Re-examining the old truisms
Tuesday, 12 October 2010
Robert B. Zoellick
We must ask ourselves: Have we become trapped by our received wisdoms? Has certainty blinded us to opportunity?
The record of development has shown that one size won't fit all. We have come a long way from the hubris of the 1960s in economics, with its faith in Keynesian-style fine-tuning and capital allocation, or its belief that poverty could be overcome with model cities and social engineering, neatly encapsulated in a plan drafted by economists in the developed world.
The fact that such ideas today have lost credibility is progress. Yet we can't stop there. We need to take the thought that one size does not fit all one step further.
Yes, there are some basic principles we can follow: a belief in property rights; contract rights; the use of markets; getting incentives right; the benefits of competition within and across economies; the importance of education; macro-economic stability --but we might learn these more from economic history than from economic models.
As the World Bank's "Doing Business" reports have highlighted, small and medium-sized enterprises can flourish given an enabling environment that encourages -- rather than blocks or constrains -- the entrepreneurial spirit.
Beyond the basic principles, experience would suggest that we may need to consider differentiated policy approaches.
The right policies may differ across phases of development -- for example reliance on export-led growth versus domestic demand, or on different types of innovation, depending on the closeness of companies to technology frontiers.
The right policies may differ now from the 1970s given the changes brought about by the internet and the growing importance of supply chains in international transactions.
The right policies on financial regulation may differ across phases of development -- what may safeguard in one context may strangle in another.
Above all, we must be honest about what we do not know. The Knowledge gaps that hold us back.
What we now need to know: So in the spirit of inquiry, and building on an internal review of our own development programmes, let me posit four sets of problems that merit future research.
First, we need to better understand how economic transformation happens. Why have some countries been able to achieve sustained growth while others appear to remain trapped in dire poverty?
How do countries transform their economies to slash poverty, create jobs, foster both domestic and foreign investment -- and then, over time, raise wages and living standards, increase opportunities, foster innovation, protect the vulnerable, and adjust to shocks from natural and economic events?
Countries operate in a global economy, so development patterns might differ as conditions change globally.
We need a deeper understanding of the process of how an economy's structure evolves. This is not just about the shift from agriculture to industry and services over time.
Within agriculture, services, or industry, we need to know much more about the process of moving into higher quality goods and services, about what determines a country's economic dynamism, and what contributes to the flexible adjustments in the structure of an economy.
We must avoid intellectual strait-jackets that stymie a spirit of inquiry. Almost all economies combine markets, the private sector, and the state. The key questions are how they should interact; for what purposes; and what the costs and the benefits are not only economically but for society.
I would maintain that a competitive market should be the economy's fundamental mechanism for allocating resources. But there are market failures. There are also government failures -- including an inability to correct market failures. There is an important role for good governance, anti-corruption, and the rule of law, and governance will go beyond considerations of simple economic efficiency.
These are political economy questions. Most governments attempt to promote industry in some fashion -- directly or through tax policy, subsidies, incentives, protections, contests, or myriad other tools -- whether they acknowledge it or not. These efforts stimulate highly contentious debates. Serious evaluations, however, have been few and rarely rigorous. There is a pressing need for new research efforts to evaluate these policies, whether broad-based, focused on sectors, or specific to firms.
Second, we need to better understand how access to economic opportunities can be broadened to ensure inclusive and sustainable development so that societies tap and foster the creativities and energy of everyone. We need to understand more about the constraints to better service delivery and better access to finance for the poor.
Broadening opportunities also has important regional and global dimensions. How can we ensure a more inclusive process of regional and global integration?
The economic crisis led to the biggest annual decline in world trade in the last sixty years. Many developing countries -- in part due to World Bank advice -- have made global integration a key component of their growth strategy. Will the export-led growth model of transformation -- famously adopted by a number of East Asian countries -- continue to succeed, especially in light of changes in developed countries' debt and demographic positions and China's exceptional capabilities in manufacturing?
Will the current reality point more to growth paths through domestic demand or regional integration -- with a different set of obstacles such as the need to improve agricultural productivity, boost local demand, and build regional infrastructure?
We need to pay closer attention to the role of the private sector in ensuring global gains from international integration.
In the 2000s, Foreign Direct Investment (FDI) inflows were the single biggest source of capital for developing countries and a critical input for technology transfer in developing country firms.
What are the right policies to attract and retain FDI, while increasing the opportunity for domestic investment as well, so that local people benefit and have a stake in the economy? Our private sector work at IFC has helped inform our economic research on these topics, suggesting opportunities for deeper private-public sector cooperation.
Third, we need to be able to meet new global challenges of dealing with risks facing economies and people. Our world is riskier than many supposed.
A large segment of the developing world's population remains especially vulnerable to shocks.
These can range from natural disasters to health pandemics, wars and civil strife, oil and food price shocks, regional and global economic crises. Climate change adds to the risks.
To date more attention has focused on financial risk than human risk. We need to redress that imbalance.
We need more research on how to reduce conflict and stabilise fragile states -- through an integrated combination of security, governance, and development policies -- the topic of the World Bank's next World Development Report. We need more research on gender.
Even "good performers" can be blown far off course by natural events that are individually unforeseen but collectively predictable. We need more climatic and hydrologic data and analysis to calibrate drought and flood warning systems; more financial "insurance" tools to assist with specific recoveries while avoiding dangerous macro-setbacks. We need more analysis of food security, agricultural productivity growth, improved seed- varieties, and climate-resilient agriculture as we prepare to feed the additional 3 billion people expected by 2050.
And fourth, we need to know what works: we need a research agenda that focuses on results. To do so, we will need to gather more evidence and data to assess the effectiveness of development efforts, including aid.
Aid and loans, whether stemming from public or private sources, are not the main drivers of development success. The dominant role has to be played by the populations and governments in the countries concerned. The assessment of results in development economics needs much greater attention.
Beyond the ivory tower to a new research model: What does this mean for the World Bank? Nothing short of an entirely new approach: Open Data, Open Knowledge, Open Solutions.
This initiative will open the treasure chest of the World Bank's data and knowledge to every village health care worker, every researcher, everyone.
The World Bank's research economists have led the world in the measurement of poverty and inequality, and have done pioneering research on the delivery of educational and health services that have changed the way we think about these issues.
Bank research has made a significant contribution to understanding globalisation and its impacts; understanding the relationship between growth and poverty; evaluating policies and programs; and analyzing aid effectiveness.
Yet we have also been criticised for the way research has sometimes been used to proselytise on behalf of Bank policy, without always taking a balanced view of the evidence or without expressing appropriate scepticism. And in keeping with much academic research, the Bank's analytic work has often lacked broad-based transparency -- not least amongst those who would be affected most by the policies derived from those analyses.
Today, the Bank remains the largest single source of development knowledge. But knowledge must be opened to all.
We need to democratise and demystify development economics, recognising that we do not have a monopoly on the answers.
We need to throw open the doors, recognising that others can find and create their own solutions. And this open research revolution is underway.
We need to recognise that development knowledge is no longer the sole province of the researcher, the scholar, or the ivory tower.
Development knowledge is about political economy and governance and transparency, and it's about recognising that all are pertinent and none are "no go areas" for research.
In this new world of policy research, we need healthy scepticism but also hearty innovation.
We need global reach, with local sensitivity. We must work with experts in economic history, government, political economy, anthropology, psychology, and sometimes the physical and biological sciences.
With networked research, all can help collect and share the data that is sorely lacking. We need more core data across countries and time periods on health, education, infrastructure, and gender. We need more and better data on public finance, especially at sub-national levels, which is critical for better governance. We need more hands and minds to confront theory with evidence on major policy issues.
This is democratising development economics. This will forever change how we conduct development research.
Conclusion: The global economic crisis has instructed us -- through the hardest of lessons -- to question assumptions. It has emphasised the rising importance of developing countries.
It has underscored the consequences of public policies -- for developed and developing countries.
There is a new opportunity, and certainly a pressing need, for a dynamism in development economics. Software has brought new tools; the Internet has brought new communications; rising economies have brought new experiences.
We need to listen and democratise development economics.
We must ask ourselves: Have we become trapped by our received wisdoms? Has certainty blinded us to opportunity?
The record of development has shown that one size won't fit all. We have come a long way from the hubris of the 1960s in economics, with its faith in Keynesian-style fine-tuning and capital allocation, or its belief that poverty could be overcome with model cities and social engineering, neatly encapsulated in a plan drafted by economists in the developed world.
The fact that such ideas today have lost credibility is progress. Yet we can't stop there. We need to take the thought that one size does not fit all one step further.
Yes, there are some basic principles we can follow: a belief in property rights; contract rights; the use of markets; getting incentives right; the benefits of competition within and across economies; the importance of education; macro-economic stability --but we might learn these more from economic history than from economic models.
As the World Bank's "Doing Business" reports have highlighted, small and medium-sized enterprises can flourish given an enabling environment that encourages -- rather than blocks or constrains -- the entrepreneurial spirit.
Beyond the basic principles, experience would suggest that we may need to consider differentiated policy approaches.
The right policies may differ across phases of development -- for example reliance on export-led growth versus domestic demand, or on different types of innovation, depending on the closeness of companies to technology frontiers.
The right policies may differ now from the 1970s given the changes brought about by the internet and the growing importance of supply chains in international transactions.
The right policies on financial regulation may differ across phases of development -- what may safeguard in one context may strangle in another.
Above all, we must be honest about what we do not know. The Knowledge gaps that hold us back.
What we now need to know: So in the spirit of inquiry, and building on an internal review of our own development programmes, let me posit four sets of problems that merit future research.
First, we need to better understand how economic transformation happens. Why have some countries been able to achieve sustained growth while others appear to remain trapped in dire poverty?
How do countries transform their economies to slash poverty, create jobs, foster both domestic and foreign investment -- and then, over time, raise wages and living standards, increase opportunities, foster innovation, protect the vulnerable, and adjust to shocks from natural and economic events?
Countries operate in a global economy, so development patterns might differ as conditions change globally.
We need a deeper understanding of the process of how an economy's structure evolves. This is not just about the shift from agriculture to industry and services over time.
Within agriculture, services, or industry, we need to know much more about the process of moving into higher quality goods and services, about what determines a country's economic dynamism, and what contributes to the flexible adjustments in the structure of an economy.
We must avoid intellectual strait-jackets that stymie a spirit of inquiry. Almost all economies combine markets, the private sector, and the state. The key questions are how they should interact; for what purposes; and what the costs and the benefits are not only economically but for society.
I would maintain that a competitive market should be the economy's fundamental mechanism for allocating resources. But there are market failures. There are also government failures -- including an inability to correct market failures. There is an important role for good governance, anti-corruption, and the rule of law, and governance will go beyond considerations of simple economic efficiency.
These are political economy questions. Most governments attempt to promote industry in some fashion -- directly or through tax policy, subsidies, incentives, protections, contests, or myriad other tools -- whether they acknowledge it or not. These efforts stimulate highly contentious debates. Serious evaluations, however, have been few and rarely rigorous. There is a pressing need for new research efforts to evaluate these policies, whether broad-based, focused on sectors, or specific to firms.
Second, we need to better understand how access to economic opportunities can be broadened to ensure inclusive and sustainable development so that societies tap and foster the creativities and energy of everyone. We need to understand more about the constraints to better service delivery and better access to finance for the poor.
Broadening opportunities also has important regional and global dimensions. How can we ensure a more inclusive process of regional and global integration?
The economic crisis led to the biggest annual decline in world trade in the last sixty years. Many developing countries -- in part due to World Bank advice -- have made global integration a key component of their growth strategy. Will the export-led growth model of transformation -- famously adopted by a number of East Asian countries -- continue to succeed, especially in light of changes in developed countries' debt and demographic positions and China's exceptional capabilities in manufacturing?
Will the current reality point more to growth paths through domestic demand or regional integration -- with a different set of obstacles such as the need to improve agricultural productivity, boost local demand, and build regional infrastructure?
We need to pay closer attention to the role of the private sector in ensuring global gains from international integration.
In the 2000s, Foreign Direct Investment (FDI) inflows were the single biggest source of capital for developing countries and a critical input for technology transfer in developing country firms.
What are the right policies to attract and retain FDI, while increasing the opportunity for domestic investment as well, so that local people benefit and have a stake in the economy? Our private sector work at IFC has helped inform our economic research on these topics, suggesting opportunities for deeper private-public sector cooperation.
Third, we need to be able to meet new global challenges of dealing with risks facing economies and people. Our world is riskier than many supposed.
A large segment of the developing world's population remains especially vulnerable to shocks.
These can range from natural disasters to health pandemics, wars and civil strife, oil and food price shocks, regional and global economic crises. Climate change adds to the risks.
To date more attention has focused on financial risk than human risk. We need to redress that imbalance.
We need more research on how to reduce conflict and stabilise fragile states -- through an integrated combination of security, governance, and development policies -- the topic of the World Bank's next World Development Report. We need more research on gender.
Even "good performers" can be blown far off course by natural events that are individually unforeseen but collectively predictable. We need more climatic and hydrologic data and analysis to calibrate drought and flood warning systems; more financial "insurance" tools to assist with specific recoveries while avoiding dangerous macro-setbacks. We need more analysis of food security, agricultural productivity growth, improved seed- varieties, and climate-resilient agriculture as we prepare to feed the additional 3 billion people expected by 2050.
And fourth, we need to know what works: we need a research agenda that focuses on results. To do so, we will need to gather more evidence and data to assess the effectiveness of development efforts, including aid.
Aid and loans, whether stemming from public or private sources, are not the main drivers of development success. The dominant role has to be played by the populations and governments in the countries concerned. The assessment of results in development economics needs much greater attention.
Beyond the ivory tower to a new research model: What does this mean for the World Bank? Nothing short of an entirely new approach: Open Data, Open Knowledge, Open Solutions.
This initiative will open the treasure chest of the World Bank's data and knowledge to every village health care worker, every researcher, everyone.
The World Bank's research economists have led the world in the measurement of poverty and inequality, and have done pioneering research on the delivery of educational and health services that have changed the way we think about these issues.
Bank research has made a significant contribution to understanding globalisation and its impacts; understanding the relationship between growth and poverty; evaluating policies and programs; and analyzing aid effectiveness.
Yet we have also been criticised for the way research has sometimes been used to proselytise on behalf of Bank policy, without always taking a balanced view of the evidence or without expressing appropriate scepticism. And in keeping with much academic research, the Bank's analytic work has often lacked broad-based transparency -- not least amongst those who would be affected most by the policies derived from those analyses.
Today, the Bank remains the largest single source of development knowledge. But knowledge must be opened to all.
We need to democratise and demystify development economics, recognising that we do not have a monopoly on the answers.
We need to throw open the doors, recognising that others can find and create their own solutions. And this open research revolution is underway.
We need to recognise that development knowledge is no longer the sole province of the researcher, the scholar, or the ivory tower.
Development knowledge is about political economy and governance and transparency, and it's about recognising that all are pertinent and none are "no go areas" for research.
In this new world of policy research, we need healthy scepticism but also hearty innovation.
We need global reach, with local sensitivity. We must work with experts in economic history, government, political economy, anthropology, psychology, and sometimes the physical and biological sciences.
With networked research, all can help collect and share the data that is sorely lacking. We need more core data across countries and time periods on health, education, infrastructure, and gender. We need more and better data on public finance, especially at sub-national levels, which is critical for better governance. We need more hands and minds to confront theory with evidence on major policy issues.
This is democratising development economics. This will forever change how we conduct development research.
Conclusion: The global economic crisis has instructed us -- through the hardest of lessons -- to question assumptions. It has emphasised the rising importance of developing countries.
It has underscored the consequences of public policies -- for developed and developing countries.
There is a new opportunity, and certainly a pressing need, for a dynamism in development economics. Software has brought new tools; the Internet has brought new communications; rising economies have brought new experiences.
We need to listen and democratise development economics.