The Evolution of Poverty and Inequality in Indian Villages

This paper examines the evolution of poverty and inequalityin rural India by reviewing longitudinal village studies. Itexplores the main forces of economic change—agriculturalintensification, changing land relations, and occupational diversification—froma wide range of disciplinary perspectives, and it considersthe roles of various institutions as conduits of change. Althoughmost village studies support the survey-based judgment thatrural poverty declined in India during the 1970s and 1980s,they find that progress has been slow and irregular and thatinequalities within villages have persisted. These continuedinequalities may constrain both the scope for further povertyreduction from economic growth and the impact of policy interventions.      

Evaluating Recipes for Development Success

This article offers a provocative critique of the ability ofresearch on the impact of institutions on growth to offer immediateand practical recommendations for reforming and redesigninginstitutions in developing countries and transition economies.The literature traces the sources of growth to unalterable historicaland geographic features. It contains equally plausible recommendationsfor opposite courses of action. It is sometimes driven by fadsor recommends imitation of the latest success story. Some recommendationsare too vague or too general to constitute practical advice.The article suggests a Bayesian diagnostic procedure to identifythe causes of economic failure in an individual country as afirst step toward remedying the failure. JEL codes: O43, O17, O20, P30, P48     

Between the State and the Market: Can Informal Insurance Patch the Safety Net?

Most households in low-income countries deal with economic hardshipsthrough informal insurance arrangements between individualsand communities rather than through publicly managed programsor market-provided insurance schemes. Households may, for example,draw on savings, sell physical assets, rely on reciprocal giftexchanges, or diversify into alternative income-generating activities.These mechanisms can be highly effective in the right circumstances,but most recent studies show that informal insurance arrangementsare often weak. Poor households, in particular, have substantialdifficulties coping with even local, idiosyncratic risks. Publicpolicy can help reduce vulnerability by encouraging private,flexible coping mechanisms while discouraging those that arefragile or that hinder economic and social mobility. Promisingpolicies include creating self-regulating workfare programsand providing a supportive setting for institutions workingto improve access to credit, crop and health insurance, andsafe and convenient saving opportunities.      

WHAT DO WE KNOW ABOUT THE POLITICAL ECONOMY OF ECONOMIC POLICY REFORM?

The recent wave of democratization in developing countries andin formerly communist ones has sparked renewed interest in therelation between politics and economic adjustment. Adjustmentprograms, however well designed in a technical economic sense,are often politically difficult to launch and, once launched,to keep afloat. Success in implementing an adjustment programmay depend on a government's skill in generating political supportand holding off the opposition. This article explores the politicsof economic reform, drawing on country studies by politicalscientists and country specialists, the growing theoreticalliterature by economists, and the findings of a World Bank researchproject on the political economy of adjustment in new democracies.The article examines three broad clusters of variables: institutionalcharacteristics of the political system, aspects of the internaland external economy, and the design of the reform program.It also considers the relevance of political analysis for policymakersand for international financial institutions.      

AID IN THE DEVELOPMENT PROCESS

This article examines the economic effects of aid and the relationshipsamong private capital flows, official flows, and concessionalassistance. It considers whether official and concessional flowsimprove the welfare of both recipient and grantor, and it outlinesthe economic rationale for concessional assistance. The impactof aid on a recipient's growth performance is analyzed, andsome criticisms of aid are evaluated.      

SOME LESSONS FROM THE EAST ASIAN MIRACLE

The rapid economic growth of eight East Asian economies, oftencalled the "East Asian miracle, " raises two questions: Whatpolicies and other factors contributed to that growth? And canother developing countries replicate those policies to stimulateequally rapid growth? This article, based on case studies, econometric data, and economictheory, offers a list of the ingredients that contributed tothat success. But it is the combination of these ingredients,many of which involve government interventions acting together,that accounts for East Asia's success.      

TRADE POLICY AND PRODUCTIVITY GAINS IN DEVELOPING COUNTRIES: A Survey of the Literature

Despite the widely accepted view that liberal, outward-orientedtrade policies are superior to restrictive, inward-orientedpolicies, doubts about liberalization remain strong in manycircles. One reason for such doubt is the dearth of researchquantifying the large gains that liberal trade policies aresaid to generate. The survey of the literature undertaken forthis article was a review of the evidence on the link betweentrade policy and efficiency, or productivity, gains in developingcountries. Does the literature support the view that more opentrade policies bring greater efficiency? Several inferencesare drawn from the literature on sources of growth—particularlywith regard to increases in capacity utilization and economiesof scale. The article also examines evidence from the few studiesthat explicitly try to correlate efficiency gains directly withtrade policy. These studies fall into three categories: thosethat evaluate the effect of trade policy on market power ordegree of competition; those that measure total factor productivityor technical efficiency gains and correlate these with the degreeof protection; and those that estimate the aggregate effectsof changes in trade policy on welfare (mainly with computablegeneral equilibrium models, which measure dynamic efficiencygains from trade). In a final section, the article pulls togetherthe findings from the indirect and direct evidence as a basisfor suggesting a number of hypotheses on the link between efficiencyand trade policy. One conclusion is that country-specific analysisover time appears to be superior to cross-country comparisons.      

Privatization and Regulation of Transport Infrastructure in the 1990s

Although the link between improved infrastructure services andeconomic growth is uncertain, it is clear that reforms aimedat creating competition and regulating natural monopolies establishan environment conducive to private sector participation, incentivesfor companies to strive for efficiency savings that can ultimatelybe passed on to consumers, and greater provision of services(such as faster roll-out of infrastructure or innovative solutionsto service delivery for customers not connected to an existingnetwork). In determining the form that infrastructure restructuringmight undertake or the design of a regulatory agency, policymakerscan generally benefit from a review of the experiences of othercountries. A key element of any decisionmaking process shouldbe a review of how the various types of reform will affect theefficiency of the sector and whether they will increase privatefinancing of its significant investment needs.      

Judicial Reform and Economic Development: A Survey of the Issues

Acknowledging the importance of sound judicial systems to goodgovernance and economic growth, the World Bank and several otherdonor organizations have funded judicial reform projects inmore than two dozen developing countries and transition economiesduring the past few years. Yet little is known about the actualeffect of judicial reform on economic performance or even aboutwhat elements constitute a sound reform project. This articlesurveys a wide range of current studies on judicial reform andfinds some surprising results.      

Creating a Legal Framework for Economic Development

A modernizing nation's economic prosperity requires at leasta modest legal infrastructure centered on the protection ofproperty and contract rights. The essential legal reform requiredto create that infrastructure may be the adoption of a systemof relatively precise legal rules, as distinct from more open-endedstandards or a heavy investment in upgrading the nation's judiciary.A virtuous cycle can arise in which initially modest expenditureson law reform increase the rate of economic growth, in turngenerating resources that will enable more ambitious legal reformsto be undertaken in the future.      

Counting the World's Poor: Problems and Possible Solutions

As recent discussions have made clear, the apparent lack ofpoverty reduction in the face of historically high rates ofeconomic growth—both in the world as a whole and in specificcountries (most notably India)—provides fuel for the argumentthat economic growth does little to reduce poverty. How confidentcan we be that the data actually support these inferences? Atthe international level, the regular revision of purchasingpower parity exchange rates plays havoc with the poverty estimates,changing them in ways that have little or nothing to do withthe actual experience of the poor. At the domestic level, theproblems in measuring poverty are important not only for theworld count but also for tracking income poverty within individualcountries. Yet, in many countries, there are large and growingdiscrepancies between the survey data—the source of povertycounts—and the national accounts—the source of themeasure of economic growth. Thus economic growth, as measured,has at best a weak relationship with poverty, as measured.      

Paths of Institutional Development: A View from Economic History

This article surveys an influential new research program onhistorical paths of institutional development and their consequencesfor growth. The research program exploits the experience ofEuropean colonialism as a kind of "natural experiment" whoseresults bear on the way institutions affect development. Thecentral hypothesis of this research is that societies that beganwith more extreme inequality were more likely to develop institutionsallowing much of the population only limited access to economicopportunities. The research has uncovered a striking reversalof fortune among the areas colonized by Europe; those that wererelatively rich in the 1600s are today far poorer than the areas(such as the United States and Canada) that initially were viewedas relatively undesirable. The timing of the reversal—atthe onset of the Industrial Revolution, when there was probablya premium on broad participation in commercial activity—suggeststhat institutions associated with high inequality may be a causalfactor in low aggregate incomes. This research program is stillin its early stages. But studies of institutions in India usingdata rich enough to permit hypothesis-testing provide evidencesupporting the hypotheses developed in the analysis of the Europeancolonial experience.      

Globalization, Poverty, and Inequality since 1980

One of the most contentious issues of globalization is the effectof global economic integration on inequality and poverty. Thisarticle documents five trends in the modern era of globalization,starting around 1980. The first trend is that growth rates inpoor economies have accelerated and are higher than growth ratesin rich countries for the first time in modern history. Developingcountries’ per capita incomes grew more than 3.5 percenta year in the 1990s. Second, the number of extremely poor peoplein the world has declined significantly—by 375 millionpeople since 1981—for the time in history. The share ofpeople in developing economies living on less than $1 a dayhas been cut in half since 1981, though the decline in the shareliving on less than $2 per day was much less dramatic. Third,global inequality has declined modestly, reversing a 200-yeartrend toward higher inequality. Fourth, within-country inequalityin general is not growing, though it has risen in several populouscountries (China, India, the United States). Fifth, wage inequalityis rising worldwide. This may seem to contradict the fourthtrend, but it does not because there is no simple link betweenwage inequality and household income inequality. Furthermore,the trends toward faster growth and poverty reduction are strongestin developing economies that have integrated with the globaleconomy most rapidly, which supports the view that integrationhas been a positive force for improving the lives of peoplein developing areas.      

Managing Oil Price Risk in Developing Countries

This article presents a simple framework for understanding theimpact of oil dependence on growth in terms of an optimal savingsand investment strategy. Among the more important factors underlyingthis strategy is the extent to which oil price changes are temporaryor permanent. This in turn determines whether a country shouldrely on stabilization and savings funds or the use of financialinstruments to manage oil revenues—or both. Country experienceswith stabilization and savings funds are surveyed, and the caseis presented for using financial instrument to manage oil pricerisk. Policy implications for enhancing the use of financialinstruments are explored, including an expanded role for internationalfinancial institutions.      

GOVERNMENT SPENDING IN DEVELOPING COUNTRIES: Trends, Causes, and Consequences

Throughout the twentieth century governments have been spendingever larger proportions of national income. Three issues arisein discussions about the growth of such spending as it pertainsto developing countries: How does it compare with expenditurein industrial nations? What explains the growth in spendingby developing country governments? And what are the effectson economic growth? Government expenditure as a share of GDPin low- and middle-income countries, on average, is lower thancomparable shares in industrial market economies and, with fewexceptions, is growing. Many factors, including ideology, demographics,a positive income elasticity for public goods, the rising costof public goods relative to private goods, and perhaps developmenttheory and practice, explain this growth. As for the relationshipbetween government expenditure and economic growth, the empiricalevidence does not reveal any strong correlation. The size ofgovernment may engender strong ideological debate, but the positionthat the aggregate level of government expenditure is a significantdeterminant of growth rates receives little support.      

Formal Water Markets: Why, When, and How to Introduce Tradable Water Rights

In most countries the state owns the water resources and thehydraulic infrastructure, and public officials decide who getsthe water, how it is to be used, and how much will be chargedfor it. But costly inefficiencies in the supply and use of watersupport a shift from government provision to a market-basedapproach that is more effective and less wasteful. Markets can allow rapid changes in allocation in response tochanging demands for water and can stimulate investment andemployment as investors are assured of access to secure suppliesof water. Because of water's unique characteristics, such marketsdo not work everywhere; nor do they resolve all water-relatedissues. By designing appropriate water laws and regulationsand by strengthening private and public institutions to administerthem, formal water markets can effectively address rising demandsfor groundwater and for water found in rivers, lakes, and canals.Lessons from Chile's experience demonstrate that formal watermarkets can improve the economic efficiency of water use andstimulate investment.      

Financial Safety Nets: Lessons from Chile

Should governments ever override bank regulators who are attemptingto close down insolvent financial institutions? An analysisof Chile's history shows that time after time from the 1850sto the 1980s, prudential banking regulations were abandonedduring economic crises when attempts to impose tight solvencystandards proved impossible to enforce. Chile's current stringentbanking regulations may prove more durable, but mounting financialdistress is equally likely to lead the government to adopt policiesthat prevent bank failure but undermine the authority of regulators. Bank regulators, including the central bank, are responsiblefor creating a financial safety net to protect depositors againstloss and for enforcing the rules of prudent behavior that arerequired for a stable financial system. Because safety netsoften additionally cover losses to bank owners and borrowers,the support they offer encourages risk-taking by the privatesector an action that may promote financial deepening, but ata high budgetary cost to the government. Poorly designed safetynets may have to be suspended during crises to prevent lossesfrom mounting and to limit the government's liability.      

Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries

Mounting evidence suggests that excessive job protection reducesemployment and labor market flows, hinders technological innovations,pushes workers into the informal sector, and hurts vulnerablegroups by depriving them of job opportunities. Flexible labormarkets stimulate job creation, investment, and growth, butthey create job insecurity and displace some workers. How canthe costs of such insecurity and displacements be minimizedwhile ensuring that the labor market remains flexible? Eachof the main unemployment income support systems (unemploymentinsurance, unemployment assistance, unemployment insurance savingsaccounts, severance pay, and public works) has strengths andweaknesses. Country-specific conditions—chief among themlabor market and other institutions, the capacity to administereach type of system, and the size of the informal sector—determinewhich system is best suited to developing and transition countries.      

EDUCATION AND DEVELOPMENT: A Review

The article reviews the evidence on the role of education ineconomic development, with emphasis on issues that have appearedin the literature in the past two decades: the contributionof education to economic growth, the screening hypothesis, thesegmentation of the labour market, the return to investmentin schooling, and the effects of education on unemployment andincome distribution. It concludes with an optimistic assessmentof the contribution of educational investment to the developmentprocess, especially when such investment is targeted to primaryschooling, general education, and improvements in the qualityof instruction and when it is accompanied by cost-recovery atthe higher levels of education.      

REFORMING FINANCE IN TRANSITIONAL SOCIALIST ECONOMIES

Financial reforms initiated in most transitional socialist economiesdo not yet adequately provide many of the financial servicesassociated with market-oriented financial systems. Such services—mobilizingresources, selecting firms and allocating capital, monitoringfirm managers, and facilitating the management of transactionsand risk—are a necessary condition for economic reformto improve living standards. This article envisages four central strategies to guide reformof the financial sector: • Building an infrastructure based on clear and enforceableproperty rights, modern accounting and auditing standards, reliablepayments systems, sound prudential and enforcement regulations,and professionals trained in finance • Ending the shell game of trying to hide the losses ofstate-owned enterprises, and separating government decisionsto finance "priority" firms from the allocation decisions ofindependent financial institutions • Privatizing some financial institutions early—althoughnot necessarily precipitously—in concert with the privatizationof firms and supervisory capabilities, meanwhile cleaning upbank loans to maximize the chances that firms and banks willsucceed as private entities • Improving the tax system and stressing a prudent interestrate policy to reduce uncertainty, distortions, and excessiverepression of the financial sector.