l'434+ R,q~ I /'~ P R O C E E DI N GS OF T HE W OR L D B AN K ANN U AL CON FE RE NC E ON DEVELOPMENT ECONOMICS 1989 w> s w, 1, 4+ r gi-S>>.ww< ;r<> Introduction Stanley Fischer and Dennis de Tray The papers in this volume were presented at the first annual World Bank Con- ference on Development Economics, held April 27-28, 1989, in Washington, D.C. The conference series brings researchers from the Bank's member countries together with Bank staff to stimulate interaction and exchange of ideas and information. Participants at the 1989 conference came from a range of research, academic, and policymaking institutions in both developing and developed coun- tries. The ultimate object of the series is, by enhancing the knowledge base, to improve both member country and Bank policymaking. Outside researchers and Bank researchers have much to offer each other. Academics and other outside researchers can and do bring different and new ways of thinking to the Bank. That is especially important for an institution as large, as busy, and as involved in policy in so many countries, as the Bank. The temptation for Bank researchers is to look inward, to talk to each other, and to assume that shared habits of thought are the right ones. Although academics too share certain modes of thought, the differences between the two groups are potentially productive. In addition, the best academics are probably closer to the cutting edge of research; they are also more free to think speculatively and to develop new theories and fresh insights. One of the purposes of the conference series is to expose Bank economists to recent developments in economics whose policy implications may not yet be clear but which are beginning to affect thinking outside the Bank and which may one day become the conventional wisdom. One example in this volume is the paper on recent developments in strategic trade theory by Elhanan Helpman. The topic is extremely important, the Bank has well-known policy views in this area, and the new theories seem to have the potential for reversing those views. The paper generated a very lively discussion, during which both Helpman and the discussants agreed that the knowledge needed for a country to benefit from the possibilities implied in the new theories is probably too detailed to make such policies empirically useful. But it is far better to reach that conclusion on the basis of an informed discussion of the theory and its empirical requirements than on a priori grounds. The Bank for its part brings to the outside research community an extremely rich and varied research agenda and an unparalleled wealth of practical knowl- edge about developing countries. The Bank's research agenda springs mainly from its operational experience and is therefore down to earth. Part of the I 2 Introduction research agenda comes from an attempt to anticipate future problems, but even here the Bank tends to be practical, asking for the operational implications of each paper and research project. Of course, one can go too far in that regard, for not every useful piece of research has an immediate payoff; the right question is whether a particular piece of research will eventually have real-world impli- cations, rather than whether it has immediate operational relevance. Nonethe- less, this challenge to produce research that is operationally relevant imposes an extremely useful discipline on researchers in and out of the Bank. Development problems are far too difficult for any one institution to believe that it has the final answers to them. The Bank's approach to development is pragmatic and open-minded. In making policy decisions, and in thinking about development strategies, the Bank has to search for better ways of helping our member countries, to entertain new ideas, to question old ones, and to listen, talk, and learn from critics. Being open-minded, however, does not mean being softheaded. After thinking and talking, the Bank and its member countries have to act, one way or the other, in light of the relevant analytical and policy-related arguments. And because decisions have to be made, the Bank cannot agree with everyone on every topic. Nonetheless, the Bank has to keep on reexamining the way it does business and be prepared to change if necessary. This conference series is one way for the Bank to listen to and ask for help from outside re- searchers in dealing with the difficult development issues that our member coun- tries face. To help in this process, we have described the Bank's current research program in an addendum to this introduction. (Requests for additional infor- mation on the World Bank's research program should be directed to the Research Administrator's Office, World Bank, Washington, D.C. 20433, U.S.A.) This first World Bank Annual Conference on Development Economics did not focus on a single subject or theme. Instead, each author was asked to review and assess the policy implications of one of six distinct subjects. This decision to explore a set of issues rather than a single theme reflects a desire to stress policy issues and to communicate findings to a broad spectrum of development practitioners rather than a group of research specialists in a narrow field. Future conferences are expected to continue this broad coverage. The conference began with a keynote address by Manmohan Singh, secretary general of the South Commission. Singh identified some of the major areas of challenge for researchers dealing with development: the role of the state, the management of the public sector, and reform of the international trading regime. Though he did not discuss them in detail in his address, he also cited food security and human resource development as deserving priority attention. Singh sees the critical question for the modernization of the state as not so much its size as the overall quality and effectiveness of its impact. He felt that better management of the public sector and its careful delineation would be critical for private sector development as well as for the prospects for reform in the socialist economies: both issues he felt would need location-specific answers. For the trading system, Singh asked whether developed country markets would Introduction 3 still be available if developing countries which have pursued inward-looking development strategies were to switch to export-orientation based on labor- intensive manufactured goods. Singh concluded by calling for an international mechanism to impartially evaluate the development performance of developing countries undergoing structural reform. Marcelo Abreu of the Catholic University of Rio de Janeiro presented the first paper, "Developing Countries and the Uruguay Round of Trade Negotiations." With the Uruguay Round well under way, Abreu asks what negotiating stances developing countries should be taking. On what issues should they stand firm and where should they be willing to make concessions? What stands should the various subcoalitions-agricultural exporters, food importers, garment manu- facturers-take? This is a complex and important set of negotiations, one in which the stakes for the developing countries are greater than ever before. Abreu's paper highlights the importance of restoring GATT discipline to the trade in goods, even while GATT is pushing ahead with the extension of GATT-like rules to services and intellectual property rights. He also sees a considerable need to focus on the issue of unilateral liberalization, under conditionality or otherwise, and its effect on developing countries' negotiating positions at the GATT. Angus Deaton of Princeton University presented the second paper, "Saving in Developing Countries: Theory and Evidence." Deaton's assigned task was to survey the literature on determinants of saving to assess its policy implications and the existing theoretical and empirical gaps. He attacked this issue by de- veloping a new framework for analyzing saving in developing countries. Deaton's approach emphasizes that motives for saving in developing countries are likely to differ from motives in developed countries. Households in developed countries save in large part to accumulate wealth; in contrast household saving in devel- oping countries, especially in rural areas, in large part is a means of guarding against declines of consumption from an already precarious consumption base. As Deaton points out, this precautionary view of saving has very different im- plications for public policy seeking to influence saving than do conventional accumulation-based models of saving behavior. Deaton also cites the tremendous need for better data, and his ongoing research for the C6te d'lvoire using this precautionary saving model. Bank staff member Emanuel Jimenez explored a controversial current policy issue in the third paper, "Social Sector Pricing Policy Revisited: A Survey of Some Recent Controversies." Declining fiscal budgets and increasing demands for health and education services have forced governments and donors to look for alternatives to general revenue financing of publicly provided goods and services. The pricing of public sector goods and services is an area that generates strongly held positions both for and against, especially when social services such as health and education are on the line. Jimenez clarifies the debate by drawing the distinction between ideological differences and disputes over empirical re- lationships. He points out that, even setting ideological differences aside, con- siderably more empirical evidence is needed to demonstrate that the poor can 4 Introduction be protected from the negative consequences of pricing health and education services if the momentum of social sector price reform is to be maintained. Jimenez believes that selective user charges can yield some improvements in equity as well as in efficiency, besides achieving fiscal gains. His paper, however, argues for systematic evaluations of actual attempts at social sector price reform. Brian Van Arkadie of the University of Dar es Salaam took on one of the more difficult assignments of the conference: to assess the policy implications of the literature on the role that institutions have played in promoting-or slowing-development. He chose to define the term "institution" broadly to encompass both the "rules of the game"-laws and regulations-and formal government organizations. Van Arkadie does not believe that it would be ap- propriate to come up with a "check-list of 'good' and 'bad' institutions," and in any case, the literature is long on generalizations and short on empirical evidence. His paper throws light on the factors to be considered in appraising institutional performance, and on how institutions can be changed to enhance their performance. Van Arkadie suggests that it is best to seek answers to specific and relevant questions about the role of institutions, and not attempt to draw up a grand theory about it. Elhanan Helpman of Tel Aviv University was asked to focus on the policy lessons of the recent and rapidly growing literature on strategic trade theory. Strategic trade theory appears to have radical implications for trade policy. Whereas conventional trade theory and its proponents generally support unre- stricted trade regimes, Helpman shows that in many circumstances the new theory argues for selective interventions. In the final accounting, however, both Helpman and the audience agreed that the information requirements of the new theory made it extremely difficult to implement in real-world policy settings. In the absence of much improved information on the way economies work and on their strategic behavior, conventional wisdom-minimal intervention and uni- form tariffs-seems likely to continue to be the order of the day. In the conference's final paper Hans Binswanger, a staff member of the World Bank, looked at the implications for policy of available theoretical and empirical evidence on agricultural supply response. Many recent adjustment programs have had as one of their cornerstones the rebuilding of the country's agricultural sector. Binswanger shows that the effectiveness of such policies depends on much more than "getting prices right." He demonstrates that in the aggregate, short- run agricultural supply responses are inherently inelastic, though the long-run responses to agricultural policy changes can be great. Without technological change or considerable infrastructural investment, price changes alone may have much less effect on overall agricultural output than hoped for. Binswanger concludes that in formulating adjustment programs, attention to agricultural growth cannot be delayed until adjustment is completed, precisely because of the long response lags involved. The final session of the conference brought together six acknowledged de- velopment experts in a panel discussion to review the current state of devel- Introduction 5 opment policy research in their own areas of expertise. Each drew the audience's attention to the existing gaps in our understanding of development processes, and outlined problems and concerns relating to developing countries that should shape new directions for basic, applied, and policy research in the future. The organization of an international conference is even more demanding than that of a national conference, and the organization of a new type of conference more demanding yet. We owe special thanks to the World Bank staff who were responsible for so efficiently organizing the conference and overseeing the com- ings and goings of its participants: Shekhar Shah, the Bank's deputy research administrator, provided overall guidance and management for the conference and this volume; Andrea Hodson organized the conference logistics. We would also like to thank the editorial staff who put together these proceedings, especially Philippa Shepherd and Pat McNees, and the secretarial staff who provided able support, especially Manny Jandu. ADDENDUM: THE WORLD BANK's RESEARCH PROGRAM Because the World Bank engages its members in a comprehensive dialog over the entire range of economic policies, it has to undertake research and maintain expertise on a broad front. Divisional and Departmental Research Current research activities are best described by reviewing the divisions and departments that make up the research wing of the World Bank's Policy, Re- search, and External Affairs complex. The names of these units provide a useful summary of the range of research interests within the Bank. We start with Bank units which deal primarily with macroeconomic and related issues. Macroeconomic Adjustment and Growth Division. About 25 percent of the Bank's current lending supports adjustment programs being undertaken by mem- ber countries. Although member country and Bank experience in this area is growing, there is much still to be learned. Two problems receiving particular attention now are the issue of the appropriate sequencing of adjustment poli- cies-especially the interactions between external and internal adjustments, and ways of minimizing the negative social consequences of adjustment. * Public Economics Division. The research and policy development program of the Public Economics Division covers five broad and interrelated areas: taxation, sector pricing, public expenditures, intergovernmental fiscal arrangements, macro-fiscal linkages. It supports and strengthens the Bank's operational and technical assistance capabilities in various areas of fiscal reform, particularly in the context of adjustment programs. * Trade Policy and International Trade divisions. The importance of trade to 6 Introduction development is such that two divisions serve the Bank's needs in this area, one dealing with domestic trade policies on both the import and export sides, and the other dealing with the international trade environment. The Uruguay Round of trade negotiations and continuing trade reforms in member countries ensure lively programs in each area. * Financial Policy and Systems Division. The question of how to expand and restructure ailing financial systems is receiving increasing emphasis in World Bank lending and policy advice. World Development Report 1989 dramatized the serious plight of the financial systems in many developing countries, as well as the critical role these systems play in the development process. The Bank's research efforts in this area are growing rapidly and will likely continue to grow. * Public Sector Management and Private Sector Development Division. World- wide experience in the last few decades emphasizes the need to increase efficiency in public sector activities. Bank and other research is focusing on ways to increase the efficiency of the public sector while preserving services, especially to the poor. Privatization is one, but certainly not the only, avenue. Although there is general agreement on the objectives in this area, there is considerable debate about the institutional changes needed to get from here to there, and research on these issues is proceeding apace. Promoting private sector activities in general is also an area of significant emphasis at the Bank. In many countries with active adjustment programs, the private sector, especially small-scale enterprises, is at the forefront of efforts to rebuild economies and to improve economic growth. What can the Bank do to encourage private development? How can countries move from highly con- trolled, public-sector-dominated economies to more responsive, diversified econ- omies in which the private sector plays a leading role? The following units address these issues. * Debt and International Finance Division. It will come as no surprise to learn that the Bank is concerned with the policy and economic implications of inter- national debt, both official and commercial. Debt is also an area in which it is relatively straightforward to see the link between academic research and the policy debate, for academic research has been highly instrumental in shaping the debate. Bank-sponsored research has contributed, and will continue to con- tribute, to this debate on several fronts, including debt measurement issues. We are also concerned to look at the forms of capital flows that may emerge in the wake of the debt crisis, and the policy measures that need to be taken to facilitate such new flows. The Bank has principal responsibility among other international agencies for the compilation and dissemination of data on the external debt of developing countries and for improvements in the quality of the data. * International Commodity Markets Division. The Bank's commodity markets division is responsible for forecasts of the prices of commodities produced by Bank-funded projects. It thus makes price projections for all major commodities Inztroduction 7 and many others over long forecasting horizons. The projections are used to evaluate proposed projects and are thus immediately operationally relevant. The division maintains an active research program to improve its understanding of the operation of particular commodity markets, and it also examines commodity production and trade policies and commodity risk management and finance for individual countries. * International Economic Analysis and Prospects Division. Evaluation of Bank and member country projects and policies also requires analysis and projections of the development of the international economy. This division combines the use of global models with topical research to predict short-run developments and long-run trends, and to examine alternative scenarios for the international economy. Besides acting as secretariat to the Bank's Planning Assumptions Com- mittee, which proves assumptions for all key global aggregates, the division also takes a leading role in the preparation of relevant parts of the Bank's Annual Report and World Development Report. The research divisions just described focus on country and international issues. Much of the Bank's research work also focuses on sectoral issues. We turn now to describe units that work in the sectoral areas. * Agriculture and Rural Development Department. The issues here have been at the core of Bank research efforts for several decades. In addition, experience, not all of it favorable, with some aspects of agricultural sector lending and with rural development projects has raised renewed interest in such issues as project evaluation under uncertainty, the role of property rights, credit markets, agri- cultural trade liberalization, and rural infrastructure in promoting agricultural development. * Environment Department. Academics have more and more realized that en- vironmental concerns are critical and are likely to become more important as the years pass. These concerns are not new to the Bank, but they pose many important positive and normative research issues, at both the microeconomic and macroeconomic level. The environment and environmental economic issues have been singled out as a priority for Bank research during the next few years. * Infrastructure and Urban Development Department. Current infrastructure concerns relate to transport, water supply, and sanitation. In transport, research focuses on pricing, regulatory, and financing issues, private sector participation, infrastructure management and maintenance, enterprise reform, and the role of freight logistics management in improving trade performance. Sectoral concerns on water supply and sanitation relate to institutional development and priva- tization, financing, service provision and costs, and usage and disposal patterns as they affect the environment and the possibilities of recycling. Urban development is growing in importance as the developing world's pop- ulations move to urban areas, putting increasing pressure on the urban infra- 8 Introduction structure. Research focuses on urban policies for macroeconomic adjustment and growth, with four priorities: urban infrastructure investment and its effects on productivity and growth; land and housing markets and their impact on private saving and investment; municipal finance and links to financial markets; and housing finance. New research initiatives also relate to the urban environ- ment, waste management, and private sector participation. * Industry and Energy Department. The Bank's work on industrial issues has changed as emphasis has shifted toward policy-based lending and away from production in the public sector. The challenge for research is to find policies that will enable the industrial sectors of developing economies to grow and cope with international competition, rather than to search for winners and losers to prescribe to individual member countries. Energy issues have also changed with the times. Today, the main areas being researched are underpricing of energy, energy sector inefficiencies and subop- timal performance, inadequate resources for expansion programs, and weak financial condition of electric utilities. Energy staff are seeking corrective meas- ures involving private sector participation, regulation, and greater autonomy for utilities. Considerable effort is also being directed at minimizing the adverse environmental impacts of providing an adequate energy supply. - Population and Human Resources Department. Human resources hold the key to economic growth and development. The Bank's research directions in the area of human resources are best summarized by the titles of the divisions that make up the Population and Human Resources Department: Education and Employment; Women in Development; Population, Health, and Nutrition; and Welfare and Human Resources. The Bank allocates substantial resources to these cross-cutting themes, and research and policy work in these areas focus on issues of quality of service provision, cost-effectiveness, user demand, and how to implement and sustain policy change. The Central Research Program Bank staff manage all, and carry out most of, the socioeconomic research sponsored by the institution. To supplement its own divisional resources, the Bank maintains a centrally administered Research Support Budget (RsB) that provides resources to Bank units to undertake specific research projects. RSB funds are used mainly to support research collaborations with outside research- ers, and this process is one of the main avenues through which non-Bank re- searchers become involved in Bank research. There are two basic requirements for projects financed through the RSB. The first is that the project must have ultimately discernible real-world implications for developing countries. The second is that the project be rooted within the Bank, specifically that it be sponsored by a Bank unit, which will administer it and take responsibility for its successful completion. These requirements are Introduction 9 designed to ensure that Bank-sponsored research projects are both relevant to the Bank's concerns and well managed. This insistence on operational relevance distinguishes the Bank from other sources of research and research funding. Ultimately, the Bank tries to ensure that research undertaken with its resources has at least a reasonable chance of improving the development prospects of its member countries through either improved policy formulation or better project design. The Research Support Budget sets priorities for developing research in areas likely to be important in coming years. The present list of priorities is the environment, socialist economy reform, and private sector development. The development of research capacity in developing member countries is also re- ceiving special attention. The Research Administrator's office takes an active role in seeking to develop the research program in these priority areas. The priorities are reviewed and updated as research programs develop. This brief overview of the Bank's research structure underscores the Bank's broad commitment to and need for policy-oriented research. (Of course, Bank project design also draws heavily on traditional scientific and engineering re- search, and the Bank supports such research quite heavily through mechanisms such as the Consultative Group on International Agricultural Research. Given the nature of this conference, we have restricted our review of Bank research activities largely to economics.) The breadth of the Bank's research interests and concerns reflects the nature of development economics: although often seen as a subdiscipline of economics akin to labor economics or international trade, in fact it embodies all economic subdisciplines, distinguishing itself by applying these subdisciplines to a particular set out countries. Because development eco- nomics is not a separate discipline, experts in virtually any of the traditional economic and other social science subdisciplines can contribute to "develop- ment" research if they direct their expertise to the specific circumstances-the institutional and social character-of developing countries.