The development of the internal combustion engine

was also critical, as was the pivotal advance in the chemical industry

mainly in Germany, with the new process for taking atmospheric nitro-

gen and converiing it into arnmonia for fertilizer (the Haber-Bosch

process). This use of fossil fuel energy to create nitrogen-based fertiliz-

ers was the breakthrough advance in raising food production in the

twentieth century enabling a great proportion of humanity, though still

not all of it, to overcome chronic hunger and the risks of famine that

had forever plagued humankind.

'llrcsc wir\/('s ol lr't lrtrologir:rl lrrlvlrtrrc rlillrtscrl lu,rrtrrrl llrc rl,rlrltlrrorrglr llrl splr':rrlol lllrrlc lrrrrl lolcigrr irrvrslnr('rrl;tvitlr it, ('( ()lr()ull(

prospclily sprt':r<l lo ollrcl l)lu lri ()l llrc wor'lrl:rs wr'll. llrrl so, loo, <lirl llrr'glolr;rl sysl('nr ol l',tnolrcitrr llolilir';rl rlotninitliott.'l'lris rlotrrirurtiorr rr'llcr'lcrl llrc vlrsl irr<'ryrutlity ol llowt'r'llltt grcw orrl ol l')rrlopr"s lrr':rrl sl;rr I

in irrrlrrstriirlizrrliorr, a lrt'lxI st.irrt tlrirt wc lurvt'st'crr is rrrolt'<l irr rrrr lrtlr,:rrr

l:r,l('()us cortllrrc:ttct: ol'politir:s, gc<lgralllry, rIl)([ l (:s()ur ('r' lxrsr'.

lly tlrc carly twcrtictlt ccrttut'y, Iirrropc largcly rkrrnirrttr'<l tlrc wollrl.l',rrlolrr:an ernpires controlled essenl,ially;rll o['Ali'i<:ir all(l lrrll](' pirrls ol

,\si;r, :tnrl loomed large in {inancing anrl ortr4:rnizing [,irtirr Arnt'r'iclr's

Ir:rrl<'lts well. This was the lirst agc of globalizaliort,:trr cr':r ol glolrirlIlrr[r:, nn era of global communications <tver telegraph Iirrt's, rrrr 1'111 ol

rrurss production and industrialization-in short, what worrlrl st'r'rrr lo lrt'rlr ('r'a of inevitable progress. And it was globalizaticln rrrrrlt'r' l'irrropclrrr

rkrrrrination. It was viewed as not only economically rrrrst.ollllulrlt', lrrrl

.rlso as the natural order of things. This imagined natural orrlt'r' glrvr'

rist' to the infamous "white man's burden," the right anrl olrligirtiorr ol

l,,rrropean and European<lescended whites to rule the livt's o[ ollrcrs:rrrxrnd the world, which they blithely did with a contradi('tory rrrix ol

r urivet6, compassion, and brutality.

'l'hc Great Rupture

At the beginning of the twentieth century globalization was vit'wcrl lrs sr r

irrcvitable that some thoughtwar itself was probably pass6, arr<l < r'r'trrinly

so irrational that no right-thinking leader in Europe woulcl r:vt'r' tirkc lriscotrntry to war. In 1910, a leading British pundit, Norman Angcll, wrotr''l'he Great lllusion, which rightly argued that national econonrics lr;rrl lrr'( onle so interdependent, so much part of a global division ol'lalror', I lrrrl

war anlong the economic leaders had become unimaginably <lt'strrrr

tive. War, Angell warned, would so undermine the netvvork o[ irrtcrrr;rtional trade that no military venture by a European powcl' :rl3rrinst

ltnother could conceivably lead to economic benefits for thc allul('r*i()r.lle surmised thatwar itself would cease once the costs and bcrrclils ol

war were more clearly understood.Angell tremendously underestimated the irrationalities zrrrrl soci;rl

processes that lead to devastating outcomes, even when they rrrirkc rrrr

sense. Angell was therefore half right: war had become much too rlirrrserous to use for economic gain. But it didn't stop war from hirppcrrirrg.

'l'lrc ycrrr l1)l.l lrt'glrrr {lrc gr('lrl rul)lrrrt'ol llrl lrvt'rrlit'llr r<'rrlln\', ('\'('n

tttol't: <lntrrurli( lt lul)lulc lllrtt WollrlWlrr ll wt,rrlrl l,rr)\/('l() lx'.Why was Worl<l Wrr I so tlnrrrurlit lrnrl so lrirrrrrurlir'/ ll t'rrrlt'rl llrc crr

of European-led globalization. lts dr:ath toll was stirgll('r'irrg, irrrrl it lt'tl toseveral cataclysmic events that cast their shadow over the rcsl. of'tlrc ccn-

tury. The first side effect was that it destabilized the Russian czarist

regime, unleashing the Bolshevik revolution. A relatively backward Rus-

sia, which had been the last country in Europe to come out of serfdom,fell into turmoil under the fiscal and human burdens of war. MadimirLenin and a small group of conspirators were able to seize power withvery little popular support and institute a revolutionary doctrine thatsent Russia on a seventy-five-year detour of enormous brutality and eco-

nomic waste. At their maximum extent, the communist doctrines thatLenin andJoseph Stalin instituted in Russia ensnared roughly a third ofthe world's population, including the former Soviet Union, China, theEastern European states under Soviet domination, Cuba, North Korea,and other self-styled revolutionary states aligned with the Soviet Union.

Another great consequence of World War I was the prolonged fi-nancial instability it created in Europe after the war. The war created amorass of interlocking financial and economic problems, including themountain of debt incurred by combatant countries; the destruction anddismembering of the Ottoman and Hapsburg empires and their re-

placement by small, unstable, and feuding successor states; and the Al-lied claims for reparation payments from Germany, which embitteredthe next generation of Germans and was one of the rallying points forHitler's rise to power.

John Maynard Keynes understood that the world as he knew it hadbeen brought to an end after World War I. In his famous essay ot The

Economic Consequences of the Peace, Keynes masterfully captured all thathad been lost:

What an extraordinary episode in the economic progress of man

that age was which came to an end in August 1914! The greater part

of the population, it is true, worked hard and lived at a low standard

of comfort, yet were, to all appearances, reasonably contented with

this lot. But escape was possible, for any man of capacity or charac-

ter at all exceeding the average, into the middle and upper classes,

for whom life offered, at a low cost and with the least trouble, con-

veniences, comforts, and amenities beyond the compass of the rich-

('st ;ur(l rrosl l)()\!('r lttl tttott:ttr lts ol olltct :rgcs. l'lr, ittlt:tlril:tttl ,,1

Lorrrlrrrr corrlrlorrlt't lr1, 1r'11';llrotrt', sippinll lris tttottrirrgi lclt itr lrt rl.

tlrc v:rriorrs prorlrrr'ls ol llrc lvlrolr'<'irtllr, itr sttrlr tltt;rttlilI lts ltr'

rrriglrl st't'lit,;rrr<l rr':tsott:rlrly ('xl)('(l lltcit cluly rlclivt'ry rtlr,rtt lris

rloolsl<'p; lrt'r'orrlrl:rl llr('s;rnr('nr()nl('lrl ;rnrl lry llrc sirrrrc ruclrrrs lrrl

v('nlllr'(: lris wt':rlth irt tlrc rrrlrrr';rl lcsoutct's ltttrl rtt'w <'rtlt'tptiscs ol

;ury (lltit|lcrol t.ltc wo|ltl, arttl sltltrt', witltortl t'xt'tliort or ( vCn lr1)rl

lrlr', irr thcir prospectivc lirrits arrrl advuttl:tgcs; ot ltt'r'orrlrl rlccirlt' to

< otrple the sectrrity of his lortuncs with thc goorl Ilritlr <>l tlrt' lowtrs

lrcople of any substantinl municipality in any corttirrt'rrt llrlrl Iltrrcv

or inlbrmation might recommend. He cotrld st:cur'() lirltlrwitlr, il lrt'wished it, cheap and comfortable means of transil t() iuly ('()untr y ()r

r:limate without passport or other formality, cotrlrl clesputclr lris scrvant to the neighbouring oflice of a bank for such strpply o[ l lrr' prr'

cious metals as might seem convenient, and could thcrr prrrct'r'tl

abroad to foreign quarters, without knowledge of thcir rt'ligiorr,

language, or customs, bearing coined wealth upon his pcrsort, :rttrl

would consider himself greatly aggrieved and much surprist'rl rrl llrt'least interference. But, most important of all, he regarcle d th is strrlr'

of affairs as normal, certain, and permanent, except in d.rt' rlir'<'r-

tion of further improvement, and any deviation from it as irbclllrrt,scandalous, and avoidable.

,\s Ke1..nes stressed, in a message for our time, the end of'llris cnr rvrrs

sirnply unimaginable:

The projects and politics of militarism and imperialism, o1' r'irci:rl

and cultural rivalries, of monopolies, restrictions, and exclrrsiorr,

which were to play the serpent to this paradise, were little nrorr'

than the amusements of his daily newspaper, and appeared to cxcrcise almost no influence at all on the ordinary course of social arr<l

economic life, the internationalisation of which was nearly conr-

plete in practice.

'I'he economic instability that followed World War I led to the Grcal l)r'pression of the 1930s and then to World War II. The linkages arc strlrllr'and debated in detail, but undeniable in basic fact. The overhang ol'llr< I

debts, shrunken trade within Europe, and overstretched budgets o['tlrt'liuropean powers meant that inflation, stabilization, and austerity w('r1'

llrt. orrlr,r's ol lltt' <ltty llttottglrottl lltt' l1)l0s. 'l'lrt' l'lttto;rr';ltt r ollttltir'srltrlyclirrrlr<.rlorrt, lryorrclritcl<totlrcgolrlslitttrl:ttrl,vicwcrl:ll llt('litttt:tsthr: guarirrrtor ol'lorru-tt'r'rrr lirurrrri:rl sllrlrilily. Alirs, llrt' tt'lttt'tt lo tlt<'

sold standard dicl little rn<trc Lharr t:xitr:crb:ttt'llrc t'otttliliotts llt:r( ltltlprevailed irt the 1920s. Most importaut, thc gold stan<lirr(l all(l it.s "rttlcs

of the garne" for monetary management made it diffictrlt i{' not irrrpossi-

ble for the major economies to escape from a slide into deep depression

in the early 1930s. The Great Depression, in turn, triggered a calami-

tous spread of trade protectionism and the rise of Nazism in Germany

arrcl military rule inJapan.By the end of World War II, the pre-1914 global system had gone to

pieces. Int.ernational trade was moribund. National currencies were notconvertible one to another, so even the basic payments mechanisms forinternational commerce had broken down. Mercifully, the age of Euro-

pean imperialism was also coming to an end, although it would take

clecades longer, and many wars, for it to end decisively. Still, standing on

the ruins of World War II, the benefits of a global marketplace-with a

global division of labor, a peaceful spread of technology, and open in-

ternational trade-looked long gone, buried under the rubble of two

world wars and a great depression.

RE,CONSTRUCTING A GLOBAL ECONOMY

Much work between the end of World War II in 1945 and the end of the

Soviet Union in 1991 went into reconstructing a new global economic

system. The immediate struggle was physical reconstruction: to repair

or rebuild the roads, bridges, power stations, and ports that under-pinned national economic production and international trade. Yet the

"plumbing" of the international economy also needed to be recon-

st.nrcted, with currency arrangements and rules for international trade

that would perrtit the market-based flow of goods and services, and the

productivity gains that would emerge from a renewed global division oflabor. This reconstruction effort took place in three steps.

First, the countries already industrialized as of 1945-Europe, the

trnited States, Japar-reconstructed a new international trading system

under U.S. political leadership. Step by step, these countries reestab-

lished currency convertibiliry (in which businesses and individuals could

buy and sell foreign exchange at market rate) in order to create a pay-

1t(.lls sysl(.nt lot ittlt't tlt(iutt;tl lr:rrlr'.'l'ltt' l'ltttr,;tcltlt ( tll l('ll( ics lrt't:ttttr'

r()n\,(.rlilrlt'lrglrirr irr l1)it1.'l'ltcycrrlrcllttttlrottlltltlrlt'lrglrirr irr l1)(;'1. Al

tlrr.s:rrrrc litrrr'. lltcsc t'ottttltit's ltgtt'r'tl lo tt'tltttt'llrt'lt;trlc lr;trticrs, ttt

, lrr<liug lriglr ttrrills lrrrrl rlrrotlrs. wlrir lr llrcy lr:rtl l)ltl itr l)llt( (' itt lltc r lr:tos

ol llrt.(lrr.:rt l)r'1rrr.ssiorr.'l'lrc lrlr<lt'lxtttit'ts ttttttt'rlrtwtt itt scvt'lltl

r,rrrrrrls ol ilrlt.t rrirtion:tl lrr<lt: rtt'goti:tliotts lrirrr<llt'<l ttrttlt't lltc ltttspir <'s

ul (lrr'(lt'rr<'r'al Agtt:t:tttcttl orr'l)rritlis itrr<l 'll'lr<lt'((;AI"l'), il s('l ()l ltll('s

tlr;rt torrs(ilrrtcrl thtt lirt't:t'rtttttt:t't() t()(lay's Worl<l 'lllt<lt'()r'gllttizlrliolr.

l lrr. r i6lr w<lrlcl, so<tn r:allecl t.hc Iirslworlrl, sttt:t't:t:<lt'rl itt tt't ttltsltttt lilrg,

,r rrlrll<r:t-lrirsed tradingsystenr. With it cilnl(: il lrttrsl ol t:t1lit[ <'torrorrrir

lqrorvllr, a powerful recovery after deca<lcs o{'war, lllockt'tl lt'lt<lr', lttrrl li

r ur r rcirtl instabiliry.'l'lt<: restoration of trade in the first worlcl clid not, llowt'vt'r', tttlittt

tlrt.x:storation of a global economy. The divisions itt tltt'wotltl t'<ott

orny a{ter 1945 went deeper than currency inconvcrf ilrility ittttl ltltrk'lrrrric'rs. By the end of the World War Il, the worlcl ltarl l>ct otttt' slirt lily

rlivirled in political terms that mirrored the econontic rttplttlt's.'l'lrcscr livisions would last for decades and are only now being htralt'<1.

The second world was the socialist world, the wgrlrl lirsl lolgt'rl lry

l,t'nin and Stalin in the wake of World War I. Thc sct:otttl wotlrl rr'

rrurined cut off economically from the first world until tlrc llrll ol tlrr'llt'rlin Wall in 1989 and the end of the Soviet Union in .l

9() I . At its 1 rt':rk,

llre second world included around thirty countries (d<:pt'rrtlittg orr llrt'

critcria for inclusion), and included about a third 9[ ltttrrr:trrily. l'l rr'

overriding characteristics of the second world were stzrt(l ttwttt'tsltip ol

tlte means of production, central planning of produ<'tiott, olt<''plttly

rrrle by communist parties, and economic integration wilhilr lltt' solirrl

ist world (through barter trade) combined with econotnit' st'p:tt:tliott

li'om the first world.The third world included the rapidly rising number ol postcolottirtl

countries. Todaywe use the terrn thirdworld simply to mcall ptxrr: l',;rt

lier on, the third world had a more vivid connotation as a gtrrttll ol

countries emerging from imperial domination that chose nt:illrt't lo lrr'

part of the capitalist first world nor the socialist second worl(|. 'l'lrcsr'

were the true third-way countries. The ideas at the core ol tlrc tlrilrlworlcl were: "We will develop on our o\{n. We will nurturc irr<lrrslry,

sometimes through state ownership, sometimes by giving sullsirlit's :rrrrl

protection to private business, but we will do it without foreigrr rrtrtlli-

nationals. We will do it without open international trade. Wc: <kr rrol

llusl llt<'ottlsirlc worlrl. Wc rv;rrrl to slrl rrorrrligrrlrl. l'lrc lirsl rvorltltottttltit's ilt('tt()l ottt ltt'tocs; lltcy lv<'tc orrr lr)uu('r (olorritrl l)()w('r:i.'I'he seconcl worltl lcixlcls iu('n()t l() lrc ltrrstr.rl cillrcr'. W<.rlo lt()l w:utlthe Soviet Union to swallow rrs.'I'lrcrt'lirrt', politictrlly wt'at('lr()n-aligned, and economically we are selGsullicierrt-."

Thus, the post-World War II world evolved on thrcc tracks. 'l'he lirn-damental problem, however, was that the second world and third worldapproaches did not make economic sense, and they both collapsed un-der a pile of foreign debt. Second world central planning was a badidea, and so, too, was third world autarky, in both cases for reasons thatAdam Smith had explained. By closing their economies, both the sec-

ond world and third world countries also closed themselves off fromglobal economic progress and the advance of technology. They createdhigh-cost local industries that could not compete internationally evenwhen they chose to try. The closed nature of these societies, in whichdomestic businesses were sheltered from competition, fostered a greatdeal of corruption. The nonaligned third world countries lost thechance to participate in the technological advance of the first worldmainly because they did not trlrst the first world. They were understand-ably intent on protecting their hard-won sovereignty, even when thatsovereignty was not really at risk.

My own work as an economist began at a time when the secondworld and the third world economies were already economically mori-bund, and were falling into a deepening spiral of economic chaos. Theearly rnanifestations of that crisis, typically, were rising levels of foreigndebt and increasing rates of inflation. My earlywork centered on macro-economic stabilization-the end of high inflation-and this workbrought me into contact with countries that were isolated from firstworld markets and technology. This early work involved technical mon-etary economics, but it brought me face to face with the more basic andfundamental choices of how countries should relate economicallv tothe broader world.

By the early 1990s, the overwhelming majority of countries of thesecond world and third world were saying, "We need to be part of theglobal economy once again. We want our sovereignty; we want our self-

determination, but we will abandon Leninist-Stalinist central planningbecause it doesn't work. And we will abandon the idea of self-imposedautarky, because economic isolation makes no more sense for a country

llr;rtt il tlot's lor ltrr irrtlivirltr:t1." lrr ('ss('ll( (', ()ll('ol tttl' 11rlcs lt,ttt llrc rrrirll1)lJOs olrwlrrrl w:rs lo lrlp r orrtrltics lo lrcr'r)tn('s()\'('lcigtt tttctttlrt'ts ttl ltrrrw irrtclrrirliorurl sysl('nr. I lt'1rt'ltlcrlly rlclrll witlt llrlt't' lrig tlttt'sliottr:

Wlrlrt is tlrc lx'sl wtry llrcl< lo irrlt'r'nrliottirl ltitrlr'/ llow rlo w('('s(itl)('Ir orrr llrt' lxrrrlrt'lcs ol l>ir<l <lclrts :rnrl irrt'llicit'rrt irrrltrstry? I lrtw <lo wt' ttr'

goliirtt'ncw nrlcs ol'tlrc ganl('t() cnsur'('tlutl tlrc cnr<'r'girrg glollltl r^r'ott

onry worrlrl trtrly scrvr: tlrc rtcr:<ls ol all o['(lrt't:ottrt(tit's of'lltt'wotlt[. ttol

orrly Ilrc rir:hcst artcl most powcrfirl?

.fWO HUNDRED YIIARS OI.'MoI)I]ITNECONOMIC GROWTH

I lrrrve touched lightly and briefly on two hr"rndrecl years ol'tIto<lt't tt t't o-

rrorrric growth-complete with change, turmoil, conflict, lrrr<l irlt'ologv.

Wlrat has this era of modern economic growth brought t.lrt' woll<li'

Iligher living standards than were imaginable twct centrrl'ics 1l,l(), il

splt:ad of modern technology to most parts of the world, ancl a s('i('lll ili('rrrrd technological revolution that still gains strength. l,ivirtg slittt<l:ttrls

;rrc much higher in almost all places than they were at tl'rc slat'l ol tllt'

l)r'ocess, the major exception being the disease-ravaged parts ()l'All ir ir.

But modern economic growth has also brought phenottt<rttlrl glllslrctween the richest and poorest, gaps thatwere simply imp<tssilrk' wlrcrr

l)overty gripped all of the world. The era of modern econotrtit' gt owllr

lras bequeathed us an economic picture of the world as sectl irt rrrltp ?,

where each country is shaded according to its per capita (il)l' (rrrcrr-

strred in purchasing-power adjusted prices) as of 2002. Thc rit'lr wor'ltl

(above $20,000 in per capita income) is shaded green, and ir.rclrr<lt's tlrt'United States, Canada, Western Europe, lapan, Australia, arttl Nt'w'Lealarrd. The countries in the middle-income range (betwecn $4,0(X)

and $20,000) are shaded in yellow, and include most of East Asirr (srrclr

as Korea and Singapore), Central Europe, the former Soviet lltriott.and Latin America. Countries within the upper end of the low-ittt orrtt'

range (between $2,000 and $4,000) are shaded in orange, and int'lrrtlt'

parts of South America, South Asia, and East Asia. The poorcsl ('()rrlt

tries (below $Z,OOO1 are shaded in red, and are concentratecl in sttl>

Saharan Africa and South Asia. There is, of course, a striking sirnilirrity

between this map of average GNP per person and the map showirrg tlrr'

l)tr)lx)t'l i(,tt ()l lt()tts('lt()l(ls itt lrovct11, (rrr:rp I): lltc lorv irrr olrrc r orrrrlricsittt', rttltltlrly, lltt'<ottnltics witlr lriglr l)r'()l)()r'liorrs ol rrrorlclrtr';rrtrl cx-treme p()vcrty.

So why d<-res a vast gull'dividc ont: sixtlr ol lrrrnrirrrily lo<liry irr tltcrichest countries from the one sixth o{'thc worlcl barcly ablc t() sust.irin

life? The richest countries were able to achieve two centuries of rn<tde rneconornic growth. The poorest did not even begin their economicgrowth until decades later, and then often under tremendous obstacles.

In some cases, they faced the brrrtal exploitation of dominant colonialpowers. They faced geographical barriers (related to climate, fbod pro-duction, disease, energy resources, topography, proximity to world mar-kets) that had not burdened the early industrial economies like GreatBritain and the United States. And they made disastrous choices in theirown national policies, often until the past decade. All of this left themwithout the good fortune of two centuries of rapid economic growth, in-stead growing only sporadically during a fewyears.

The key point for these countries is that there are practical solutionsto almost all of their problems. Bad policies of the past can be cor-rected. The colonial era is truly finished. Even the geoeraphical obsta-

cles can be overcome with new technologies, such as those that controlmalaria or allow for large crop yields in marginal production areas. Butas there is no single explanation lbr why certain parts of the world re-main poor, there is also no single remedy. As I shall stress repeatedly inthe pages ahead, a good plan of action starts with a good differential di-agnosis of the specific factors that have shaped the economic conditionsof a nation.

'l'lt,re e

WHY SOME COUNT'RII.]SFAIL TO THRIVtr

f the world's population of 6.3 billion, roughly 5 billiorr pt'oplr'have reached at least the first rung of-economic devcl<lptttt'ttl. liivc

sixrlrs of the world's population is at least one step abovt: (:xtt('ul('

lrovcrty. Morever, approximately 4.9 billion people live in cotrttlticsrvlrt're average income-measured by GDP per person-itrct't::tsr'<l lx'-nvt'cn 1980 and 2000. An even larger number, roughly ,l-r.7 l>illiorr

pt'<>ple, live in countries where life expectancy increased. Et:oltonrit rlr''

r,r'lopment is real and widespread. The extent of extrentt: pov<'r'ly is

slu'inking, both in absolute numbers and as a proportion ol'tlrc wotlrl's

population. That fact is whywe can realistically envision a wot'l<l willtottl('xtreme poverty as soon as2025.

Precisely because economic development can and does wot'k itt so

nlany parts of the world, it is all the more important to understirtrrl lrtrrl

solve the problems of the places where economic developntr:nt iri n()l

working, where people are still off the ladder of developmcnl, ()r ilr'('stuck on its lowest rungs. To understand why economic growth srt<'t ccrls

or fails, we first need a conceptual framework that can acc:orrrtl lirr

t:hanges over tirne in GDP per person. I have already discussecl soltlt' ol

the factors that promote long-term development, but here I atl<ltt'ss

them more systematically, including a discussion of why the prot'css ol

cconomic development breaks down in many places, especially tlrr'poorest places. Perhaps it would be clearest to begin with a very spc<'ilir'

case: a single farm household.

't il l,t (: l{()\A, t il ()t, il()Ul.il,tll(}l,l) I N(;()l\1 l,:

(-lorrsirlcl tr Irorrsclrolrl <orrsisling ol lr lrrrslxrrrrl, wili', lrrrrl lirrrr clril<llcrr(two daughtcrs and two srlns) livirrg on a lwo-lrt'r'tirx: Irrnr.'l'lrc lrorrsc-

hold grows rnaize and provides for its own shelter in irn arkrl>r: lrtrt. Bc-

ing extremely poor, the family consumes its own maize harvest andearns no other cash income during most years. The children collectfuelwood in the vicinity of the farm for cooking, and fetch drinking wa-

ter from a nearby spring.This year the household produces two tons of maize per hectare, or

four tons in total. Even though the household eats its own maize, thestatisticians in the government will assign this household an incomebased on the market value of the rrtaize. Suppose that each ton of maize

sells in the local market for $150 per ton. The household's imputed an-

nual income will be $600 ($150 per ton times four tons), or $100 percapita ($600 divided by six people). The government will add this figureto other household incomes to calculate the country's gross nationalproduct.

The family's income per capita can increase in at least four ways thefollowing year.

Sauing

The household might decide to consume only three out of the four tons

of maize, and take one ton to market. With the $150, the household in-vests in livestock (perhaps chickens or sheep or a bull or dairy cow). Thelivestock generate a new stream of income, whether from improvedfood yields by using the bull for manure and animal traction, or the cow

for sales of milk, or the animals for meat, eggs, or hides. In economicjargon, the saving has led to capital accumulation (in the form of live-

stock) , which in turn has raised household productivity.

Trade

In a different scenario, the household learns from a neighboring farrnerthat it has the right kind of farmland, climate, and soil to producevanilla beans, with a much higher income. After some deliberation, thehousehold decides to shift to vanilla as a cash crop. The next year thehousehold earns $800 in vanilla, and uses $600 to buy four tons of grain

lor loorl. As trtotc vltttill:r lltttrrcts lttis<'in llrt tcgiott.;r lr('t! f.itott;r ol

trrrrlirrg lirrrrs lrlso lor rrrs, spcr i:rlizirrg irr slrippirrg lrrrtl slor:rgc ol r,:rrrill:r,lootl, lrrrrl lirlrrr irrprtls.

'l'lris pirllcrrr t'xorrplilics Arlirrrr Srrrillr's irrsiglrt inlo llrt'lwo wlry lirrliIrorrr spt'< illizlrlion to t'xllrrtt<lr'<l rtlrt kt'ls lrit< l< lo incttlrsr'<l slrcliirlizlrtiorr.'l'lrt' Iirrrn lrorrst'ltol<l sllcti:rlizt's irr lriglr-valrrc virrrillrr lirlrnirrg lrr'

t lrrrst'il livr:s in Iirvolalllt: r:r'ological t:orrrliliorrs lor vlrrrilllr lrt'r's. Il lclicsorr llrt: nrarket lo trarlc witlt othcr lt<ltrsr:ltol<ls, wlri< lr insl('ir(l sp<'r'i;rlizr'

irr llro<lucing food. As incornes rise, and tht: "cx(cnl o[ tlrc rrr;rlkcl" irr

( r'('as()s, to use Smith's phrase, there is roorn Iirr firrtht:r'sJx'r'iirlizirtiorr,irr tl'ris case in transport services. l,ater on, econorni<'lrctivitit's will lrr'lirrther divided among firms specializing in hotrsing t'orrsllrrctiorr,t l<lthing manufacturing, road maintenance, plumbing, clt:r'lricily, wrrlcr

lrrrrl sanitation systems, and so forth.

'lbchnolog

Alternatively, an agricultural extension officer teaches the Izrrrrr lrousr'-

hold how to manage the soil nutrients in a new and improvc(l nriuur('r'

lry planting special nitrogen-fixing trees that replenish the vil;rl rritro-gen nutrients of the soil, and to multiply the benefits by using irrrprovcrlgrains. The new cereal varieties are faster maturing and pr:st rt'sisl:rrrt,

zrnd they flourish with the replenished soil nutrients. As a rt'srrll, llrt'crop yield rises in a single year to three tons of maize per he('larr', rlr six

tons in total. The income per capita therefore rises to $150 (t.hr'<'r' torrs

per hectare times two hectares at $150 per ton divided by six pcolrlr').

Resource Boom

The farm household is able to move to a much larger and more lirrtil<'farm after the government's success in controlling the breeding o{'blir< k

flies, which spread African river blindness. Suddenly there are thotrsln< ls

of hectares of new farmland and a significant expansion of produ('ti()ncapacity as a result. Incomes rise and hunger falls as each householrl irrthe newly opened region is able to triple its previous food output.

These four pathways to higher income are the main ways that econonri<'s

grow, albeit in much more complicated settings than I have just rl<-

scribed. In actual economies, a rise in gross domestic product (GDl')

l)('t ( itl)ilil is typir lrlly lltt' rcsrrll ol rrrosl or lrll ol llrr.sr. lorrr 1rr()( (.ss('s si

trltlllltll(:()ltsly lrl wor'l<: s:r\/ing lrrrrl r';r1ril:rl irr lrlrrrrllrliorr, irrcrr.lrsinl"l sl)('-

cializatiorr all(l tl':t(l(', tt'<lrrtologi<irl it(lviur(('(lrrrrl rr t(.slrllinll risr,irroutputforagiven alnoulttol'irr;luts),lrrrcl gr<:irtcr rritlrrlal r'('s()ur'(('s Ix)rperson (and a resulting irlcrease in the level oI'()utput pcr pcrsorr). Al-though I have illustrated these pathways to rising incorne at the level ofan individual household, in fact each of these processes operatesthrough the interactions of thousands or millions of households linkedtogether by markets and collective actions through public policies andpublic investments.

What, instead, could lead to a reduction of household income percapita? In general, an economy can rewind the clock, moving backwardrather than forward. Here are a number of ways that this might happen.

Lach rf Saaing

Suppose that the household is chronically hungry and, therefore, con-sumes all of the four tons of rnaize,leaving nothing to sell to the marketand no income to use to purchase a new plow. In fact, during the year,the existing plow breaks down. Next year's crop falls trelow four tons,and household income per person declines. The broken plow counts as

capital depreciation, or a fall in the amount of capital available perworker.

Absence of Tiade

In another case, suppose the household hears about the vanilla oppor-tunity, but is unable to make use of it. There may be no road linking thefarm and the regional market, so it is not possible for the household tomarket the vanilla or to use the proceeds to buy food. As a result, thehousehold passes up the opportunity to specialize in a cash crop andstays with the food crop on which it depends to stay alive. Trade can sim-ilarly be hampered, or blocked altogether, by violence (which impedesthe reliabie shipment of goods), monetary chaos (so that money is not areliable medium of exchange), price controls, and other forms of gov-ernment intervention that may impede specialization and trade.

'

I )r lt trtltyit'rtl Itnu't,vtI

\Allr;rt il. lrs ollcrr lurlrpcns in lrrr:rl Alrir:r, tlr<'r lrilrlrtn losc llrrir tttolltct.rrrrl l;r{lrcr to IllV/AIl)S?'l'l r olrk'sl clrikl llrkcs r lurtgr', lrtrt lt:rs ttol lcllrrrrl tirrrt'(() ln:lst('l l)r)l)('r'lirrrrrirrg lcclrnitlrtcs. I'ltt'ttcx( <lirp l:tils,

;rrrrl llrt'r'lril<lrcrr rrrrrsl <lcpcrrrl orr ollrcr lrorrsclrokls irr tlrc villlrgr'.'l'lrt'l:rrrrily irr<'onrr'luts rl<:clirrr:rl lo zcro lrccltrtst'tlrt'l<'vr'l ol tcclrttologir:tll\n()wl(f(lgc has ac:trrarl[y <lct:lirrt:<1.'lt:r'lrrrologi<':tl kttow-ltow is noI ltttlottt.tlir rrlly irrlrt:ritr:d. Ezu:h l)ew gellcruliotr trtrtsl lcitt'tt tcclutologi<:rl cxlrt't list'.

N ril, ural Resource Decline

'lir illustrate another possibility, not only is thert: rro a<t<lilion:rl l:rrrrl, lrrtt

llrrt of the existing farmland gives rvay to environnrctrlirl tk'r'littr'. Spt'r il

ir ully, the household has not treen able to allbrcl Icrtiliz.r:r irrrrl rlr,('s n()l

l<rrow about nitrogen-fixing trees, so the nitrogen in tltt: l'ltt rrrlitrrrl is st'r i

orrsly depleted. The result is that only one hectare rctrtltitts irt ptorlttrlion, and household annual income falls to a devastalirrg $150 pcr r';r1ril;t

(two tons times $150 per ton divided by six).

A duerse Productiuity Shoch

A natural disaster, perhaps a flood, drought, heatwavt:, ltosl. 1x'sls, ot

rlisease in the household (for example, a bout o1'tnltlitrirt), ()r ri(|rrl('combination, wipes out household income for the year.

Population Growth

A generation passes. The parents die, and the two hectares irrt'tlivirlt'tlbetween the two sons. Each son now has a wife and four chil<ln'n. As

suming that crop yields of two tons per hectare remaitr tttt<'luttrgt'rl,

household income per capita has declined by half because tltc sizc ol

the population living on the same farm has doubled. This expt'r'it'rrcr'has been prevalent in rural Africa's in the most recent generati()lts.

These simple illustrations show the many ways that even a simplt' orrr-

household "econorny" may grow as well as the many ways thitt llrt'household economy can decline. The first ta.sk of a developmenl slx'-

cialist looking at the conditions in any particular country is to tttt<l<'t'

slltrrrl r,vlrir lr ol llrr'st' \';u iolrfi l)t()( (.\s(.s is rvor l<irrg :rrtrl rvlrir lr is rrol.lirrowilrg lltitl lrtt ('(()rr()rrty is itt rlcr lirrc is n()l ('lrorrglr. Wc rnusl Iur()wwhy tltt'o(()t)()lrly is lirilirrg to rt< lrit'vr'('( ()n()uri( gr'owllr il wc lrlc lo llrkr.steps to establistr or rccstablish it.

WHY COUNTRIES FAIL TO ACHIIIVEECONOMIC GROWTH

The most common explanation for why countries fail to achieve eco-nomic growth often focuses on the faults of the poor: poverty is a resultof corrupt leadership and retrograde cultures that impede modern de-velopment. However, something as complex as a society's economic sys-

tem has too many moving parts to presume that only one thing can gowrong. Problems can occur in different parts of the economic machineand can sometimes cascade, bringing the machine to a near halt.

In economic growth, eight major categories of problems can causean economy to stagnate or decline. I have witnessed these kinds of disas-ters in many parts of the world. Each has its own different appropriatecourse of treatment; therefore, a good diagnosis is crucial.

The Pouerty Tiap: Pouerty Itself as a Cause of Economic Stagnation

The key problem for the poorest countries is that poverty itself can be atrap. When poverty is very extreme, the poor do not have the ability-bythemselves-to get out of the mess. Here is why: Consider the kind ofpoverty caused by a lack of capital per person. Poor rural villages lacktrucks, paved roads, power generators, irrigation channels. Human cap-ital is very low, with hungry, disease-ridden, and illiterate villagers strug-gling for survival. Natural capital is depleted: the trees have been cutdown and the soil nutrients exhausted. In these conditions the need is

for more capital-physical, human, natural-but that requires moresaving. \A/hen people are poor, but not utterly destitute, they may beable to save. When they are utterly destitute, they need their entire in-come, or more, just to survive. There is no margin of income above sur-vival that can be invested for the future.

This is the main reason why the poorest of the poor are most proneto becoming trapped with low or negative economic growth rates. Theyare too poor to save for the future and thereby accumulate the capital

l)(.t l)(.tsorr llurl lorrlrl lrrrll llrt'tn ottl ol llrt'ir (lttt'('tll tltist'ty,'llrlrlc I

slrows llrr. rirlr.ol gross rlornt'slic sitvitrg;ts lt sltlttt' ol ( ll)l' lot t ottttlttt's

;rt rlilli.r.<.rrl incorrrc lt,vcls. (llclrrly, lltr'poott'sl ol llrt'ltool ltltvt'llrl low

1sl s:rvirrg nrlt, llt.< lrrrsc tlrt'y irn' rrsirrg tlrt'il ittt otttt' rrlcttly lo sllry lrlivr'.

t I ppt'r.Mi<lrllt:lttt'tttttc (lottttlt'it:s 2!"il,

')8')1,

!t)t )i

'

lot)1,

Lowt'r.M irlrlltrln cotnc ( lotttt trit-'s

l,ow I rrr:orttc Cl()untries

I r';rst-l)cvclopecl Countries

\trrt': l\lill llunh (2001).

In fact, the standard measures of domestic saving, btrst:rl olt tlrt'ollicial national accounts, overstate the saving of the p(x)r l)c('atlst' lltcst'

<lata do not account for the fact that the poor are clepleting lltcil rrrtlrr'

lal capital by cutting down trees, exhausting soils of thcir ttttltit'ttls.

rrrining their mineral, energy, and metal deposits, and ovcrfishitlg' 'l'lrt'sr'

lirrms of natural capital are not monitored in the official ttaliottitl ltt'('ounts data and, as a result, their "depreciation" or depletior) is t)()l l ('( -

ognized as a form of negative saving. \A4ren a tree is cut dowtr ;rrttl soltl

li;r fuelwood, and not replanted, the earnings to the logger ttrt' < ottttlt'rl

1s income, but instead should be counted as a conversion tll'tlttt: t lrllilirl

ersset (the tree) into a financial asset (money).

Physical Geography

Even if the poverty trap is the right diagnosis, it still poses tht: rlttcstiotr

of why some impoverished countries are trapped and others ill(' ll()1.

The answer often lies in the frequently overlooked problems ol Jrlrysir':rl

geography. Americans, for example, believe that they earrtt:tl tltcir

wealth all by themselves. They forget that they inherited a vast c()rrl irt('rl I

rich in natural resources, with great soils and ample rainfall, irtttttt'ttst'

navigable rivers, and thousands of miles of coastline with dozcns ol ttltl-

ural ports that provide a wonderful foundation for sea-based trir<lt'.

Other countries are not quite so favored. Many of the worl(l's Ix)()l'

est countries are seyerely hindered by high transport costs be catlst' llrcy

are landlocked; situated in high mountain ranges; or lack naviHlrl)l('

rivers, long coastlines, or good natural harbors. Culture does tlol cx-

'I'ablc I: Saving Rates (iortntlits

hy lrrcorne [,cvel in 2002' in 7o ol'GDI'

pllrirr llrr' ;rcrsislctrr t' ol lrovrr ly irr lirlivitr, l,,tlriopiir, KvrHyzsllrrr, or 'l'i

lrll. l,ook irrslt'ltrl lo lltc trrourrllrirr gcogrlrplry ol lr llrrrrlloclit'rl rr.giorrllcirtg ('l'uslling tr'anslx)r'l t osls rur<l ('( ()n()nri( isollrliorr lltirt slill<'irlnt()stall f<lrms o1'nroclcrn cc()n()ll)ic irctivity. Arllrru Srrritlr was irculcly ilwilr'(.()lthe role of high transport costs in hindering ccon()n)icr rlcveloprrrcnt.He stressed, in particular, the advantages of proximity to low-cost, sea-

based trade as critical, noting that remote economies would be the lastregions to achieve economic development:

As by means of wateFcarriase a more extensive rnarket is opened to

every sort ofindustry than what land-carriage alone can afford it, so

it is upon the sea-coast, and along the banks of navigable rivers, thatindustry of every kind naturally begins to sub-divide and improve it-self, and it is frequently not till a long time after that those improve-

ments extend themselves to the inland part of the country.

Other kinds of geographical distress are also at play. Many countries aretrapped in arid conditions with low agricultural productiviry or l,ulnera-biliry to prolonged droughts. Most of the tropics have ecological condi-tions that favor killer diseases like malaria, schistosomiasis, denguefever, and dozens of others. Sub-Saharan Africa, in particular, has anideal rainfall, temperature, and mosquito tJpe that make it the globalepicenter of malaria, perhaps the sreatest factor in slowing Africa's eco-

nomic development throughout history.Jared Diamond, in his wonder-ful book Guns, Germs, and Steel, gives a magnificent account of howgeography helped shape the early stages of human civilization. He of-fers scintillating insights into how the Americas, Aliica, Europe, andAsia differed in terms of indigenous crop species, animals for domesti-cation, ease of transport, possibilities for the spread of technology, dis-ease ecology, and other geographically related factors in economicdevelopment. Some of these factors, of course, became much less or notat all important with the advent of modern transportation and commu-nications and the resulting transfer of crops and animal species across

different regions of the world.Fortunately, none of these conditions is fatal to economic devel-

opment. It is time to banish the bogeyrnan of geographical determin-ism, the false accusation that claims about geographical disadvantageare also claims that geography single-handedly and irrevocably deter-mines the economic outcome of nations. The point is only that these

.rrl1r'tsilit's tt'rlrril('(lllllllit's lo lttltlt'rl:rlic lrrlrliliott;tl ittvr'sltttt'ttls lltltlollrr.r. rrrorc lr)t llll;tl(', r'otiltltics rlirl ttol lt;tvt' lo tltlllit'. l{o:rtls r ittt lrt'

lrrrill llorrr lr llrtrrllo<lir.rl corrnlry lo it pot l itt lttto(ltct (()lllllly.'liopir:rlrlisr.:rsr.s r'trrr lrr.r'orrllollcrl. Ari<l r'lirnlrlt's r':trr lx'()v('t(()ltt('witlr irliglr

liorr. Arlvr,r'st. g<'ogrtrlrlry l)()s('ri ;ltolllt'ttts lltttl trttt lrt' solvt'rl. tyllir:rlly

tlrrorrglr llltysir:al irrvt.slirrt'rrts lrr<l goo<l cotts<rt'vlttiolt lttltllilll('lllcrrl. llrrl

,rrlvt'r'st: gcogltrplry laist:s tlrt: tosls ol solvirtg tltt';trrrlllt'rrrs ol l:rlrrrirlg,

trinril)()l'1, atrrl lrt:irlllr, itt)(l tilol-(:l)y ll)akos it rrtttt:lt rrrol't'likcly llt:tl:t( ()untl y will lrt'cirtrght irt it povt'rty lrttp.

l;iu'a,1, 'lhttlt

l,,vcn when the private economy is not impoverishecl, the f{()v('t'lllll('lltrrrly lack the resources to pay for the infrastructure ot-t u,hit:lr (:t ortotrtit

sr.owth depends. Governrnents are critical to investing in prrlrlit gootls

;rrrrl services like primary health care, roads, power gricls, porls, :rlrll llrr'

lil<r'. The sovernment may lack the financial means to provirlt'tltt'sr'prrl>lic EJoods, however, for at least three reasons. First, the poptrllli<lrr it-

st.ll'rnay be impoverished, so taxation of the population is not lirrrsilrlt'.

St'<:ond, the government may be inept, corrupt, or incapacitlttcrl, lttlrl

tlrt'reby unable to collect tax revenues. Third, the governrn<:rtl trrlty ltl-

rt'ady be carrying a tremendous load of debt (for exarnple, dt:bt t'itrt it'tl

li rrl,rard from an earlier decade), and must use its limited tax rt:v<'t tt tt' lr t

sr:rvice the debt rather than to finance new investments. This tltir rl t itst'

is often called a debt overhans. Debt from the past crushes tltc lrtrrspt't ls

lirr: growth in the future. In such circumstances, debt cancellaliorl rrr:ry

l rc the only way to give the country a fresh start on a path of ecot tortr it t lt''

vt:lopment.

( )ouernance Failurcs

l,]conomic development requires a government oriented towar<l <lt'vr'l-

()pment. The government has many roles to play. It must identily itrrrl li"

nance the high-priority infrastructure projects, and make thc rtt't'rlt'rlinfrastructure and social services available to the whole populatiotr, rlol

illst a select few The government must Create an enYironlnol)l ( ()ll"

clucive to investments by private businesses. Those investors ttlttsl llt-lieve that they will be allowed to operate their business and to kc:c1r llrt'ir'

[iture profits. Government must exercise self-restraint in derrlitn<lirrg

lr.ilrr.s .r. sirll l)llylt(.11s. ( lrvr.trrrrrt'rrls nutsl :tlso ttt;tittllrtlt irrlCtttltl

1rt:lrr.t, lrrrrl sirli'ly so llrt. s:rlt'ty ol pt'tsotts :tttrl ptopctly is rrol rrlrtlrrly

threatepccl, nraillt.aill .irrrli< ill syst('rns lltitl t itrt tlt'lirrt' prrpt'r'ty liglrts

and honestly enfbrce contracts, arxl (lc:l'cn(l tltc tratiollitl t(:l't'it()l'y (()

keep it safe from invasion.

when governments fail in any of these tasks-leaving huge gaps in

infrastructure, or raising corruption to levels that impair economic ac-

tivity, or failing to ensure domestic peace-the economy is sure to fail,

and often to fail badly. Indeed, in extreme cases, when governments are

unable to perform their most basic functions, we talk about "state fail-

ures," which are characterizedby wars, revolutions, coups, anarchy, and

the like. We will see later on that state failures are often not only the

cause of economic disaster, but also the last stage of it. State failure and

economic failure can chase each other in a dizzying and terrif,ring spiral

of instability.

Cultural Barriers

Even when governments are trying to advance their countries, the cul-

tural environment may be an obstacle to development' Cultural or reli-

gious norms in the society may block the role of women, for example,

leaving half of the population without economic or political rights and

without education, thereby undermining half of the population in its

contribution to overall development. Denying women their rights and

education results in cascading problems. Most important, perhaps, the

demographic transition from high fertility to low fertility is delayed or

blocked altogether. Poor households continue to have six or seven chil-

dren because the woman's role is seen mainly as child rearing, and her

lack of education means that she has few options in the labor force. In

these settings women often lack basic economic security and legal righs;

when they are widowed, their social circumstances turn even more

dreadful, and they are left completely impoverished without hope for

improvement.Similar cultural barriers may apply to religious or ethnic minorities.

Social norms may prevent certain groups from gaining access to public

services (such as schooling, health facilities, orjob training). These mi-

norities may be blocked from entering universities or public sectorjobs.

They may face harassment in the community, including boycotts of

their businesses and physical destruction of property. In extreme cir-

( utnsliut( (.s, :t)i ()( ( lu'l('(l in l,llrst Alr it:r lvitlr tltc ltrrli;trr t rtttttltttltil\',

wlt.l.sltlr"'t'lltttit .l.ltttsittg" lll:ly ('llrill(., rvillt ttt:tltl' ll.r'irrg l,r llr.ir lir'<'s

( )ulxtlitir.s

tt takr.s Iw() l() trrrlt:.'lilr<lt'lxrrrit'r's <'rcclt'<l lry Iirrtiglr tottttltit's t rttt ittt

pt:<lc ur l)()()r ('()lurlly's t'<'onorrrir'<lt:vr'lolltttt'rrl.'l'ltt'st'lr:tt tit't's lll('s(,lll('

tirrrcs politicztl,:rs wlr<:rr ir [x)wcrlill ('()lu)tly itttlrost's ttlt<lt's:ttlcli()lls ()ll :l

r'<:girnc that it dt>cs not likc.'l'hr:sc sun<:lions rttity itittt lo wt'ltltt'tt ()l l()l)

llle a clespicable regimc, but oltt:n they sinrply irrrllovt'r'isll llrr'lxrlrrtl:t

tion of the targeted corrntry withottt toppling tltt: t't:girtt<'. Mltrty litllors

in acldition to trade that may affect tt cotlntry's dtlvt'loJrtrt<'ttt t lttt lrt' ttt:t

rripulated from abroad fbr geopolitical reasolrs.

Lach of Innoaation

( lonsider the plight of inventors in an impoverished cotlllt l'y. l'lvt'r I il llrt'sr'

irrventors are able to develop new scientific approaches t() Ill(:(rl lot ltl t't r I

rr<lmic needs, the chances of recouping investments in rcst:itlt'lt lttrll rlr'

vclopment through later sales in the local market are very low.'l'lrt' Lrt rrl

ptrrchasing power to buy a new product is tiny, and will rttll lrtovitk' lor

sufficientprofitsif aninventionissuccessfullybroughttonrltrkt'l,r'vclt il

rhe impoverished countryhas state-of-the-artpatentlegislatiorr.'I'lI<' 1rrrrl I

It:m is not the property righS to the invention, but the sizc ol l ltc rr rrrr lit'1.

There is, therefore, a huge difference between rich arrtl l)(x)l ( ()rlll

l'ies in their tendency to innovate. Rich countries have a lrig ttlltrlit'1,

wlrich increases the incentive for innovation, brings new (('( llllologics(<l market, further raises productivity and expands the siztl tll lllc tlt:tt

l<,t:t, and Creates new incentives for innovation. This mometlllllll ( l ('lll('s,

irr effect, a chain reaction, which economists call endogetrotts gtor'vllt.

ltrnovation raises the size of the market; a larger market raist's lltc irr

lgntives for innovation. Therefore, economic growth aucl itlltov:tliorr

l)r'oceed in a mutually reinforcing process.

In the rich countries of North America, Western Europt:, itrrrl l'lltsl

Asia, the process of massive investment in research and devclol)llt('lll'It:acling to sales of patent-protected products to a large market, st:ttttls :tl

tlrc core of economic growth. Advanced countries are tlpically invt'stirrg

? percent or more of their gross national product directly into llrt' r't'

st.nrch and development process, and sometimes more than 3 p<'trt'rrl

()l (;l)l'. I lrlrt irrlcslnr('nl is vcrt'siz:rlrlr', lvitlr lrrrrrrltrrls ol lrrlliotts ol tlolllus ittvcslcrl t':r< lr y('iu in tcst':tt'r'lt iur(l (l('\'('l()lrtn('nl :l( lrvltics. Mott-ovc:r, tlrcsc irrvt:strrrcnts ill(' lr()[ sirrrply lt'li. to llrt' rrurrkt'1.. (iovt'trurtcttts

invest heavily, especially in the cnrly st.agcs o['l{ itntl [) (rrrorr: itr lt, r't:-

search, than in D, development, although gclvcrnmctrt financc is pres-

ent at both stages).

In most poor countries, especially smaller ones, the innovation pro-cess usually never gets started. Inventors do not invent because theyknow that they will not be able to recoup those large, fixed costs of devel-

oping a new product. Impoverished governments cannot afford to backthe basic sciences in government labs and in universities. And the scien-

tists do not stay. The result is an inequality of innovative activity that mag-

nifies the inequaliry of global incomes. Although today's low-incomecountries have 37 percent of the world's population and 11 percent ofthe world's GDP (adjusted for differences in purchasing power), these

countries accounted for less than 1 percent of all of the U.S"-registered

patents taken out by inventors in the year 2000. The top twenty coun-tries in patenting, all high-income countries, account for 98 percent ofall patents.

Over the span of two centuries, the innovation gap is certainly oneof the most fundamental reasons why the richest and the poorest coun-tries have diverged, and why the poorest of the poor have not been able

to get a foothold on growth. The rich move from innovation to greaterwealth to further innovation; the poor do not. Fortunately, there are afew opportunities for innovation, although these are not as robust as we

would hope.The first is the diffusion of technology. Even when countries are not

inventors of technology, they can still be beneficiaries through the im-portation of technology. A1l countries today, without exception, are us-

ing personal computers, and cell phones are reaching most parts of theworld as well, even very poor places. Innovations can be importedthrough consumer goods, capital imports by business (in the form ofmachinery for example), foreign direct investment (in which a high-tech firm sets up a factory in a poor country) , or textbooks, word ofmouth, and reverse engineering. History is replete with examples inwhich new capital goods and blueprints were simply pilfered andbrought to a new location.

However, the importation of technology can be frustrated in thepoorest of the poor countries. These countries may be too poor to pur-

r lr.rsc llrc r:rlritrrl lioorls, trrrrl llrt'1,1,,',t' lrr rur:rllt:rr livc rrs 1rltr, r's lor lor('rl,n nr\'('slrrrcrrl, givcrr llrt'ir l;r< l. ol irrlr;rsltlr( lrrrt'. llrrl llrcrl is olllrr .r

rurrr lr tlcr'pt'r'Ptolrlcrrr. M:rrrv,rl llrt'licy lrrr';tlitlrrorrglrs irr lcr lrrrololi!',1,'rr'lopcrl ilr llr<'r'iclt cotutltics;ttc tcllvltttl lot'llrr'prrtlir rrllrt <'rolo;,ir,rl r orrrliliorrs ol llrc liclr corrrrlrics, lrrrrl :rrr^rrol csPcciirllv rrsclrrl irr llrr'lrnlrrllrl, ot ;rtirl. or rnorrrrlrrin t'rrvir'orrrncnls wltltc s() nriuly ol llrc crIr('nr('poor livt'to<lrty.'l'lrt'rtutssivt'irrv<'slrrrcrrls irr lriorrrt'rlir';rl lcsclrrr lr

rrr tlrc ri< lr <'orrrrtrit's, rrror'<'tlrlrrr $i70 llillir>rr, lrrrgt'lv ovcllool< tlrc r lr;rl

llrrlics ol tlopit'itl rlist':tscs sttt'h its tnttlitt'iit. l{i<'lr<otrrrlry ltrrrrling is, rrrrt..r r r I rr isi r ruly, iritttr:rl at t'ich-corrtrl.r'y rlisr:ttsr:s.

lVllrrry poot'l.,itsI Asian cotrrttrics wcrc itrilially srrctt'sslirl irr rrrisirrg

tcr lrnology lr()t so mtrch through l-r<ltne-growrt irltovtrliorr ;rs llrr orrglr

llrcil srr< t'css in attracting lbreigrr investors who lrrorrglrl llrc lcclrrrolopircs lvillr them. As early as the late I960s,'lexas Instnlrn('n(s, N:rliorr:rlSt rrucortrltrctor, and Hewlett Packard, among othcrs, s(:l ul) opt'rirtiorrsrrr Sirrglpore, Penang Island (Malaysia),2rnd other pluts ()l l,,rrst Asirr.

I lrcy savcd a lot of money but also introduced what wcrt: <ltlrt'r'wisc vcr v

lx)()r' c('onomies to sophisticated scientific tcchnology arr<l rrtlv:rrrr'r'rl

nr,urilllclnent processes. If a poor country can beconre an atlrrclivr' 1rl:rt r'

l,rr lriglr-technologyenterprisestoconductpartoftheirl>rrr<hrctionlrr'lir.,itics, llrt:n they can become a home, even at a low level ol'rlt'vt'loprn('nl, ((,

rlrritc sophisticated production and management techniqtrt's. IJnrlt'r tlrr'rrpilrl r:ircumstances, hosting such activities on the horne lrrrl clrrr tlrcrrlr':r<l to a diffusion of knowledge, and participation in rno<lt'r'rr plorlrrrIrorr. so that those benefits can then be transferred to dorncsti<' lilrrrs.

'l'he process even works in technologically humbler sc( l()r's lilir' :r;r

p;rx'1. \Arhen foreign investors such as Wal-Mart,J. C. Penrrcy, Yvcs Srrint

Lrrrrrent, and others outsource their production to Dhaka, tlrt'y lrr irrg irr

tlrc lirtest fashion designs and integrate the local producl.ion rrrri( irrto :r

lilolritl supply chain. The local production units do the r:trttirrg, slitt lrirrg, labeling, and packaging of the merchandise, which is rk'sigrrcrl irrrrlrrltirrrately destined for the United States and Europe. Thcst' llrclorilslrcr'otne important training grounds for climbing the tcr:lrrrologv lrrrl

rlcr'. moving from basic technology up to the next steps. A <'rrltirrg rrrrrl

stitr:hing company may take 100 percent of the fashion rlt'sigrr olrlcrslr'orn abroad at the beginning, but later on, once it gets thc hirrrg ol it, itnrlry start hiring its own designers, and start selling not only llrt' l:rlrol ol

tlrc assembly operation, but also the designs. That progressiorr lr:rs lrrr;r

pt'ned over and over again throughout the world.

Wlt:rt ;)t (.\,(.nls llris prot t'ss ltr)lll l;ll\lllfl lrolrlt'r'r'l\1\vll('l('itr llrc lvotlrl/

l,)v<'nlrrlrlly il r'lut, lrttl in lltt'r';ttly slilll('s lllr'Ilott'ss ltltttosl ;tlw:tYs sl;ttls

riglrt lrt 1 l)()ll.'l'ltt'ltr'<otttp:trryirrg lllill)s,:i illr(l l, slrow llt<'lrtr;tlirttts ol

multinationarl c()tnl)allics ill lll('r'lct ltrrttics s('( l()t llll(l ill 1r'xlilt's:tll(l Hilt:

ment manufacturing, illustrzrtirrg tlrc t'o:tstttl lot ltliott ol tlrt'st' liIttts, t'sPc:-

cially in their operation in the poor cotllltrios. Ilintcrllrrr<ls hrtvc litggcd

far behind in their abiliq/ to attract these kinds of industrics'

It is no coincidence that boomins sites for fbreign investment-

such as Penang Island (Malaysia), Singapore, Taiwan, Hong Kong, and

Mauritius-are all islands on the Asia-Europe trade route. It is no coin-

cidence that china's leading economic ciry, Shanghai, sits right on the

coast at the mouth of the Yangtze River. It is no coincidence that Mex-

ico,s assembly sector is right along the Rio Grande River, since Mexico's

economically relevant "coast" is its border with the United States. The

same geographical advantages are seen in many other places that have

received substantial foreign investments in recent years' Wroclaw,

poland, and Bratislava, Slovakia, and Lada Bolislav, czech Republic, and

Lubljiana, Slovenia, have all reaped an extra bonus ofjobs and t.echnol-

ogy transfer by virtue of their proximity to Western European markets'

The Demographic TraP

Most countries have experienced a significant decline in fertility rates in

recent decades. Half the world, including all of the rich world, is at or

near the so-called replacement rate of fertility, in which each mother is

raising one daughter on average to "replace" her in the next genera-

tion. The replacement rate is two children, one of whom, on average, is

a girt. (In fact, the replacement rate is a little bit above two, to take into

account the possibiliqz that the daughter will not survive to reproductive

age.) The poorest of the poor countries, by contrast, are stuck with fer-

tility rates of five or more. On average, a mother is raising at least two

girls, and in some cases three girls or moIe. In those circumstances, na-

tional populations double each generation.

However, the demographic transition has occurred in most parts of

the world. Moreover, although Western Europe's demographic transi-

tion took a century or rnore, the transition among developing countlies

in the twentieth century has occurred over decades or just a few years'

In Bangladesh, the total fertility rate fell from 6.6 in 1975 to just 3.1 in

2000, as we saw plainly with the BRAC microfinance group in the village

,a\ /

ci{ irEo

q,

dLL9

E}.!er{

E

tr"

Ir,

l/igrrrr. l; l,r.r tlllty nrrrl l,lr oltorrrlr ltr.vr.lopurr.rrl

1000 t00{)0

GDP per Capita, PPP (200 I )

\ttt .\ il\).\ )\ oil il bgarithmit .unle.

\,' t t t t t ( i t h u I detl et ir] g ial a from Worhl B ruLk ( 2001 ).

,ttlsirltl of Dhaka. In Iran following the 1979 Islarrric rt,volrr(iorr, tlrr.trnrslirrmation was even faster, from 6.7 in 1980 to.jtrst 2.(i irr 2(xx). I lrr.Ir:rrrian revolution, it seems, brought a generation o('yrlrng gir.ls irrtotlrt'schools, and this boom in girls'literacy has translatc<l r.lrPirlly rrrrrlr lr rrrnirtically into the desire for fewer children.

()ne reason for a poverty trap is a demographic trap, wlrt.rr irrrJr,vr,rislrt'rl families choose to have lots of children. These choir.r's:rr.<.rrrrrk.rsl;tttdable, yet the results can be disastrous. \A/hen impovcrislrcrl llrrrrilir.slrltvc larse numbers of children, the families cannot aff<rrcl t9 ir rvt.sl ir r tlrlrrrrlrition, health, and education of each child. They rnight orrly rllirrrltlrt: cducation of one child, and may send only one son t() sclro.l. IIiglrIcrtiliqr rates in one generation, therefore, tend to leacl to irrrlrovo.islrrrrt'trt of the children and to high fertilityrates in the following g(.n(.r'rli( )n:rs well. Rapid population growth also puts enormous strcss(:s orr lirrrrrsizcs and environmental resources, thereby exacerbating thc p.v<'r rv.

As with the other obstacles to economic growth, the dc:rrrrgr.lrPlrirtlitp is avoidable. Girls' education would allowwomen to mor-() t:irsily j.irrtlrc labor force, increasing their earning power and the "cost" .l srlryirrglrornc to bear children. Education, law, and social action can ('nrlx)w(.rwomen to more easily make fertility choices (instead of lravirrg llrrsr.

r lrrir r.s ntit(l(.solcll lrl ltnslr,ttt,ls ot olltctr itr lltl l,ttrrtl\'). ( ilrrlrlt,'tt,.ttl lrr'

lrclttr'<l lor tlist'ltsc lo lrt'llct ('ttstll(' llttit stttvl\':ll, lll(':lllilll', lll,ll l)ill('llls('a1 lrlv('li'wt'r'rlriltllcn,lt'r'lirrgs('(ur'('llt;tl llrr'1,willsrrrvivt lol:tl<.t't:ttt'

of thcir parerlts in okl ilg('. l,'illrrily lrllrrrrring iur(l l('l)r'()(ltr( liv(' ltt':rltlrservices can be provided evcll in v(:ry p()()r'('()ulunlrrili('s. All ol tlris rt'-

quires money, however, and money is lacking in tlrc J)()()r'(:s( (:('()r)()lltics.

Figure 1 shows how the total fertility rate in the year 200 I conrpares

with the country's national income per person. The total I'ertility rate,

and hence the population growth rate, is stunningly high especially inthe poorest parts of the world. Here is the demographic trap in vivid

perspective: the poorest places, many with the greatest obstacles to

modern economic growth, are also the places where families have the

most numbers of children, and where the populations continue to soar'

High population growth leads to deeper poverty, and deeper poverty

contributes to high fertility rates.

WHERE GROWTH HAS FAILED

Map 5 shows all of the countries in the world where per capita GDP de-

clined during the twenty-year period befween 1980 and 2000- Notice

that not one single rich country in North America, Western Europe, orEast Asia failed to achieve economic growthl All of the problems lie inthe developing worlcl. Forty-five countries had negative growth irr GDP

per capita. (Only countries u,ith a population of at least two millionpeople in 1980 were examined in order to avoid the idiosyncrasies ofsome very small countries.)

It is illuminating to divide the world's economies into the following

six categories, depending on their per capita income in 1980:

All low-income countries

Middle-income oil exporters

Middle-income postcommunist countries

Other middle-income countries

High-income oil exporters

All other high-income countries

l''rlll ti

Ntg:r(ivr' l,i onotttir' ( lr orvllt

\rr1i,,l,r lir tn,r

ll.rliri,r N'l.rrl,r1i,rr,,u

lirr rrrrrli Nl,rlr

( ,rrrll(xu Nrr rrrrllrr,r

( i rrtr;rl r\lr ir rrrr l{r'p Nigcr

( irrrgo, l)r'rrr. l{r'p. Nigcr i;r

(irtr rl lurir l'r'rrr

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l,tlriopi;r l{wlrrrrlrr

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I lliti 'lirurr

I lorrrlrrrrs Zrtrrrlrir

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---_l i ' ",' l:ll,' :_:l !-!ll !l

I'osilivr' l'i ortorrtir (lrrrrrllt

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( lhil'(,hirr;r

l)orrrirrir lu I{r'1r

l'lgvpt

lll Srlvrtkir

( lhitrlr( lri rrcir

I ntliir

Irrrkrrrt'siir

I larr

.fanririca(olca, l{rp.

Lao PDR

Malarvi

ill,rl,rrr.r

l\lot rr r ,,

Nlol,trtrlrirln'

Nr'1 r.rl

l',r[.isl,rrr

l'rtpur Nlw ( lttttrr'.r

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Sttrl;ur

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l'olrrlr

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l,ut'll.\l)(r'tcrs

Armenia Moldova

Ilelarus liomania

Cloatia Russia

Georga 'lajikistan

Ihzakhstan Turkmenistan

Kvrgz Rep. Ukraine

Lania Uzbekistan

Lithuania

Alhania I ltrrruirlv

Bulgariir l'rilirrrrl

Czech Republic Shvuk l{r'p

ll lr

() (r)

)ll,()ir)

ltl:i()lr)

\lgcria \reneznela

( )ther

Midrllelrrclrtne

South Africa Paraglay Argentina Lcburron

Brazil Mcxir o

(lolombia Portugal

Costa Rica Sing;r1rol

Greece Sptil

Hong Kong flnrsrlry

Non-Ijuel

l,:rporters

Australia Italy

Austria Japan

Belgium Ncthcrhnrls

Canada New Zcrlrrrrl

Dermark Nrnvo,

Finland Swnlrl

France Slvilzcr'lulrl

Germany United Kingdorrr

lsrael United Slatcs

0 lH

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Saudi Arabia

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rl

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f

'l'ltr':trrotttP:ttn'intrl l;rlrlt'I lisls lltt'rottttlrics itr r';t,ll t;tlt'1iorv, rli

vi<lt'rl irtlo lwo coltrrnns: llt()ri(' llr:rl r'x;rtt icttt t'rl lrostlirc t'r'ottotttit

g-r()wtll 1ln(l llr()s(' llrirl <'x1x'r'icn( ('(l ()ultiglrl cr'otr)uri( (l('('littr'. 'l'lrt'

numbers of cotrntrics in t:at'lr ('irt(:ll()r'y 1u(' slr()wn irr llrr.' lwo coluttuts itI

the right of the table. There arc sever:rl kcy poirrts. l'irst, tlrt' biggcst

problem with economic decline is indeed in thc poorest coLuttries,

especially but not only in sub-Saharan Africa. The second oltservation

is that except for oil-exporting and ex-Soviet countries, all high-incomecountries achieved economic growth, as did most middle-income coun-

tries. The only growth failure among high-income countries occurred

in Saudi Arabia, an oil-exporting country. Among the middle-income

countries, the vast proportion of growth failures were in the oil-exporting and postcommunist countries. In the rest of the middle-income countries, twelve out of fourteen countries enjoyed positive

economic growth.The economic declines in the oil-producing and postcommunist

countries reflect very unusual circumstances. The oil-rich states are, ofcourse, not impoverished countries, but instead are middle-income and

high-income countries where the economic activity depends over-

whelmingly on oil exports. These economies rise and fall in line withthe "real" price of oil, that is, the price of oil relative to the price of im-ported goods such as machinery and consumer goods. The real price ofoil soared during the 1970s, leading to the massive growth in living stan-

dards of these economies, but during the 1980s and 1990s, the oil pricefell sharply, leading to a collapse of living standards. If there is a lesson

here, it is that an economy dependent on a single product (or a small

number of products) for export is bound to experience high volatility as

the relative price of the product fluctuates in world markets. Since oil ishighly volatile, the real income of the oil economies has similarly been

highly volatile.The economic decline in postcommunist countries is even more of

a special case. These countries have experienced a one-time decline inGDP per capita as they changed over from a failed communist system to

a market economy. Even in the cases of the strongest of the so-called

transition economies-the Czech Republic, Hungary and Poland-there was a period of sharp reduction in GDP per capita for a few years

as old hear'y industries linked to the Soviet economy declined or disap-

peared in bankruptcy and new sectors took time to develop. The result

il lo',i(L

J i'i'&. ti'x,o. ,,o |iri-,." ? t'f;

E i' u:t,taE A ','/.

t r,';

.u ti,/o

f "I

rv,rs nrllrl cr orronrisls r:rllcrl lt lt;tttsiliott trr rssion, llt'tlrt'l;rlr' l1]! X)s, tlrr'

l)()sl( i)nunurrisl r'orrrrlrit's llrrl rcsrttrrcrl cr ottotttir gtolvllt, lrrtl ltottt :t

lolvt'r ( ll)l'pcl clrlrit:t tlrlrrr lrclirtc llt<'Sovir'1 r oll:t1rsr'.

l,igrrrr^2: (lcrcal Yitl<l itrt<l (lrowllt

Artt orr g l,ow-l rtcortrr' (lo ttrr l tics

0 500 1000 1500 2000 2l-nx) 30(X) lll-r{X) 'l{n)0 lrrlio

1980 Cereal Yield (kglhectarc)

\rrrtt: ( itk:ukttnl usiltg dahlron WolrL llank (2001|

WHY SOME POOR COUNTRIIlS (;ITI,] WAND OTHERS DECLINE, I)

l'<lor countries have a significant chance of falling into a l)()v('llv ltirl).( )rrt of the fifty-eight nonoil countries with per capita intotncs lrclow:i[:t,000, twenty-two (or 38 percent) experienced an outriglrt rk'< lirrr'. \i'trlrc thirqr-six other countries enjoyed economic growth. IIow is il tlrrrl

s()me very poor countries escaped the ravages of a poverty t.ra1l wlrik' tlr<'

x:st did not? Comparing those countries that made it and (h<lst' tlrltt <litl

rrot, the success stories show certain characteristics. The rnosl ilrtllot lrurl

rk:terminant, it seems, is food productivity. Countries that stitrtt'rl willrlrigh cereal yields per hectare, and that used high levels ol lcrtilizt'r irr

l)ut per hectare, are the poor countries that tended to expt:rit'lt( ('('( ()

nomic growth. Countries that began with very low yields in l9u() rtIt lltr'<'ountries that tended to experience economic decline betwct'tr l1)l'10

irnd 2000. Figure 2 illustrates this point: among low-incomc c'otrttltit's,lrigh cereal yields in 1980 (measured on the horizontal axis) itt'r' rtssr rci

atedwith high economic growth rates (measured on the verti<'itl rrxis).

Table 3: East Asia and Sub-Saharan Al'rica irr l9tl0

Cereal yield (ke,/hectare)

lrrigated land (% ofcropland)

Share of crop area planted to modern varieties (%)

Adultlitelacyrate (%)

lnfant mortality rate (per 1000 live births)

Tcrtal f'ertility rate (births per woman)

\out:r: Cfih:uLalnl tLting rhhJron Wtkl Benk (200,1)

'l'lrr' ;x)\'('rll, lr:rl) is nr;rirlt' :r ttrt,rl pltrrtrlnr('n()rr ol ;rr',ts,rttl I:tttncts(iurgltl irr:t spirlrl ol risirrg 1ro;rulrtliotrs;tlttlslitBn:url or l:rllirrg lootllrto-rltrct ion lx'r' I)('r'ri()n.

The biggest difference between Africa and Asia is that Asia has hadhigh and rising food production per capita during recent decades,

whereas Africa has low and falling food production per capita. TheAsian countryside is densely populated, with a relatively extensive roadnetwork that can carry fertilizer to the farms and farm output to themarkets. Farmers use fertilizers and irrigation, and food yields are high.Donor agencies gave ample support to the development of new high-yield varieties in Asia. Under these conditions Asian farmers were able

to adopt high-yield crop varieties that produced the famous Green Rev-

olution of rising food production per farmer. The African countryside is

much less densely poplllated, with an absence of roads to transport fertil-izers and crops. Farmers do not use fertilizer on food crops, and dependon rainfall rather than irrigation. Donors have woefully underfundedthe scientific effbrls toward improved varieties appropriate for Africanconditions. Under these much harsher conditions, Africa's farmers were

not able to benefit much, if at all, from the Green Revolution develop-

ment of high-yield varieties of food crops. Although both Asia and Africawere very poor in 1980, Asian agriculture was significantly outperform-ing African agriculture, as shown in table 3. This performance has pro-vided a platform forAsia's extraordinary growth since then.

There are other tendencies apparent in the data. The Asian coun-tries that experienced growth started in 1980 with better social condi-tions: higher literacy, lower infant mortality, and lower total fertilityrates. They were, thereibre, less prone to fall into a demographic trap of

r,rl,rrllv risirrli;roPrrl;rliorrs lrrcssinl, orr lt lirrrilrrl ;rrrrorrrrl ol Ltrrrrl,rrrrl( )rtrr' ;r1,,;tirr. llrr' ,\st:rrr lx'lrs:urls \v('r('sorrrlrvlr;rl lrr.llcr oll llt;rrt llrt.rt\lr tr:ttt ( ()llltl('l l):u ls. l\rrollrtr 1r'rrrlcrrr'1, ir llutl 1rr)()t ( ()lnrlr ir.s r,villt

l.rrlir';rolrttlltlir)lts ri('('ltt lo lt;tt,<'rlottr'lrcllct llurn 1rr)()t (()unlrirs rvillr',tn,tllt't popttlltliorrs.'l'lrc l:rlgcr';roprrllrliorr plolr:rlrlv irrt rr.lrscrl tlr.sizr.,rl lltt'tlotttt'slic tttittk<'1, rtrlrl<irrg il rnorc lrppr':rlirrg lo lirrcigrr ltrrrl rl,,tttcslir ittvt'slots. l)t'tlltps il wits t'lrsit'r' lo irrlrorlrrr'<' l<r'y irrli;rsltu( lln(.,,rrr lr :rs rolr<ls lrrrrl I)()w('l'srrlllrlics irr <:ourrtrit's willr l:rrg<.r'poprrl:rtiorrs,',rrrr c lltt'st' irtli'itstr-rrclrrr(: nctw()l'ks :rlc <'llrnrctt'r'izt'<l lry llrrg<' irriti.rlr osls ()l (()t)st.rllct.lotr tltitl Arc rlr()l-c casily Iirrant:crl lly llr|gt'r'lurrl trr()rr.

,l, rrst ly 1l,r;rtrllttr'<l ecorrornies.

WIIY T,ATIN AMERICA,S MIDDI, Ii] -IN(]oMI,;COUNTRIES FAILED T'O'I'[I RI V I.]

I lrr' lroverty trap of the poorest countries is less puzzling, irr s()ln(. witvs,

tlr:rrr the stagnation that gripped a number of countrics in (lt'rrtrlrl :rrrtlSorrtlr America during the 1980s and 1990s. Table 2 shows llurt corrntrit's like Ecuador, Guaternala, Paraguay, and Peru experir:rr<'c<l orrtriglrtcr orlornic declines. These are not, in general, desti(rrlt: r'orrrrtrir.s,llrorrgh they have destitute populations within them. [-low <rrrr wr.rrrr orrnt fbr their development failures?

I take up that question in more detail later. It will suf iir'<' lrcr c to rrotr.tlrrtc characteristics of these economies. First, all of th<'st' r'r'ononricsl;rr c particular geographical difficulties. Ecuador and I'crrr irrr. r\rr<lr.;ur

r orrtttries, w'ith populations divided between a lowland tropiclrl r.nvir,rrr

rrrcrrt and a mountainous highland environment. Tiansport. r'orr<litir rrrs :rrr.

lnzardous and expensive. Paraguay, of course, is landlockecl. ( Iurlr.rrr;rllr rs

.r rrtix of molrntains and low-lying tropical rain forests. Secorr<1, tlrr.( ir.nllal American and Andean societies suffer from sharp soci:rl rlivisiorrs,typiczrlly along ethnic lines. The European-descended poprrlatiolr t(.n(ls

to be much richer than the indigenous and mestizo (mixcrl) lroprrlirlions. Europeans conquered the native populations, repress<:<l tlrt.rrr irr

rn:rny ways, and were generally uninterested in investing in tht:ir lrrnrlrrrcapital until very recently. Politics have therefore been highly <orrllit I

laclen and often violent. Third, these countries are all r,rrlncrirlrlc lo t'xtreme external shocks, both natural and economic. Natural lrazlrlrls irr

t'lude earthquakes, droughts, floods, and landslides. Econonlic lurz:rlrls

irrllrrrlt'llrc lrrrgt'insl;rlrilitirs in irrlt'r rr:rlrorr:rl pr ir ls lor llrl lr':rrlirrg r orrr

rrro<lily t'xpot ls ol llrcs<' t ornrlrics, srrt lr lrs ( ()lll)('r, lislr rrrr':rl, t ollcr', lrlr-lI?Irtits, ?Ill(l ()tlr('l ag|icrrl(rr|lrl iur(l illinintr4 Pt ()rlrrcls.

CONTINUING EXTREME, POVERTY IN'IHIIMIDST OF ECONOMIC GROWTH

Even among the poor countries in Asia that experienced marked eco-

nomic growth, extreme poverty often continues to afflict significantparts of the population. Economic growth is rarely uniformly distrib-uted across a country. China's coastal provinces, linked to world tradeand investment, have grown much more rapidly than the hinterland tothe west of the country. India's southern states, also deeply integrated inworld trade, have experienced much faster economic developmentthan the northern regions in the Ganges valley. Thus, even when aver-

age economic growth is high, parts of a country may be bypassed foryears or decades.

Another reason for persistent poverty is the failure of government.Growth may enrich households linked to good market opportunities,but it may blpass the poorest of the poor even within the same commu-nity. The very poor are often disconnected from market forces because

they lack the requisite human capital-good nutrition and health, andan adequate education. It is vital that social expenditures directed at hu-man capital accumulation reach the poorest of the poor, yet govern-ments often fail to make such investments. Economic srowth enricheshouseholds, but it is not taxed sufficiently to enable governments to in-crease social spending commensurately. Or even when governmentshave the revenue, they may neglect the poorest of the poor if the desti-

tute groups are part of ethnic or religious minorities.A third possible reason for continued poverty in the midst of growth

is cultural. In many countries, women face extreme cultural discrimina-tion, whether or not those biases are embedded in the legal and politi-cal systems. In South Asia, for example, there are an overwhelmingnumber of case studies and media reports of young women facing ex-

treme undernutrition within the household even when there is enoughto go around. The women, often illiterate, are poorly treated by in-laws

and lack the social standing and perhaps legal protections to ensure

their own basic health andwell-being.

Itt slr,rtl,lltctt':lt('nrvlilrrlpossilrililit's lot llrt'lrcrsislcnr t'ol lrot't'tlvllrtt itt llrc rrrirlsl ol cconotttic llr'()wllr. ( )rrly:r llosl rlilrgtrosis ol p:rrlrr rr

l,u r irlrrrrrsllrrrccs will lrllow lrrr lr(( urrl(' rrrrrlt'rsliurrlirrg. l'oliry rrrirl<r'rs

,rrrrl lrturlysls slroul<l lr<'st'rrsiliv<', lrowcvcr'. (() g('()lllirlrlrir lrl, politiclrl,:rrrrl, rrltrrllrl corrrliliorrs (lurl rrury t'lt< lr pllry lr rolt'.

't'H U () t{l,lA't' lls'I' C il A L L E N (; t,t :

()v [,]lt(;()M IN (]'[H U ['OVt,]l{',t'y'l'RA t,

\{'lrcn totrntries get their foot on the ladder ol'rlcvr:loprn('nl, tll('y ru('

licrrclltlly able to continue the upward clirnb. All goo<l tlrirrgs lcrrrl torrrovc l<lgether at each rising rung: higher capitarl slock, grt'lttcr spr'r'i;rl

rzlrliorr, more advanced technology, and lower ('ertility. ll'a corrnlry is

lr:rlrpt:d below the ladder, with the first rung too higl'r ol['tlrt' glorrrrrl,tlrc t'liurb does not even get started. The main objectivc ol'ccorrotrr ic r lt'vckrprnentfor the poorest countries is to help these <:orrrrlrics to g:rirr

.r lirothold on the ladder. The rich countries do not ltavt' lo irrvcst

crrorrl4h in the poorest countries to make them rich; thcy rrr:crl to irrvt'st

,'norrgh so that these countries can get their foot on tlrc llrrl<k'r: Altcrtlrlr(, the tremendous dynamism of self-sustaining econornit'growtlr < lrrr

trrl<t'hold.

liconomic developmentworks. It can be successful. It tcrrrls to lrrrilrl,,rr itself. But it must get started.

Twelue

ON.THE.GROUNDSOLUTIONS FOR

trNDING POVE.RTY

,""ii 'tn" end of poverty will require a global network of cooperation-.,i[. among people who have never met and who do not necessarily trust

each other. One part of the puzzle is relatively easy. Most people inthe world, with a little bit of prodding, would accept the fact thatschools, clinics, roads, electricity, ports, soil nutrients, clean drinkingwater, and the like are the basic necessities not only for a life of dignityand health, but also for economic productivity. They would also acceptthe fact that the poor may need help to meet their basic needs, but theymight be skeptical that the world could pull off any effective way to give

that help.If the poor are poor because they are lazy or their governments are

corrupt, how could global cooperation help? Fortunately, these com-

mon beliefs are misconceptions, only a small part of the explanation, ifat all, of why the poor are poor. I have noted repeatedly that in all cor-ners of the world, the poor face structural challenges that keep themfrom getting even their first foot on the ladder of development. Most so-

cieties with good harbors, close contacts with the rich world, favorableclimates, adequate energy sources, and freedom from epidemic disease

have escaped from poverty. The world's remaining challenge is notmainly to overcome laziness and corruption, but rather to take on geo-

graphic isolation, disease, wrlnerability to climate shocks, and so on,with new systems of political responsibility that can get thejob done.

lrr tlrr.rrr.xl llutplr.t's, I llry ()ttl:t sltltl('Hy l()l t'nrlirtg ('Ill('ltl('l)o\'('ll)lry ll0lll-r.'l'l rc sll';l(('gy lot ttst's ott lltt'l<r'y ittvcslrrrt'rtls irt pt'oplr':tttrl itt

rrrlt ltslt rtltrr, r.-g 1s111 r'irrr givc ittrlrovct islt<'tl t ottttttttltitics ltt'ottttrl lltr'

rvor'lrl, llollr nrlirl :rrr<l rrrlxrrr, {lrt'tools lirl stts(lrittttlrlc tlcvcloprrlcrrl.

Wr, rrt.r.rl plirrrs, syst(:uts, rrrtrlrurl rrccottrtlitlrility, itrrtl lirrtrttcirtg tttt't ltlt

rrislrs. lhrt t:vcrr Ilt.lorr. wt: lravt: lrll ol tltlt( ltllllitlaltls-()l ccolloltlit'

plrrltlrilg-ip placc, wo nrust Iirsl rrtttlcrstitttrl ttt<lr'<' r'<ttt<'tt'lr'ly wltitl

srrclr tr strat.cgy rncans to thc one billion-pltrs pt:olrlc: wlto t ittt lrt' lrt'lpcrl.

It is t[c bravery, fbrtitucle, rezrlisrn, and scrtsc ol't't:slrottsilrility ol tlrt' ittr

povcrished and disempowered, lbr thernsclvcs iltrd t:s;lt'<'iirlly lirl tlrr'irr lril<lren, that give us hope, and spur us on to ettrl cx(t't'ttt<' povt'rly itr

orrr tirne.

MEETING WITH THERURAL POOR: SAURI, KENYA

'lirgetherwith colleagues from the UN Millennium Project atrd t.lrt' l'l:rltlt

Irrstitute, I spent several days inJuly 2004 in a group of eight Kt:tlyrtrr vil-

lirges known as the Sauri sublocation in the Siaya district ol'Nyitrrzir

l,rovince, about forty-four kilometers from Kisumu, in westcl'rt l(t'rtylr.

We visited farms, clinics, a subdistrict and district hospital, attrl st ltools

in Sauri and the environs. We met with international orgattizltliotts

working in the region, including ICRAF (the World Agroftrrt'slry ( it'rr

tcr), the UN Development Program, and the U.S. Centers lirl' l)ist'rrsr'

(lontrol and Prevention. The visit made vivid both why extrenrc povct lv

persists in rural areas and how it can be ended'

We found a region beset by hunger, AIDS, and malaria. ThC sitrrrr-

tion is far more grim than is described in official documents. Tlrt: sitrtit-

tion is also salvageable, but the international community rerlrtitts lt

rnuch better understanding of its severity, dynamics, and solutiorls il llrt'

crisis in Sauri and the rest of rural Africa is to be solved.

The situation is best understood through the voices of Sauri's stlrrg-

gling residents. In response to an invitation from our group, mort: tltlttt

two hundred members of the community Came to meet with us ottt: itl-

ternoon (see photograph 2). Hungry thin, and ill, they stayed for thrt't'

and a half hours, speaking with dignity, eloquence, and clarity alxltttheir predicament. They are impoverished, but they are capable and l'(r

sourceful. Though struggling to survive at present, they are not dispir

il('(l l)ul tlr'lcttttittcrl lo ittrptovc tltcil silruttiotr.'l'l tr'l, litrour wcll lrowtlrr:y r:orrlrlgr'( lrirck to lriglr gnrrrrrrl.

The ntectirtg t<tok plixt'on llrc gtorrrt<ls ol rr s< lrool clrllcrl tlrt' Illrr'Sauri Primary School, un(lcr tht: atrspit'<:s ol a rr:rrurrklrlrk'sclrool lrt':rrl-mistress, Ms. Anne Marcelline Omolo, who shcplr<:r'rls Irrrn<ln:rls ol'lrrrn-gry and impoverished schoolchildren, many of thcm orpharrs, throughprimary education and the travails of daily life. Despite disease, orphan-hood, and hunger, all thirty-three of last year's eighth-grade class passed

the Kenyan national secondary school exams. On a Sunday in July,we saw why. On their "day off' from school, this year's class of eighthgraders sat at their desks from 6;30 a.nl. until 6:00 r.u. preparing monthsin advance for this year's national examinations in November. Unfortu-nately, many who will pass the exams will be unable to take a position ina secondary school because of lack of funds for tuition, uniforms, andsupplies. Nonetheless, to boost. the fortitude of the eighth graders dur-ing the critical examination year, the community provides them with acooked midday meal, with the fuel wood and water brought from homeby the students (shown in photographs 3 and 4). Alas, the communityis currently unable to provide midday meals for the younger children,who must fend for themselves. Many go hungry the entire school day.

The village meeting got underway on a Monday afternoon, with thevillagers arriving on foot from several kilometers away. I introduced mycolleagues and told the community of the Millennium Project's assign-

ment from UN Secretary-General Kofi Annan to understand the situa-tion of communities like Sauri, and to work with villagers to identi$,ways to help such communities to achieve the worldwide MillenniumDevelopment Goals of reducing extreme poverty, hunger, disease, andlack of access to safe water and sanitation. I also announced that thanksto a remarkable grant from the Lenfest Foundation in the UnitedStates, the Earth Institute at Columbia University would be able to putsome of the ideas to work in Sauri and help the international commu-nity learn from the experience in Sauri for the benefit of villages inother parts of Africa and beyond. Several hours later, around 5:30 p.u.,

we all rose from a discussion that was distressing, uplifting, and pro-foundly challenging-challenging, most of all, for the rich world.

\Arhatever the official data may show about "stagnant" rural incomesin places like Sauri, stagnation is a euphemism for decline and earlydeath. Food output per person is falling; malaria is pewasive and in-

lrr.lrsitrgl AII)S sllrllis llrr,rorrrrrrrrrrily lrrrl tlrl rt'giott, willr lrrlttll ;rrt't'itIr.ltr'r.on llrr.olrlr,r ol llO lrt'r'r <'nl, il rrol lriglrrr. l{rrrlirrtcrr(lrt'v spt itrgs lot

r ollt.t ting wlrlt.r'lirr'lrorrst'lroltl us(':u('ollcrr rIirty, r'spt'r'ilrlly litlct itr llrr'rltry trlicr t'xtt.rrsivc rrrorrrirrg rrst'. Att N(l() li'oltr tlrt'tll( lrt'l1x'rl irrstlrll tr

li'w l)l'()t(:(:l(:cl w:tlt:t'poittts, ltrrt (lrcy llt'() t()() li'w irr tttttttlrt'1, l:rl liorlrrnirrry lrontesteacls, ancl hcarvily cortgt:stcrl, sotttctitttt's yiclrlitrg littlt'rrrorc than a trickle and t.herclore rccluiring sevcritl tttitttttt's to lill :r irrg.Itapid population growth in the past has madet larrn sizcs sttritll. Ii'r'tilittr'utes are around six children per woman, and the villagt:l's ll;tvt' tt,, llt(:ess whatsoever to family planning and reprodttctivc ht:itltlr st'lvit't's ,,t

to modern con traceptives.

I canvased the group on the material conditions o1't.ltc cotnntttttily,

and received very perceptive accounts of the grim situatiort. ( )ttly lwo oI

the two hundred or so farmers at the meeting reportecl ttsitrg li'r tilizrrat present. Around 25 percent are using improved fallows wi t I r r t i I r ogc t r

{ixing trees, a scientific farming approach developed irnrl ittltorlrt< r'rl

into Sauri by ICRAF. With this novel technique, villagers Srow tl ('('s llr:rl

naturally fix nitrogen, meaning that the trees convert itltttos;llrt'r'ir

nitrogen, which most food crops cannot use directly, inlo it ttiltogcttcompound that food crops can use as a nutrient. Thc l<'gtlrrrirrorrs

(nitrogen-fixing) trees can be planted alongside maize <>t' olltt't lirorl

crops. By choosing the right timing for planting and the rigltt <'orrrlrirlt

tion of trees and crops, the farmer gets a natural substitute lot <'lrcllriclrl

nitrogen fertilizer.So far, just one fourth of Sauri farmers use the new metltotl. lt < osls

money to introduce the technique and one planting seas()ll is losl.

Farmers may also need to add some nonnitrogen fertilizers, t'spcciirlll,

potassium, which is also costly, too costly for the impoverished l'rtt tttct s.

All of these additional complications could easily be addressc<I, itttrl llrt'

ICRAF technique could be scaled up throughout the villagc, il orrly

there were additional flnancial resources available to ICRAf' an<l tlrt' vil

lage tojump-start the process.

The rest of the communiry is farming on tiny plots, often llo Ill()r'('than 0.1 hectares, with soils that are utterly exhausted of nutrietlls, itttt I

therefore biologically unable to produce an adequate crop. Tlrt' soils

are so depleted of nutrients and organic matter that even if the ririrts at <'

good, with yields of around one ton of maize per hectare, thc ltottst'

holds still go hungry. If the rains fail, the households face the lisk ol

rlr.,rllr lirrrrr inrrrrurrosrrp;rrtssion lrccirrrsc ol sr'\,t'rt'rrn<lct rrttlt ili()n.litltttl-ing, nrcarring low lrt:iglrl lirt ottt"s ltgr', is witlcsptllrrl, rt sigtt ol llt<' llct vtt-

sive and chronic undernrrtril.ion rll t.ltc cIriltln:rr.The real shocker came with my lirllow-trp cltrr:stion. llow ttuuty litt'tn-

ers had used fertilizers in the past? Every hand in t.hc roon) woltl ul).

Farmer after farmer described how the price of fertilizer was now ottt ol'

reach, and how their current impoverishment left them unable to pur-chase what they had used in the past. A fifty-kilo bag of diammoniumphosphate (DAP) fertilizer sells for around 2,000 Ksh (Kenyan shillings)(US$25). At $500 a ton, that is at least twice the world market price. Aproper application might require two to four bags per hectare, or $50 to

$100 per hectare, a cost vastly beyond what the household can afford.Credits to buy fertilizer are neither available nor prudent for these

farmers: a single failed crop season, an untimely episode of malaria, orsorne other calamity can push a household that has taken on debt into aspiral of unending indebtedness and destitution.

In my mind I started the calculations as the conversation pro-gressed. Scaling up an appropriate combination of agroforestry and

chemical fertilizer inputs would cost some tens of thousands of dollars.

Yes, the amount was out of reach of the villagers themselves, but wouldrepresent a low cost per person in villages like Sauri if donors would rise

to the occasion. Fortunately, on this occasion, the Earth Institute was

able to respond.As the afternoon discussion unfolded, the gravity of the commu-

nity's predicament became more and more apparent. AIDS is ravaging

the village, and nobody has yet had access to antiretroviral therapy. Iasked how many households were home to one or more orphaned chil-dren left behind by the pandemic. Virtually every hand in the room shot

up. I asked how many households were receiving remittances from fam-

ily members living in Nairobi and other cities. The response was that the

only things coming back from the cities were coffins and orphans, notremittances.

I asked how many households had somebody currently sufferingfiom malaria. Around three fourths of the hands shot up. How many

used antimalarial bed nets? Two out of two hundred hands went up.How many knew about bed nets? All hands. And how manywould like touse bed nets? All hands remained up. The problem, many of the womenexplained, is that they cannot afford the bed nets, which sell for a few

dollars per net, and are too expensive even when partially subsidized

(s6r iirlly rr;rlkr,lt.rl) lry inlr,r rr;rliottlrl rlottrtt itglttt ics. Ilow tttitttv irr lltr'

lorrrrrrttrrilywt.r'r.rrsirrg rrtr,rlilirtc l() ll('lrl;t lrottl ol tttltltttiirl r\ lcw ltlrttrls

w(,nl ul), lrrrl tlrt.vltst tnili()ti(y lt'rnlrirrt'<l tlowtt. A wottlittt lltttttr'lrcrl ittlo

irrr t.xplarurl iorr t lrirl llrr: rrrt'<licit tt's st'll ll llt i<'r's w<'ll lrt'yor r< l wlrlrt llrc vil

llrgcls < rttt rtllirr'<1.

A yt:arr'()r s() trll(), Sarrri lrirrl a srrtitll <:littit:, llri s('('ll irr pltotogtltplr 1'r.

'l'llg (l(x:tor hzrs sittcc lclt iurrl thc clinit: is ttow 1l:trllot'kt'rl.'l'ltt'villlrgt'rsr.xplirinccl that tlrcy coulcl not allorcl to p2ly tltc r[ot:tor itrr<l lrtry llrc tltctl

ir:ittt-'s, so the rloctor departed. Now they I'cncl Ior'tltctttst:lvt's willrortl

lrr:ulth care or medicines. When mtrlaria gets bncl, antl tlrt'ir t lriklr crr l:rll

irrto anemia-induced tachycardia (rapid heartbcat) , girspirrg lirl lrrt'rrllrirr small, ravaged bodies deprived of oxygen-carrying ltcnrr>gloltirt. llrcl'

rtrsh the child to the subdistrict hospital in nearbyYrlir.'l'lrc ttrolltt'ts

rnay carry the children on their backs or push them in wltct'llrlrrt ows lot

st:veral kilometers over dirt paths. Yet when we visited tlrt'Yltlir sttlrtlis

trict hospital on our way from the village, we found zr hospilltl witlr ;rlr'tients lying on cots in the halls-without running watc)r, lltl itt-ltottst'

(loctor (one visits only two afternoons perweek), or even ottt'< olttplt'lt'

surgical kit.Afewyears back, Sauri's residents cookedwith locally <'ollt'r'tt'tl lrrt'l

wood, but the decline in the number of trees has le{i lltt: sttlrkrr';tliott

bereft of sufficient fuel wood. The quarter or so househol<ls wllo lll(' tls

ing the ICRAF system of improved fallows, based on legttnritr()lls lr('('r'i,

have a dedicated supply of fuel wood. Other farmer holtscltoltls tl< I ttr tl.

Villagers said that they now buy pieces of fuel wood in Yala ol M r r l rrr t rr l;t

(both a few kilometers away), a bundle of seven sticks costitlg lttotttttl

twenty-five shillings (thirty cents). These seven sticks arc bitll'ly srrlli

cient for cooking one meal. In our meeting with the villagcrs, I r otr

veyed astonishment at the price, thirty cents per meal, for er t'ottttltttttilt'

that earns almost no money at all. Awoman responded tltat rrrirtty vil

lagers had in fact reverted to cookingwith cow dung or to tlltlittg rttt

cooked meals.

As this village dies of hunger, AIDS, and malaria, its isolatiort is slt t tt'

ning. There are no cars or trucks owned or even used within Satrri, irrrtl

only a handful of villagers said they had ridden in any kind of mot.ot'izt'<l

transport during the past year. Only three or four of the two httnrlx'<l ot'

so said that they get to the regional city of Kisumu each montlt, lttttl

about the same number said that they had been to Nairobi, Kt:ltyit's

commercial and political capital, four hundred kilometers away, ()ll('('

rlrrrirrg llrc pirsl yclrr'.'l'lr<'r't'iu1'vir'(lllllly tto tctttillittrt t's tritlltittg tllc vil

lage. Indeecl, tlrcrc is virtrurlly rro t aslr iltt otttc ol lttty liiltrl lcltclrirrg lltt'village. Given the farmers' nrcagcr pr'(xlu('li()lr, littrtt otttptll Ittttsl llt'used almost entirely for the household's own c()nsuntl)ti()ll, t'ttllrt:t' lltrttt

for sales in the market. The community has no r)otlcy lirr firrlilizcrs,

medicines, school fees, or other basic needs that must be purchased

from outside of the villages. Around half of the individuals at the meet-

ing said that they had never made a phone call in their entire lives.

(Ironically, and promisingly, our own mobile phones worked fine in the

village, relying on a cell tower in Yala. Extending low-cost telephony to

the village, for example based on a mobile phone shared by the commu-

nity, would therefore pose no infrastructure problems.)

This year the rains are failing again, another disaster in an increas-

ingly erratic climate, quite possibly a climate showing the increasing ef-

fects of long-term man-made climate change emanating from the richworld. The two roof-water harvesting cisterns at the school are now empty,

and the farmers fear disaster in the harvest next month' The Kenyan gov-

ernment has already put out a worldwide appeal for emergency aid to

fight imminent starvation in several provinces, including Nyanza.

This village could be rescued, and could achieve the MillenniumDevelopment Goals, but not by itself. Survival depends on addressing a

series of specific challenges: nutrient-depleted soils, erratic rainfall,

holoendemic malaria, pandemic HIV/AIDS, lack of adequate educa-

tion opportunities, lack of access to safe drinking water and latrines,

and the unmet need for basic transport, electricity, cooking fuels, and

communications. A1l of these challenges can be met, with known, prouen,

reli ab le, an d appropri at e te chrtologies and inte rve n tions'

The crux of the matter for Sauri sublocation can be stated simply

and directly:Sauri's villages, and impoverished villages like them all over the

world, can be saved and set on a path of development at a cost that is

tiny for the world but too high for the villages themselves and for the

Kenyan government on its own.

African safari guides speak of the Big Five animals to watch for on

the savannah. The international development community should speak

of the Big Five development interventions that would spell the differ-

ence between hunger, disease, and death and health and economic de-

velopment. Sauri's Big Five, identified by the villagers as well as by the

UN Millennium Project, are

Agrit'rrltrrrul irrputn. Witlr lrr tilizt'rs, itrrlrtovcrl lirlkrws (willr l( iltAl,"s

l)r'()v('nlt'r'lrrrologics),gtccttttlttltlt('s;ltttltovt'l'(t(tl)s,wltlct ltlttvcsl

ing lrrr<l srrrirll-sr'llc irrigllion, ;rrrrl irrrlr'ovcrl sccrls, Sltttt i's lltt tttt'trt'otrl<l tripk'tlrc lootl yi<'l<ls pt'r'ltt't'litt't'irrrtl rlrri<kly t'tttl r'ltt'ottirIrtrrrgt:r. In arklitiort, sl()r'zrg(: la<'ilitit:s wottl<l rtllow lltt'vill;rgt'lo scll

llrr: grain over lhc c()rrrse ol'tn<>ntlts, ratltt:r tlritrr ttll lll ()tt( (', tlrt'rtlry gt't

ling rnore lavorable prices. Grain cotrltl lrc Jlrotc<'(t'rl irr hxrrlly rrr:rrh'

st()ra€fe bins using leaves from the irnprovcd lztllow spt'< it's lt'plttrrsi;r,

which has insecticide properties. These improvcntcttt^s wottl<l ll<' ol prrt

ticular advantage for the women, who do thc liou's sltittt'ol Alrit lrrtthrm and household work.

Investrnents in basic health. A village clinic with onc rloclot' rt t tr I t t t tt sr'

for the five thousand residents would provide llec attlitttitlltliltl lrcrl

nets; effective antimalarial medicines; treatmertt.s Iirt' I llV/AIl)tiopportunistic infections (including highly effective artrl low< ost llrrtrim); antiretroviral therapy for late-stage AIDS; ancl a t'artgt' ol ollrctessential health services, including skilled birth attertdattts ltttrl slxual and reproductive health services.

Investrnents in education. Meals for all the children at tltt' lllirrutryschool could improve the health of the schoolchildrcr), tlr('<ltutlity ol

education, and the attendance at school. Expandecl vo<:ltl iottltl ltltitting for the students could teach them the skills of morlt'ttt llrlrrrirrg(for example, using improved fallows and fertilizer), cornprrt<'r' lilt'r'lrcy,

basic infrastructure maintenance (electrical wiring, ust: ittt<l tttltittlt'nance of a diesel generator, waterharvesting, borewell constrrr<'tiort :ttttl

maintenance), carpentry and the like. With a mere thottslttt<l ltottsr'

holds in Sauri, villagewide classes once a month could trairt it<lttlts irr

hygiene, HIV/AIDS, malaria control, computer and mobilt' pltotrr'

use, and a myriad of other technical and enormously pressirtg t()l)i( s.

Without doubt, the village is ready and eager to be empowcrt:<l lry irr

creased information and technical knowledge.

Power, transport, and communications services. Electricity c<lttl<l llr'

made available to the villages either via a power line (from Vtlrt ot

Nyanminia) or an oflgrid diesel generator. The electricitywoulrl powcr

lights and perhaps a computer for the school; pumps for saf'e wt:ll wit"

ter; power for milling grain and other food processing, refrigt:ratiorr,carpentry; charges for household batteries (which could be ust'<l lirt

Irerrst'lrelrl illrrrrrirrirlion); irrrrl olltt't ltt't"tls.'l'lrc villlrgt'ts t'tttlrltltsizt'rl

l-[at tlrg stu(lorrt.s worrlrl likr.to slrrrly irltt't'stllls('l lrttl titttttol tlo so

without electric light.ing A villagc t.t'tt<:k t'otrl<l lrlirrg itr li'r'tilizt'rs,

other farm inprits, and modern cooking Irrc:ls ([irr oxilllll)l(1, t'lttt islt't's

of liquid petroleum gas [LPG], familiar fi"grn Arnericttn l)itcky2url l>:rt'

becues), and take out trarvests to the market, transport perishable:

goods and milk for sale in Kisumu, and increase opportunities filr ofl:

farm employment for youth. The truck could rush women with child-

birth complications and children with acute complications of anemia

to the hospital. one or more shared mobile phones for the village

could be used for emergencies, market information, and generally to

connect Sauri with the outside world.

. Safe drinking water and sanitation. With enough water points and la-

trines for the safety and convenience of the entire village, women

and children of the village would save countless hours of toil each day

fetching water. The water could be provided through a combination

of protected springs, borewells, rainwater harvesting, and other basic

technologies. There is even the possibility of establishing links with

an existing large-scale storage tank and pumping station a few kilo-

meters away.

The irony is that the costs of these services for Sauri's five thousand resi-

dents would be very low. Here are some quick guesses, which colleagues

at the Earth Institute are refining:Fertilizers and improved fallows for the five hundred or so arable

hectares would be roughly $100 per hectare per year, or $50,000 per

year for the communitY.A clinic, stalfed by a doctor and nurse, providing free malaria pre-

vention and care and additional free basic services other than antiretro-

virals, would cost around $50,000 per year. (Antiretrovirals would be

provided by rhe Global Fund to Fight AIDS, TB, and Malaria, the U.S.

Emergency Plan, and other pr.ograms.) School meals could be paid for

communally out of just a small part of the incremental grain yields

achieved through the application of fertilizers.

A village truck would be an annual inclusive running cost of per-

haps $15,000 per year if amortized over several years (or leased from a

manufacturer). Modern cooking fuel for the primary and secondary

school students (numbering about a thousand) in the entire subloca-

tiorr worrkl (()sl lru lrrlrlitrorr.rl $Ir,(Xlo l)('r'y('irt'. A lt'w villlrH,r'r't'll lrltottt's;rrrrl:r glrrin st()lr!{('llrr ilitl,rvorrhlirrkl lrclllrlrs $5,(X)0 lx'r y('lu,lrrr ;r lotrrl ol lli25,0(X) po ycrtt.

A torrrllirurliorr ol plolct lcrl slllirrgs (witlr irrrplovcrl itcllss), lxrtr'wt'lls (witlr llrrrrrJrs), irrr<l t:orrrrrrrrrrily Iirl)s ('()nr)('('lt'rl lo llrc lrrlgr'-sllrlt'st()r'ilgc systcrr) woulrl providc access to watcr rtt (t:tt t'ottvcttit'ttl lor rrliorts

;ur<l c:ost around l[25,000 dollars.l.llectricity could be provided to the school, tltr: ttt:itrlry tlirrir, irrrrl

livc water points by a dedicated off-grid generator or by ir powt'r'lirrr'lrr>rnYalaorNyanminiaforan initial costof about $31-r,(XX). I,'ol irrrotlrcr

1f40,000 in initial costs and recurring costs of $|10,000, t:vcry lrorrsclrolrlcrrrrld be providedwith a battery/bulb assembly to light a srrurll lrrrllr lirrir l-cw hours every night with the battery charging station r:orrrrcclcrl lothe village generator. The annualized costs would be 1125,(XX) l)('r'y('rr.

Additional expenses would include scaling up educatiorritl irctivili<'s,

vzrrious costs of local management, technical advice fiorn itgrit ttllrrt:rlcxtension officers, and other related delivery services.

My Earth Institute colleagues and I estimated that thc conrlrirrctlcosts of these improvements would total around $350,000 lxrr y('lu, ()r

roughly $70 per person per year in Sauri, for at least the next li'w ycrrls,

The benefits would be astounding: decisive malaria control (willr lrrrrrsrnission reduced by perhaps 90 percent, judging from recent ( llX I lrcrl

net trials in a neighboring area), a doubling or tripling ol'lirorl yicklsper hectare with a drastic reduction of chronic hunger and urr<k'r'nrrtr i

tion, improved school attendance, a reduction of water-bornt: rlist'lrst', ;r

rise in incomes through the sale of surplus grains and cash t'trrps. lltr'growth of cash incomesviafood processing, carpentry small-scirIc cIotIring manufacturing, horticulture, aquaculture, animal husbanrlry, lrrrrl lr

myriad of other benefits. With anti-AIDS drugs added to the clinir''s scr.

vices, the mass deaths from AIDS, as well as the deluge ol ncwly ot

phaned children, could also be stanched.

Sooner rather than later, these investments would repay thcnrst'lvcs

not only in lives saved, children educated, and communities prcsct vt'rl,

but also in direct commercial returns. Consider the case of fertilizt'ts.which are currently unused, since households lack access to s[()r'ag(',

transport, credit, and a financial cushion against the risk of crop Iitiltrr cs

even if credit is made available. A fertilizer application of $100 pcr

hectare (such as two hundred kilos of DAP), combined with or srrlrsti-

tuted by improved fallows (as appropriate), could raise crop yielrls irr ir

n()r'rnirl s('rrs()n liorrr orrc l()n lx'r'lrt'r'l:rrt'lo llrtcc lorrri l)('r'ltt'r'llttr', willra nrarkctal)lc virlrrt'ol tlrc irrot'rrrt'nt ol rrrrglrly $2(X) t() $,1(X) rlolllrrs pclhectare, assurning that lrarrspolt is irvailirlrlt'lrrrrl llrr:r't'is ir slrrlllt'ptict'for the maize crop. In a drought year, Icrtilizcr antl/ot'itttllrrrvt'<l lirllows

would mean the difference between harvesting ()n(i t()l) arrrl a Iaik:rlcrop (with attendant acute hunger, if not starvation). ln tltc lirst l.ew

years, fertilizers and improaed fallows should be giaen largely ./br Jree to Lhe uil-

lagersto boost their own nutrition and health, and to build a small finan-cial cushion. Later on it will be possible to share the costs with thecommunity and, eventually, perhaps in a decade, to provide the fertil-izer and improved fallows on a full commercial basis.

INTERNATIONAL DONORS ANDVILLAGES LIKE SAURI

The international donor community should be thinking round theclock about one question: how can the Big Fiae'interaentions be scaled up i.n

rural areas lihe Sauri? With a population of some thirty-three millionpeople, of whom two thirds are in rural areas, Kenya would require an-

nual investments on the order of $1.5 billion per year for its Sauris, withdonors filling most of that financing gap, since the national govern-ment is already stretched beyond its means. (More precise estimates ofcost would have to be worked out in the context of detailed de-

velopment plans as described in chapter 14.) Instead, donor supportto Kenya is around $100 million, or a mere one fifteenth of what is

needed. Kenya's debt servicing to the rich world is around $600 millionper year, so its budget is still being drained by the international commu-nity, not bolstered by it.

This is all the more remarkable since Kenya is a new and fragiledemocracy that should be receiving considerable help from its develop-ment partners. Kenya, ironically, is also a victim of global terrorism,caught in a war not of its own making. U.S. and Israeli targets on Kenyansoil have been hit in recent years, sending Kenya's tourist industry into a

downward spiral and causing hundreds of deaths of Kenyans and mas-

sive property damage.

The UN Millennium Project is working with the government ofKenya to ensure that its poverty reduction efforts are bold enough to

.rr lrit'vr. tlrl Millcrrrrirrrrr l)r'r,r'lopur('ul ( lltls. 'l'lris strill('HY lvill tt'rlrtitr'rrrrrr lr grt':rlt'r'rlt'r,r'lopnrcrrl lrssisllrtrr'r'lrttrlrlr','1x'r rlclrl r ltltlcllltliort ltrrttttlrc li< lr wolkl lo cnrrlrk' l(t'nyrr lo irrvt'sl irr llrc llig ltivt'- ==lrglilrrlltrrr',

lrt':rlllr ;rntl t'tlrrr':rliorr, r'l<'r'lricity, tllrtrsporl lttrl r'otttnrttttit itliotts, irttrl

s:rl<'rlrirrkirrg w:ll('r'-uol orrly irr Strrrri villitgcs, lrrtl lrctoss itttlrovrtisltcrlrrrnrl l(t:rryir. V:l wltcrr tlrr: I(t:tryitrt,l'()v(:t'lun('ltl t't'<:t'ttlly lttrrpost'rl lt tt:ttiornrl s<lr:ial Ircirltlr insrtntncc [itrrtl, tlrt: vt:r'y thing nt:t'<k'tl lo scltlt'tt;t ltr

('('ss l() llasic trcalth c?rrc, donors qtrickly objc<:lr:rl lallrcl tltirrr.jrrrrrpcrl :rt

tlrr' opportunity tr,l examine how it cottkl actttally bt: itt'r'ourplislrrl.'l'lre issue of corruption ovcrshadows donor rt'lu(ious willr tlrr'

l(r'rryan government. Much of the corruption rcllcct.s lrolrklrls liorrr llr<'

t'lrrlier regime of more than two decades, corrllpt ofliciuls wlro Irrvc rrol

vct been weeded out. Part of the corruption is new attd r'otttllk'l<'lv itvoirl

rrlrlc, but only if donors help Kenya to improve the fitttt'tiortirtg ol llrr'prrblic administration, not by moralizing and fingcr poinling lrtrl lry tlrr'

irrst.allation of computer systems, published accounts,.job trairrirrg irrrrI

rrpurading, higher pay for senior managers so that thcy clo ttol llrvc lolivc off bribes and side payrnents, continued support firr tltt: l{ov('r'nrrrcnt's already major efforts to improve the judicial systcnr, ('nrlx)w('t'

nrent of local villages to oversee the provision of public st't'vi<r's, rtttrl

some humiliry on the part of donors. Most donor governrn('lrls lutvc r'ot

ruption inside their own governments and even in the pntvisiott ol'lotcign aid (which is often linked to powerful political intert:sls witlrirr tlrcclonor countries). The affliction iswidespread, and needs to lrc rrlllckcrlsystematically and cleverly, but without useless and false morulizing.

Donors should sit down with the government leadersltip rtttrl slty,

"We'd like to help you scale up the Big Five in Kenya's vill;rg<'s lo ctutlrlr'you to ensure that all of Kenya's rural poor have access to agt icrrllrrt'irl

inputs, health, education, electricity, communications and triurilx)tl,and safe water and sanitation. Together, let's design a budgt'tirry lurrl

management system thatwill reach the villages and ensure a mortilourlrk'.governable, and scalable set of interventions across the count.ry. Wr"tr'prepared to pay if you are prepared to ensure good governanct: ott sttclt

a historic project." Private international consulting firms cottltl lrr'brought in to help design these systems and to lend credibility to tlrt'irimplementation and performance.

With a little more forethought, donors and governments corrkl llrl<r'

advantage of the crucial fact that villages like Sauri have a group tttotti"

lot irtg lrtrrl crrli,r'( ('nr('nl rrrcr'lurrrisrrr lrrrlorrurticrrlly llrrilt into villlgr. lili.llrirl cllr Itcllr to ('nrilll'(' tlrtrt trirl to llrt'villirpit'is wt'll rrscrl..frrsl :rs cxllr.r'i-cnce witlr group lcrrtlirrg itt tttir:tolirtuttt:t: Irirs lrccrr lriglrly srrt'tt:sslirl,projects that empower village-based contnttrnity organizal.ions (() ovcr-see village services have also been highly successlul. Recent expcricnccswitir village governance in India, based on the panchayals (local coun-cils), are but one notable example. In Sauri, the villagers jumped witheagerness at the invitation to form various committees (schooling, clin-ics, transport and electricity, farming) to help prepare for the actual in-vesfinents and to ensure proper governance as they are put into place.Headmistress Omolo, who oversaw the formation of the committees,also ensured that the village women, with their special needs and bur-dens and even legal obstacles, would be well represented in each of thecommittees.

If donor officials wouldjoin the government of Kenya in meetingwith the villagers and brainstorming with government officials, theycould come up with dozens of fruitful approaches to ensure that aid ac-

tually reaches the villages. We need to be more creative in order to save

the lives of millions of people now stmggling to survive-and often fail-ing-in the impoverished villages around the world. The donors andthe government of Kenya can and should agree on a suitable and boldstrateg'y. Kenya's new democracy, from the national government downto the villages, is prepared to govern the use of international help withtransparency, efficiency, and equity if we can get the delivery mecha-nisms right and invest in the supporting information and reportingtechnologies.

MEETING WITH THE URBAN POOR:MUMBAI, INDIA

Several thousand miles from Sauri, Kenya, an impoverished communityin Mumbai, India, struggles with the urban face of extreme poverty. Agroup that I met inJune 2004 comes from a community that lives nearthe railway tracks. By near, I do not mean within range of the railwaywhistle as the train rolls through the city; I mean a community that lives

within ten feet of the tracks. It may seem impossible, but the shacks ofposter board, corrugated sheet metal, thatch, and whatever else is athand are pushed right against the tracks, as seen in photograph 6. Chil-

rlrr.rr;rrrrl tlrt. olrl rotrtirrely wrrlk lrkrtrg lltr ltil( k$, rrllcrr willritr it lirot ot

two ol ;llrssirrg lurirrs.'l'ltt'y rk'li'r'ltlt'ott tltt'ltitcks, lirr Ilrlk ol ttllct'tt:tlivr'

slrrritltiorr. Arrrl tlrt'y lrrt lorrlirt<'ly ttritirrrcrl irrrtl kilk'tl lry tlrt'tlitills.Arr t'ttt'r'gctir' :ttt<l <'lrlttistttrtti< sot'iitl wot.l<t'r; Sltct'lit l'lrtcl, wltrl lt'll

rrcrrrl<'rlir: rr:sc:ar'<:lr yt:ars r:arlict'lo worl< willt <:otttttttlrritit's likt' tlris orrr',

lrirs lrrorrght In(i t() tttc:t:1. l.ht: gr()tlP. Sht: ltas 1li<tttt:t:t't:tl l.ltt't'ltttst'tll t'ottt-

rnrrtrity organization wit.hin thc vcry p()()rcst sltttlts, stl(tll tts lltost' sltowtt

irr ltlrot<>graphs 7 and tl. Thc NCIO that shc fouttrlt'<[, lllc Socit'ly lirr'

tlrr: Promotion of Area Resource (lentres (Sl'}AR(l), is ottt' ltost torlity.'l'hc lifty or so people assembled around the r<>onl irrt: rttostly W()lllt'll

irr their thirties and forties, but they look rnuch oldcr ltllt:r <lcclt<lt's ol

lrard physical work and exposure to the elements. Thcy hitvt' ('()tlt(' l()

rrreet with me, and also a group of visitors from Durban, Sottllt Aliicrr,

who are there to learn about community organization firr sltrltt <[wt'llct s

irnd squatters.The overarching theme of our discussion is not latritrt:s, I'tttlttittg

water, and safety from the trains, but empowerment: spccilically, tlrt'

group is discussing how slum dwellers who own virtually notltittg ltitvr'

tbund avoice, a strategyfor negotiatingwith the city governlllcllt.. lrr llrrpast few years, this particular group, with SPARC's support, ltits lrt'r'rt

negotiating arrangements to relocate away from the tracks lo sltli't'

ground, in settlements with basic amenities like running walcl', lirlt ittt's,

gutters, even roads. Thousands have already been relocatc<l, tlrottglt

thousands more wait to find new living quarters.

The notion of large communities of people living within a li'w li't't

of the train tracks is startling enough for me this morning' Il is, lo lrt'sure, a measure of the desperation of the poorest of the potlr who ltrt ivt'

in cities to escape rural impoverishment, even famine, and tltctt sttttg-

gle to establish survivable conditions for themselves and ftrr tlrt'il clril-

dren. But I'm even more startled to learn that there is actually a l*rilway

Slum Dwellers Federation (RSDF), which has been organizcrl lry (lrt'

community members, with the aid of SPARC, to negotiate with tht: tlttt-

nicipality and the Indian Railways concerning their needs and intct csts.

In addition to SPARC and the RSDF, a third NGO is represente(l at llrt'

meeting, Mahila Milan (Women Together), which focuses specili<:ally

on the needs ofwomen slum dwellers.

As the women begin to talk, the realities of extreme urban p()v('t'ty

and the range of solutions come vividly to the fore' Each woman bt:gins

with a kind of testimonial to the power of group action. This testitltotty

uligltl Iulv('s('('rr('(l sllrg<'rl lrrrl lirr llrc gcrrrrirrc srrrilcs, r':rlrrt rlctrrrrtttot,anrl st.r'iriglrtlorwlrrrl, rrurllcrol-llrcl rrpprrr:tclt ol llrt^,lr'()ul).'l'lrcy cxpllrirr

how thcy havt: lrarl no sr:lro<llirtg-[)ct'lurl)s lw() ()r' tltt cc yt:itt's ol litlirl itl-tendance several decades ago.'fhey czrnn()t rc:rrl or writc, lxlt llrcy krtow

full well that their children need and deserve better. Bclbrc thcy came

together in the joint initiative of SPARC, the RSDF, and Mahila Milan,they were resigned to their dreadful circumstances, living in constantdanger, noise, disruption, and squalor.

But group action has taught them that in fact they have legal rightswithin the city and even the possibility of access to public services if they

act together. The city government and Indian Railways, for their part,have been only too huppy to try to relocate the group away from the rail-way tracks, since the presence of the slum right up against the trackleads to frequent accidents and forces the trains to slow down markedly,raising costs and limiting service. The city and the railway company have

learned the hard way that any forcible actions to relocate individualfamilies can trigger an uproar, as occurred in February 2001 when two

thousand huts were demolished along the Harbour railway line and thefederation mobilized its members to shut down the city's railways.

As in the villages of Sauri, what this community needs are invest-

ments in individuals and basic infrastructure that can empower peopleto be healthier, better educated, and more productive in the workforce.These impoverished families want basic amenities-to live away fromthe railway tracks, with access to water, sanitation, roads, and even elec-

tricity. They will need to have new ration cards for the government-supplied subsidized food and cooking oil in the new neighborhoodswhere they will live. Their children will need access to a school andclinic. They would like to be able to reach theirjobs on public transportor by foot if they are close enough. All are hard workers, earning theirmeager incomes as maids, cooks, sweepers, guards, launderers, or inother low-skilled, labor-intensive services. The younger and more liter-ate members of the group have actually begun to gain, or regain, basic

literacy, empowered and motivated by their political activism. Those

who become literate have a chance to find work at two or three timestheir current salaries, perhaps in the garment factories.

One recent report from the slums of Mumbai and Pune, India,speaks plainly to how the lack of basic infrastructure, in this case safe

drinking water, has devastating consequences on the dignity and physi-

cal well-being of women:

It is typir itlly u,orrrr.rr n,lro r ollrr I wlrl('r ltortr lrttlrlir sl;ttrllripcr, ol

Ictt tlrtlttittg lot lortg pcriorls itt lltt'ptot'r'ss;ttttl lt:tt,iltH lo H('l tll)

vt'r'y t'lrlly or go litlr':rl riglrl l() g('l llr('wltlct, ll is typitirlly w()lll('ll

wlro llrvr. t() ( iu ly lrr.ltvy wirl<'r't ortlltirrcls ovt'r'lottg rlislitttct's:ttttl ott

slippr:r'y slopt"s, lt is tylrir':rlly w(,rrl('rr wlro ltrtvt'lo tttrtlit'tlo witlr tlrr'

olicrt ilaclt'tluaL(' wal(:r strpplics to tlt'ittt tlt<' ltotllt', ptr'pitrt lltt'

lood, waslr tltc ttl.t:nsils, tlo tltt: lirtrrt<lry:rlt<l llittltt' tlrt'r'lrilrln'rl. ll is

also women who have t() scr()ung(:, lrtry or bcg Ior walt'r, llitllit rrllrlly

when their usual sources run dry It is inrportal)1. lt()t l() tttltlt'ttsli'

mate this side of the water burden. There are n() c()l)rJx'llirrg irrlt'r'trir

tional statistics, comparable to health statistics, rl<tcttrtrt'rttittg lltt'

Iabour burdens related to inadequate water provision. It is rlillit rrltfor those who have never had to rely on public or othcr pt:oplt's' lrtps

to appreciate howhumiliating, tiring, stressful and inconvt:trit'rrt tllis

can be. Not having toilets, or having to wait in long qtrctr(:s l() tls('

filthy toilets, carries health risks and is also a source of artxit'ty.

In many ways, the logistical and investment needs ol'tllt' s(ltl:lll('ls

will be easier to address than the comparable needs of'tltt: vilLrg<'r's irr

Sauri. Water taps can be provided from the main city pipcs. l'llt'r'lr ilitycan be tapped into from the power grid rather than supplit:<l lry it slirtrrl

alone generator. In densely populated urban areas, acccss lo st'ltools

and clinics can also be easier to arrange. Doctors and nurs<:s rtlrottttrl itt

Mumbai in comparison with the scarcity of trained meclicitl pltsottttclin rural Kenya. The problems in urban areas revolve ar<ttttttl ('tltlxrw('t

ment and finance. How can an impoverished squatter colrlllttllrity, witlr

out its own land, find a collective voice and the security lo tltisc lltltlvoice, and how can the financial burdens be shared among lltt' r'ity gov

ernment and the slum dwellers in a realistic manner?

With SPARC's initiative, the new Slum Rehabilitation Acl has givt'rr

added power to the communities: slum-dweller organizati<tns llr(' tt()wlegally empowered to act as land developers if they can denlottslt'ltlr'

that they have agreements to represent at least 70 percent of tht: cligilllt'slum dwellers in a particular location. As land developers, tltt: slttttl-

dweller organizations can tap into special municipal programs lo gltitt

access to real estate for community resettlement or for commerciitl tlt'-

velopment that can finance resettlement elsewhere. SPARC is also rtt'go'

tiating with the Kolkata Municipal Authority to help set up lavatorit:s itr

Kolkata's slums, under an arrangement in which the costs of coltsl t'tt< -

liotr wottlrl lrt'lrotttc joirrtly lry llrc rrrrrrrir iplrlity trrrrl tlrt'slrrrrr rlrvr.lk'rs,all(l llllliltl(:tlut( ('wottlrl lrt'tlrt'r'r'slxrrrsilrility ol llrc slrrrrt rlwt'llr'ts' ()tllll-nization.

As Sheela Patel explains, adding al) ol'!4allizc<[ slrrrrr <lwt'llt'r's' voit'cat the table will make possible future solutions that werc rrn<lr'r:arncrl ol'in the past. Recently the World Bank has creativelyjoined the mix, help-ing to finance some of the upgrading of Mumbai's urban transportbased on a major role for the NGOs in the design and implemenrationof the resettlement programs. The NGOs, for their part, have made im-portant advances in organizing and documenting the community mem-bers to facilitate the process. Sheela Patel and her colleagues have saidthat these programs are "steps on the journey towards citizenship forthe urban poor, where rights are translated into reality because of the fa-vorable confluence of a supportive policy environment and grassrootsdemocracy in action."

THE PROBLEM OF SCALE

The end of poverty must start in the villages of Sauri and the slums ofMumbai, and millions of places like them. The key to ending poverty is

to create a global network of connections that reach from impoverishedcommunities to the very centers of world power and wealth and backagain. Looking at the conditions in Sauri, we can see how far $70 perperson can go in changing lives-not as a welfare handout, but as an in-vestment in sustained economic growth. Looking at the conditions inMumbai, we can see how a stable and safe physical environment for acommunity can enable its households to get a foothold in the urbaneconomy, one that is already linked to global markets. For a sum similarto that in Sauri, it will be possible to establish that foothold.

The starting points of that chain are the poor themselves. They areready to act, both individually and collectively. They are already hardworking, prepared to struggle to stay afloat and to get ahead. They havea yery realistic idea about their conditions and how to improve them,not a mystical acceptance of their fate. They are also ready to governthemselves responsibly, ensuring that any help that they receive is usedfor the benefits of the group rather than pocketed by powerfut individu-als. But they are too poor to solve their problems on their own. So, too,are their own governments. The rich world, which could readily provide

tlrr.rrrissirrg lirlrrrct's, worrrlt'ts lrow lr) ('ttsttt('lltltl lll()ll('y tlt:ttlt'lrvlril;rlrlr'

r,vorrlrl ll( lltillly lctrclr llx' 1root ltttrl lrc lut ittvt'sltttt'rrl irr crrrlirtH lt()v('t ly

r;rllrt'r'lllrrt lrtt t'tttllcss;ltovisiott ol t'tttt'tgt'ttcy tltliotts.'l'lris r;rtcsliutl

r rrrr lrt.irrrswcrt'rl lry slrowirrg Irow rrclwot l<s ol ntttltutl ;tcr'ottttlltlrility r trtr

lr rn lrlor rgsirlr' ( ltc nt'lworks ol li r ritrtr'i rrg.

Irr slrort, wr: rtr:t:<l it striltogy lor s<'itlirrg tr;l tlrt: illvcsllll('llls tlrirl will

t.rrrl ltovcrty, inclrrcling a sysl.crn ol govcrrtirttc't: tltitt crtll)()w('ts lltt' poot'

wlrilc holcling thcm accountablc. ln eaclr krw-irtcotrtc ('()lur(r'y, il is litttr'to <lesign a poverty reduction strategy that can rncct. this <:hallt'rtgt'.

tr'aurleen

A GLOBAL COMPACTTO END POVERTY

1[-*"t rraing glotral poverty by 2025 will require concerted actions by the

..$.;rich countries as well as the poor, beginning with a "global com-

pact" between the rich and poor countries. The poor countries must

take ending povefty seriously, and will have to devote a greater share oftheir national resources to cutting poverty rather than to war, cormp-

tion, and political infighting. The rich corrntries will need to move be-

yond the platitudes of helping the poor, and follow through on their

repeated promises to deliver more help. All of this is possible. Indeed, itis much more likely than it seems. But it needs a framework. My col-

leagues and I in the UN Millennium Project have proposed just such a

framework, focused on the period until 2015, called the MillenniumDevelopment Goals-Based Poverty Reduction Strategy.

A SHADOW PLAY

Today's situation is a bit like the old Soviet workers' joke: "We pretend

to work, and you pretend to pay us!" Many poor countries today pretend

to reform while rich countries pretend to help them, raising the clmi-

cism to a pretty high level. Many low-income countries go through the

motions of reform, doing little in practice and expecting even less in re-

turn. The aid agencies, on their part, focus on projects at a symbolic

rather than national scale, just big enough to make good headlines. In

2002, the United States Agency for International Development (USAID)

;rrorrrllv lrrrrrrlrt.lcrl ils W(.st Aliirlrrr Wlrlr,r'lrritiirtivr', rrolirrg llrir( "lr rrli.rlrh'srrpllly ol sirli'wlrlcr'. irhrrrg willr irrk'rlrrirlc sirrrilirliorr irrrl lrygicrrr'.

.u('()n tlrt'lrorrt lirrt'irr lltc tourlrirl itgitinsl wlrlt't.tt'lltlctl rliscirst'ltttrlrlcrrtlr." lilil t'rtotrglr. lrrtl wllrl wlrs []SAII)'s ir< ttutl cortttilrtttiorrl A piti-lrrl $,1 .4 rrrilliorr ovt'r'tltn't'yt:itt's. II Wr:st Ali'i<'rr ltits it;roprrlitliott ol sotttc

llro rrrilli<lrr llcoplt:, $4.4 rnillion ()vor tlrrt:r: yt:ars worrl<l lrt' /rrs.r lh,utt tt,

ln'tt tt1 pcr pt:r.nn per yeru; ertotrglt ;rerlrerps to lruy a I)ixit: t'tt1l, lrr tl pn rlritlllyil( )l ('rrot-tgh to {ill it with watcrl

'l'he chronic lack of donor financing rohs pr><lr courrtri<'s ol tlrt'irpovt'r-ty-fighting zeal. In 2003, Frirne Minister Mcles Zenawi anrl I colrostrrl;ur (ivcnt in Addis Ababa to launch the Human I)evelopnrcrrt l{t'polt inl,ltlriopia, one of the world's poorest countries. The prime rrrirristt:r' rrur<k'

;r powerful and insightful presentation about Ethiopia's potr:ntial to cx-

prrrrcl food production, and thereby to overcome pervasive hungcr: A rlrrcs-

tiorr came from the floor. "Mr. Prime Minister, we agree with yort ()lr llt('irrrportance of agriculture, but what about health care?" Tir nry srrr'plisr',

tlrc prime minister responded, "I'm afraid that health care is goirrg to

llrkc more time. We will be able to expand health care only lAtt:r, orrt'r' wr'

rrrr: richer." Back in his office, I said that I did not agree with his answt'r',"l,lthiopia needs expanded health care now." He looked back at rtrt' plirirr-

tivcly and agreed. But then he told me that IMF officials had rc<:r'rrtly tolrlIrirn, "There's no more money available for health."

A reasonable estimate, based r:n the work of the UN Millt'nrrirrrnl'r'oject, is that Ethiopia needs about $70 per person per year in tlt'vt'lop-nrent assistance (or $5 billion in total for a seventy-million pcrs()n ('( ( )n-

omy) compared with the $14 per person per year it receivt:s to<liry (or

$il billion in total). About half of that sum would be devoted to t lrt' slrrl

ing up of public health. The balance would go to infrastructur(' anrl liris-

ing rrral productivity, especially in the food sector.

As soon as I returned to NewYorkfromAddis, I telephoned a scrrior'

IMF official. 'Jeff, what are you complaining about now?" thc olliciirlsaid good-naturedly. I repeated the story and noted that Ethiopiir livr'<1,

in essence, without modern health care, enduring a life expectal)('y r':lt('

of forty-two years, child mortality of 170 for every 1,000 born, a ()ll('-

third chance of living to sixty-five years, one doctor for every 30,(XX)

people, and public spending on health of $2 per person per year'. "So

what do you want me to do?" said the official. "I want the IMF to sr"rJ)lx)r'l

a m{or increase of public health spending in Ethiopia." "But.f t'll',there's no donor money for that." "The donor world is awfully ri<;|r," I

t('l()ll('(l. "fCll, tltr'<lotrots lttl'u(,1 ollr.rirrg lo givr.nt()t,(. 1() l,ltlriopilr.""lltrt tlrt:rr tltt'tr"s ltlrsoltrtt'ly n() way lirl l,ltlriopiir l() nr(,(,1 llr<. Millt,rrrrirrrlDeveloprncrtt Gtlals." "V>tt'r't: r'iglrt, tlrost'goirls urr. rrrrr.cirt.llrlllt'." llxirs-perated, I said, "well, then, at least say that prrblir:ry-trrat rithioPia willfail to meet the MDGs unless the donors give more. The worlcl nec,ds tohear that. Perhaps that would get the d.onors to move."

we are stuck in a shadowplay. In public, rhe IMF says howwell thingsare going in Ethiopia; in privare, ir recognizes that aid for Ethiopia is in-sufficientfor the country to achieve the Millennium Development Goals.The March 2004 IMF-world Bank Joint Staff Assessmenr of Ethiopia,sPoverty Reduction strategy (on the IMF's web site) does nor brearhe aword about the need to scale up donor financing significantly if theMDGs are to be achieved. Even more distressing, but par for the course,the IMF-world Bank document contains no data whatsoever about thecountry's public health emergency. How could the IMF and world Bankexecutive directors even know that the country program they have ap-proved cannot even achieve the goals that have been promised?

I believe that the senior IMF official was wrong: there is more moneyavailable for Ethiopia, but only after we cut through the thicket of excusesand platitudes about aid, some ofwhich the IMF itself propagates. In put>lic, all of the standard reasons why aid to Ethiopia is at just the right levelare marshaled: Ethiopia is doing fine (says the IMF-world Bank sraff As-sessment), it has all the donor resources it needs, it could not absorb anymore, corruption and mismanagement would undermine greater assis-tance. This is the standard litany of excuses used to justify the status quo.In private, virtually the entire development community knows thatEthiopia is starved for cash. Apparently, it is too embarrassing to the polit-ical bosses in the united States and Europe to make the point. This is amistake. If we explain patiently and honestly to the taxpayers in the richworld that more money is needed and can be well used, it is much morelikely to become available.

TWO SIDES OF THE COMPACT

so that I am not misunderstood, let me underscore that a global com-pact, like any contract, has at least two parties, and therefore responsi-bilities on both sides. Poor countries have no guaranteed right to meetthe Millennium Development Goals or to receive development assis-

l.rrrrt'lronr llrc rir lr rounltrr.s.'l'lr.t'orrlv lr;rvr. llr;rt ri;ilrt il tlrr.t,tlrr.rrrsrlvt's t:tt'ty llrrrrrpilr otr llrt'ir r orrrtrrilrucrrls lo goorl govr.ttt;utr t'. 'l'ltcrx;r;tttsiott ol lrirl is prcrlirltt'rl ott lt sctiorrs plirrr ol lrliorr, r'orrrlrint,rlrvillr tt rlt'rrtottslrtlt'tlwill to clrlry it ortl irr rr luursl)iutul lrrrrl lrorr<'sl nrrrrttt't. Not:tll govt't'rttrtt'rtts will wlull t(), ol'lrc lrlrlc lo, rrrrrl<r'suclr lr r orrrrrrilntt'ttt, itttrl lltost: ttittiotts ttt:c<l rrot itpllly. ()ru < onrlllt<'1, ()ut r'orrrruilrttr.trl,in tlrc rir:lt corrnt.r'ir:s shotrkl bc to ht:l;t all poor r'orrrrtrics wlrt.r'r,tlrr,r'ollcclivr: will is present [o be responsible partn(:rs irr llrt: t.rrrk.irvor'. l,or tlrr.o(lrcrs, where ar"rthoritarian or cornlpl. reginrr:s hol<l swiry, llrr.<orrsc(lu(:llces fbr the population are likely to be tragic, but tlrt' n.sporrsilrilitir.sol lltc rich world are also limited. Perhaps thc rnost inrprlrtlrrrt lrction tlurllich countries can take in those circumstances is to ht'lp tlrr.wr.llgoverned neighbors of such countries to prove that thcrc is ltr.lp trv:ril

rrlrle for those that are organized politically to help thcnrst.lvr,s.'l'lrr.lriggest problem today is not that poorly governed corrrrtrit.s ll(.1 l{)(,rrruch help, but that well-governed countries get far too littlt'.

PLANNING FOR SUCCESS

lloring as it may seem, we need to fix the "plumbing" ol'itrlt'r'nirliorrll<levelopment assistance in order to be effective in helping tltr.wr.llgoverned countries. Aid flows through certain pipes-bilatt.r'irl <krrror s,

the World Bank, the regional development banks (such :u tlrt. Ali icirlDevelopment Bank)-but these pipes are clogged or simply loo rr:llr ow,

not able to carry a sufficient flow of aid. If we are to get ?rgt'(:(,tn(.nl l)\,

the rich world's taxpayers to put more aid through the systcrtr, wr. lirslhave to show that the plumbins will carry the aid from the rit'lr < orrrr

tries right down to where the poorest countries need it most-in tlrt. vil-lages, slums, ports, and other critical targets. Let me describc lrow tlrlrtplumbing can be put right. I focus my attention on the pcrio<l rrrrtil2015, when the Millennium Development Goals are to be met. Sirrrillrr

principles will apply for the second decade, from 2015 to 2025.The UN secretary-general, overseeing the UN agencies and tht. lh t,l

ton Woods Institutions (which are also part of the UN family) , slrorrkloversee the entire effort. Working through the United Nations Dr.vt.lolrment Program-the economic development arm of the UN syst(.tn-the secretary-general, on behalf of the member nations, should (:llsln ('

that the global compact is put into operation. Much of the work will

lirl<t'pllrct'lrl tlrt'k'vcl ol llrc irt<livirlttirl (()unlry, wlrt'tr'pllrrrs will llt'tlt-visr:rl itrr<l invt:slrrrcrrts nlil(l('(,n Ilrt'lxrsis ol nlrlioturl lirutrrci;rl l('s(,ur'(('s

and increased <lonor aitl.To organize country-level work, c:ircll l()w-in('()ln(: country sltottlcl

adopt a poverty reduction strategy (PRS) specilically rlcsigned to meet

the Millennium Development Goals. Most poor countries toclay alreadyhave some form of a poverty reduction strategy-usually a poverty re-

duction strategy paper or plan-that it has developed in cooperationwith the IMF and World Bank. The existing World Bank poverty reduc-tion plan lays out the country's goals, targets, policies, and strategies tocut poverty. Introduced a few years ago to give more coherence to each

country's efforts to fight poverty, and to provide a framework for officialdebt relief, the existing plans are not yet designed with enough rigor orambition to enable the countries to achieve the MDGs.

The poverty reduction strategy papers, incidentally, are all publiclyavailable on the IMF and World Bank Web sites, so one can read foroneself what the countries have deemed to be their poverty reductionstrategies. The programs are often ingenious, but are all chronically un-derfunded compared with what is needed to achieve the MillenniumDevelopment Goals. As a result they are often forced to shortchange en-

tire areas of public investment (such as public health). Five recent povertyreduction strategy plans of notable quality in Africa are:

. Ghana's Poverty Reduction Strategy (GPRS)

. Ethiopia's Sustainable Development and Poverty ReductionProgram (SDPRP)

. Kenya's Economic Recovery Strategy for Wealth and Employ-ment Creation (ERS)

. Senegal's Poverty Reduction Strategy Paper (PRSP)

. Uganda's Poverty Eradication Action Plan (PEAP)

l\hy Tbday's System Is Incoherent

Alas, the international community's approach remains incoherent inpractice. On the one side, it announces bold goals, like the MillenniumDevelopment Goals, and even ways that the goals can be achieved, such

as the pledge of increased donor assistance made in the Monterrey Con-

\('nslls. \Yi'l wlrt'rt il ronrcs l() r('lrl lrtlrliilr', rvlrlrc llrt'rrtlrlrrr lrils lltc to;trl,ttt lltc lx)v('r'ly ttrlttcliott plltrrs. llrl Millctrrritrrrr l)r'vt'loprrrt'nl ( lo;rls trrr,txlrtcsst:rl ottly lts vlrgtrc irspilirlions rir(lrcl llrirrr ollclir(ion:rl l:u gt'ls.( lrttrt(t it's lttt lolrl lo go irlrorrt tlrt'ir lrrrsitrt'ss willrorrl lrrry lroll<'ol rrtcr'lirrg llr<'MIXis.'l'lrr: lMI,'lru<l Workl Iltrnk rcvcirl split pt,r'sontrlilir.s,r lurrrr;li<lnintr1 tlrc MIXIs irr prrlllir: spt't:t:lrt's, ap1>r'oving plogllrrrrs lllrtrvill rrol. achicvc thcur, and prival.cly acknowledging, willr lrrrsirrcss ;rs

rrsrrirl, that they cannot be nret!

Ilere is how the aid actually makes its way through thr: plrrrrrlring torliry. When Prime Minister Nleles Zenawi or his counterpal'ts irr Aliiclr.Asia, and Latin America lead their country's preparation ol (lrt' povr,r ty

rr'<ltrction plans, theyare told to be "realistic," meaning thal tlrt'y slrorrltllrrke as a given the limits of today's constricted donor resorlr(:(.s.

Operationally, the IMF and World Bank staffs make rotrrrrls ol crrlls

l() canvas the "bilateral" donor community, that is, the aicl agt'rr< ir,s ultlre rich countries. They contact the aid agencies to get a Iirrcclrsl uI tlrr.It'vel of aid that each agency is likely to provide in the conrirrg ycrrr'.'l'hese sums are totaled up and then conveyed to the recipicnt corrrrlt v.

lithiopia is told, for example, 'You can expect around $1 billiort nr.xt

year. Please tell us what you plan to do with that aid."Knowing that a certain amount of aid is likely, the recipicnl ('()lllt(t \,

is expected to engage in a broad-based public consultation t() l)r'(.1)iu(.the poverty reduction plan, including how the aid will be deployctl, 'l'lrt'

international community's insistence on broad public partir:ipirtion irr

the design of these plans is designed to achieve four main goals: ( I ) lrctter prioritization of investment plans, (2) increased public ilwiu('lt(.risabout poverty reduction programs, (3) mobilization of NGOs arrrl t orrr

munity groups in the fight against poverty, and (4) fostering morr. 1rolit-ical "antibodies" against corruption.

All of this is fine; indeed, it is reasonably successful in eliciting prrlrlir'

participation. \A/hat is missing in the process are the practical linketgt's lx.tlveen the Millennium Development Goals and the poverty rcclrrr'(iorr

plans. In today's arrangements, the country is presented with a fait ir(:('( )l I t-

pli-"Here's the amount of aid you will receive." Instead, the prot't,ss

should be turned around. The first step should be to learn what the c<lrrn-

try actually needs in foreign assistance. After that, the IMF and WrrklBank should go out to raise the required amount from the donors!

To show how straightforward it would be to adopt this approach, lr,t

me provide another recent example, Ghana's poverty reduction 1tl:rrr.

(ilrlrnit is orrt'ol tlrt. llt.sl govclrr<'rlitttrl ntrtttttgcrl t ttttttlt ics itt Alr ir':r. lt is

a stable, nrtrltiparty rlt:rrro<'r'acy willt n'llrlivr.ly lriglr lilclircy ('1)? pt'rr t'ttt

of youths aged fifteen to twcnty-lolrr) an(l rrrorlt:sl lt'vt'ls ol ( ()r'l tll)li()tl

compared with other countries at a colnparal>lc int't>tttc lt:vt'l. Olrzrnil

suffers from considerable extreme poverty. Like clther Afiican cotln-

tries, Ghana has been unable to diversi$' its export base beyond a nar-

row range of primary commodities, mainly cocoa beans. It lacks the

domestic resources needed to finance critical investments in health, ed-

ucation, roads, power, and other infrastructure. It fell into a sharp debt

and financial crisis in the early 1980s, and since then the government

has been hard pressed to pay its monthly bills, much less to expand the

levels of public investment.The government of Ghana reached these same conclusions when it

presented the Ghana Poverty Reduction Strategy (GPRS) in 2002, its

version of the poverty reduction plan. Ghana took seriously the Millen-

nium Development Goals and presented a strategy based on the invest-

ments that it would need to achieve the MDGs. The plan called for a

major scaling up of public investments in the social sectors and infra-

structure, estimated to require donor aid of around $B billion over five

years, or roughly $75 per Ghanaian per year during the five-year period.

The Ghana strategy was exceptionally well designed and argued, but the

donors balked. The first draft was rejected by the donors. The govern-

ment cut back on its ambitions, and slashed the aid request tojust $O nit-

lion over five years. The donors balked again. The plan was slashed

again. By the end of this excruciating process, the poverty reduction

plan was funded at around $2 tlllion for the five-year period.When I was recently in Accra, Ghana, a very pleasant representative

of the European Commission said to me, "But Professor Sachs, the orig-

inal plan was simply not realistic." "\A/trat do you mean by realistic?" I re-

sponded. "Do you mean that it was not realistic because the program

was poorly designed, or do you mean that it was not realistic because the

donors wouldn't foot the bill?" "Oh, I mean only the latter, Professor

Sachs. The strategywas fine, butwe couldn't come close to the $8 billionrequest." Realism, it seems, is in the eye of the beholder. I would have

thought that the original plan was realistic because it aimed to accom-

plish the very goals that the world had endorsed' The final plan seemed

unrealisticto me, because it can no longer achieve the MDGs. The donors,

evidently, meant something else about realism. For the donors, realism

nr(.llnl corrvt.trir,trrr,, .rrrrl rPrr ilirlrllv sltot'ltotttittg (llt;tttlt's lirrlrrrr ilrl

rrcr'<ls ittlo lltr tiglrl lrt ul,ttt tttsttllicit'lrl lrirI plrcl<lrgt',

A M I l,l,l,lN N I LiM l)llvl,ll,ol'M l'lN'l'G OA I,S- BAS Ii D I'OV I.] I{'I' Y

REDUCTI ON STRAT'I.](} Y

Still, I am not despairing. Ghana could soon have a str'1rt('gy lr:tst'rl otr

the Millennium Development Goals. One reason is that <'r<:ltlivt' wot li lrv

the World Bank, the UN agencies, and the bilateral clonors luts ltcltutllt'

prepared the plumbing system to handle a much grcitl('t'llow ol tcsources. Ghana's donors have already reached imporl.arrt itl.ll.t'('lll('lll3

to coordinate (or "harmonize") their efforts around thc Oltitl rit st l ll l('Hy,

They have agreed to simpli$r their own aid procedurcs, ittrrl itr lircl t.pool their financial resources to support the plan.

In the alphabet soup of donor aid, the new donor pr<tgtrtttt lot

Ghanais called the Multi-DonorBudgetSupport (MDBS) Jroli<'y. I Irrrlt'r

this newarrangement, the donors have agreed to give thcir rrrotrt'y rli

rectly to Ghana's budget so that the government of Ghana ('all ('lll t y ()rll

the public investments it has identified as the highest priolitit's lor

poverty reduction. In Ghana's case, a viable development pllrrr (( ll'l{S)

and the financial plumbing to support the plan are now in plitr'<'. Wlrrrt

Ghana now needs is an adequate flow of cash.

A true MDG-based poverty reduction strategy would havt: livt' prtl ls:

. A Dilferential D'iagnosis, which identifies the policies rtlt<l ittvt'sl

ments that the country needs to achieve the Millennittrrr I )t'vt'l

opment Goals

. At InaestmentPlan,which shows the size, timing, and c<tsls ol'llrr'required investments

. A Financial Plan to fund the Investment Plan, including t ltc cltl

culation of the Millennium Development Goals Financirrg ( lrrp,

the portion of financial needs that the donors will have to lill

. ADonorPlary which gives the multiyear donor commitntt'ttts lirt

filling the Millennium Development Goals Financing (ia1r

. h l'trltlir' Alrrtttt.l4r'tttt'ttl l'lrttt lltl( ortllitrcs llrt' nrr,r'llrnisrrrs ol gol,('t'ltittt( ('itrrrl pttlrlit ir<lrttirrislrlrliorr llrirl will lx'l1l irrrplr,rrrcrrl llrt'cxparrdc(l ptrlllit: irrvcstrrrcnt stt'at(:By

In combination, these five sections would pul. t() rcst thc crrrrollI luvorilr:explanation of donors for not doing more to help the p()orest coull-tries: the alleged lack of "absorptive capacity" to use more aid. How carr

we scale up the health sector, the donors ask, if the countries lack thedoctors, nurses, and clinics to provide health services? Such a questionmisjudges the whole puryose of aid. Sure there are not enough doctorsand nurses now !\rhat about in four, or six, or ten years? With more aid,there can be more doctors, nurses, and clinics. Getting from here tothere is a matter of routine planning, not heroics.

With a lead time of a couple of years, for example, doctors from thecountry who have relocated abroad could be attracted home with im-proved salaries, covered partly by donor aid. Within two or three years,tens of thousands of community health workers could be trained, withthe training financed by donor aid. With a lead time of five years, thegraduating class of the existing medical schools could be enlar.ged, withthe expenses covered in part with donor aid. And with a lead time of tenyears, several new medical schools could be built within the countrywith the new schools financed by donor aid. Limited absorptive capacityis not an argument against aid. It is the very reason that aid is needed!The key is to invest that aid over the course of a decade, so that absorp-tive capacity can be increased step by step in a predictable manner.

In the previous chapter we discussed the essence of the differentialdiagnosis and the investment plan, specifically the areas of priority in-vestments in infrastructure and social seruices that can lift a country outof a poverty trap. Let me therefore turn directly to the last three ele-ments of the MDG-based poverry reduction strateg"y: the financial plan,the donor plan, arrd the public management plan.

The Financial Plan and Mill,ennium DeuelopmentGoals Financing Gap

A proper financial plan begins with an estimate of the unir costs of pro-viding the key investments: teachers, classrooms, kilowatt hours of elec-tricity, health clinics, kilometers of road, and so forth, and thenexamines the increased populations to be covered by these interven-

tl,lr I lrr.sc r osls ol sr:rlirrg lrll ( lur lrl rrlittltlt'rl tvillr t,,ttsirlt't:rlrlt'rllt,rtl,,rtrrltlrryslrorrltl tovct ttol ottly'llrcr'lrlritlrl trtslsol lllt'proilrts, lrrtl,rlqr llrr.( ()sls ol ollcntliotrs ltttrl ilutittl('nllrl( ('. Itt tlrr'lrlrsl, rlrtttots ollt'lllr,rrr,lr<.l1rr'rl corrrrlli<'s to lrrrilrl t lirrics, lrrtt tlrcrr rcjcr lcrl lltr'plclr lo lrr'lp

rrr\r'r llrl sltlltics ol <lotlots lttttl Ittttst's to sllrll llr<'r'lirrits.'l'lrr'Prt'rlir t.rlrl<'r'r'sull lrirs lrt'r'rr llrt'(:()nslrlr( li()rt ol t'rrrllly sltt'lls rlrtlrct lltlttt op

r r,rtnrl,, lrt.lrltlr lirt ilitit's. l)orrors rrct'rl to lrt: lltrrlllttr'<[ lo lirrittt< t' ttol ottly

tlr,.plry,siclrl irrliirstnrclrrrr', lrtrl also tltc sal:tt'ics ol'lrrrlrlit'-sr'<'lot wol kcts.

I)rrlirrglllcsilru(:trrr:tladjustrncntc:ra()l't.hcl9fl0siur<I I1)lX)s,tlrt'lMl',

\\irrlrl lllrul<, anrl tlonor cotnmttnity oftcn ac<:cptcrl lltc trt'r'<l lirl l:rlgcr

lrrrrrlrrrg lirr lrcalth or edtrcation, bul saicl that thc 1,loor sllotrkl pity tltt'it,\\'n wry. Sirnilar arguments are heard today con<:crning tlrt: pt'ivltlizltliott,I rr,;r1t'r'lrrrcl szrnitation services. 'Yes, let's mobilize ncw inv<'sttltt'tlls ltt try;t

lrr ,rrrrl sunitation, but let's do it through the privzltc sc(lt()r. 'l'ltt' lroot r'ittt

p.rv lol irrrproved seryices." In some cases, donors havc sttpJrot'lt'<l ll ( ()tlt

l,r, rrrrisc lormula called social marketing, in which the poor ltt't' ltslit'tl lo

;r,rr' pirr'(, not all, of the cost of the sewice, with the donors pi<:kirrg ttl) llr('

l,,rl;rrrct^. Social marketing has been applied, for example, to lltt: sitk'ol'r r rrrlllr<:r:ptives and antimalarial bed nets. These recomlnoll(litliotrs lltvcl,rrk'rl rcpeatedly. They have been unrealistic about what thc p()()l ( illl rl('trrrrlly:rfford to pay, which is usually little or nothing. The cxtrcrrr(' l)(x)tr lorr't cven have enough to eat, much less to pay for electricity ()l wllt('l ( )l

lr<'rl rrets orcontraceptives. The historyof userfees imposed ott lltr'pootrs ;r lristory of the poor being excluded from basic services.

'l'he financial plan, therefore, must include a realistic pit lrrlt' ol

rvlritt the poor can actually pay and what they can't pay. The tJN Millcrr

rrirrrn Project, following the similar recommendations of the WI I( ) ( lrrrr

rrrission on Macroeconomics and Health (CMH) recommencls lltltl ttst't

It't's should be dropped entirely for essential health serviccs itrrtl pri-

rrrary education in poor countries. As for water, sanitation, ettr<l powt't,

tlrc project strongly endorses the use of lifeline tariffs, explainc<l t::tt lict'.

lrr that system, every household gets a guaranteed fixed supply ol t'lct -

t ricity and safe water; above that amount, they pay by the meter.

The financial plan should also estimate the share of GDP ill litx t cv-

(inues that can be devoted to the Millennium Development Goals. I lt'tligain realism is vital. Poor countries can only raise limited amotrttts itt

taxation. The poor cannot be squeezed by taxes any more than thcy crrr

be squeezed through user fees. Attempting to raise taxes too higlr rr'-

sults in widespread evasion and serious economic distortions. Wlrt'lr llrr'

(l<tttttttissirltt ott Mltt tot'r'ottottrits lrrtrl Ilclrlllr r'orrsirlr.r'r.rl tlris issrrr., llrr.lMI" rt:prcs<)ltt.lttivo ()lt llrc corrrnrission srrggr.slr.rl llurl it lrsslltn(. llrirl llow-income count.ry coulcl Inol)ilizt: un arltlitiorr:rl I 1lo'r'r.rrt ol (ll)1, irr

tax revenues for the health sector by 200? urrl an itrltlitiorrirl 2 pcr<:r:nlof GDP by 2015. The UN Millennium Pr<tject adopted rhc sarnc ap-proach, assuming that low-income countries can raise an additional 4percent of GDP by 2075 for allMDG-related invesrmenrs.

With these assumptions, it is possible to calculate a Millennium De-velopment Goals financing gap, which measures how much the donorcommunity would have to contribute to enable the low-income countryto finance the investment plan. The following chapter details these cal-culations. One point to stress here is that help will be needed not justfor a few years, but for most (or all) of the period until 2025. Fundingplans cannot realistically expect that poor countries will suddenly pickup the full tab for expanded projects afterjust a few years. Sustainabilityof the investment plans will require sustained large-scale donor financ-ing for at least a decade to come, and in many cases for two decades.

The Donor Plan

The donors have put great stress on the need for countries to improvetheir governance, but much too little stress on how donors themselvesneed to improve their own performance. A part of every MDG-basedpoverty reduction strategy, we need a donor plan that spells out in atransparent manner the way that donor commitments will be fulfilled. Adonor plan should focus on four aspects of aid flows:

. Magnitude. Aid must be large enough to enable the recipientcountry to finance its investment plan.

. Timi,ng.Aid must be long term enough to enable the recipientcountry to follow through on a ten-year program of scaling up.

. Pred'ictabiliry. Nd must be predictable enough so that stops andstarts in the aid flows do notjeopardize the investment programor the macroeconomic stability of the recipient country.

. Harmonization. Nd must support the MDG-based poverty reduc-tion strategy, and specifically the investment plan, rather thanthe pet projects of the aid agencies.

l,r'l rrrc rrurlr.r'scolc wlrv prcrlir l:rlrility ol ;rirlwill lrc ttltttosl tts itttpotlltttl

;rs llrr.ovr,r'lrll :urrorrrrl ol :rirl. ll povrlty is lo lrc t'rtrlcrl,ltirlol ttt,rtttlrl$tit)

l)('t l)('ls()ll J)(.r'y(.ilt will lritvc lo llow lo llrt' l)(,()t('sl t ottttlt it's. llrrl tlrlrl

Ir.vt.l ol :rirl will <'ortstilttlt'lttotttt<l l?0 lo liO 1lt'ttt'tt( ol (ll)l'wllctt pcr

clrllita irr<orrtr:s lttt itt lltt'tltrrgt'ol $i2(X) l() $\300 l)('1'lx'ls()lt [)('l'y('ill.Wlrcn ai<l ilows art: srrt'h a lurgt: Jlart ol (ll)l', tttrcxllttt ttl<l lltt< tttirliotts itt

irirl can be a hugc shot'k lo tltc o(:()I)()lI)y. Il, ottc yt:itr', tltt: <lottot s givt' lt0

p<:rc:cnt of GDP, but tltc next yorr orrly l5 Pcrcont ol'()N|'}, tlrc lcsrrll

would be massive layoltii, closures of'govcrnment Iacilit.ics, hrrgt'lrtltltrict

<lcficits, and inflation. To guard against this threat, dontlr aitl rrrrrsl lrc

lrighly predictable over a period of at least a fewyears'

The issue of aid harmonization is also crucial. A discussion irt ?(XX)

Irbout aid to Tanzania noted that there are "thirty agencies involvt'<l irr

providing development funds, 1,000 projects, 2,500 aid missions it y('irl'

[and] all with separate accounting, financial and reporting systeuls. . . ."

World Bank PresidentJim Wolfensohn has commented, "I think thirt wt'

zrre now in a situation where everybody recognizes that to havc totttt

tries burdened with innumerable visits from good-hearted peoplt' likrus and all the bilateral donors, and innumerable reports that thcy ltltvr'

to complete quarterly and little coordination in terms of some ol tlrr'mechanics of the implementation, that there is a large pick-up to bc ltit<l

in just coordinating and better implementing what the developtttt'ttt

community are doing already."

In order to harmonize aid, the various aid agencies should operilt('

on the basis of their true comparative advantage. When it comcs l<r

Iarge-scale aid to help countries expand their public investment pro-

grams, the money should flow through multilateral donors such as lllt'World Bank and the regional development banks. \A{ry should Ghattit

negotiate with twenty-three bilateral donors when what Ghana really

needs is budget support to scale up public investments? The twcl)ly-

three bilateral donors should agree, beforehand, to pool their moncy ltt

the World Bank or the African Development Bank, and then let thost'

institutions make a single grant. The bilateral agencies are much bc((t:l'

when it comes to matters that require individual small-scale projct:ts,

such as specific kinds of technical assistance (for example, to treatAl[)S

patients or to mobilize solar power), or small-scale experiments, ()l'

people-to-people exchanges.

A l'u,ltlir Mtt,rt rlgt,rtr,t,r t l. Sl rutl qry

Financing is necessirry, btrt har<lly srr[[icit'nt, Iirr srr<'<:t'ss. Morrt'y will lrt.wasted or sit idly in a bank accourrt if thc govcrnrncnt is rrnabk: to irrrple-ment its investment plan. Implementation requires tirne, olcoursc, Ibrplanning, construction, training, and improved oversight. But beyondthe necessary time, a sound public management plan should have sixcomponents:

. Decentralization. Irestments are needed in hundreds of thou-sands of villages and thousands of cities. The details will have tobe decided at the ground level, in the villages and cities them-selves, rather than in the capitals or in Washington. Decentral-ized management of public investment is therefore a sine quanon of scaling up.

. Train'ing. The public sector at all levels-national, district, village-lacks the talent to oversee the scaling-up process. This is not acase for evading the public sector, which will not work, but forbuilding the capacity of the public sector. Training programs (orcapacity building) should be part of the overall strategy.

. Information Tbchnohgie-s. If the aid plumbing is going to carrymuch larger flows of aid each year, we will need better meters,which will mean the use of information technologies-computers,e-mail, mobile phones-to increase dramatically the amount ofinformation transmitted in the public sector and accessible toall parties.

. Measurable Benchmarh.s. Much clearer targets of what is to beachieved rnust accomparty a major increase of spending. EveryMDG-based poverty reduction strategy should be supported byquantitative benchmarks tailored to national conditions, needs,and data availability.

. Audits. Let's face it: the money has to reach the intended recipi-ents. No country should receive greater funding unless the moneycan tre audited.

. Monitoring and Eaaluation. Right from the start, the MDG-based

poverty reduction strategy should prepare to have the invest-

nt('nls ttrotritotrrl ,rnrl ('\':rluirl('(1. Ilrrrlg<'ts ittttl tttt'r lt;tttisttts

lot' rttortilot ittg ,ttrrl lr':tltltliorr slrortlrl lrr' r'sst'trti;tl ;ritt ls ol lltcslritlcgics.

I l r S4i o n a, I I nJ r o,s tru dure

Many important investments are regional in natrrrc an<l ittvolvt' st'vcntl

<ountries at once. Consider, as I did earlier, thc roarl thitl lirrl<s tlrr'

I(cnyan port of Mombasa with the four countries that dcpt:rr<l ott llrttlport: Kenya, IJganda, Rwanda, and Burundi. The rnad is it lwo-lltttt',

scmipaved road that services more than a hundred million pt:o;rlr'. ll is

poorly maintained and imposes extremely high costs lbr l-rt:iglrt slrilr

rnents to and from the coast. One part or another of the roacl {)'c<1ttt'ttllv

gives way. The road should be repaired in a shared four-countt'y proi<'t'1,

rather than as piecemeal haphazard projects within each of llrt' lirrrr'

countries. The problem is that the World Bank and other donor-s itl (' I r( )l

good at managing multicountry projects, since they are used to llrirrliirlgabout one countly at a time. Various regional economic grottlls lt:tvr'

sprung up around the world, including several in Africa, that cotrl<[ Irt'l1r

to achieve coordination of investments across neighboring c<)rtttll'i<'s.

Multicountry investments will become more common, not only irt t'rlltrlsand rail, but also in port services, telecommunications, financial trtitt'kt't

regulations, biodiversity conservation (of forests and river sheds), t'ort-

trol of air and water pollution, energy development (including lry-

dropower, geothermal power, electricity transmission), and othcr ltt't'lts.

Regional groupings can also play another significant role: shirrt:tl I r'-

sponsibility for governance. Countries respond to peer pressurc. 'l'ltt'

African Union is utilizing that basic insight to launch a policy knowtt :ts

the African Peer Review Mechanism (APRM), in which countries voltttt-

tarily subscribe to a systematic governance review by their peers. ,\s tltt'African Union describes it, the primary purpose of the APRM is

To foster the adoption of policies, standards and practices that lead

to political stability, high economic growth, sustainable develop-

ment and accelerated sub-regional and continental economic inte:-

gration through sharing of experiences and reinforcement ol'

successful and best practice, including identi$,ing deficiencies ar.rcl

assessing the needs of capacity building.

'l'lrt't'x1rt'r'it'tt<r'ol ttruty ollrct ttgiorurl r'l'lirrls, llorrr tlrr.Mirrslrirll l'llrrrto the lLttropcatt IJrriorr, slrows tlrirl llrt'st' lrop<.s llrvr. glt.irl trr(,t il. ( ltrrrrlrpressure from outsidc czttt ht:lJl l<l l<r'c1> tr n'lorrrr-rrrirr<lcrl govt'r'nnrcnlon track, just as Poland's hopes tojoirr tht: lrur<lpcan Urriorr hr:lJrt:rl t<r

insulate Poland's economic reform policies {iom en<trrnorrs ancl inap-propriate short-term pressures and populist enticements.

GLOBAL POLICIES FORPOVERTY REDUCTION

Poor countries also have critical needs that cannot be solved by nationalor regional investments or by domestic policy reforms. There are con-cerns that must be addressed at the global level. Four are most important:

. The Debt Crisis

. Global Trade Policy

. Science fbr Development

. Environmental Stewardship

The Debt Crisis

This issue should have been resolved years ago. For at least twenty yearswe have known that heavily indebted poor countries (HIPCs) are unableto repay their debts, or at least do so and achieve the MDGs at the sametime. The debts should simply have been canceled, but the debtors haveinsisted for far too long that the poorest countries of the world continueto pay debt service, often in amounts that were greater than nationalspending on health and education. In fact, rich countries should havegiven the poorest countries grants rather than loans, so that the poorcountries would never have been indebted in the first place.

The behavior of the creditor countries in recent decades comparesvery poorly with the U.S. commitment and practice during the formula-tion of the Marshall Plan, when it decided to help rebuild Europe withgrants rather than loans. The post-World War II planners knewwell thedisastrous experience after World War I, when, as Keynes had foretold,allied war debts and post-World War I reparations claims entangled

clrrlilor lrrrtl rlelrlor rr;rliorrr irr :r prolorrgcrl politiclrl lrrrrl litlrru'iirl llisisllurl corrlrilrrrlrrl lo llrr'(lrclrt l)r'prcssiort irrr<l irrrlirtctly to tlrl tisc ol

lirscisrrr. Altt'r'Wrllrl Wirl ll, I l.S. strirtt'gists cltost'lr rlilli'rtrrt ( ()lu's(', ('n-

srrrirrg t[rat lroslwrrr'<lt'llts worrlrl rrol t'rrr:rrrrrlrt'r'1,)rrr'o;lr"s liagilc rlt'rrror'-

nrcit:s. Wc wotrkl rl<l wcll lo r:nrrrlalc that wisrlorn Io<liry. lt is tirrrc lirr tlrt'tlt'll$ ol'the highly indebted poor countries t.o 1>t: <:arrt:r:llc<l orrtriglrl rrs

part of the financing package for the Millenniurrt Goills-bascrl povt't'ty

r'<:duction strategies.

Global Trade Policy

Sustained economic growth requires that poor countries incrr:asc tlrt'ircxports to the rich countries, and thereby earn the foreign cxclurngt' tu

import capital goods from the rich countries. Yet trade barricrs irr liclrcountries hamper export growth. The ongoing Doha Traclc l{trttttrl,launched in November 2001, is committed-on paper at least-l() iru-

proving market access for poor countries. This commitment is vitirlly irrr-

portant, especially in low-skill, labor-intensive sectors such as gann('nlmanufacture. Still, two caveats are in order.

The first is that although trade is important, the popular slogirrr

"trade not aid" is wrong. Poor countries will need "trade plus aid," sirrcr'

trade reforms alone are not nearly powerful enough to enable tht: pootrest countries to escape from extreme poverty. The "trade not aicl" lolrbyseeks to use the undoubted importance of open trade to undernrinc llrt'case for aid. Even if trade reforms would raise the incomes of tht: lloor"est countries by billions of dollars per year, only a small fraction ol'tluttwould be available for funding the vitally important public investrrrt'rrls

needed to escape from the poverty trap. \A/hen huge gains are attril>uted to trade reforms (hundreds of billions of dollars), we need to lookat the fine print: almost all of those gains accrue to the richest coutttt'icsand the middle-income countries, not the poorest countries, and r:s1lr'-

cially not the poorest countries in Africa. How after all, coukl trark'alone enable isolated rural villages in Africa to meet their basic nt:t'<ls'/

The second caveat is to warn against hlperbole vis-i-vis agrir:ullttt'itltrade liberalization. There is no doubt that liberalization of worlrl irgli-cultural trade would be a good thing. Europe, for example, wasl.cs iu-

credible amounts of money subsidizing its high-cost farmers, and corrlrl

accomplish other goals (environmental preservation) much nl()l'('

cheaply. But it is wrong to conclude that the end of agricultural srrlrsi"

dies wottlcl ltc a gr:at lroott lirt lt'irsl rlcvt'lopcrl corrnllit.s ilr Alliclr irrrrlother parts of the worlcl. ll'I'l"rrolrc t:rrt.s llat:k orr its srrlrsirlics lirr slill)l(.crops (wheat,maize), the results IbrAfiica <:otrl<l wr:ll lrt: rrcglr(ivt:, rrotpositive, since Africa is a net food-importing rcgiorr: c()nsrull(:t's ol lilo<lwould pay higher prices for food, whereas farmers would benefit. 'fhcnet effects on poverty could be either positive or negative, but are veryunlikely to be hugely beneficial. Africawill unambiguously benefit fromthe liberalizaion of trade in tropical products (for example, cotton,sugar, bananas), but the subsidies for tropical products are only a verysmall part of the widely reported $300 billion in artificial support forfarmers in the rich countries. In short, liberalize trade in agriculture,but do not believe it to be a panacea. The benefits will accrue over-whelmingly to the large food exporters: the United States, Canada, Ar-gentina, Brazil, and Australia.

S cienc e for D ea elopment

Many of the core breakthroughs in long-tenn economic developmenthave been new technologies: the Green Revolution for food produc-tion, vaccines and immunizations, antimalarial bed nets, oral rehydra-tion therapies, agroforestry to replenish soil nutrients, antiretroviralmedicines. In almost all of these cases, the technologies were first de-veloped for the rich-country markets, or were sponsored for the poornations in a special donor-led process. It is very rare, alas, that technolo-gies are developed by the private sector to meet specific challenges inthe poor countries (for example, for tropical fbods or diseases). Thepoorest of the poor simply do not provide enough of a market incentivefor private-sector-led research and development.

Recognizing that the poor are therefore likely to be ignored by theinternational scientific community-unless special efforts are made-itis critical to identify the priority needs for scientific research in relationto the poor, and then to mobilize the requisite donor assistance to spurthe research and development. Here are a few areas of special impor-tance, drawing on work by various scientific bodies in recent years thathave explored this issue:

. Diseases of the poor: new preventive, diagnostic, and therapeu-tic measures for diseases specific to low-income countries, espe-cially tropical diseases

. 'lirrlrir irl ngiir iillul' irlrv slt'rl v;tt iclics, \,vitl('t lrtitttltgt'tttt'ttl lt't lt

ttirlt tcs, ltt tr I rroil I tt,tt t.tFl('lt t('t I I lt'r'l r r r it 1r

rcs

. l,)rrr.t gy sysl('nlri irr rlrrrutc nn lrl ltt t'rts: s1l<:<'iltl lt'<'ltttologics lirr'

,r1l:gri<l l)()w('r, irrr lrrrlirrg t't:ttcwtrblc cI)crf{y s()ltl'('('s (lirl t'x;trrr-

ple, phol-ovoltitit <t'lls), power generators, ittlplovt:tl lrittlt't'ics,

and low-watt illumination

. Climate forecasting and adjustment improved tncenttrclttt'ttl ol'

seasonal, interannual, and long-term climate changes, willt it vit'w

toward prediction as well as adjustment to climate challg('s

. Water management: improved technologies for wal.ct' ltittvcsl:

ing, desalination, small-scale irrigation, and improvccl rllil t l:lll('ment of aquifers being depleted by overuse. Water will rist' irr

importance as population densities and climate changt: irtlct itr'l

to produce more regions in acute water stress.

. Sustainable management of ecosystems: fragile ccosysl('lIls

around the world (coral reefs, mangrove swamps, fisherit's, t ltitt'forests, to name a few) are succumbing to anthropogenit: lirrr'<'s'

often with dire consequences. In many cases, poor cornntttrtitics

do not have the technical capacity to monitor changes ()l' l() t ('-

spond in an effective an sustainable manner.

The UN Millennium Project recommends global donor support ott iltt'order of $7 billion peryear to address priority R&D needs for trt:rtlllr,agriculture, energy, climate, water, and biodiversity conservati()tl in tlrt'poorest countries. Targeted scientific efforts have had huge berrt"lils irr

the past. The Rockefeller Foundation financed the research leacling trr

the yellow fever vaccine in 1928 and much of the plant breeditrg lt'-search leading to the Green Revolution. In recent years the Bill lrrr<l

Melinda Gates Foundation has financed extensive research into Alt)S.TB, malaria, and other diseases that afflict the poor. GlaxoSmithKlirrt',

working together with the Gates Foundation, has recently annortltt't'tl

promising advances toward a malaria vaccine, though a proven vat t'ittt'

for use in Africa is still years off. In order to stimulate the needecl rt'-

search and clinical testing of new vaccine candidates, I have r('('()lll-

mended together with Harvard economist Michael Kremer that cloltot'

agencies and the Global Fund to Fight AIDS, TB, and Malaria cottttttilahead of time to purchasing a successful vaccine on a large scale Iirr' <lis-

[r'ilrtrtiorr irr Alliclr, llrr.tclryclclrlirtglt litutttcilrl itttt'ttlivt'lirt v:ttttttt'tt'search zrtrtl cle:vclrll)tIlcl) l.

Enu ironment al S t ew ards hip

Even though the local effects of global climate change are extremely

hard to forecast, we can be sure that many of the world's poorest places

are at risk of being overwhelmed by climate shocks coming from outside

their borders. Rising ocean levels associated with long-term warming

will likely inundate impoverished regions such as Bangladesh and small

island economies. Shifting patterns of rainfall, such as the declines in

precipitation evident in Africa's Sahel and those associated with long-

term warming in the Indian Ocean, are likely to be experienced else-

where. An increasing frequency and intensiry of El Niflo climate cycles

could become an important disturbance for hundreds of millions ofpeople in Aia, Latin America, and Africa. Changes in ocean chemistry

associated with rising atmospheric concentrations of carbon dioxide

could poison the coral reefs, with attendant disastrous effects on coastal

ecosystems and coastal economies.

The poorest of the poor are mostly innocent victims in this drama.

The major cause of long-term climate change, fossil fuel combustion, is

disproportionately the result of rich-country actions. Any responsible

global approach to poverty reduction should include much greater at-

tention to three things. First, the rich countries themselves, and parti-

cularly the United States, will have to live up to their longstanding

commitment under the United Nations Framework Convention on Cli-

mate Change to the "stabilization of greenhouse gas concentrations in

the atmosphere at a level that would prevent dangerous anthropogenic

interference with the climate system." Second, the rich countries willhave to give added financial assistance to the poor countries to enable

them to respond effectively to, or at least to cope with, the changes

ahead. Third, as I noted earlier, the rich countries will have to invest

more in climate science to gain a clearer understanding of how the

changes already under way are likely to affect the world's poorest people,

as well as the rest of us.

\\'ll (l ti (t N l) ll (l l's 'l'll l,:

lN'l l':ltNr\ l l()NAL SYS't t',Ul

'l'ltt'llorlr'('()urrlri('s lt'li'r'r'rrlrlrcrrristi<'ltlly to lltt' IlN ir,]r'trcit's, lril:rlct;tlrlorrors, ancl Ilrctton Woo<[s instilutiorrs as tlrt'it'"rlt'vt'loprttt'nl l)iulrrcls." In thc best ol'circurnsttrnces, thesc itgt:ncics iut<l contttcl l)lu l B()v('r'lrrncnts really act as partners. Often, howevct, lltcy <ltrt lrt'lts tttttr lt

rrrrisance as help. Aid flows are often small and trnprccli<'trrlrlr'. wlrilr'lrrrndreds of small-scale aid projects eat up the timt: an<l lttlt'ttliott ol

ovt:rstretched and impoverished governments. Flarmottizittiott ol :rirI irrsupport of a single MDG-based poverty reduction stral.clly is vitrrl.

In order to harmonize aid, however, the partners tltt:tttsclvcs ttt'r'tl

lo do a betterjob in dealing with each other. The key, I llclicvr', is lo nsltlte United Nations system to its best advantage. The LIN s('( t('liuvg-eneral is the best placed official in the world to help r'oorrlitutlc lltr'various stakeholders who must contribute to the achicvt:ttt<'ltl ol lltt'Millennium Development Goals. The UN agencies ofI-er vitrtlly irrrp,rr

tant expertise in every aspect of development. A partial listing ol lltcsr'

agencies and their core areas of competence is shown in lablt' l. Willrthe lead of the secretary-general, and operating through t.h<' t lN l)r'l,r'lopment Program (UNDP), each low-income country shottl<l lt;tv<' lltr'benefit of a united and effective United Nations countl'y tt:irrrr, wlrir lr

coordinates in one place the work of the UN specializccl itgt'rrcics, llrr'IMF and the World Bank. In each country the UN countl'y lcltttt sltottlrl

be led by a single United Nations resident coordinator, wlto t r'llot ls lr r

the administrator of the United Nations Development Progt'anr, tvlto itt

turn reports to the UN secretary-general. This UN country lt'iutt is vilirlto providing every poor country with the best of internati<>nal t'virlcttcc

and science addressed to the challenges of escaping the povt:r'ly tutlrand achieving sustainable development.

\t\4ry do I belabor such an obvious housekeeping point? Bc<:itttsc lltr'current system is surprisingly dysfunctional, to the point whert: t lrc lM l"

and the World Bank sometimes hardly speakwith the UN agen<'it's, r'vctr

though they all depend on one another. For the past twenty yt:ats, lltr'rich countries have assigned the IMF and the World Bank a privilt'gt'rlposition in relation to the other UN agencies, so much so that tltt'olltctagencies would sometimes have to call me simply to find out wlritt tlrr'IMF was actually doing in a particular country. They lacked tlrc <lirtctaccess to find out on their own.

Wlry tlrc' lMl" lrrrtl llrt' Workl llitrrk wcrt' givr.rr tlris privil<,gcrl positiorris easily cxplaint:rl. As tlrt: ol<l iulvict: prrls il, l,irllow tlrc rrrorrt.y.'l'lrt.r.i<.lrcountries hold sway in the IMF and lhe Worl<l Barrk nrrrr:lr ur91' t.lr;rrr irrthe uN agencies. Unlike the UN General Assembly, and rnosr ol'the

TableAbbreviation Core Arem of Concem in Developing

Comtries

Bretton Woods Institutions

In rernational Monetary Fund IMF Provides assistance to developing countries onfinance and budgetary issues, and temporaryfinancial assistance to help ease macroeconomicadjustments

World Bank Provides loans and grants, policy advice, andtechnical assistance to help low- and middle-income counffies fight poverty

FoodandAgricultureOrganization FAO Leads fight on hungeq providing policy advice

and technical assistance

International Fund forAgricultural Development

Finances agriclrltural development projectsto increase food production and improvenutrition

IFAD

United Nations

Development ProgramServes as the UN's global developmentnetwork; also has programs to strengthendemocratic governance in developing countries,fight poverty, improve health and education,

t the environment, and deal with crises

United Nations

Environment ProgranrUNEP Helps countries care for the environment

through project-s and technical scientific support

United Nations

Human Settlements Program

UN- Promotes socially and environmentallyIIABITAI sustainable towns and cities with the goal of

providing adequate shelter for all

United Nations

Population FundUNFPA Helps countries establish population

and reproductive health programs

UNDP

United Nations

Children's FundUNICEF Improveschildren'slives,particularly

through programs promoting education, health,and child prorection

World Food

ProgramWFP Frontline agency in the fight against gtobal

hunger, feeding over 100 million people in81 countries in 2003, including most oftheworld's refugees and internally displaced people

Provides vital technical assistance to countries oninvesting in health

World Health Organization \,'HO

lroittr[s (]l llr('slx'( illliz('(l;rH('n( i('s, rvlr('r('il's "orrr'( (,unlry, orrt,\,o1r,," intlrc lMl,'illl(l llt('Worlrl llirrrli, it's "()ni'(l()llilr', ()n('v()l('." l,llrllr rrrlrrrllr,r ol

tlrc IMlr lln(l lll('Wotl<l Ilrrtrk ioilrs witlt lrtt lnisilln('(l(lu()lir, wlrir lr rlctcrnlin('s tlrt' votirrg liglrls ()l lltt' < outttry illl(l llr('sizc ol llrr' < orrrrlly's slll)s( r'i[)(i()n. Irr tlris wily, llr(' rit'lr t'orrrrtri('s llilv(' kt'1rt lr v()tinFi nrili()r'ily. l'lti$v()tillg lnaioril.y ltas lt:rl tlrt: IJrritc<l Stutt:s, irr pirrli<'rrlirr; t() r ('ly rn()r'(. lr(,irv

ily orr thc IMI'and tht: W<>rl<l llzurk, wlriclt it rtrolt: (:asily ('()nlt'()ls, tllul()r) the UN agencies, ovcr which it has rnuch lcss inflrr<'rr<:r..

The problem is that the IMF and the Workl Barrk sirrrply ('iulltot (l( )

tlrcirjobs without much closer cooperation with thc [JN irgt.rrcir.s. 'l'lrr.

IMF and the World Bank are generalist institutions, tlrc lMl,' lirl rrr:rr r o('conomic (budget, financial, exchange rate) issut-:s tul(l (lr('Wrll<l lllrrrlilirr development issues. The UN agencies are specializr'<l irrstitrrtiorrs.UNICEF, for example, has great knowledge in chilcl hr:rrltlr iur(l ('(ln( ir

tion; the United Nations Population Fund (UNFI'}A) has ullivirl(.(l (.\pertise in family planning; the Food and Agricult.rrrc ()r'grrrrizlrliorr

(FAO) is unmatched in agriculture; the World Health ()r'girrrizrrtiorr

(\,'HO) has unique capaciLy in public health and diseascr ('()lrtr'()l; llr(,United Nations Development Program (UNDP) is unerltralcrl irr crr.

pacity building and governance; and so on. On the other harr<1, tlrt. s1rt.

cialized agencies rarely have the macroeconomic overview (lurt is lrrrimportant part of the IMF-World Bank perspective. Withorrl rr rrrrrclr

closer partnership of the specialized UN agencies with thc IMli lrrrl tlrt.World Bank, none of these institutions can do theirwork prop<'r'ly,

NEXT STEPS

Extreme poverty is a trap that can be released through targctcrl invt,st-

ments if the needed investments are tested and proved and thc irrvr.sl'

ment program can be implemented as part of a global compact ltt:lwt't.rrrich and poor countries, centered on a Millennium Developmenl. ( irxrls-

based poverty reduction strategy. That is all great news. But c?rr) w(. ill-ford to do all of this? Would helping the poor in fact bankrupt thc riclri'I answer this underlying question, in some detail, in the next chirl)tct',