I. INTRODUCTION ast year within this forum I outlined the problems imposed upon the developing countries by worldwide inflation, de- terioration in their terms of trade, and stagnation in their export markets. In the intervening months these threats to development have not abated. They have grown more ominous. I would like, then, today to explore with you the developing countries' urgent need for increased flows of foreign exchange- both from exports and from external capital-to help offset these adverse forces. The one billion people of the low-income nations have be- come the principal victims of the current economic turbulence. They did not cause it. By themselves they cannot change it. And they have little margin to adjust to it. Granted all they can and must do to work out their own problems, they desperately need additional external assistance. Many of the middle-income countries as well are facing a for- eign exchange crisis. In the long run this can be met only by more exports. In the short run, they too need greater access to exter- nal capital. This, then, i s the most immediate and pressing problem in the global development scene. But underlying this emergency situation-and partially ob- scured by it-lies the more fundamental problem of poverty itself, and the need to shape an effective strategy to deal with it. That is the second issue I want to discuss with you today. What i s required i s a strategy that will attack absolute poverty and substantially reduce income inequities, not merely through programs of welfare, or simply through redistribution of already inadequate national wealth, but rather through measures de- signed specifically to increase the productivity of the poor. + - --- --- _ Two years ago in Nairobi I outlined the elements of such an attack on poverty as i t exists in the countryside. We chose the rural areas as the initial target for an intensified World Bank effort because it is there that the vast concentrations o f the abso- lute poor-some 700 million individuals-in fact live. But poverty degrades life for hundreds of millions in the slums of the cities as well. Though their total numbers are smaller than those in the countryside, their rate of increase-through migra- tion-is greater. In certain areas of the developing world their deteriorating conditions have already begun seriously to strain the fabric of their societies. The Bank is giving increased atten- tion to this issue, and we believe we are ready now to undertake a far more comprehensive effort to help governments deal with it. In summary, then, what I propose to do this morning is this: Analyze the immediate problem of increased foreign ex- change requirements in the developing world, and indicate what the OECD nations, the capital-surplus OPEC countries, and the World Bank itself can do to help meet this need; Report on the progress the Bank is making in i t s implemen- tation of a strategy to reduce poverty in the rural areas; And outline a program for an integrated approach to attack poverty in the cities. Let me begin with the problem of foreign exchange require- ments. II. FOREIGN EXCHANGE REQUIREMENTS I N THE DEVELOPING COUNTRIES For most of the developing countries the past year has been a period of painful accommodation to a global economic dis- equilibrium. At least four principal factors-all of them interrelated-have combined to threaten their future growth prospects: Persistent worldwide inflation; The surge in the cost of petroleum; The deterioration in their terms of trade; 2 And the prolonged recession in the OECD countries. Inflation always exacts greater penalties from the poor than from the rich, and most of the developing countries have been faced with major increases in the prices of critical imports, par- ticularly manufactured goods, foodgrains, and fertilizer. The unprecedented rise in the cost of oil has been especially difficult for them to deal with since they have relatively little capability for a rapid conversion to other sources of energy, and only an insignificant margin for consumer conservation. But though inflation has raised the cost of most of what the developing countries must import, i t has failed to sustain the high prices of many of their exports. Last year the prices of their imports rose by 40%, but their export prices increased only 27%. This year inflation will add at least another 6% to the cost of their imports, but very little to the price of their exports. The result has been a substantial deterioration in their terms of trade, making i t increasingly more difficult for them to pay for what they need. Finally, not only have their export prices failed to keep pace with import costs, but in many cases their export volume has stagnated or even declined as the recession has grown more serious in the industrialized countries. The OECD nations are the chief markets of the developing countries, and normally absorb 75% of their total exports. As the recession has deep- ened, demand for these exports has declined. Given these four factors-persistent inflation, the high cost of petroleum, deterioration in their terms of trade, and prolonged recession in the developed nations-the oil-importing develop- ing countries find themselves confronted with an array of un- anticipated obstacles to achieving even minimal development objectives in the remaining years of the decade. Indeed, in many respects, the outlook now appears worse than it did twelve months ago. For the poorest countries-those with per capita incomes of less than $200-the situation is particularly grave. I n 1974, per capita incomes of the one billion people living in these nations declined an average .5%. For the hundreds of mil- lions of them already severely deprived, i t meant hunger, illness, and an erosion of hope. This year the outlook i s for a further weakening of these economies, and the per capita incomes of the one billion people are likely to fall again. The middle-income developing countries-those with per capita incomes of $200 and a b o v e h a v e not felt the full impact of the deterioration of the world economy until this year. Last year, due to a series of emergency measures-including the drawing down of reserves, the expansion of short-term debt, and the postponement of long-term development programs- they managed to maintain average GDP growth per capita of 3.9%. This year, however, the growth of GDP is expected to be less than the growth of population and their per capita incomes are projected to decline by more than 1 %. Moreover, their trade deficit will exceed 3% of their gross national product-twice as large as it had been in the late1960s. The events of the past two years have in effect swept away the progress these countries had made in reducing their dependence on external capital. The 1976-1980 foreign exchange requirements of the oil-im- porting developing countries ought, then, to be viewed as com- posed of two principal elements: a declining transitional com- ponent, needed until export earnings can grow to offset higher import costs, and the more traditional external capital supple- ment to domestic savings, equivalent to about 1.5 to 2% of their GNP. Growth Rates and Related Capital Flows To better grasp the capital requirements of the developing countries over the next five years, i t is useful to examine alterna- tive levels of capital flows and resulting rates of growth of per capita income. Two such projections are set out below." In each of these examples, growth rates are linked to "capital flows." The flows represent the amounts of foreign exchange "The projections simply illustrate rough orders of magnitude. They serve as a guide to appropriate policy decisions. N o claim is made for the precision of the forecasts themselves. But w e believe they indicate the severity of the economic problems confronting the developing countries, and they point t o 4 ways i n which the rest of the world can assist their efforts t o cope with them. required in the short run, over and above currently projected export earnings. In the longer run, of course, most of these for- eign exchange needs, if they are to be met at all, must come from higher export earnings. There i s much the developing countries themselves can do to i i create a more favorable climate for export expansion. All too often their policies of subsidized capital, overvaIu~_e_change ' rates, and excessive &atJon-$rscourage entrepreneurial in- centive to s e l r - x z d . Their own efforts to remove these self- , imposed roadblocks to greater export earnings are essential if .I 1 their full trade potential i s to be realized. But i t will take time for these fundamental policy changes to ' become fully effective, and that is why in the short run the "capi- tal flows" in the projections are representative of the amounts of external capital required to support the alternative growth rates. The first set of data, labeled Case I, assumes substantial growth in capital flows in nominal terms between 1975 and 1980, but no increase in real terms. I t assumes also that the industrialized countries will make a relatively rapid recovery from the current recession. Should that turnaround be delayed, the projected rates of growth of per capita income in the developing countries would of course be lower, or the external capital requirements higher. These Case I growth rates-especially for the low-income countries-are far below the targets of the Second Development Decade, and, on average, provide barely perceptible increases in per capita incomes for the poorer countries. As this is a wholly unacceptable prospect, we have estimated-in Case Il-what the additional capital requirements would be to raise income growth for the oil-importing developing countries to the Second Development Decade targets, at least for the remaining years of the decade. These requirements are substantial, even though the growth rate for the decade as a whole would still be far below the target level. In both Case I and Case II, the principal increases in capital would have to be supplied on concessional terms, and the bulk of this assistance would have to come from the OECD countries. I t i s not difficult to understand why. 5 Annual GDP Growth Rates, Per Capita, In Oil-Importing Developing Countries and Related Capital Flows in Billions of Current Dollars Average Average '76-'80 '69-'73 1974 1975 Case I Case l l G r o w t h Rates L o w - I n c o m e Countries " .5% -.5% -.7% 1.2% 3.2% M i d d l e - I n c o m e Countries " 4.5% 3.9% - 1.2% 2.8% 3.8% Capital Flows N e t O f f i c i a l Capital $7.9 $15.0 $19.8 $24.0 $35.2 Private C a p i t a l - 19.4 - 7.5 - 25.4 - 22.9 - 26.5 Total 34.4 - 15.4 - - 42.7-49.4 - 61.7 - - - - - O D A as % D o n o r G N P OECD .34% .33% .32% .29% .48%b OPEC .OO% 1.41% 2.57% 1.56% 1.56% "The population o f the Low-Income developing countries totals 1 billion and o f the Middle-Income developing countries, 725 million. Here, as throughout these remarks, the statistics d o not include those nations which are not mem- bers o f the Bank. T o r O D A t o average .48% o f GNP during the five years 1976-80 would require that it reach at least .70% in 1980. Even to achieve the wholly inadequate levels of economic activity of 1975, the developing countries have had to borrow large sums from the private capital markets. They will have to continue to do so in the future. But there are limits to credit- worthiness and these make i t unlikely that they will be able to borrow significantly more in real terms, over the next five years, than they are doing now. That is the reason many of the developing countries, and par- ticularly the poorer ones, will have to depend so heavily on con- cessional aid for the additional capital. And if these Official Flows are to grow, it is likely that most of the growth must come from the OECD nations. In 1974, the capital-surplus OPEC countries supplied about one-sixth of the concessional assistance (ODA) made available to the developing countries. This year their disbursements for ODA have been rising further and could reach an estimated $4.5 billion. This would represent about 3% of their GNP, and 10% of their current balance of payments surplus. But i t is unlikely that the OPEC countries can maintain this 6 level of aid throughout the decade. They are themselves devel- oping countries and the source of their capacity to make aid available i s not the size and strength of their combined GNP- which is only a small fraction of that of the OECD countries- nor even of their GNP per capita, which on average Is also sub- stantially less, but rather the levels of their surplus trade balances. By 1980, i t is estimated that only a few of the OPEC countries will have current accounts s t i l l in substantial surplus. The others, which have provided about half the group's aid commitments over the past two years, are likely to reduce their level of aid as their imports rise and their trade surpluses diminish. The OECD nations will be in the strongest position to assist the developing countries, and particularly the poorest among them, to achieve at least minimally acceptable rates of per capita income growth in the years immediately ahead. To illustrate the problems of the developing countries in an- other way, consider the decade of the 1970s as a whole, and compare the economic progress-actual and projected-of three groups of people: the one billion people of the poorest developing countries; the 725 million people of the middle- income developing countries; and the 675 million people of the developed nations. Income and Investment Levels 1970-1980 for Developed and Developing Countries" ( I n 1970$s) - 1975 c ..~ p Estimated Investment Population Growth Per Capita p.a. (in GNP Per Rate Per D o m . Ext. Cap. Country Group millions) 1970 1980 Capitap.a. Svg. Inflow Total I. Low-Income Countries (Under $200 per capita p.a.) 1,000 $ 105 $ 108 .2% $ 14 $ 2 $ 16 II. Middle-Income Countries (over $200 per capita p.a.) 725 $ 410 $ 540 2.8% $ 75 $ 10 $ 85 Ill. OECD Countries 675 $3,100 $4,000 2.6% $850 $-I5 $835 "Excludes Centrally Planned Economies and OPEC. Assumes Case I rates of growth for the de- veloping countries 1976-80. '7 As the table makes clear, the Second Development Decade would result in virtually no progress at all for the one billion people in the low-income countries and would mean that both they and the 725 million in the other developing nations would be growing relatively poorer when compared to the people of the developed countries. To raise the growth rates of the developing nations to the level of Case II for the remainder of the decade would not require Official Development Assistance in 1980 to exceed the United Nations target of .7% of GNP. And that target could be reached were the developed countries willing to dedicate to ODA a minor fraction-no more than 2%-of the incremental wealth which they can expect to receive in the second half of the dec- ade as their economies recover from the recession. In contrast, as the table on page 39shows, today the devel- oped nations are contributing less than half of that goal-only .33% of GNP. Moreover, many of these nations, under present policies, are failing to increase their concessionary aid commit- ments by amounts sufficient both to offset inflation and to reflect their rising real incomes. Unless such policies are changed, ODA during the remainder of the decade, relative to GNP, will con- tinue to fall, declining to perhaps .28% by 1980. I t is essential, therefore, that the developed nations reexamine their conces- sionary aid programs. As government revenues and national incomes rise in the years ahead, ODA in relation to GNP should first be returned to former levels, and then later move toward the .7% target. In view of the critical need of the developing countries for additional capital, I want to turn now to what the World Bank itself can do. The World Bank Program As events have unfolded this past year and the capital crisis engulfing our developing member countries became more ap- parent, we resolved that the Bank must take a number of steps to help meet that crisis. The first step was to expand the overall level of our lending 8 program. We propose to expand i t both in nominal and in real terms to the maximum level consistent with our capital structure, the availability of funds, and the creditworthiness of our borrowers. As inflation has persisted, the dollar volume of our loan com- mitments has necessarily increased. The average dollar amount of each loan has gone up in order to insure that our borrowers will in fact be receiving over the years of the loan's disbursement amounts sufficient to meet the rising costs of the project. The following table illustrates how inflation has affected the real value of our lending operations. Amount Required to Finance Equivalent of $100 Million Commitment in FY65" US$ Million FY65 I00 FY70 141 FY75 228 FY80 300 "Allowing for price changes during the disbursement period. By 1980, i t will require $3 of commitments to accomplish what $1 did in FY65, and more than $2 to equal $1 in FY70. But in addition to expanding our lending program in nominal terms by an amount that will fully offset the effects of inflation, we propose also to expand the real transfer of resources repre- sented by that program in order to meet as far as we can the critical capital shortage which has such corrosive effects on the growth rates of our developing member countries. To meet both objectives, we increased in FY75 the Bank Group's new financial commitments to $6 billion, compared to $4.5 billion in FY74. I have proposed $7 billion for FY76 and the total for the five-year period FY76-80 should approximate $40 billion. Such a level of new commitments would constitute, in real terms, a 58% increase over the previous five years, FY71-75, .and a 153% increase over the preceding period, FY66-70. Though this represents the largest program of financial and technical assistance to developing countries ever undertaken by a single agency, i t of course still falls far short of meeting the full scope of the capital needs of those countries. World Bank Croup Lending: Actual and Proposed, In Current and Constant Dollars (in billions of dollars) Fiscal Years Current $5 In FY75$s 1966-70 $ 7.5 $14.2 1971-75 $19.9 $22.8 1976-80 $42.0 $35.6 As an interim measure, therefore, to help our lower-income member countries in their efforts to obtain additional resources for development, we have proposed, and the Executive Direc- tors have approved, the formation of a new lending facility within the Bank-the so-called Third Window- which will pro- vide funds at a concessional interest rate midway between that of Bank loans and IDA credits. The purpose of the Third Window i s to make available addi- tional development assistance on terms suited to the limited ability of the developing countries to service additional debt, and with longer maturities than that currently being provided by emergency mechanisms such as the IMF O i l Facility. We plan to begin this intermediate-term lending within a few weeks, with an initial level of operations of $500 million- which we hope to expand to $1billion. To subsidize the interest rate of these new funds, we have been seeking contributions from a number of our OECD and OPEC member governments. Twelve have already indicated they intend to support the plan. The Third Window facility is at best only an emergency meas- ure. It can supplement, but in no way substitute for our IDA operations. And because the capital requirements of our poorer member countries have now reached such a critical degree of urgency, i t is imperative that we begin before the end of this year serious negotiations for a substantially increased IDA Replenishment. IDA IV funds will be fully committed by June 30, 1977. In order to provide our member governments with adequate time to secure legislative approval-and to avoid the procedural de- lays which in the end penalize not the Association, but the poor 10 countries all of us are trying to help-it i s essential that our member governments move decisively and generously to nego- tiate, approve, and bring into being an I D A V Replenishment ap- propriate to the unprecedented needs it i s designed to serve. The new replenishment must be established at a level suffi- cient both to fully offset the effects of inflation, and to provide an appropriate measure of real growth. I t should be supported by i t s traditional donors, and by those additional countries which, since the last replenishment, have benefited from major increases in their national incomes and foreign exchange reserves. Finally, within the next few years, the need will arise to review the capital structure of the Bank and the International Finance Corporation. I have presented to the Executive Directors a proposal for a Selective Increase in the Bank's subscribed capital and in paid-in capital. The proposal, which parallels the proposed increases in IMF quotas-and which should be acted upon as soon as the Fund takes a decision-makes provision for additional increases in the capital subscription of OPEC countries to reflect their in- creased economic and financial strength and their growing im- portance as a source of loan capital to the Bank. The catalytic role of IFC in mobilizing additional private in- vestment in the developing countries takes on even greater importance in a period of capital shortage, and we are exploring ways to increase its resources as well. Although the Selective Increase for the Bank will significantly strengthen i t s ability to continue its role as a major source of development finance, the impact of inflation on the nominal amounts of our operations will make it mandatory to consider a General lncrease in IBRD subscribed capital in the course of the next few years. The Articles of Agreement of the Bank pro- vide that loans outstanding and disbursed shall not exceed the equivalent of unimpaired subscribed capital, reserves, and su r- plus. This provision would force us, at the proposed level of lending, to cease making loans in the early 1980s. To permit adequate time for the necessary legislative action, we must start soon to discuss an appropriate solution to this situation. The Bank's entire lending program, and its future plans, clearly must be derived from the nature and scale of the problem that confronts the developing countries. A major element of that problem consists of a desperate need for external capital for high-priority development investment that can enhance the living standards of nearly two billion people. Let me summarize, then, the nature of that problem as I have outlined i t thus far. Essentially i t i s this: The developing nations are confronting a foreign exchange crisis. It i s a crisis compounded of all the turbulent economic events of the past two or three years, and the cumulative effect will be to bring the economic progress of many of these nations virtually to a halt unless corrective action is taken. I t i s clear that at such a time additional efforts to mobilize internal resources and greater efficiency in the use of these resources become criti- cally important and the governments of the developing coun- tries must give high priority to these actions. The fact remains, however, that they desperately need additional imports to get their economies moving again. And the foreign exchange to fi- nance those imports can only come from greater official and private external flows, and increased export earnings. The Bank itself must contribute to the expansion of the external capital flows and we intend to do so. But despite all of this-despite the urgency for all of us to focus our attention on this emergency, and to take every step we can to try to deal with it-we cannot allow this to diminish our concern with the central issue of development which under- lies the present situation: the necessity of creating an effective strategy to deal with the fundamental problem of poverty itself. Let me turn to that consideration now. Ill. ABSOLUTE POVERTY AND THE REDUCTION OF INEQUALITY Three years ago I began a discussion with you of the critical relationship of poverty and economic growth. I pointed out that 12 this problem in the developing world can be summed up very succinctly: roughly half the population are neither contributing significantly to economic growth nor sharing equitably in its benefits. these are the poor. Within most developing societies they form a huge group at the lower end of the income spec- trum, receiving only a fraction of what the middle and upper- income groups do. Some 900 million of these individuals subsist on incomes of less than $75 a year in an environment of squalor, hunger, and hopelessness. They are the absolute poor, living in situations so deprived as to be below any rational definition of human de- cency. Absolute poverty i s a condition of life so limited by il- literacy, malnutrition, disease, high infant-mortality, and low life-expectancy as to deny its victims the very potential of the genes with which they are born. In effect, i t i s life at the margin of existence. In addition to the absolute poor there are what I have termed the relative poor. These are individuals with incomes somewhat above the absolute poverty level, but still far below their na- tional average. Because of the distortion in income distribution - a distortion which in most developing countries far exceeds that of the industrialized nations-they too have been bypassed by economic progress. The heaviest concentration of absolute poverty is in Asia. India, Pakistan, Bangladesh, and Indonesia are particularly af- flicted. One out of every two individuals there is enmeshed in it. In Africa, most countries are plagued with both absolute and relative poverty. Not only are per capita incomes meager on average, but often highly skewed as well. In Latin America, many countries enjoy higher per capita in- comes, with only about one individual in six at Asian or African levels of absolute poverty. But income distribution throughout the region i s marred by serious inequality, and relative poverty is widespread and severe. Analysis of income data makes it clear that policies aimed at diminishing income inequalities through direct redistribution of wealth will not be sufficient to end indigence. That is not to say that adjustments in this direction are not desirable on the 13 grounds of equity, but no degree of egalitarianism alone will solve the root problem of poverty. What is required are policies that will enhance the productivity of the poor. The truth i s that throughout the developing world-in the countryside and cities alike-there is a huge and largely un- tapped potential to reduce absolute and relative poverty, and to increase economic growth, by directly assisting the poor to be- come more productive. Two years ago in Nairobi I outlined a strategy for moving against poverty in the countryside. In the interim we have ac- celerated our efforts to implement that strategy, and I would like to report to you on that now. IV. REDUCING POVERTY I N THE RURAL AREAS We chose the rural areas to begin an assault on poverty be- cause the overwhelming majority of the absolute poor are there. As I pointed out, the poverty problem in the countryside re- volves primarily around the low productivity of the millions of small subsistence farms. Despite the growth of the GNP in most developing countries, the increase in output of these small fam- ily holdings over the past decade has been so low as to be vir- tually imperceptible. The scale of the problem i s immense. More than 100 million families-some 700 million individuals-are involved. The size of the average holding i s not only small, but often fragmented. More than 50 million of these families are farming less than one hectare. You will recall the objective we recommended that the inter- national development community adopt: to take the steps nec- essary to increase production on these farms so that by 1985 their output will be growing at an average rate of 5% per year." "Such an increase in productivity is necessary not only to advance the well- being of the 100 million small farmers, but also to help assure that global food requirements will be met. Though I will not deal specifically with the food problem in my remarks today, I do want to emphasize the Bank's concern with this issue. Following the World Food Conference last year in Rome, the Bank, in association with the F A 0 and the UNDP, established the Consultative 14 Group on Food Production and Investment in Developing Countries. Clearly no simple formula exists to move forward so complex an objective as rural development. I t is the interplay and mutual reinforcement of a coordinated array of national policies that is required. To help shape effective action, the Bank over the past two years has researched and published a series of policy papers that range over a broad spectrum of issues. These include major statements on Rural Development, Agricultural Credit, Land Re- form, Education, and Health. But we have not merely elaborated policy. We have moved ahead with an expanded lending program in rural development and we now lend more in this sector than in any other. t h i s is a clear change in emphasis: 50% of all rural-development lend- ing in the history of the Bank has occurred in the last year. We expect to commit $7 billion more in this field over the next five years, and we estimate that these new projects will bring finan- cial benefits to approximately 100 million individuals. Projects have been devised which combine components from several different sectors-roads, electricity, water, education, family planning, and nutrition-and which integrate these with agricultural inputs into a development package to be applied to an entire region. Typical of such new-style projects are the following: A package of four loans, totalling $86 million, designed to increase the crop production and incomes of subsistence farmers in Nigeria, with the benefits reaching some 2 million individuals. The projects include financing of feeder roads, medium-sized earth dams, water reservoirs, village service centers, seed multiplication farms, trainingfacilities, swamp- land conversion to rice paddies, and extension, credit, and marketing services. The estimated rate of economic return i s 25%. Two credits totalling $44 million for dairy development in India designed to increase the cash incomes and living standards of some 400,000 households-2.2 million indi- viduals-the majority of whom currently have holdings less than two hectares, or are landless. t h e projects are expected to boost milk production by 760,000 tons a year, substan- 15 tially improving nutrition, creating 14,000'' new jobs, and yielding a return of 30%. A $21 million loan for rural development in Thailand de- signed to benefit 400,000 low-income farm families-two and a half million individuals. The project will include spe- cialized agricultural extension services, rural electrification, village water supply, access roads, and small-scale irrigation, and yield 16%. One of the most innovative of the rural development projects i s a $10 million credit to assist the Tanzanian government to bolster the productivity and living standards of farm families in the Kigoma region where per capita incomes are among the lowest in the world. The project will channel economic and' social services to 250,000 individuals in 135 newly-established villages, substantially improving their crop production and dou- bling their incomes. It will include a credit and marketing sys- tem; primary schools, health centers, and improved water supply; clearing the area of the tsetse fly; regional radio-tele- phone communications; and a program of adaptive agricultural research. Should the project succeed-and we believe i t will- i t could serve as a model for new settlements elsewhere. Though the new rural development projects are innovative, they are designed to provide a substantial economic rate of re- turn at a low investment per individual served so that they can be readily extended to additional areas as additional resources become available. Overcoming Obstacles But the closer we get to the core of the problem of poverty in the countryside, the more difficult, complicated, and time- consuming the task becomes. Let me take a moment, then, to describe some of the principal roadblocks we are encounter- ing, and how we propose to deal with them. One is the issue of appropriate technology. The agricultural methods of the wealthy nations in the temperate zone are fre- quently unsuited to the environment of many developing coun- 16 tries, where poor farmers are often struggling to subsist on semi-arid, or marginal land. There i s a critical need for new agri- cultural technologies tailored to these conditions. The Bank helps to meet this need through its chairmanship of the Con- sultative Group for International Agricultural Research, and its shared financing of ten specialized international research insti- tutes around the world, including one specifically for the semi- arid tropics. In addition to the research work of the international institutes themselves, much more needs to be done by individual govern- ments. The Bank has, therefore, recently agreed to help finance government efforts to consolidate and intensify specialized agri- cultural research in Indonesia and Malaysia. We anticipate an increasing number of such requests. One technique we are making increasing use of i s satellite remote sensing imagery in the survey and evaluation of potential land and water resources. This new tool i s proving valuable in many aspects of project planning, and we are helping a number of our member countries to utilize it-Indonesia, India, Bangla- desh, Nepal, and Kenya, among others. Another problem i s the pricing and subsidy policies some gov- ernments impose on the rural sector that tend to discourage additional food production. These policies are usually imposed to provide cheap food for the cities. But if prices are kept artifi- cially low in relation to costs, farmers have no incentive to ex- pand production. This i s especially true of small farmers who simply have no margin for risk. What many of us sometimes forget i s that just because a man i s poor does not mean that he i s naive. The truth i s that millions of small farmers-even without elaborate inputs-could in- crease their productivity measurably if they could be given but one simple assurance: that at harvest time they would be able to sell their additional production at a rewarding price. Moreover, the small farmer i s almost always discriminated against by public institutions that tend to favor the larger and more prosperous producers. I t is the larger farmer who typically enjoys easy access to public credit, research, water allocations, and scarce supplies of petroleum, pesticides, and fertilizer. And 17 i t is the smaller farmer who i s left to wait endlessly for the public services he needs far more urgently, but only too rarely receives. The Bank i s intensifying its dialogue with member govern- ments to come to grips with these issues of pricing policy, and to assure more responsive public services specifically shaped to the needs of the poor. There are some signs of movement in this direction, but as yet not nearly enough. Still another roadblock in implementing complex rural opera- tions is the scarcity of trained technicians. That is why we often include training components in our projects. But much more needs to be done to expand the supply of such personnel, and we are gearing more of our education projects to that end. Finally, all of us-at every level-have a great deal more to learn about the motivational patterns and behavioral responses of the poor in shifting from traditional subsistence agriculture to cash-crop production. Both the technical and social variables in such a transition are complex. To deal with them effectively calls for continuing feedback and evaluation, sensitivity and re- spect for indigenous values, and a healthy measure of humility. Let me, then, conclude this section by summing up the prin- cipal points I have made. They are these. There are some 700 million individuals locked into absolute poverty in the rural areas of the developing world. Their degree of deprivation i s so extreme as to be an insult to human dignity -to theirs, because as human beings they deserve better; and to ours, because all of us have had i t in our power to do more to help them, and have not. Two years ago I outlined a strategy for reducing absolute pov- erty in the countryside. I t focuses on the more than one hundred million small subsistence farmers, and their families. And what i t proposes is not traditional welfare, but sound investment to assist them to become more productive. I t is a strategy that can succeed. I t requires of governments political decisiveness, new policies, and a reallocation of re- sources. But it can return immense dividends. We in the Bank 1s are developing a whole new program of integrated rural devel- opment. projects to assist governments. They are projects that package together innovative economic and social components specifically designed to help transform poverty into productivity. W e have a long way to go, but the early evidence is clear: i t works. It works because i t i s an approach that provides the poor with what they really want most of all: a chance to build a better life, through their own efforts, for themselves and their children. I t i s an approach that works in the countryside. And i t is an approach that we believe can work in the cities as well. I want to turn to a consideration of that now. V. REDUCING POVERTY I N THE CITIES W e began the assault on poverty in the rural areas because that is where most of the absolute poor currently are. But they live in the cities of the developing world as well. Roughly 200 million are there now. More are coming, and coming soon. The Bank has been giving increased attention to this issue. It is immensely complex-even more so than the problem of pov- erty in the countryside. But we believe we are ready now to initi- ate a much more comprehensive effort to assist governments to reduce urban poverty. What I would like to do today is, first, discuss the scope of the problem; second, analyze its underlying causes; and third, suggest a strategy to deal with it. The Scope of the Problem To understand urban poverty in the developing world one must first understand what i s happening to the cities themselves. They are growing at a rate unprecedented in history. Twenty-five years ago there were 16 cities i n the developing countries with populations of one million or more. Today there are over 60. Twenty-five years from now there will be more than 200. How has this happened?Fundamentally, of course, it is a func- tion of population growth. But it i s more than just that. For though the total population in the developing world is increas- ing by about 2.5% a year, the urban population is growing at 19 nearly twice that rate. Half the urban growth is due to natural increase, and half i s due to migration from the countryside. What this means is that some 400 million additional people have been absorbed into cities, through birth and migration, in a single generation-something wholly without parallel. In con- trast, the developed world urbanized at a leisurely and less pres- sured pace at a time when its national populations were growing very slowly, at only about half a percent per year. Latin America is already 60% urbanized, and Asia and Africa about 25%. But by the end of the century, three out of every four Latin Americans will live in a city, and one out of every three Africans and Asians. Thus, at current trends, over the next 25 years the urban areas will have to absorb another 1.1 billion people, almost all of them poor, in addition to their present population of 700 million. Life for the urban poor today is unspeakably grim. Though they spend up to 80% of their income on food, they typically suffer from serious malnutrition. It is estimated that half the urban population of India is undernourished. Up to 15% of the children who die in Latin American cities,and up to25% of those who die in African cities, are needless victims of malnutrition. Now what do these figures imply? They make i t certain that the cities of the developing world are going to find it incredibly difficult to provide employment, and minimally decent living conditions, for the hundreds of mil- lions of new entrants into urban economies which are already severely strained. An even more ominous implication i s what the penalties for failure may be. Historically,vioIence and civil upheaval are more common in cities than in the countryside. Frustrations that fester among the urban poor are readily exploited by political ex- tremists. If cities do not begin to deal more constructively with poverty, poverty may well begin to deal more destructively with cities. 20 I t is not a problem that favors political delay. The Underlying Causes of Urban Poverty To comprehend the pathology of poverty i n the cities, one must begin with an analysis of the employment opportunities of the poor. Employment in the urban areas of the developing world is a function of an economic dualism that i s widespread. Two sectors coexist side by side. One is the organized, modern, formal sec- tor, characterized by capital-intensive technology, relatively high wages, large-scale operations, and corporate and govern- mental organization. The other is the unorganized, traditional, informal sector- economic units with the reverse characteristics: labor-intensive, small-scale operations, using traditional methods, and providing modest earnings to the individual or family owner. In the modern sector, wages are usually protected by labor legislation and trade union activity; in the informal sector, there i s easier entry, but less job security and lower earnings. Though jobs in the modern sector may be more desirable, as a practical matter they are often beyond the reach of the poor. They require literacy, experience, and a level of trainingthe poor find i t difficult to acquire; and in a labor-surplus market, em- ployers can afford to insist on exceptional qualifications. Even more important, the growth of employment in modern manufacturing and distribution lags considerably behind both the growth of its output, and the growth of the urban labor pool: output has increased 5 to 10% per year, but employment rose only 3 to ~ O / O , while the labor pool was growing at a rate of 4 to 5%. Though i t i s true that as the formal sector expands i t tends to generate some indirect employment in the informal sector, i t can also eliminate jobs there on an alarming scale. At the cost of $100,000, for example, a corporation may set up a plastic foot- wear plant, with only 40 employees, that can displace 5,000 tra- ditional shoemakers and their suppliers. High population growth rates, and massive migration to the cities, have swollen the urban labor pool. But the capital-inten- 21 sive nature of the modern sector has kept openings for addi- tional workers down. In some developing countries, manufac- turing techniques have already become so mechanized that an investment of $50,000 to $70,000 is often required to create a single new job. Given, then, the limited potential of the formal sector in most developing countries to absorb labor, i t i s not surprising that the informal sector i s a critical component in urban employment. It provides, for example, nearly half of all the jobs in Lima, more than half in Bombay and Jakarta; and over two-thirds in Belo Horizonte. And yet, the fact i s that governments tend to view the informal sector with little enthusiasm. They consider i t backward, ineffi- cient, and a painful reminder of a less sophisticated past. I t i s true that economies of scale are important in some activi- ties. But it i s not true that all small-scale enterprises are uneco- nomic. They can frequently operate at acceptable cost levels when costs of labor and capital are measured correctly, and when production operations are broken up into individual processes and products. In the production of many types of food, clothing, and furniture, and in construction, transporta- tion, assembly, packaging, repairing, and service activities, small units can compete effectively. -- But government -___. . -- preiudice agginst the informal -- -sector fre- quently gets translated into publi: Folicies _whichgive u n d u e advantag& to b~ firms: unrealistically low exchange rates for caGtal imports, special tax exemptions, high minimum wages, underpriced public utilities, and subsidized interest rates. All of these measures favor the large and capital-intensive firm over the small enterprise, and have the net effect of reducing the employment opportunities of the poor. These discriminations against the poor are compounded by limited access to public services. There are heavy biases in the design, location, pricing, and delivery of such services. Though most cities, for example, have expensive modern hos- pitals, the poor usually do not have access to them. They are 22 largely reserved for the rich minority, even though the privileged have less incidence of illness than the poor. Nor is i t surprising that the poor are so often ill, considering the squalor in which they must live. Frequently they have no public water supply or sewerage services whatever. And they often have to pay up to 20 times more for water supplied by street vendors than do mid- dle and upper-income families for water piped by the city into their homes. But if the poor are denied equitable access to water, sanita- tion, and health, they fare equally badly with education. Many of their children receive no formaleducation at all simply be- cause they live beyond a feasible distance to the nearest school. Thus, though half the total population of the capital of one African country lives in the slum areas, all of the schools, with one exception, are located elsewhere in the city. The result is that the primary school enrollment is only 36% in the poor areas, but 90% throughout the rest of the capital. Children of the urban poor, although often in the majority, very seldom reach secondary school, much less a university, despite the fact that public expenditure per student for second- ary and higher education is up to 20 times the expenditure on primary education. This means that education-in theory a pow- erful force in equalizing opportunity-in fact often reinforces, rather than reduces, existing economic disparities. In a typical Latin American city, for example, workers with pri- mary education earn 37% more than workers without educa- tion, and workers with secondary and higher education earn 40% more than workers with only primary schooling. Denying adequate education to the urban poor, then, i s simply syn- onymous with denying them opportunities for earning higher incomes. Public transport i s another vital service the poor are often without. Their incomes are so low they can rarely afford it. And even if they could afford it, i t often does not exist in the periph- eral areas of the city where they generally must live. While the wealthy drive their cars, and the moderate-income workers ride the bus, the poor walk to work-frequently as much as two hours each way. Such distances are a penalty both to their energy and to their earnings. And as the cities grow 23 larger, so their commuting grows longer. Studies indicate that in a city of a million, the poor's average journey to work i s three miles; in a city of five million, seven miles. In city after city of the developing world, the streets are grow- ing congested with private automobiles, and the city councils are pouring over blueprints for elaborate subways or express- ways. But little if any of this heavy investment will ever benefit the poor. I t will only drain away resources that might be used to help them become more productive. The deprivation suffered by the poor is nowhere more visible than in the matter of housing. Even the most hardened and un- sentimental observer from the developed world i s shocked by the squalid slums and ramshackle shantytowns that ring the periphery of every major city. t h e favelas, the bustees, the bidonvilles have become almost the central symbol of the pov- erty that pervades two-thirds of the globe. I t i s the image that is seared into the memory of every visitor. But there i s one thing worse than living in a slum or a squatter settlement-and that is having one's slum or settlement bull- dozed away by a government which has no shelter of any sort whatever to offer in its place. When that happens-and i t hap- pens often-there remains only the pavement itself, or some rocky hillside or parched plain, where the poor can once again begin to build out of packing crates and signboards and scraps of sheetmetal and cardboard a tiny hovel in which to house their families. Squatter settlements by definition-and by city ordinance- are illegal. Even the word squatter itself i s vaguely obscene, as if somehow being penniless, landless, and homeless were de- liberate sins against the canons of proper etiquette. But i t i s not squatters that are obscene. I t i s the economic circumstances that - make squatter settlements necessary that are obscene. ~__-------------l_ A_- _I-_ This, then, is the profile of poverty in the cities. I t is not the profile of an insignificant minority, nor of a miscellaneous col- lection of unfortunates, nor of a fringe group of nonconformists 24 -but of 200 million human beings whose aspirations are iden- tical to yours and mine: to lead a productive life, to provide for those they love, and to try to build a better future for their children. They differ from us in only two respects: in the inhuman bur- den of their problems; and in the unjust disparity of opportunity they have to solve them. It is development's task to reduce that disparity. Let me, then, suggest at least the broad outlines of a strategy to deal with urban poverty. A Strategy to Reduce Urban Poverty Though the dynamics of poverty in the cities differ substan- tially from those in the countryside, the key to dealing with them , both i s fundamentally the same. What is required a r e m, ../ and that will assist the poortojnc_reasetheir productiv- r t h i s calls for measures that will remove barriers i to their earning opportunities, and improve their access to public services. The following are essential steps governments should con- sider in any comprehensive program: Increase earning opportunities in the informal sector; - ' + - Create more jobs in the modern sector; CLA- 9) 7 L. F& 7 Provide equitable access to public utilities, transport, edu- cation, and health services; And establish realistic housing policies. The fundamental consideration underlying such a program i s the reassessment of the role of the cities in the development process. Let me begin with that, and then turn to the others in sequence. The Role of Cities in the Development Process We need to remind ourselves what the role of cities in devel- opment really is. Cities are, of course, many things, but essentially they are an instrument for providing their inhabitants-all their habitants- with a more productive life. They are not primarily collections 25 of elaborate architecture, or of city planners' theories perpetu- ated in stone. Even less should they be thought of as sanctuaries of the privileged, w h o wish t o put a decent distance between themselves and the masses of the rural poor. Urban poverty can be cured nowhere in the world unless cities are thought of as absorptive mechanisms for promoting productive employment for all those w h o need and seek it. In the past 25 years in the developing countries some 200 to 300 million individuals have benefited at least marginally by migra- tion, and since even at their unacceptably l o w levels of income they have been more productively employed in the cities than they would have been had they remained in the rural areas, the national economy itself has benefited. This is not t o make a case for wholesale migration from the rural areas. It i s only t o recognize that poverty will persist in the cities until governments determine t o increase their capacity not simply t o absorb the poor, but t o promote their productivity by providing the employment opportunities, the infrastructure, and the services necessary for that purpose. N o w specifically h o w is this t o be done? Our understanding of so complex an issue i s limited, but at least i t i s possible, o n the basis of what w e d o know, t o identify policies and actions that could have a significant impact o n the problem. The Bank's approach in the urban sector will be different from the strategy w e are following in rural areas, although the basic objectives are the same. The Bank's rural development strategy i s focused o n the small farmer. The main thrust i s to provide the organizational struc- ture and financial resources to increase the supply of essential inputs and -raise . . f a specific target group. In the p r o d u c t i v i ~o the urban sector w e will retain the emphasis o n productivity. But w e need a more flexible and diversified approach t o match the greater diversity in the nature of the urban environment, the difficulty in identifying a readily accessible target group, and the variety of opportunities arising from the complex linkages in modern economic activity. Any realistic strategy must place emphasis o n increasing the 26 earning opportunities of the poor i n the informal sector. Increasing Earning Opportunities in the Informal Sector The employment problem in urban areas i s --- not simply "jobs", in the conventional sense but rather t f productivity and earnings. There is relatively - e m p l o y m e n t among the urban poor. Without some kind of a job, they simply can- not eat. But they are often prevented from increasing their earn- ings by a combination of market forces, institutional arrange- ments, and public policies which confer privileges on the large, well-established firms and which penalize the informal sector. Gov~ernments must take steps to moderate the bias in favor of large-scale, capital-intensive production, and turn their attention more positively to small produ= not only in manufacturing but also in transport, construction, commerce, and other serv- ice sectors. The informal sector offers the most immediate opportunities of greater productivity for the urban poor. I t already, of course, provides the livelihood for the vast majority, and though its earnings are considerably less than those in the formal sector, its flexibility and ease of entry are an important asset. What is required i s that government policy support it, without attempt- ing to standardize it. The informal sector's great virtue i s its responsiveness t 0 , o . ~ portu-, - its high degree-oof resourcefu16ess,and its entrgxe- ____ neuria[ originality. The understandable enthusiasm of govern- __/- ments to "modernize" their economies must be restrained in their dealings with the informal sector. The point is not to try to transform i t into the formal sector, but to support i t without undue insistence on regulating it. There are a number of ways in which governments can assist the small producer and the self-employed. They can, for example, assure access to credit facilities on reasonable terms. The informal sector usually has very limited access to government banking and credit services. I t must rely largely on the urban moneylender, who, like his village counter- part, is responsive but usurious. What are needed are improved banking policies that will make adequate capital available. 27 This can be done through rediscounting commercial bank loans to small-scale enterprises by central banks; by government guarantees to cover additional risks in informal-sector loans; and by new specialized institutions designed specifically to fi- nance small enterprises. Like the small farmer, the urban infor- mal-sector businessman is usually starved for credit. He does not need i t in large amounts, nor does he need i t at unrealistically low interest rates. But he needs i t without excessive bureau- cratic obstruction, and he needs i t without procedural delay. Further, governments can promote mutually beneficial rela- tionships between the informal and formal sectors by reserving land for small enterprises in the vicinity of industrial develop- ments. One effective technique is to establish industrial estates which will provide space neither exclusively to large nor to small industries, but which will deliberately situate firms of all sizes in close proximity, specifically to encourage economic linkages between them. Since small enterprises individually have only very limited purchasing and marketing capacity, governments can promote cooperative facilities to lower their costs and increase their effi- ciency. At the national, regional and municipal levels, govern- ment agencies, as well as banks and private firms, can offer technical assistance to the small entrepreneur, analogous to the extension services for small farmers. Finally, governments can help the informal sector to flourish by the removal of onerous and often outdated licensing and regulatory controls. Taken together, the removal of biases favoring the modern sector, and the special assistance to the informal sector, can sub- stantially improve the earning opportunities of the urban poor in the informal sector. Creating More Jobsin the Modern Sector But the strengthening of the informal sector need not prevent the continued growth of the larger enterprises. O n the contrary, special efforts must be made in many countries to turn their manufacturing enterprises away from the relatively small mar- 28 kets associated with import substitution, and toward the much larger opportunities flowing from export promotion. Korea, Taiwan, Mexico and Brazil, which achieved 15 to 20% annual growth in their manufactured exports in the late 1960s and early 1970s, clearly demonstrated the feasibility of bolstering manu- facturing employment with this policy. Further, the gradual reduction, and the ultimate elimination, of -- subsidies capital ___-_ -- to the modern sector, as has been done in-" H o n g Kong and Singapore, can make both production and serv- ice activities significantly more labor-intensive. Even in relatively automated modern factories, substantial labor-capital substitu- tion possibilities exist in such activities as materials handling, packaging, and intrafactory transport. When producers have to pay realistic prices for capital, they not only explore more labor- intensive solutions for each process and product, but tend to use the plant's capacity more intensively, thus creating more jobs per unit of capital. /. , The first element, then, in the strategy to increase the produc- tivity of the urban poor is to remove barriers to their earning opportunities. The second is to provide them with essential publicservices at standards they can afford. Assuring Access to Public Services About one-third of the population in most of the cities of the developing world lives in slums that are either wholly without or very inadequately served by public water, sewerage, transport, education, and housing. These conditions have a seriously detri- mental effect on the health, productivity, and incomes of the poor. The urban poor are frequently denied access to public serv- ices, not because they don't exist, but because they have been designed or located largely for middle and upper-income city dwellers, and are simply beyond the reach of the less privileged. The whole question of "standards" of urban services works to the disadvantage of the urban poor for they are often written with middle-class or upper-income orientations, and have little relevance to the situation the poor find themselves in. 29 Standards are important, but they must be formulated to meet realistic and attainable objectives. If the needs of the poor are to be met within a reasonable time span, public utilities and social services will have to be provided at costs which they can afford to pay. Water and Sewerage Services The single most important factor in improving the health en- vironment of the poor i s to provide clean water and adequate sewerage. A commonly used standard calls for cities to supply 200 liters of water per person per day. Many cities in the devel- oping world simply cannot afford to do that. That i s understand- able. What i s not understandable is that instead of lowering the standard to fit their resources, some cities pipe 200 liters per person per day to individual houses in the affluent and middle- class neighborhoods, but leave 60% of the population-the poor on the periphery of the city-without any piped water at all. The result frequently is endemic cholera among the poor, because they must depend on unclean water from other sources. Often, all that low-income families can afford are standpipes, but this form of water supply, together with technical assistance in improving sanitation facilities, can have an immensely bene- ficial impact on their health. Health and Education Services Essential health and education services for the poor are also seriously deficient in most of the cities of the developing world. Health care, for example, is frequently confined to modern and expensive hospitals, when what is needed are small clinics lo- cated in areas of the city where most health problems begin: in 1 the slums and squatter settlements. Indeed the whole orienta- tion of health care should emphasize low-cost preventive medi- cine rather than high-cost curative care. The poor are often ill -and their children often d i e b u t the causes are almost always diseases that could have been readily prevented by a more sani- tary environment and simple preventive measures. Inexpensive health delivery systems can be designed around 30 community-based health workers who can provide the poor with a broad spectrum of simple and effective services: immu- nization, health and nutrition education, and family-planning advice. The same principle applies to education. What i s required are small, inexpensive, and informal basic education units, located in accessible areas, and designed to serve minimum learning needs of both children and adults: literacy and elementary arithmetic, child care, vocational advice, and the knowledge necessary for responsible civic participation. Transportation The poor must also be within reach of employment possibili- ties. Tlhis means transport facilities which they can afford. Usu- ally the urban transport available is either too expensive, or does not serve the areas in which the poor live. I t i s clear that most cities would benefit substantially from a radical reallocation of their transport systems away from domination by the private automobile, and in the direction of public transport that can move large numbers of passengers at low unit costs. What is needed is a healthy pluralism in transport: buses, jit- neys, taxis, motor rickshaws, pedicabs, bicycle paths-whatever 4 pzP. is cost-effective and appropriate to the distances involved. ,f Establishing Realistic Housing Policies City governments often congratulate themselves on their sub- sidized blocks of low-income housing, and the physical struc- tures are frequently impressive. What is depressing is that the so-called low-income housing is almost always too expensive for the poor. Surveys indicate that up to 70% of the poor cannot afford even the cheapest housing produced by public agencies. Slums and squatter settlements are the inevitable result. Au- thorities typically strongly disapprove of them: they are illegal, they are unsightly, and they are unsanitary. But too often cities have failed to find any solution-short of demolition-to deal with them. t h e fact i s that the upgrading of existing squatter settlements can be a low-cost and practical approach to low- income shelter. Upgrading legalizes the settlement, provides 31 secure tenure, and supplies minimum infrastructure: water, roads, storm drainage, security lighting, and rubbish collection. Education and other communityfacilities can generally beadded. iOne of the most interesting features of squatter settlements i s that though they are inhabited by the very poor, there i s a very 1 strong sense of saving among the residents. Out of their minus- cule earnings, they save every cent they can. Their great ambi- i tion i s to have a better home for their families. But they are I prudent men and women: they are unwilling to invest their sav- 1 I ings in home improvement until they have tenure. That i s why squatter settlements are often so ramshackle. Once upgraded I projects provide legal tenure, the poor are not only willing to spend on home improvement, but do so with enthusiasm, and remarkable transformations often take place. The housing that can be provided by upgrading existing slums and squatter settlements is of course limited. A somewhat more costly, but still practical, alternative is the "sites and services" approach. It can provide the framework for improved housing for vast numbers of the poor, particularly if i t is planned with adequate lead time. The city provides a suitable area of new land, grades and levels it, and furnishes it with essential infrastructure: access roads, drainage, water, sewerage, and electricity. The land is divided into small plots and i s leased or sold to the poor, who are sup- plied with simple house plans, and a low-cost loan with which to purchase inexpensive building materials. The actual construc- tion is made the responsibility of the poor, who build their houses themselves. And as communities are more than just housing, sites and services projects include schools, health clinics, community halls, day-care centers, and some provision for creating jobs: land, for example, set aside for the establishment of an appropri- ate small-scale industry. Sites and services projects, then, stimulate self-help, and make i t possible for the poor to house themselves in a viable, cohesive community with a minimum of public expenditure. But though this i s a highly desirable approach, it often suffers 32 from two constraints: the understandable economic constraint of the availability of the land, infrastructure, and building ma- terials; and the less understandable institutional constraint of regulations governing tenure, building codes, and zoning restrictions. The determination of appropriate standards is critical for the poor family's ability to acquire housing. If, for example, stand- ards relating to land use, floor space, durability of materials, quality of finish, and utilities were modified to meet low-income household budgets, it should be possible for some 80% of the population in the cities of the developing world to afford much improved shelter with no subsidyat all. It i s also important that reasonable user charges and taxes should be levied on the middle and upper-income consumers of city services of all kinds-housing, utilities, education, health facilities, transport, and others-to generate surpluses which can be used to expand coverage of these services, and give the poor a more equitable opportunity to benefit from them. These, then, are some of the measures that governments should ponder as they confront the growing pressures of urban- ization. For the next decade or two-indeed for as far forward as anyone can realistically plan-the urban problem will be a poverty problem. The urban poor are not simply a statistical inconvenience to planners, a disturbing reminder of what might be possible if they would somehow just go away, a continually disappointing factor in budget allocations because of their chronic inability to pay taxes. That i s not what urban poverty i s about. The urban poor are hundreds of millions of human beings who live in cities, but do not really share the good and produc- tive life of cities. Their deprivations exclude them. I t is within the power of governments to change that. We in the Bank can help, and we propose to do so in the future on a scale far greater than that of the past. Any serious effort in solving the problems of urban develop- ment will clearly involve a number of sensitive and difficult 33 political choices. Those, of course, are for governments to make, not for the Bank. Moreover, the Bank's own lending can finance only a very small proportion of the necessary investments in productive facilities and supporting urban services. The Bank, however, can play a significant role in pointing out the extent to which governments' present policies, practices, and investment allocations are seriously biased against the poor. And the Bank can expand and redirect its own investments in urban areas to insure that they result in increased earning opportuni- ties and more adequate services for the poor in both the modern and traditional sectors. This will be a major objective of our five- year program for the years FY76-80. In future years, I will report to you on our progress in helping to achieve the objective of assuring minimum standards of decency for the nearly two billion people who will be living in the cities of the developing world by the end of this century. VI. SUMMARY AND CONCLUSIONS Let me now summarize and conclude the central points I have made this morning. If we survey the global development scene today, i t i s clear that most of our developing member countries are caught up in a critical situation. The consequences of the continuing world- wide inflation, the sudden surge in the cost of oil, the deteriora- tion of their terms of trade, and the prolonged recession in their export markets have combined to endanger their economic future. The net effect of these external forces has been to reduce their prospective rates of economic growth, while increasing their foreign exchange requirements. And i t i s the very poorest countries, countries that collectively contain a billion human beings, which face the bleakest pros- pects-the prospects of virtually no increase at all in their des- perately low per capita incomes for the rest of the decade. It i s important to comprehend what this stagnation really means in the life of an average individual in a poor country. I t does not mean inconvenience, or a minor sacrifice of comfort, 34 or the simple postponement of a consumer satisfaction. It means struggling to survive at the very margin of life itself. Statistically, the stagnation means that for a billion people, per capita incomes, in constant prices, will grow from $105 in 1970 to $108 in 1980. The comparable figures for the peoples of the developed world are $3,100 in 1970 to $4,000 in 1980. Over an entire decade, a $3 increase versus a $900- increase. The 725 million human beings in the middle-income develop- ing countries are also facing a far more difficult situation than we anticipated a year ago. Unless the foreign exchange available to them can be substantially increased, their per capita incomes too will inch forward at a wholly unacceptable pace. Are those in the developed world going to conclude that they cannot find it within their collective capacity to make a modestly greater effort to help save several hundred million people from a degree of deprivation beyond the power of any set of statistics even remotely to convey? I cannot believe so. I cannot believe so because what is involved for the developed nations is not the diminution of their already towering standard of life. All that is required in order to assist these peoples so immensely less privileged is a simple willingness to dedicate a tiny percentage of the additional wealth that will accrue to the developed nations over the next five years. As for the World Bank, we should at the minimum increase our lending programs not only fully to offset price inflation, but also to increase the flow of capital in real terms, particularly to our poorest member countries. And that i s what we propose to do. Preliminary negotiations for the next replenishment of the International Development Association should start within a few weeks. I t is, of course, one of the principal multilateral means available to assist the poorest nations. It is an instrument that has proved its value through hundreds of carefully designed projects that represent arealistic, tough--- minded, unsentimental approach to development. 35 L -- - - - - -- -- Whatever other debates there may have been throughout the development community, there never has been serious disagree- ment over either the principle or the record of the International Development Association. But even with a generous IDA replenishment, and even with a realistic effort by the governments of the developed world, as well as by those of the capital-surplus OPEC countries, to ap- propriate sufficient funds for the other forms of Official Devel- opment Assistance-even after all this has been done- it i s clear that these official flows of external capital, as well as increased private flows, will not be enough to ward off the crisis the de- veloping countries are now confronting. I t is imperative that they generate additional capital both through greater domestic savings, and through expanded export earnings. Both will be difficult. For with such low per capita in- comes, only arduous sacrifice can produce significantly greater savings. And though there i s an impressive potential for greater export earnings, both the developing and developed countries will have to take major steps to accomplish it. The current foreign exchange crisis, then, in the developing world-and particularly in the poorest countries-must com- mand the attention of us all. I t i s an emergency situation. And it requires emergency measures. But beyond this immediate emergency lies another more pro- found problem. And in our concern for immediate measures, we must not let our longer-range objective be obscured. That objective i s the central task of development itself: the reduction-and ultimately the elimination-of absolute poverty. Poverty i s a word that has largely lost its power to convey reality. At least that i s true among most of those who have never known it in i t s most abject form. But if we have not personally endured it-if most of the afflu- ent world has never experienced it-there are 900 million indi- viduals alive today, more than 40% of the total population of our developing member countries, who not only know it, but in 36 their wretched circumstances are living examples of it. Most of the absolute poor live in the rural areas. And two years ago, in Nairobi, we outlined a strategy-and launched a program within the Bank-designed to reduce that poverty. It is based o~&xh-p-rmosition~that the only feasible way , -- morg-roductiue, to deal with poverty is to help the poor become---- It i s a task, of course, primarily for the governments of these countries. The Bank can only assist. But we have evolved a whole new series of multisectored projects to help those governments which are committed to the goals of rural development, and our earlyexperience confirms our initial conviction: i t is an approach that can succeed. But poverty pervades not only the countryside, but the urban centers of the developing world as well. There, the numbers of the poor are smaller. But the natural increase within the cities, combined with the rapid rate of migration from the rural areas, guarantees that the probl&m will grow to mammoth proportions in the next two decades, if governments do not begin to take appropriate measures to deal with it. I have tried to suggest today a number of those measures. We in the Bank are resolved to help our member governments in every feasible way we can to come to grips with the problem. In the end, cities exist as an expression of man's attempt to achieve his potential. It is poverty that pollutes that promise. It is development's task to restore it. INTERNATIONAL B A N K FOR RECONSTRUCTION A N D D E V E L O P M E N T 181 8 H Street, N.W., Washington, D.C. 20433, U.S.A. Telephone number: (202) 393-6360 Cable address: INTBAFRAD WASHINGTON D.C. European O f f i c e : 66, Avenue d'l6na. 751 1 6 Paris, France Telephone number: 723-5421 Cable address: INTBAFRAD PARIS