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GlobalEconomic
Prospects

Technology Diffusion in theDeveloping World

2008

GlobalEconomic
Prospects

Global
Economic
Prospects
Technology Diffusion in theDeveloping World2008© 2008 The International Bank for Reconstruction and Development / The World Bank
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ISBN: 978-0-8213-7365-1
eISBN: 978-0-8213-7366-8
DOI: 10.1596/978-0-8213-7365-1
ISSN: 1014-8906
Cover photos: Irrigation by Chris Stowers/Panos; Man with Cell Phone by Jacob
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Cover design: Critical Stages

The cutoff date for the data used in this report was December 12, 2007. Dollars are current
U.S. dollars unless otherwise indicated.

Contents

Forewordxi

Acknowledgments
Abbreviations

xiii

xv

Overview
1
Technological achievement and diffusion in developing countries
Some policy directions
13
Note
15
References
15

2

Chapter 1 Prospects for Developing Countries
17
Growth outlook
17
Risks
18
Financial markets: Needed correction or major disruption?
18
Global growth
21
World trade33
Inflation and commodity markets
36
Risks and uncertainties: Danger of a banking crisis and a U.S. recession
Long-term prospects and poverty forecasts
43
Notes
48
References
49
Chapter 2 Technology and Technological Diffusion in Developing Countries
The role of technology in development
53
Measuring technology in developing countries
58
Evaluating overall technological progress
78
Technological diffusion over the long term
87
Conclusion
92
Technical Annex: Construction of the summary indexes
92
Notes
99
References
101

41

51

v

C O N T E N T S

Chapter 3 Determinants of Technological Progress: Recent Trends and Prospects
Drivers of technological progress: A framework
107
External transmission channels
109
Nurturing technological adaptive capacity
127
Conclusion
150
Notes
153
References
156

105

Appendix: Regional Economic Prospects
165
East Asia and the Pacific 165
Europe and Central Asia
170
Latin America and the Caribbean
176
Middle East and North Africa
184
189
South Asia
Sub-Saharan Africa
193

Figures
1
Robust growth among developing countries should cushion the developed country
slowdown
22
Scientific innovation and invention is almost exclusively a high-income activity
3
3
Technological achievement: Converging, but the gap remains large
44The penetration of older and more recent technologies depends on morethan income
55Technological achievement tends to level off at different income levels in different
regions
6
6
Most technologies fail to penetrate deeply into developing economies
77
The urban–rural gap in telephone access in India is huge
78
Domestic absorptive capacity both conditions and attracts external flows
89Developing countries’ trade in technology goods has risen
10
10
Macroeconomic stability has improved since the early 1990s
11
11
Literacy rates have increased in all regions
12
12
Developing regions have much poorer governance than do OECD countries
13
1.1
The perceived riskiness of high-yield corporate bonds increased more than thatof emerging market bonds
19
1.2
Emerging market asset sell-off more severe than during earlier periods of market
turbulence
19
1.3
Global equity markets fall, then recover led by emerging markets
20
1.4
A step-down in growth in 200821
1.5
Volatile patterns of growth among OECD countries
23
1.6
Tighter credit and weak housing yield slower U.S. growth23
1.7
Robust growth in developing country industrial production24
1.8
Developing growth retains strong momentum during the first half of 2007...
26
1.9...with growth moderating through 200926
1.10
East Asia now accounts for one-quarter of China’s imports
27
1.11
External positions vary widely across Europe and Central Asia27
1.12
Growth eases in 2007 for the Latin America and Caribbean region
28vi

C O N T E N T S

1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.29
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14

Continued oil revenue gains support growth among Middle East and North Africa oil
exporters
30
South Asia growth is slowing as the Indian rupee appreciates
32
Oil exporters drive 2007 growth results for Sub-Saharan Africa
32
Weak U.S. growth reduces demand for developing country exports
35
Export opportunities for high-income countries
35
U.S. current account narrows over 2007 and is likely to continue doing so
36
Inflationary pressures are rising in the Middle East and North Africa and
Sub-Saharan Africa
37
Inflation is broadly stable elsewhere, though at high levels
37
Commodity prices continued gains through 2007 led by metals
38
Copper, zinc, and aluminum prices sharply affected by China
38
Growth in the world’s demand for oil slows
39
OPEC reduces output to support prices
39
Agricultural prices surge over 2006–07
40
A rise in food prices, led by a ramp-up of the prices of fats, oils, and grains
40
Long-term growth, 1980–2030
44
Declining capital-led growth for developed countries, 2002–30
45
Sustained high productivity growth for developing countries
45
Patent activity is rising in middle-income countries
61
Electrical consumption varies markedly even at similar income levels
63Rail and road densities rise with income and population density
65
Telephone densities are highly correlated with income, but airtransport is not
66
The incidence of Internet use varies widely across countries
73
Logistics performance in the world
77
Distribution of technological achievement by dimension
80
Increase in summary technological achievement subindexes, 1990s–2000s
82
Alternative summary indexes of technological achievement
83
Technological achievement rises with income levels
84
Comparison of levels of technological achievement, early 1990s andearly 2000s
85
Domestic absorptive capacity both conditions and attracts external flows
108
Rising share of high-tech imports
112
Exports of low-, medium-, and high-technology goods
114
Share of foreign affiliates in business R&D expenditure
117
Licensing payments have risen sharply
121
The brain drain is a severe problem in a number of small countries
123
Share of Ph.D. students still living in the United States five years
after graduation
124
High-skilled emigrants are disproportionately represented in the diaspora
124
Most developing countries have increased their exposure to external
technology
128
Number of countries in conflict worldwide
129
Efficiency of contract enforcement
132
Developing country governance scores relative to OECD average
132
Regional averages of six governance indicators
133
Per capita incomes have accelerated in recent years
134

vii

C O N T E N T S

3.15
3.16
3.17
3.18
3.19
A1
A2
A3
A4
A5
A6
A7
A8
A9

A18
A19
A20
A21
A22
A23
A24

Except in Sub-Saharan Africa, life expectancy is improving
134
Educational expenditures have risen in some regions
137
Many developing country students fail to meet literacy standards
138
Levels of intellectual property protection
146
Level of and recent changes in technological absorptive capacity
149
East Asian growth moves up in 2007
165
Except for China, inflation is now stabilizing across East Asia
166
Performance improves for East Asian countries other than China169
Mixed growth outturns across Europe and Central Asia 171
External positions vary widely across Europe and Central Asia
171
Growth in Europe and Central Asia eases into 2009173
Growth outturns were mixed across Latin America in 2007
176
Latin American inflation eases over the last 15 years
177
Latin America and the Caribbean sovereign bond spreads decline, thenincrease again
177
Growth in Latin America and the Caribbean eases into 2009179
Financial test: Credit
183
Exchange rate policy dilemmas?
183
Export product (value) concentration is increasing
183
Export market (value) concentration is falling
184
Growth in Middle East and North Africa picks up
184
Hydrocarbon exports continue to rise on higher prices, modest volume gains
186
Tourism and remittances offset widening trade deficits for Maghreb andMashreq countries
187
Middle East and North Africa equities rebound from the mid-2007 slump
189
South Asian economies ease into 2007
190
Monetary policy is tightened in response to a buildup in inflation
190
Growth in Sub-Saharan Africa has accelerated markedly. . .
194. . . reaching a 35-year high in oil-exporting countries . . .
198. . . and a 10-year high in oil-importing countries
199
Contributions of investment and consumption have increased
199

Tables
1.1
1.2
1.3
1.4
1.5
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9

Gross capital flows to developing countries, 2005–07
20
The global outlook in summary, 2005–09
22
Recent economic indicators, developing regions, 2005–07
25
Developments and prospects for world trade and payments
34
Poverty in developing countries by region, selected years
46
Disparity among TFP levels remains wide
54
Scientific and innovative outputs
61
Indicators of the diffusion of older technologies
64
Affordability of fixed-line phones falls rapidly with lower incomes
67
Immunization rates lag significantly in South Asia and Sub-Saharan Africa
68
Diffusion of both water and sanitation technology is low in rural areas
69
Diffusion of recent technologies
72
Share of high-tech products in total exports
73
The quality of logistics services in 2005 varies by income
77

A10
A11
A12
A13
A14
A15
A16
A17

viii

C O N T E N T S

2.10
2.11
2.12
2.13
2.14
2.15
2.16
A2.1
A2.2
A2.3
A2.4
A2.5
A2.6
A2.7
A2.8

A2.9
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
A1
A2
A3
A4
A5
A6

Indicators included in summary indexes of technological achievement
79
Technological achievement in developing countries relative to that in high-income
countries
81
Increase in technological achievement in developing countries relative to that in
high-income countries
81
Overall technological progress in absolute and relative terms
86
Successful diffusion has accelerated
88
The pace at which technology diffuses has picked up among successful adaptors
89
Slow diffusion means that many developing countries never reach the 25 or 50 percent
threshold90
Indicators used to calculate the summary indexes and overall index related totechnological achievement
95
Indicators used to calculate the summary indexes and overall index of technologicalabsorptive capacity
96
Share of total variance explained by principal components, technological achievement
index
96
Share of total variance explained by principal components, technological absorptive
capacity index
96
Share of total variance explained by principal components for each subgroup of
indicators
97
Factor loadings and variable weights for technological achievement
subgroups
98
Factor loadings and variable weights for technological absorptive capacity
subgroups
98
Share of total variance explained by main principal components oftechnological achievement and technological absorptive capacity
using the sub-indexes
99
Factor loadings and variable weights obtained from second-stage principal
components analysis (2000–03)
99
Trade in technology goods has increased in developing countries 111
Foreign direct investment as a percent of GDP
116
Foreign direct investment as a percent of fixed capital formation
116
Selected purchases of high-tech firms by companies in developing countries,
early 2000s
121
Increases in exposure to external technologies index, 1990s to 2000s
129
Macroeconomic stability has improved in developing countries
130
The regulatory burden is heavier in developing countries than in the OECD
131
Educational attainment indicators
135
Relatively high youth literacy rates
136
Weak financial intermediation hinders technology in developing countries
139
R&D intensities have increased
141
Private-public sector R&D
141
East Asia and Pacific forecast summary
166
East Asia and Pacific country forecasts
168
Europe and Central Asia forecast summary
170
Europe and Central Asia country forecasts
174
Latin America and the Caribbean forecast summary179
Latin America and the Caribbean country forecasts
180

ix

C O N T E N T S

A7
A8
A9
A10
A11
A12
Boxes
1
1.1
1.2
1.3
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9

x

Middle East and North Africa forecast summary
Middle East and North Africa country forecasts
South Asia forecast summary
192
South Asia country forecasts
192
Sub-Saharan Africa forecast summary
194
Sub-Saharan Africa country forecasts
195

185
188

Summary of empirical results
14
Developing country exports in the wake of the removal of barriers to
Chinese exports
31
Biofuels
41
Policy responses to rising food prices
42
Technology can contribute to welfare without affecting measures of short-term
output55
Technological innovation may spur further innovation in upstream and downstream
activities
56
Promoting appropriate technologies in Rwanda
57
Shortcomings of available measures of technological achievement60
Deepwater petroleum technology in Brazil
62
The green revolution
68
Technology and growth in Latin America’s natural resource–based economies
71
Innovative use of communications technology is improving financial access forthe poor75
The technological divide within India
91
Technology imports: Different paths for different countries
113
European call centers in the Maghreb have inspired local entrepreneurs and prompteda specialization in high-value-added services
118
South African investment in Zambia’s retail sector has improved the quality of local
produce and farmers’ earnings
118
Wal-Mart’s entry in Mexico boosted the Mexican soaps, detergents, and surfactants
industry
119
Technological transfers through the diaspora and return migrants:
Some examples
125
Principal market failures impeding technological progress in developing
countries
143
Government sponsored innovation: Brazilian biofuels
144
A successful government program of technological development and innovation
financing in the Republic of Korea
145
Technology in 2020152

ForewordE

ACH YEAR, Global Economic Prospects

explores critical “here and now” economic developments that are relevant tolow- and middle-income countries. Past editions have examined the economic implications of international and regional trade liberalization, and migration and remittances. Last
year’s report looked at the recent accelerationin growth among developing countries and its
sustainability over the longer term.
This year we take a closer look at technology, a critical determinant of sustainablegrowth and poverty reduction. We do so bydirectly measuring the extent to which countries use technological inputs (including scientific technologies embodied in goods andservices and business processes) and produce
technological outputs. The report also examines trends in the major channels throughwhich technology is transmitted internationally, and in the country-specific factors that determine how well it is absorbed domestically.
Encouragingly, this Global Economic
Prospects finds that, since the early 1990s,
technological progress in both low- andmiddle-income countries has increased more
rapidly than in high-income countries. As a result, the level of technology used in developing
countries is catching up with high-income
countries. However, the technology gap between them remains wide. Globalization has
underpinned much of the recent progress by
exposing developing countries to foreign technology through imports of high-tech consumption, intermediate and capital goods. Countries

have also benefited from rising levels of foreign
direct investment that often brings with it
knowledge of important process technologies
and foreign markets. Finally, highly skilled international diasporas are exposing developing
countries to technology, both through thetrade and marketing contacts that they provide
to their countrymen and through the return offormer émigrés.
Unfortunately, progress in improving thecapacity of developing countries to absorb
and make use of those technologies throughout their economies has been much weaker.
Whether technological progress in developing
countries will continue to outpace highincome countries will depend on the improvements in this regard. The main impediments tofurther progress is not access to technologies,
but the weakness of domestic skills and competencies, which prevents many developing
countries from exploiting these technologies,
and rigidities in the regulatory environmentthat prevent innovative firms from being created and expanding. The diffusion of technologies within countries is often slow, whichmeans that although some firms may havetechnologically sophisticated operations, most
do not. Moreover, most of the population andmost firms operate in a low-tech environment.
As a result, despite having technologicallysophisticated cities and world-class firms, theeconomy-wide level of technological achievement in countries like China and India is notvery different from that in other countries atsimilar levels of development.

xiF O R E W O R DThis report suggests a number of policy directions to bolster technology diffusion andabsorption within developing countries. First,
developing countries should safeguard theprinciple of openness and actively strengthenskills in the domestic population to ensurethat they are able to take advantage of future
opportunities. Second, to assist diffusion
throughout the economy, policy needs to reinforce technological absorptive capacity at the
subnational and regional levels and tostrengthen dissemination channels withincountries, including the outreach, testing,marketing, and dissemination activities of applied R&D agencies. Third, authorities should
ensure that publicly supplied technologicalservices and technology-enabling infrastructure are widely available, whether they are delivered directly by the state or by private firms.
Fourth, in low-income countries and in thosexii

middle-income countries with uneven accessto quality secondary and tertiary schooling,
efforts should concentrate on raising the quality and quantity of schooling.
Finally, governments may need to intervene
directly to encourage the rapid diffusion oftechnology and a domestic culture of “new-tothe-market” innovation. However, caution isrequired. Although direct interventions havesometimes been associated with some important technology successes, in many instances
they have not. Policies that have succeeded
have tended to make subsidies conditional on
performance and put in place high-quality andindependent-of-industry oversight systems.
Alan Gelb
Acting Senior Vice President andChief Economist
The World Bank

AcknowledgmentsT

HIS REPORT WAS produced by staff from the World Bank’s Development Prospects Group.
Andrew Burns was the lead author and manager of the report. The principal authorsof chapter 1 were Hans Timmer and Elliot (Mick) Riordan. Chapter 2 was written by
Andrew Burns and William Shaw, with written contributions from Antonio David, Yvan
Decreux, and Annette De Kleine. Chapter 3 was written by Andrew Burns and William Shaw
with written contributions from Dilek Aykut, Antonio David, Yvan Decreux, Annette De Kleine,Mariem Malouche, Sanket Mohapatra, and Olga Sulla. Both Chapters 2 and 3 benefitted fromthe expert research assistance of Taras Chernetsky, Shuo Tan, and Teng Jiang.
Several people contributed substantively to chapter 1. The Global Trends Team, under theleadership of Hans Timmer, was responsible for the projections, with written contributions fromJohn Baffes, Paul Brenton, Maurizio Bussolo, Betty Dow, Teng Jiang, Annette De Kleine, Donald
Mitchell, Denis Medvedev, Gauresh Rajadhyaksha, Elliot (Mick) Riordan, Cristina Savescu,
Shane Streifel, and Dominique van der Mensbrugghe. The poverty numbers originated with
Shaohua Chen from the Development Research Group.
The accompanying online publication, Prospects for the Global Economy (PGE), was produced by a team led by Cristina Savescu and including Sarah Crow, Teng Jiang, Shunalini Sarkar,
and Jennifer Vito, with technical support from Gauresh Rajadhyaksha.
Martha Grotton edited the report, Nigar Farhad Aliyeva and Michael Paul managed the publication process, and Merrell Tuck managed the dissemination activities. Roula Yazigi provided
invaluable assistance with the design of some figures. Book production was coordinated by Mary
Fisk from the World Bank Office of the Publisher.
The report was produced under the guidance of Uri Dadush, François Bourguignon, and Alan
Gelb. Several reviewers offered extensive advice and comments throughout the conceptualization
and writing stages. These included Jean-François Arvis, Kevin Barnes, Vandana Chandra, Prof.
Carl Dahlman, Mark Dutz, Alan Gelb, Mary Hallward-Dreimeier, Daniel Lederman, Jeffrey
Lewis, William Maloney, Claudia Paz Sepulveda, and Alfred Watkins.

xiii

Abbreviations

BACI

Banque Analytique de Commerce International (International Trade
Analytical Database)

CAGR

compound annual growth rate

CAT scancomputerized axial tomography scan

CEPII

Centre d’Etudes Prospectives et d’Informations Internationales (Institutefor Research on the International Economy)

CIS

Commonwealth of Independent States

DAX

Deutsche Aktien Exchange

DJIA

Dow Jones Industrial Average

DPTdiphtheria, pertussis, and tetanus

DSL

digital subscriber ink

EAFelectric arc furnace

EAP

East Asia and the Pacific

ECA

Europe and Central Asia

EMBIG

Emerging Market Bond Index-G

EPO

European Patent OfficeEU

European Union

FDI

foreign direct investment

GDPgross domestic product

GNI

gross national income

HIV/AIDS

human immunodeficiency virus/acquired immune deficiency syndrome

ICB

International Crisis Behavior

IEA

International Energy Agency

IMF

International Monetary Fund

ISOInternational Organization for Standardization

LAC

Latin America and the Caribbean

LME

London Mercantile Exchange

MENA

Middle East and North Africaxv

A B B R E V I A T I O N S

xvi

MSCI

Morgan-Stanley Composite Index

NASDAQ

National Association of Securities Dealers Automated Quotations

OECD

Organisation for Economic Co-operation and Development

OHF

open hearth furnace

OPEC

Organization of the Petroleum Exporting Countries

PC

personal computer

PPP

purchasing power parity

R&D

research and development

SAR

South Asia region

SMEs

small and medium enterprises

SSA

Sub-Saharan Africa

TFP

total factor productivity

TOPIX

Tokyo Stock Price Index

UN Comtrade

United Nations Comtrade database

UNCTAD

United Nations Conference on Trade and Development

UNDP

United Nations Development Programme

UNESCO

United Nations Educational, Scientific, and Cultural Organization

UNIDO

United Nations Industrial Development Organization

USPTO

U.S. Patent and Trademark Office

WTO

World Trade Organization

Overview

This edition of Global Economic Prospects isbeing released during a period of increased uncertainty following four years of record
growth in developing countries. In addition to
examining economic prospects over the nearand longer term, it takes an in-depth look at
the current level of and recent trends in technological achievement and the main factorsthat determine the extent to which developing
countries succeed in implementing foreigntechnologies.
Notwithstanding the financial turmoil
provoked by a reassessment of risks in the
U.S. mortgage market, and despite large losses
in some financial markets, exposure to assetbacked securities appears to be broadly based.
Losses so far have been manageable, althoughcredit conditions have tightened. For developing economies, sovereign risk premiums haveincreased but remain low by historical standards. Equity values, exchange rates, andcommodity prices have become more volatile,and the vulnerability of countries with large
current account deficits or pegged exchange
rates has become more visible.
Against this background, global growthslowed modestly in 2007, coming in at 3.6 percent after a strong 3.9 percent in 2006.
Most of the slowdown was attributable toweaker growth in high-income countries.
Growth in developing economies was a robust
7.4 percent, broadly unchanged from 2006
(figure 1). This strong performance in thedeveloping countries has offset somewhat theslowdown in U.S. domestic demand thatstarted with the unwinding of the housing
bubble early in 2006. During 2007, developing

countries accounted for more than half thegrowth in world imports, contributing—alongwith the depreciation of the dollar—to strong
net exports for the United States and furthering the reduction in global imbalances.
Global growth in 2008 should moderate to
3.3 percent, as the robust expansion in developing countries partly compensates forweaker results in high-income countries.
World output should pick up in 2009, expanding by 3.6 percent, as the U.S. economy
regains momentum.
Several serious downside risks cast ashadow over this soft landing for the global
economy. External demand for the products ofdeveloping countries could weaken much
more sharply and commodity prices could decline if the faltering U.S. housing market or
further financial turmoil were to push theUnited States into a recession. Alternatively,
monetary authorities might overreact to thecurrent climate of uncertainty and overstimulate the economy. This would be particularly
dangerous for developing countries if the bulkof the resulting liquidity were to move into
rapidly growing developing regions, provoking the same kind of overinvestment conditions that arose in the U.S. housing market.
Prospects for the U.S. dollar represent anadditional risk factor. A recession in the UnitedStates or an excessive easing of U.S. monetary
policy could contribute to further sharp declines
in the dollar. A weaker dollar would benefit
developing countries with dollar debt, but
impose losses on those that hold dollardenominated assets. It would hurt the competitiveness of firms exporting to the United States

1

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1 Robust growth amongdeveloping countries should cushion thedeveloped country slowdown
Real GDP, annual percent change

Forecast

8

Developing
countries

6

4

2

High-income
countries

09

08

20

20

07

06

20

20

05
20

04

03

20

20

02

01

20

20

20

00

0

Source: World Bank.

(and those producing close substitutes for U.S.
imports), while benefiting countrieswithcurrencies pegged to the dollar—at least temporarily.
However, the main impact of a precipitous decline of the dollar would likely derive from theincreased uncertainty and financial-market
volatility it would provoke, which would increase trading costs, and spreads on developingcountry debt—resulting in weaker export andinvestment growth throughout the global
economy.
Even should such risks not materialize,
several developing countries may be quite
vulnerable to sudden adjustments in financial
markets. Most exposed are those countries
that combine large current account deficits
with pegged exchange rates and with increasing domestic inflation. Also at risk are countries whose domestic banking sectors havebalance sheets characterized by large currency
mismatches.

Technological achievement anddiffusion in developing
countries

The special topic of this edition of Global
Economic Prospects is technology and its
diffusion within the developing world. Much2of the economic and social progress of the pastfew centuries has been due to technology.
Technology has been central to both economic
growth and many elements of social welfare
that are only partly captured by standard measures of gross domestic product (GDP), including health, education, and gender equality. As
measured by total factor productivity, it explains much of the differences in both the level
and rate of growth of incomes across countries(Easterly and Levine 2001; Hall and Jones
1999; King and Levine 1994). And, looking
forward, it is expected to play a central role inmeeting the environmental and climate-change
challenges of the remainder of this century.
The private sector and the efficient functioning of markets are key to technologicalprogress. At the same time, the efficient delivery of socially relevant technological goods andservices depends on the direct contribution ofnonmarket actors, including governments,
nongovernmental organizations, and international organizations. Of course, policy also
supports technological progress by facilitating
the smooth operation of markets, by ensuring
the acquisition of technological competencies
by the general population, and by providing thephysical infrastructure that is often a necessary
complement to technologically sophisticatedactivities. Active measures to promote technology diffusion and strengthen the linkages between firms and research and development(R&D) agencies are also vital.
In exploring technological achievement anddiffusion, this report adopts a broad definitionof technology and technological progress, onethat encompasses the techniques (including
the way the production process is organized)
by which goods and services are produced,
marketed, and made available to the public.
Understood in this way, technologicalprogress at the national level can occur
through scientific innovation and invention;
through the adoption and adaptation of preexisting, but new-to-the-market, technologies;
and through the spread of technologies acrossfirms, individuals, and the public sector within
the country.

O V E R V I E W

Figure 2 Scientific innovation and invention is almost exclusively a high-income activity
Index
0.25

0.20

0.15

0.10

0.05

0
High-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Source: World Bank.

The following discussion traces the structure of the overall report, which in chapter 2
explores the level of—and recent trends in—technological achievement, as well as theprocess by which technology diffuses between
and within countries. Chapter 3 concentrates
on the process by which countries absorb foreign technology, both the mechanisms throughwhich they are exposed to foreign technologies and the domestic factors that dictate how
successfully they absorb those technologies.
Although the chapter identifies a number ofimportant, policy-relevant trends, and it explores their policy implications, it leaves tofuture work a more normative analysis of thepolicies that developing countries should
follow to maximize the development benefitsof technological progress.

Policy needs to actively promotetechnological adoption and adaptation as
well as nurturing domestic innovative
capacity
A central finding of the report is that most developing countries lack the ability to generateinnovations at the technological frontier.
Although the number of patents and scientificjournal articles is strongly correlated with
GDP per capita for high-income countries,

almost none of this activity is being performed
in developing countries (figure 2). The lack ofadvanced technological competencies in thesecountries means that technological progress indeveloping countries occurs through the
adoption and adaptation of pre-existing but
new-to-the-market or new-to-the-firm technologies. Moreover, relatively thin domestic
technology sectors and much better economic
and scientific opportunities abroad mean thatmany nationals of developing countries perform cutting-edge research in high-income
countries. For example, 2.5 million of the21.6 million scientists and engineers working
in the United States were born in developing
countries (Kannankutty and Burelli 2007).

The level of technological achievement indeveloping countries has converged withthat of high-income countries over the
past 15 years
A sustained policy of increased openness to foreign trade and foreign direct investment (FDI),
plus increased investments in human capital,
have contributed to substantial improvements
in technological achievement in developing
countries over the past 15 years. And despite
rapid progress at the technological frontier,technological achievement in both low- and3

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2 0 0 8Figure 3 Technological achievement:
Converging, but the gap remains large
Rapid progress in developing countries…
Percent change in technological achievement, 2000s versus
1990s
180
150
120
90
60
30
0
High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries…fueled relative convergence…
Index, high-income countries ⫽ 100
120
100
80
60
40
20
0
High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries…but the gap remains large
Technological achievement index
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0
High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries

Source: World Bank.

4

middle-income countries has increased much
more rapidly than in high-income countries. As
a result, developing countries have closed
the relative gap with high-income countries.
However, the gap remains large (figure 3).
Moreover, the strong aggregate performance of
low-income countries reflects large improvements in technological achievement by some,but much more modest advances by the
majority. As a consequence, many are only
maintaining pace with, or even losing groundto, high-income countries.
In general, the level of technologicalachievement observed in a country is positively correlated with income levels. However,considerable variation is apparent within income groups. Among other things, this variation reflects the nature of the technology being
observed, the impact of the overall policy
framework on the ability of technologicallysophisticated firms to grow, and the extent towhich governments have given priority to andhad success in delivering services with a strong
technology component.
The penetration of older technologies, suchas fixed-line telephones, electrical power, transportation, and health care services—many ofwhich were originally provided by governments—is only weakly correlated with income.
The low-income countries with the highest
utilization rates of these older technologies
tend to have rates as high as those of the average lower-middle-income country (figure 4).
Similarly, the lower-middle-income and uppermiddle-income countries with the highest utilization rates tend to have rates that match theaverage rate of the next highest income group.
In part, this reflects the nature of thetechnologies in question, such as electrical
networks, road infrastructure, fixed-line
telephony, and sanitation networks. Manyof these technologies require an infrastructurethat is relatively expensive to create andmaintain, and which relies on large numbersof individuals with scarce technical skills. In
addition, the observed diffusion of older technologies today depends on the intensity and efficiency with which government services have

O V E R V I E W

Figure 4 The penetration of older and more recent technologies depends on morethan income
Penetration of older innovations (2000–03)
Index
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0
High-income countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income countries

Lower-middle-income
countries

Low-income countries

Penetration of newer innovations (2000–03)
Index
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
High-income countries

Upper-middle-income
countries

Source: World Bank.

been delivered in the past. Part of the strong
technological showing of the countries in theformer Soviet bloc is explained by the heavyemphasis that past governments placed on providing basic infrastructure and education to awide range of the population. Similarly, past
governance problems and civil strife help explain the relatively weak penetration of thesetechnologies in many Sub-Saharan Africancountries, whereas macroeconomic turmoil
and a relatively unequal distribution of incomes and skills in Latin America may havecontributed to weak outcomes in that region.

The penetration rates of newer technologies have risen relatively rapidly and are more
directly correlated with income than is the casefor older technologies. The infrastructure fornewer technologies such as mobile phones,
computers, and the Internet is generally lessexpensive to create and requires fewer (thoughmore skilled) workers to maintain. Moreover,in many countries, regulatory reform has
meant that the private sector now offers these
services in a competitive environment as compared with the state-owned, monopolistic environments of the past. As a result, supply of5G L O B A L

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2 0 0 8Figure 5 Technological achievement tends to level off at different income levels in
different regions
Technological achievement versus per capita income by region
Index
0.30
Europe and Central Asia
0.25
All countries

0.20
0.15
0.10
0.05

Latin America

0
0.05
0.10
0

5,000

10,00015,00020,00025,00030,00035,00040,000

Income per capita (PPP)
East Asia and the Pacific

Europe and Central Asia

High-income other countries

Latin America and the Caribbean

Middle East and North Africa

Middle East and North Africa

South Asia

Sub-Saharan Africa

High-income OECD countries

Source: World Bank.

these new technologies has been more responsive to market demand and less restrainedby the budget constraints of governments orstate-owned-enterprises. Furthermore, demand for these products has been boosted bylow end-user costs as a result of competitive
pricing strategies and because some of thesenewer technologies lend themselves more easily to sharing than do some older technologies.
Overall, although technological achievement tends to rise with incomes, this relationship is nonlinear and shows a tendency to level
off. Moreover, it is not uniform across regions.
Thus countries in Europe and Central Asia
tend to have somewhat higher levels ofachievement than would be expected on thebasis of income alone, but the overall relationship between technological achievement andincome in the region tracks relatively well thatof all countries (figure 5). In contrast, technological achievement in Latin America tends tobe lower than what would be expected given
incomes, and the overall relationship suggests

6

that other factors appear to be restraining
achievement even as incomes progress. These
results are consistent with the view that policy
choices over the long term (such as thosethat generated the uneven distribution of income and educational opportunities in Latin
America and the region’s history of weak links
between R&D communities and the businessworld) are important determinants of absorptive capacity and technological progress.

The level of technology in developing
countries reflects the pace at which
technology diffuses within countries
Although it can take time for a technology togain a foothold in developing countries, themore serious impediment to technologicalachievement is the speed with which technologies spread within these countries. On
average, the time it takes before official statistics in a developing country record significant
exploitation of a new technology has declined
from almost 100 years for innovations

O V E R V I E W

Figure 6 Most technologies fail topenetrate deeply into developing
economies

Figure 7 The urban–rural gap in telephone
access in India is huge

Percent60

120Percent of subscribers with phone service

5%
25%

100

50%

50
Cities
40

Rural
areas

80
30
60

20

40

10

20

06

07 a
20

05

20

04

20

03

20

02

20

01

00

99

20

1975–2000

20

1950–75

20

1900–50

19

1800s

19

98

0

0

Source: World Bank calculations using data from Comin and
Hobijn 2004.

Source: Telecommunications Regulatory Authority of India.

discovered in the 1800s to about 20 years
today.1 However, technological progress also
depends on how rapidly the technology
spreads within the country. Here the story isless encouraging. For technologies discovered
during 1950–75, only a quarter of the developing countries that have achieved at least a
5 percent penetration level have gone on toreach the 25 percent threshold, and all of these
are upper-middle-income countries (figure 6).
The story is somewhat better for newer
technologies. Not only have these technologies
spread more quickly between countries, butalso the share of countries that have achieved
the 25 percent threshold is higher, at 33 percent. Indeed, developing countries have now
reached the same average level of penetrationof mobile phones as was observed in highincome countries in 1995.
The unevenness of technological diffusion
across countries is often mirrored withincountries, especially large countries. Althoughtechnology spreads relatively rapidly among
elites living in major cities, it takes much
longer for it to find its way to the rest of the
population or from top-performing companies
to the average firm. Specific sectors in advanced urban centers in China and India, forexample, use world-class levels of technology,
but the incidence of these technologies elsewhere in the country, and in rural areas in particular, remains low (figure 7). Even within
sectors, technology may diffuse only slowly. In
Brazil and India, for example, the most sophisticated firms use technologies and achievelevels of productivity that rival world leaders,
but the vast majority of firms operate at levelsof productivity that are less than one-fifth
those of the top performers.

a  estimated.

A framework for understanding the
diffusion of technology within developing
countries
The bulk of technological progress in developing countries has been achieved through theabsorption and adaptation of preexisting andnew-to-the-market or new-to-the-firm technologies, rather than the invention of entirely
new technologies. Given the still wide technology gap, this is likely to remain the case forthe vast majority of developing countries.
A developing country’s ability to absorb
and adopt foreign technologies depends on
two main factors: the extent to which it is
exposed to foreign technologies (the pace at

7

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2 0 0 8Figure 8 Domestic absorptive capacity both conditions and attracts external flows

Technological absorptive
capacity

Transmission
channelsTechnological frontier

Trade

FDI

Diaspora
and other
networks

Governance and the business climate

Policies to- create competencies- build infrastructure- foster an innovationfriendly business climate

Basic technological literacy

Finance of innovative firms

Technologicalabsorption

Pro-active policies

Spillovereffects

Returns to
scale

Dynamic
effects
magnifytechnology
transfer

Domestic technological achievement
Source: World Bank.

which technologies diffuse across countries)
and its ability to absorb and adapt those technologies to which it is exposed (the pace atwhich technology diffuses within the country). Figure 8 presents a stylized description of
how a developing country absorbs technology.
As a first step, an economy is exposed tohigher-tech business processes, products, andservices through foreign trade; foreign direct
investment; and contacts with its diaspora andother communications channels, including
academia and international organizations (thelarge arrows at the top of the figure). The
larger these flows, the greater the exposure of
the economy to the global technologicalfrontier.
However, exposure to new ideas and techniques is not sufficient to ensure that thetechnology diffuses throughout the economy.
Successful absorption of foreign technology

8depends on the technological absorptive
capacity of the economy (represented by themultiple-ringed drum). Absorptive capacity
depends on the overall macroeconomic andgovernance environment, which influences
the willingness of entrepreneurs to take risks
on new and new-to-the-market technologies;
and the level of basic technological literacy
and advanced skills in the population, which
determines a country’s capacity to undertakethe research necessary to understand, implement, and adapt them. In addition, because
firms are the basic mechanism by which technology spreads within an economy’s private
sector, the extent to which financing for innovative firms is available—through the banking system, remittances, or government
support schemes—also influence the extent
to and speed with which technologies areabsorbed.

O V E R V I E W

Government policy also has a crucial roleto play. Governments are often the primarychannel through which certain technologies,
such as electricity, fixed-line telephones,
transportation infrastructure, and medical andeducational services, are delivered. Moreover,
government policy is largely responsible forcreating a business environment that facilitates easy firm entry and exit and that is not
hostile to the profits to be made from exploiting new technologies. Too often, rules and/or
specific features of the domestic market prevent firms from making money by exploiting a
new technology, and, as a result, the technology does not spread within the country. Policy
should also ensure that R&D and dissemination efforts give priority to creating and introducing products for which a market (domestic
or foreign) exists and to helping firms exploit
those opportunities.
The overall process is, of course, much
more complicated and much less mechanistic
than is depicted in Figure 8. Technologicalflows and technological absorptive capacity
influence each other. How well technology diffuses depends on various market imperfections, including increasing returns to scale andtechnological spillovers (the smaller light blue
rings toward the bottom of the figure). Herethe existence of a financial sector that intermediates between savers and innovators may
be necessary to overcome the initial cost ofsome new technologies. In particular, accessto finance may be essential if innovative firms
are to achieve the necessary scale to unleash apotential virtuous circle, so that the additional
income garnered by the successful exploitation of one new technology permits the acquisition of another, thus resulting in further
gains.

Increased openness to trade, FDI, anddiaspora contacts have boosted
technological diffusion
The dismantling of trade barriers in many developing countries over the past two decades
has dramatically increased developing countries’ exposure to foreign technologies. Their

imports of capital and intermediate goods(which permit the production of technologically sophisticated goods and services) now
represent between 6 and 14 percent of theirGDP, an increase of more than 80 percent
since 1994. The ratio of high-tech imports
to GDP more than doubled during the same
period. Partly as a result, developing-country
exports of high-tech goods have also increased, rising from 11 percent of total exports in the mid-1990s to 19 percent in
2002–04 (figure 9). In the case of lowermiddle-income countries, high-tech goods represent broadly the same 23 percent share in
total exports as in high-income countries (15percent if China is excluded).
The easing of restrictions on FDI also has
contributed to technology diffusion within developing countries. FDI is a major source ofprocess technology and learning by doing opportunities for individuals in developing countries. Over the past 15 years, FDI inflows todeveloping countries have almost doubled as apercentage of GDP. In addition, foreign firms
are making important contributions to thetechnological capacity of host countries, performing more than 40 percent of the total
R&D in some countries. At the same time, thecompetition, standards and knowledge of
foreign markets that foreign firms bring to
the domestic market can have important
spillover effects. Finally, many firms in developing countries have increased their access to
cutting-edge technology by purchasing technologically sophisticated firms domiciled in highincome countries.
In addition to dismantling barriers to foreign investment, some middle-income countries have encouraged greater FDI flows byimplementing stronger regimes governing intellectual property rights (evidence suggeststhat stronger intellectual property rights areassociated with a rise in knowledge flows toaffiliates and in inward FDI flows towardmiddle-income and large developing countries, but not in poor countries). A few countries have encouraged joint ventures rather
than FDI to maximize technology transfers to

9G L O B A L

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2 0 0 8Figure 9 Developing countries’ trade in technology goods has risen
Imports of high-tech goods

Exports of high-tech goods

Percent of GDP

Percent of merchandise exports

8

25
20

6

2002–04
1994–9615

4

2002–0410
1994–962

50

0
High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries

High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries

Source: World Bank.

local firms. However, this strategy seems towork only for countries with substantial market power. In particular, fear of losing control
over cutting-edge technologies sometimes
causes multinational firms forced into joint
ventures to reserve their best technologies forthe domestic market and transfer only older
less efficient ones.
Substantial technology transfers are also associated with international migration and thediasporas of developing countries. Not all ofthese are positive. Even though 93 percent of
university-educated individuals from developing countries return to or remain in their country of origin (Docquier and Marfouk 2004), thebrain drain is a serious problem for a number ofmostly small countries. However, the existenceof a well-educated diaspora (more highlyskilled individuals migrate than lower-skilledindividuals) constitutes an important technological resource for the home country—a brainbank, as it were. This is especially the case when
weak employment prospects in the home country reduce the economic benefits initiallyforgone by the individual’s departure.
For most countries, high-skilled outmigration remains at managable levels and thesetechnologically savvy diasporas contribute totechnological transfers by strengthening trade10

and investment linkages with more advanced
economies through networks that provide
access to technology and capital and through remittances. Remittances not only contribute todomestic entrepreneurship and investment, butalso, along with the introduction of mobile
phone services, have greatly expanded the provision of banking and other arm’s-length financial services within developing countries—
themselves a critical enabling process
technology. Finally, returning migrants canprovide important resources, such as entrepreneurship, technology, marketing knowledge,
and investment capital. The effect of a single returning émigré armed with skills acquired in adeveloped economy can have (and has had)large economic and technological effects on the
country of origin.

Better macroeconomic and educational
policies have improved absorptive
capacity in developing countries...
Although increases in the flows of the principal international transmitters of technology
have been marked, improvement in the factorsthat determine the capacity of developing
countries to absorb and effectively use thattechnology has been much more gradual. On
the positive side, most developing countries

O V E R V I E W

Figure 10 Macroeconomic stability has improved since the early 1990s
Median inflation rateReal-effective exchange rate volatilitya

Percent

Percent

25

8

20
6
1990–9415
410

2002–06

1990–94
2002–062

5

0

0
High-income Upper-middle- Lower-middle- Low-income
countries
incomeincomecountries
countries
countries

High-income Upper-middle- Lower-middle- Low-income
incomeincomecountries
countries
countries
countries

Source: World Bank.
a  average absolute value of the monthly change in the real-effective exchange rate.

have improved their investment climates.
Their macroeconomic and political environments have become more stable over the past
15 years. The number of international conflicts has fallen by more than 50 percent sincethe 1990s, median inflation has dropped fromabout 20 percent in the early 1990s to lessthan 5 percent, and exchange rate volatility
has fallen by more than 50 percent in every developing region (figure 10). All these changes
reduce risk and increase the likelihood that entrepreneurs will take a chance and introduce a
new technology within a country. These samechanges have contributed to improved per
capita GDP and a significant decline in thenumber of people living in absolute poverty,
which has eased the constraints on the abilityof poor countries to generate resources forinvestment, and has increased the willingnessof firms and individuals to take risks.
Improvements in the quality of humancapital in most developing countries have increased the countries’ capacity to adopt andadapt technologies. Poor health is receding asa factor that impedes technological progress.
Life expectancy in middle-income countries

has reached 70 years and continues to rise. In
low-income countries outside of Sub-SaharanAfrica, life expectancy is up from 59 years
in 1990 to 64 years in 2005 (in Sub-SaharanAfrica, extremely low incomes and the
HIV/AIDS epidemic have led to a drop inlife expectancy since 1990). The labor force
in most developing countries has also become
better educated. Adult literacy rates have increased in every developing region over the
past 15 years (figure 11). The share of children graduating from primary school has also
increased in all regions except East Asia andthe Pacific (where it stood at 98 percent in2005). Meanwhile, secondary school and college enrollment rates are up across the board.
Increased school enrollment has raised youth
literacy rates to close to 100 percent in all
the predominantly middle-income regions. According to official statistics, almost 75 percent
of 15- to 24-year-olds in Sub-Saharan Africa
can read and write. That rate compares favorably with an adult literacy rate of 60 percent
and suggests that over time, the technologicalliteracy of the population will rise. Althoughpolicies to promote literacy and extend school11

G L O B A L

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2 0 0 8Figure 11 Literacy rates have increased
in all regions
Percent of adult population
100
2005
80

1990

60
40
20

an

d

th

e

Ea

s
Pa t As
ci ia
fic
E
C uro
e
p
La ntra e al A nd
tin
si
a
th Am
e er
C ic
ar a
i
b a
M
id bea nd
dl
n
e
N E
or as
th t
Af an
ric d
So a
ut
h
As
ia
Su
bSa
h
Af araric na0

Source: World Bank.

attendance are critical, in too many cases, thequality of the education delivered in many developing countries remains low. Large proportions of students officially classified as literate
fail to pass international standardized tests ofliteracy and numeracy.
Technological progress requires additional
improvements in the quality of the labor force
beyond strengthening educational systems.
Training can make an important contribution
to both the productivity of private firms and theefficiency of public services. For example, thedissemination of the simple skills required tobuild rainwater collection systems can improveaccess to clean drinking water and to reduce theincidence of disease. And investing in the domestic skills required to support high-skill andhigh-value-added industries can help maximize
the technology spillovers from FDI.

...but improvements in the businessclimate and governance lags
In contrast to improvements in the quality ofhuman capital, business climate and governance indicators have shown little improvement, on average, over the past decade.
Governance in several countries has
improved, notably in Central Europe and theBaltic countries, proving that motivated12

political leadership can make a difference.
But, in many other countries, the quality of
governance has declined or remained stable.
Progress in the dismantling of regulatory
barriers that impede technology diffusion has
also been slow. Restrictions on labor mobility
that constrain firms’ ability to reallocate
workers within the firm can be important barriers to the adoption of new technologies, andrestrictions on firm entry and exit tend to prop
up inefficient firms and limit the expansion
and creation of innovative ones. Overall, thetime and cost involved in starting a business,the efficiency of contract enforcement, thetime required to resolve insolvencies, the average amount recovered, and the degree of corruption in developing countries generates anoverall investment climate that is much lessconducive to innovation than that observed in
the industrial countries (figure 12).
Along with eliminating unnecessary
requirements, technological progress often
requires the strengthening of regulatory initiatives. For example, improvements in theeffectiveness of public-sector institutions havecontributed to more efficient logistics services,a key determinant of trade competitiveness.
Strengthening contract enforcement, the efficiency of court operations, the security ofproperty rights (including the reliability andtimely update of property registries), and theeffective regulation of financial markets canbe critical to ensuring an adequate return toinvestments in technology. Governments also
can play a key role in boosting technologicalprogress through the definition and promotion of product standards, and in helping
firms comply with them.
Despite the limited amount of at-thefrontier scientific innovation performed in developing countries, technological progress
depends on R&D and especially technology
dissemination activities. In most developing
countries and sectors, R&D should focus on
the adoption and adaptation of preexisting
technologies, not on efforts to expand theglobal technological frontier. For low-income
countries, policy should focus on strengthening

O V E R V I E W

Figure 12 Developing regions have much poorer governance than do OECD countries
OECD
Caribbean
Europe and the Baltics
East Asia
Developing countries average
Latin America
Middle East and North Africa
South Asia
Sub-Saharan Africa
Former Soviet Union

0

10

20

30

40

50

60

70

80

90

100

Regional averages of six governance indicators: percent share of average OECD percentile rank
Source: Kaufman, Kraay, and Mastruzzi 2007.
Note: OECD  Organisation for Economic Co-operation and Development.

the infrastructure necessary for the successful
diffusion and implementation of technologies,
on facilitating the diffusion of already existing
technologies, and on developing domestic
competencies. More technologically advanced
middle-income countries should emphasize
the same points but should strengthen their
R&D and technical competencies in order toincreasingly compete at the global technological frontier. In both low- and middle-income
countries, policy should place special emphasis on incentives and on maintaining strong
ties to private-sector firms.

Some policy directionsT

his review of the level of and trends intechnological achievement in developing
countries, of the major transmitters of technological knowledge, and of the determinantsof countries’ ability to absorb them suggests a
number of empirical conclusions (box 1). This
report does not offer a comprehensive explanation of why technological progress occurs,
nor does it include an in-depth analysis of
the policies that governments can adopt toincrease the rate of technological progress.
Nevertheless, the preceding analysis makes
clear that some combination of openness
to foreign technology, strong domestic

technological competencies, a motivated public
sector, and a well-financed private sector are
key ingredients for success. In addition, several
general policy directions suggest themselves.
First, much of the technological progress indeveloping countries over the past 15 years
has been associated with the increase in openness that occurred during the same period.
This openness has increased developing countries’ exposure to foreign technologies, but
their capacity to absorb them has improved
much less. To the extent that technologicalabsorptive capacity limits the level of technological achievement that an economy canreach (as suggested by the tendency for technological achievement in Latin America tolevel off), the relatively weak improvement inabsorptive capacity may result in a futureslowing of the rate of technological progress insome countries unless they take significant
steps to raise the quality of domestic humancapital, improve the regulatory environment,
and increase the efficiency with which they
deliver government services. This risk may bemost marked for those countries such as Indonesia and Mexico that have taken advantage of globalization in a relatively passive
manner, exploiting their low-wage comparative advantage without taking strong steps toimprove domestic competencies.

13

G L O B A L

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Box 1

F

P R O S P E C T S

2 0 0 8

Summary of empirical results

irst, on most fronts, developing countries haveprogressed markedly over the past 15 years. As aresult, technological achievement in all income
groups and in every region has advanced more
quickly than in high-income countries.
Second, the technological frontier has advanced as
high-income countries (and some developing countries) continue to innovate at a rapid rate. Thus thetechnology gap between developed and developing
countries remains large, particularly for low-income
countries.
Third, to a large extent the convergence in technological achievement reflects a substantial increasein the openness of developing countries to foreign

trade, foreign direct investment, and internationalmigration, which has dramatically increased both theexposure of developing countries to new technologies
and the opportunities to use foreign markets to
exploit increasing returns to scale.
Fourth, progress has also been made in increasing countries’ absorptive capacity through improved literacy, enhanced educational attainment,
and better macroeconomic stability. However,progress in improving the business climate andgovernance indicators has been much more mixed.
As a result, technological absorptive capacity has
advanced much less quickly than technologicalachievement.

Second, because of the complementarity oftechnologies and infrastructure, countries
where older technologies have yet to penetrateparticularly deeply may also face limits to theextent to which other technologies are able todiffuse. Therefore, the authorities should focus
on ensuring that publicly supplied technological services are available as widely, reliably, andeconomically as possible, whether they are delivered directly by the state or by private firms.
Third, a main remaining challenge is toensure that technologies diffuse throughout
the country, not just to major centers or topperforming firms. This does not mean trying
to create research centers everywhere, but it
does require reinforcing absorptive capacity at
the subnational level. Moreover, it means paying attention to dissemination channels withincountries, including domestic transportation
infrastructure, and the essential role to beplayed by the outreach, testing, marketing,and dissemination activities of applied R&D
agencies.
Fourth, notwithstanding the relatively
strong improvement in technological achievement by some low-income countries, manyothers have improved only marginally or not
at all. In particular, improvements in technological absorptive capacity have been limited.

14

Efforts to concentrate on increasing thequality of human capital must continue, notonly by ensuring that more students stay inschool longer, but also by raising standards,
which in too many cases are too low.
Fifth, given the importance of market failures (for example, increasing returns to scale,the potential for coordination failures, the difficulties in appropriating the full returns to innovation owing to imitators, and capital-market imperfections), governments may need tointervene directly to encourage the rapid
diffusion of technology and the growth of a vibrant domestic culture of technology adaptation and new-to-the-market innovation. Policies that have been tried include, among others,
support for industry-specific research, subsidies
for specific products, barriers to trade thatfavor technology-intensive activities, and directed credit programs. Such policies have been
associated with economic miracles, particularly
in several East Asian countries. However, they
have also been associated with significant failures, notably in some Latin American and SubSaharan African countries. In those cases
where direct interventions have been successful, they have tended to make support conditional on performance and have maintained
high-quality government monitoring programs

O V E R V I E W

that have avoided being “captured” by industrial interests.

Note
1. Significant is defined here to be a penetration
rate that is at least 5 percent of the average level incountries with the highest rate of exploitation.

References
Comin, Diego, and Bart Hobijn. 2004. “Cross-Country Technology Adoption: Making the Theories
Face the Facts.” Journal of Monetary Economics
51(1): 39–83.
Docquier, Frederic, and Abdeslam Marfouk. 2004.
“Measuring the International Mobility of Skilled
Workers (1990–2000).” Policy Research Working
Paper Series 3381. World Bank, Washington, DC.
Easterly, William, and Ross Levine. 2001. “It’s Not
Factor Accumulation: Stylized Facts and Growth

Models.” The World Bank Economic Review
15(2):177–219.
Hall, Robert E., and Charles I. Jones. 1999. “Why Do
Some Countries Produce So Much More Output
per Worker Than Others?” The Quarterly Journal of Economics 114(1):83–116.
Kannankutty, Nirmala, and Joan Burrelli. 2007. “Why
Did They Come to the United States? A Profile of
Immigrant Scientists and Engineers.” Info Brief.
National Science Foundation: Directorate forSocial Behavioural and Economic Sciences.
Arlington, VA. June.
Kaufmann, Daniel, Aart Kray, and Massimo Mastruzzi. 2007. “Governance Matters: GovernanceIndicators for 1996–2006.” World Bank Policy
Research Working Paper No. 4280, World Bank,
Washington, DC.
King, Robert G., and Ross Levine. 1994. “Capital
Fundamentalism, Economic Development, andEconomic Growth.” Carnegie-Rochester Conference Series on Public Policy 40:259–92.

15

1
Prospects for Developing Countries

Following the sudden and sharp drop in
market valuations of U.S. mortgage-backed
securities in mid-2007, global markets haveentered a phase of heightened uncertainty.
This has been reflected in increased volatility
in equity markets, commodity prices, andexchange rates.
Notwithstanding the increased volatility,
the impact on developing countries has been
relatively minor to date. Risk premiums have
escalated, but remain relatively low in a historic context, and capital inflows remainplentiful, although bank lending has dropped
off. Aggregate growth in developing countries continues to be strong, reflecting
improved fundamentals in many countries,
sizable revenues from commodity exports,
and continued access to international financeat moderately higher cost. Their strong grossdomestic product (GDP) growth is partially
offsetting weaker U.S. domestic demand,
which is now expected to remain subdued
well into 2008.
Despite the resilience demonstrated by the
global economy, risks exist and increased
volatility has made several developing countries more vulnerable to financial disturbance,
especially those with large current accountdeficits, pegged exchange rates, or domesticbanking sectors that have borrowed heavily
in international markets.

Growth outlookOn average, developing countries havebeen affected only modestly by the slowdown in the United States during 2007, which
is now anticipated to continue into 2008

before picking up in 2009. GDP growthamong low- and middle-income economies
eased just 0.1 percentage point in 2007 fromthe strong 7.5 percent recorded in 2006.
Despite weaker U.S. import growth, continued
robust spending by oil-exporting countries andvibrant expansions in China and India are projected to keep developing-country growthstrong at 7 percent or more in 2008 and 2009.
Over the longer term, the resilience of developing countries’ improved fundamentals
will be tested. More prudent macroeconomic
management and technological progress (seechapters 2 and 3) have contributed to an increase in total factor productivity (TFP) andreal income growth over the past 15 years.
Over the next 10 years, these same factors are
expected to enable developing countries toachieve annual per capita income gains of
3.9 percent, and perhaps as much as 3.4 percent in the following decade. These projections imply per capita income growth that ismore than twice as fast as that in high-income
countries. Growth of such magnitude would
reduce the number of people living on lessthan a dollar a day from 1.2 billion in 1990
and 970 million in 2004 to 624 million by
2015. Such aggregate outcomes are not guaranteed, however, and performance across individual countries is likely to be diverse.
Inflation has remained remarkably muted
worldwide despite four years of strong
growth. Many developing countries have contained domestic inflation following a tightening of monetary and fiscal policies. The sharp
increases in commodity prices mainly had
one-time direct impacts on inflation, with only17

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8limited second-round effects. Moreover, the increasing integration of developing countries
into global markets and their rising shares inworld trade have helped dampen inflation
globally through heightened international
competition. In some countries, however, inflation may become an increasing challenge. In
several oil-exporting countries, spending ofvast export revenues is heating up domestic
markets. In China, efforts to slow growth may
not succeed in quickly reversing a recent acceleration of inflation, and demand pressuresremain pronounced in several countries in
Europe and Central Asia and Latin America
and the Caribbean. In Sub-Saharan Africa, thecombination of strong domestic demand andrising international grain prices could pushalready mounting inflation still higher, particularly in import-dependent coastal states.
Continued high and increasing oil prices
have stimulated the use of food crops for biofuels and raised fertilizer costs. Prices of maize
and vegetable oils increased by 33 and 50 percent, respectively, during 2007. Wheat production fell short of consumption partly because
it has been displaced by maize and partly
because of adverse weather conditions. As aresult, stocks have reached historic lows, andwheat prices have jumped 30 percent. From amacroeconomic perspective, these price increases have hit low-income countries thehardest, resulting in a terms-of-trade loss equal
to 0.5 percent of their GDP, with the poorest
urban and nonfarming rural segments of the
population bearing the greatest burden. While
experience shows that direct and targeted income support, rather than price controls, is themost effective way to help these vulnerable
consumers, the institutional requirements forsocial safety nets can be daunting.

Risks

T

he financial turbulence that emerged in mid2007 has demonstrated how sudden andpervasive adjustments in financial markets canbe. Because the dynamics of financial behavior
are inherently difficult to control, and because18

new securitized instruments have made identifying the location or magnitude of underlying risk
difficult, the possibility of a breakdown in a key
financial institution or system cannot be fully
discounted. Moreover, the likelihood of financial problems would increase rapidly if homeprices in the United States were to fall precipitously, an event that could push the U.S. economy into recession. Such circumstances, and thelikely U.S. monetary policy reaction, would
reinforce the dollar’s slide, with a consequentdestabilizing effect on global markets.
To date, strong fundamentals in developing
countries have helped mitigate the slowdown in
the United States, but in the case of a major disruption, adverse effects in emerging markets areunlikely to be avoided, which at some point
would exacerbate the U.S. slowdown. Substantially tighter financial conditions could generatea credit crunch that would have consequences
for investment and growth in middle-income
countries. Low-income countries would also
suffer substantial repercussions resulting fromweaker global demand for commodities, pricedeclines, and terms-of-trade losses. Even without further turmoil in international financial
markets, several developing countries havebecome more vulnerable to financial pressure
as a result of heightened anxiety and increased
volatility in foreign exchange markets.
Another important risk is that the looseningof monetary policy in response to the U.S. subprime mortgage crisis could cause growth toovershoot. Commodity markets could tighten
further, inflationary pressures would mount,and financial imbalances would increase
rather than recede. Such a scenario could sow
the seeds of a much sharper slowdown in themedium term and illustrates the current challenge facing monetary authorities in both highincome and developing countries.

Financial markets: Needed
correction or major disruption?

T

he financial market turmoil of the second
half of 2007 resulted from the interactionof several factors. An extended period of

P R O S P E C T S

D E V E L O P I N GC O U N T R I E S

Figure 1.1 The perceived riskiness of highyield corporate bonds increased more thanthat of emerging market bonds
Basis points
600

High-yield spreads indeveloped markets

550
500
450
400
350
300
250
200
150

EMBIG spreads

20

ov
.1

8,

,2
.9
ct

N

O

Au

07

7

7

00

00

7
,2

30
g.

21
l.
Ju

,2

00

07
20

07
Ju

n.

11
,

20

07
M

ay

2,

20

07
3,

20
M

ar
.2

11
,
Fe

b.

n.

2,

20

07

100

Ja

abundant liquidity and low interest rates worldwide sparked a search for yield that induced
many investors to take on additional risk. Thiswas supported by robust global growth andfavorable financial conditions, fueling a fouryear expansion in the global credit cycle. Rapid
growth in the market for asset-backed securities
and structured financial products (collateralized debt obligations in particular) throughout
major financial centers facilitated both lending(by making the calibration and offloading ofrisk easier) and borrowing (by effectively increasing liquidity and the availability of credit).
Emerging market bond spreads declined torecord lows, and equity prices increased rapidly
in many developing countries during the firsthalf of 2007. However, the degree of risk was
especially underestimated in the lower credit
segments of the U.S. mortgage market (subprime and “alt-A” loans), and hence the valueof many asset-backed securities was grossly
overestimated.
Corrections to this overvaluation begansuddenly in late July, and rising default rates
in the U.S. subprime mortgage market spilledover into equity, currency, and bond markets
worldwide. Credit conditions for corporate
borrowers tightened significantly, while government bond yields declined sharply in what
is known as a “flight to quality.” Spreads on
noninvestment grade U.S. corporate securities
widened by 200 basis points in July and thefirst half of August, indicating that investors’
appetite for risk had diminished considerably(figure 1.1). In mid-August, the U.S. Federal
Reserve and the European Central Bank provided ample liquidity to the banking system tohelp stabilize financial conditions.
The sell-off in risky assets served to widen
emerging market bond spreads by about 100
basis points by mid-August, raising the cost ofcapital for corporate borrowers in both mature and emerging markets. As financial conditions tightened once more near the end of
the year, U.S. high-yield spreads jumped to
600 basis points by the end of November
and emerging market spreads retreated, thenincreased to 270 basis points, with the overall

F O R

Sources: Bloomberg, JPMorgan-Chase, and World Bank.
Note: EMBIG  Emerging Market Bond Index-G.

widening attributable to the current episodemoving to 170 points.
Even though the turmoil has affected
emerging markets, so far the financial fallout
has been limited, though nevertheless more serious than other, fairly short-lived episodes ofmarket turbulence and volatility that haveoccurred since 2005 (figure 1.2). Flight toFigure 1.2 Emerging market asset sell-off
more severe than during earlier periods ofmarket turbulenceSize of drawdown over peak to trough (percent)
0
10
20
30

Emerging
marketequities

40

Emerging market
bonds

50
60
Mar.–Apr.
2005

Oct.–Nov.
2005

May–June
2006

July–Oct.
2007

Sources: Bloomberg and World Bank.

19

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.3 Global equity markets fall, thenrecover led by emerging markets
Equity market index (January 1, 2007 ⫽ 100)
150

MSCI emerging
markets

140
130
DAX (Germany)
120
110
100
90

DJIA (U.S.)
TOPIX (Japan)

N

ov
.1

2,

8,

07

07

07
Se

p.
2

.1
Au
g

0,

4,

07

7
Ju
n

ay
M

.3

16

,0

,0

7

07
5,

r.
1
Ap

Fe
b.
1

Ja
n

.1

,0

7

80

Source: Thomson/Datastream.
Note: DJIA  Dow Jones Industrial Average; MSCI 
Morgan-Stanley Composite Index; TOPIX  Tokyo Stock
Price Index; DAX  Deutsche Aktien Exchange.

quality and the need to cover losses in the
subprime market provoked a sell-off acrossthe entire spectrum of high-yield assets in mature and emerging markets. Equity price declines in emerging market economies initiallyexceeded those in mature markets, but emerging markets rebounded sharply, outpacing
gains in mature markets (figure 1.3). The
Morgan-Stanley composite index of emerging-market stocks picked up close to 50 percent from the beginning of the year, well
above the developed markets, before both
retreated in tandem by late November. The
rebound in emerging market equities wasunderscored by a resumption of inflows toequity funds, which had experienced outflows
of some $5 billion during late July and earlyAugust. Until recently, corrections were global
in nature, and stock exchanges in East Asiaand the Pacific and Latin America and the
Caribbean were continuing to drive solid
recovery in emerging market equities.
Gross capital flows to developing countries
showed strong gains in 2007 before financial
uncertainties arose. Bond issuance, bank loan
commitments, and equity placements together
averaged $53 billion a month from January
through July, up from $41 billion during
2006, but a decline in August dropped flows
to $42 billion (table 1.1). The surge in flows
before August was concentrated in bond issuance and equity placements, and these categories initially experienced the steepest falloff
after the turmoil. By October, bond and equity flows had recovered fully or almost fully,
but a sharp falloff in bank lending emerged,
with commitments dropping $25 billion during the month. Viewed on the basis of only
moderate increases in sovereign spreads, thelack of bond issuance in August and September may have reflected decisions by governments in developing countries to postpone
new issuance because of limited financing
needs rather than an inability to access themarket. However, for corporate borrowers inemerging economies, which accounted for
80 percent of bond issuance during 2007,
financial conditions have deteriorated. The
decline in banking flows is a concern, possiblyreflecting a partial near-term withdrawal from

Table 1.1 Gross capital flows to developing countries, 2005–07(monthly averages, $ billions)
2007

Total
Bond issues
Bank loan commitments
Equity placements

2005

2006

January–July

AugustOctober

30
11
15
5

41
11
20
9

53
22
18
13

42
3
35
4

50
15
10
25

Source: Dealogic Loanware and Bondware.

20

P R O S P E C T S

C O U N T R I E S

Figure 1.4 A step-down in growth in 2008
Real GDP (percent change)

Forecast

8
Developing countries
6High-income
countries
4
World
2

9
20
0

07
20

05
20

20
03

01
20

19

99

0

97

fter four years of robust GDP and trade
growth, steadily increasing commodity
prices, low bond market spreads, graduallychanging interest rates, and relatively stableexchange rates, volatility in international markets has increased. Conditions in global financial markets have turned from exceptionallyfavorable to less stable and less predictable.
More than in recent years, reserves andother buffers will be needed to absorb unexpected shocks. Policy makers must prepare
both for the possibility that their economies
may slow sharply and for the possibility thatgrowth may continue to exceed potential.
Similarly, they must prepare for the possibilityof an abrupt depreciation of their currencies
as well as the possibility that continued capital inflows could push them up. Commodity
prices may spike, or they could give up part of
the gains realized this decade.
Despite such a volatile climate, aggregate
growth is likely to remain robust for the developing countries, mainly because of strong
domestic momentum in most of them. Indeed,
economic performance for many developing
economies was exceptionally robust during
the first half of 2007, much stronger than anticipated in Global Development Finance inearly 2007 (World Bank 2007a).
Table 1.2 and figure 1.4 summarize recent
developments and the base case outlook.
World growth eased from 3.9 percent in 2006
to 3.6 percent in 2007, with the slowdown led
by members of the Organisation for Economic
Co-operation and Development (OECD).
Their GDP dipped by 0.3 percentage points to
2.5 percent in the year. The downturn was
more marked in the United States, withgrowth slowing from 2.9 percent in 2006 to
2.2 percent in 2007. Much of the decline re-

19

A

95

Global growth

D E V E L O P I N G

flected the direct fallout of the weakening
housing market, with residential investment
falling rapidly, and credit conditions for both
firms and consumers tightening.
Among developing countries, growth remained firm at 7.4 percent in 2007, after an
equally strong 7.5 percent in 2006, underpinned by continued strength in East andSouth Asia. If China and India are excluded,
activity in low- and middle-income countries
slipped by 0.2 percentage points to 5.7 percent
in the year.
In 2008, global growth is expected to moderate further, as the effective cost of capital remains elevated for financial institutions, firms,
and households. Weak domestic demand is expected to keep U.S. GDP growth below 2 percent in 2008, while growth in Europe andJapan should continue to ease under the additional weight of appreciating currencies.
OECD import demand is projected to movefrom a solid 6.8 percent gain in 2007 to 5.4 percent during 2008, slowing export growth in developing countries by a point to 11 percent anddampening their output growth to 7.1 percent.
The OECD countries are anticipated to recover during the course of 2009, as returning
stability in financial markets helps revive consumer and business confidence and residential

19

emerging markets, as banks tighten credit
criteria and assume a more risk-averse postureas they replenish reserves after sharp losses insubprime securities.

F O R

Source: World Bank.

21

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8

Table 1.2 The global outlook in summary, 2005–09(percent change per annum, except where otherwise indicated)
Estimate

Global conditions
World trade volume
Consumer prices
Group of seven countries a,b
United States
Commodity prices (US$ terms)
Non-oil commodities
Oil price
US$ per barrel c
Percentage change
Manufactures unit export value dInterest rates$, 6-month (percent)€, 6-month (percent)Real GDP growth e
WorldWorld (PPP weights) f
High-income countries
OECD countries
Euro Area
Japan
United States
Non-OECD countries
Developing countries
East Asia and the Pacific
China
Indonesia
ThailandEurope and Central Asia
PolandRussian Federation
TurkeyLatin America and the Caribbean
Argentina
BrazilMexicoMiddle East and North Africa
AlgeriaEgypt, Arab Rep. of
Iran, Islamic Rep. ofSouth Asia
Bangladesh
India
Pakistan
Sub-Saharan Africa
Kenya
NigeriaSouth Africa
Memo items
Developing countries
Excluding transition countries
Excluding China and India

Forecast

2005

2006

2007

2008

2009

7.8

10.1

9.2

7.6

9.2

2.0
3.4

2.0
3.2

1.7
2.8

1.7
2.6

1.9
2.4

13.4

24.5

15.3

⫺0.7

⫺4.6

53.4
41.5
0.0

64.3
20.4
1.6

71.2
10.8
2.3

84.1
18.1
0.8

78.4
⫺6.8
0.8

3.7
2.2

5.2
3.2

5.3
4.3

4.8
4.0

5.0
4.3

3.4
4.8
2.6
2.4
1.5
1.9
3.1
5.8
6.8
9.1
10.4
5.7
4.5
6.1
3.6
6.4
7.4
4.6
9.2
2.9
2.8
4.3
5.1
4.4
4.3
8.7
6.0
9.2
7.7
5.8
5.8
6.6
5.0

3.9
5.3
2.9
2.8
2.8
2.2
2.9
5.6
7.5
9.7
11.1
5.5
5.0
6.9
6.1
6.7
6.1
5.6
8.5
3.7
4.8
5.0
1.8
6.8
4.6
8.8
6.6
9.4
6.9
5.7
6.1
5.6
5.4

3.6
5.2
2.6
2.5
2.7
2.0
2.2
5.1
7.4
10.0
11.3
6.3
4.3
6.7
6.5
7.5
5.1
5.1
7.8
4.8
2.9
4.9
3.4
7.1
5.0
8.4
6.5
9.0
6.4
6.1
6.3
5.9
5.0

3.3
4.9
2.2
2.1
2.1
1.8
1.9
4.8
7.1
9.7
10.8
6.3
4.6
6.1
5.7
6.5
5.4
4.5
5.7
4.5
3.2
5.4
4.0
7.0
5.0
7.9
5.5
8.4
6.5
6.4
5.3
7.4
5.1

3.6
5.1
2.6
2.4
2.4
2.1
2.3
5.0
7.0
9.6
10.5
6.5
5.2
5.7
5.1
6.0
5.7
4.3
4.7
4.5
3.6
5.3
3.8
6.8
4.7
8.1
6.5
8.5
6.7
5.8
5.1
6.1
5.3

6.9
5.2

7.5
5.9

7.5
5.7

7.2
5.3

7.1
5.2

Source: World Bank.
Note: OECD ⫽ Organisation for Economic Co-operation and Development; PPP ⫽ purchasing power parity.
The CPI figures in this table that were released on January 9, 2008, reflected typographic errors. Current figures were released on
January 11, 2008.
a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
b. In local currency, aggregated using 2000 GDP weights.
c. Simple average of Dubai, Brent, and West Texas Intermediate.
d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars.
e. GDP in 2000 constant dollars; 2000 prices and market exchange rates.
f. GDP measured at 2000 PPP weights.

22

P R O S P E C T S

investment bottoms out. On aggregate,
growth in developing countries is expected to
be robust in both 2008 and 2009, remaining
at or above 7 percent.

F O R

D E V E L O P I N G

Figure 1.6 Tighter credit and weak
housing yield slower U.S. growth
Real GDP growth at annual rates (percent)

Forecast

5

The high-income countries

Figure 1.5 Volatile patterns of growthamong OECD countries
Growth at seasonally adjusted annualized rates
6

Q2, 2007
Q1, 2007

4

Q3, 2007

202
United States

Japan

Euro Area

Source: National agencies and Eurostat.
Note: Q  quarter.

Germany

4
3
2
1

08
20
Q

1,

20
3,
Q

1,

20

07

07

06
Q

3,
Q

1,
Q

20

20

05
20

05
Q

3,

20
1,

06

0

Q

Among OECD countries, the first quarters of2007 appeared to be a prelude to morevolatile growth (figure 1.5). U.S. GDP weakened sharply in the first quarter before rebounding to 3.8 and 4.9 percent in the second
and third quarters on the strength of business
investment in the second quarter, surprisingly
strong consumer demand and stock-buildingin the third, and strong net exports in both.
But high-frequency data point to weaker consumption growth in the fourth quarter, andfor the year as a whole, 2.2 percent growth isexpected, 0.7 percentage points below 2006
results (figure 1.6).
In contrast, Japan and the Euro Area maintained a favorable pace of growth in the firstquarter, with business confidence breachingrecord highs, but developments in the second
quarter were disappointing. In Europe, a retrenchment in business capital outlays morethan halved GDP gains of the previous quarter, while in Japan, a slide in fixed investment
turned growth into a decline. Third quarter results for Europe provided an upside surprise,C O U N T R I E S

Source: World Bank.
Note: Q  quarter.

with growth returning to a favorable 2.9 percent. GDP gains were broadly based acrosscountries, while business investment, stocks,
and consumer spending in France andGermany revived to spur overall growth.
The Japanese economy rebounded modestly in the third quarter as well to register
growth of 1.5 percent after a 1.8 percent decline in the previous quarter based on much
improved net exports and a moderate boost tohousehold spending. For 2007 as a whole,
European growth is expected to register astrong 2.7 percent, eclipsing the United States
for the first time in more than a decade, andgrowth in Japan should register 2 percent.
GDP growth in the United States is
projected to weaken further in 2008, falling to
1.9 percent. During the year, continuing difficulties in the commercial paper market, thesource of working capital for most U.S. business, implies a boost in the effective cost of
short-term funds, despite a cumulative reduction of 100 basis points in Federal funds over
September through December, which carried
the rate to 4.25 percent. Recovery is anticipated for 2009, with growth registering

23

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 82.3 percent, grounded in a stabilization of financial markets and a revival of business andhousehold spending.
As a result of weaker domestic demand andstronger export performance (in part based ona substantially weaker dollar and continued
solid demand from emerging markets), theU.S. current account deficit is expected to decline from its high of 6.6 percent of GDP in2006 to around 5 percent by 2009. Inflation is
anticipated to moderate toward 2.5 percent,in step with slower growth, while householdsavings could move toward positive groundfor the first time in many years. Developmentsin the United States are expected to influence
conditions in Japan, both because of Japan’s
reliance on trade as a source of growth andbecause of the sensitivity of business investment to the costs of long-term capital. This isof particular note given Japan’s experience
with the yen carry trade.1 Because such trade
can potentially unwind rapidly, with local currency proceeds used to redeem yen, substantial appreciation of the currency could hamper
exports, production, and incomes. Growth inJapan is expected to slow to 1.8 percent in2008 before picking up to 2.1 percent by
2009.
Household spending in the Euro Area has
not yet fully recovered from the increase in theGerman value added tax of January 2007,
although unemployment in Europe eased to

7.3 percent in September 2007, the lowest
level since figures began to be compiled in
1993. Business investment continues to movein close step with export performance, which
deteriorated toward the end of the year, inpart because of the appreciation of the euro
and slowing U.S. demand. As exports soften
and business investment declines, GDP
growth is projected to slip to 2.1 percent in2008 before reviving to 2.4 percent in 2009.

The developing countries
The first half of 2007 was marked by anacceleration in industrial production acrossdeveloping regions, notably in East Asia
(20 percent, year over year) (figure 1.7 andtable 1.3).2 A pickup in China’s production,
together with momentum gains in Indonesia(7.3 percent) and Thailand (6.0 percent), resulted partly from a bottoming out of thehigh-tech slump in the second quarter of theyear. South Asia’s continued buoyant production gains are linked to double-digit growth
in India, which is tied in turn to strong domestic demand. Latin America and the
Caribbean achieved a 6.4 percent increase inindustrial production during the second quarter, at a seasonally adjusted annual rate, up
from 2.4 percent during the first. Within theregion, strong performance in Brazil (10 percent), Colombia (13 percent), and Mexico(5.5 percent) have offset weakening output

Figure 1.7 Robust growth in developing country industrial production
Industrial production (percent change, seasonally adjusted annualized rate)28
24

Developing
countries

20

OECD

16

World

12
8
4
0
Jan.
2005

May
2005

Source: World Bank.

24

Sep.
2005

Jan.
2006

May
2006

Sep.
2006

Jan.
2007

May
2007

Sep.
2007

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E STable 1.3 Recent economic indicators, developing regions, 2005–07
Growth yearon-year
Indicator and region

Seasonally adjusted
annualized growth

Growth yearon-year

2005

2006

Q1, 2007

Q2, 2007

H1, 07

LatestGDP growth (percent) a
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

6.8
9.1
6.1
4.6
4.3
8.7
5.8

7.5
9.7
6.9
5.6
5.0
8.8
5.7

8.5
10.3
3.8
7.5
4.8
15.6
4.9

7.0
10.5
4.3
5.0
4.5
7.7
4.0

7.5
9.8
6.3
5.9
4.7
9.2
5.0

—
10.2
—
5.7
—
—
—

Industrial production growth (percent)Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

9.3
13.8
1.4
3.9
4.4
9.1
5.0

10.1
14.3
4.5
4.3
0.3
11.0
5.3

14.6
19.6
5.6
2.4
1.9
15.6
—

18.5
28.9
0.0
6.4
1.5
11.3
—

14.0
19.6
3.7
3.8
0.5
13.0
—

11.4
16.4
5.0
4.6
1.2
8.0
—

Consumer prices (year over year growth rates in percent)Developing countries
6.4
East Asia and the Pacific
7.2
Europe and Central Asia
4.4
Latin America and the Caribbean
5.4
Middle East and North Africa
2.8South Asia
7.0
Sub-Saharan Africa
3.4

6.2
4.9
5.6
5.6
1.8
7.6
4.6

5.7
4.3
4.5
5.8
4.9
7.1
6.3

6.1
3.4
4.8
5.0
4.2
6.4
7.1

5.9
3.8
4.7
5.4
4.5
6.7
6.7

6.1
3.1
7.1
4.7
5.0
6.9
7.1

Spreads on debt (basis points)
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

198
180
137
213
338
199
266

176
138
147
183
418
166
283

162
129
134
167
434
171
270

169
134
141
175
426
169
277

243
207
192
259
548
482
321

306
265
185
364
324
199
277

Source: National statistical agencies through Thomson/Datastream; spreads: JPMorgan.
Note: Q  quarter.
Quarterly 2007 growth for developing regions based on data available for key economies.
EAP: China, Indonesia, Malaysia, Philippines, Thailand. SAR: India. ECA: Hungary, Poland, Russian Federation, Turkey.
LAC: Argentina, Brazil, Chile, Colombia, Mexico. MENA: Arab Rep. of Egypt. SSA: Nigeria, South Africa.
—  not available; H1  1st half.
a. Growth rates at annual or annualized rates unless otherwise indicated.

gains in Argentina and the República
Boliviarana de Venezuela.
Robust production data are also reflected
in GDP results. Led by the large economies,
notably China, India, and the Russian Federation, output for the developing countries
averaged 7.5 percent (year-on-year) in the firsthalf of 2007, matching the record pace of2006 (table 1.3 and figure 1.8). Because
developing economies have been less affectedby the fallout from the subprime crisis thanhigh-income economies, the anticipated slow-

down of growth in 2008 should be less pronounced. Gains among developing countries
are projected to slow from 7.4 percent in 2007
to 7.1 percent in 2008, with easing across all
regions except the Middle East and North
Africa and Sub-Saharan Africa, in part becauseof higher oil revenues. For the remaining countries, slower export market growth, only gradual improvement in financing conditions, anddeclines in the terms of trade account for mostof the slowdown. Though a further easing ofgrowth to 7 percent is anticipated for 2009,25

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.8 Developing growth retains
strong momentum during the first halfof 2007...
GDP growth (percent)
10

2006

8

2005 H1, 2007
6

4

h
As
ia
ev
e
co lo
un pinE tri gC uro esen p
tra e aanlnd La As dth tin iae
Su C Ab- ar me
Sa ibb ric
ha ea a
ra n
n
Af
M
ric
id
dl
a
e
N E
or as
th t a
Af nd
ric
a
ld

Al

So

Ea

ut

st

As

ia

2

Sources: World Bank and National agencies.
Note: H1  1st half.

Figure 1.9 ...with growth moderating
through 2009
Real GDP (percent change)
10
2008
8
2007 2009
6

4

As
ia
ev
e
co lo
un pi
n
E tri gC uro esen p
tra e aanld La As nd
th tin iae
Su C Amb- ari e
Sa bb ric
ha ea a
ra n
n
Af
M
ric
id
a
dl
e
N E
or as
th t
Af an
ric d
a
Al

ld

ut
h
So

Ea

st

As

ia

2

Source: World Bank.

global conditions should favor a smootherstep-down in activity for those countries andregions more dependent on trade, notably East
Asia and Latin America (figure 1.9).

Developing region perspectives
GDP in East Asia and the Pacific is expected to
grow about 10 percent in 2007, the strongest

26

performance since 1994. Growth in China is
expected to exceed 11 percent (table 1.2). Elsewhere in the region, strong investment demand
boosted growth in Indonesia by almost a
percentage point, from 5.5 percent in 2006 to
6.3 percent in 2007. Tighter monetary policy
and the economy’s absorption of the direct
effects of the removal of energy subsidies
in 2006 have nearly halved inflation, from
13 percent in 2006 to 7 percent in 2007.
Growth is expected to remain in the 6 percent
range. Growth in Malaysia and the Philippines
appears to have picked up as well, coming in atnear 6 percent or better, reflecting a relaxationof monetary policies and improved external
demand for electronics. Growth in Thailand
has been more subdued during 2007, at a little
over 4 percent, tied in part to political unrest,
as well as a lagging response to the high-techrevival.
Assuming that China continues its doubledigit growth and that the authorities succeed
in dampening overheated sectors, GDP
growth in East Asia should slow gradually to
9.7 percent in 2008 and to 9.6 percent by
2009. Many countries in the region could,
however, experience a stalling of export
growth and a loss of business and consumer
confidence, leading to a moderate falloff in
GDP gains in 2008.
The effects from the turmoil in the world’s
financial centers may be minimal for mosteconomies in East Asia. Except for China, direct exposures of financial institutions in theregion to mortgage-backed securities (or subprime risks) are limited.3 Economies in East
Asia and the Pacific are entering this moreturbulent period from a position of relative
strength: improved macroeconomic fundamentals, further movement into current accountsurplus, and rapidly increasing reserves. Yet
several of these economies have been the objectof international investor interest through carrytrades.3 Should conditions in the mature markets deteriorate so that assets are shifted out ofclasses perceived as risky to cover other losses,
the threat of an unwinding of the yen carrytrade, with attendant down-spikes in local

P R O S P E C T S

equity markets and rapid currency depreciation, is a concern for policy makers.
Possible side effects related to financial
market turbulence—notably a distinct softening of U.S. and European import demand—
could affect all East Asian countries. The EuroArea and the United States together accountfor 43 percent of China’s export market, while
Japan accounts for 7.5 percent. With the development of China as a hub for the final assembly and shipment of goods to destination
markets, with parts and materials supplied byother East Asian economies (figure 1.10),
slower import demand from developed countries could adversely affect the entire region.
Some East Asian economies could experiencea double hit, sustaining a loss of both direct
and indirect import demand.
In the Europe and Central Asia region,
investment and external demand are bothslowing, leading to a moderate easing ofgrowth from 6.9 percent in 2006 to 6.7 percent in 2007. Private consumption, fed byrobust credit creation, accounted for 4.6 percentage points of the advance in 2007. Investment, which accounted for 3.4 percentage
points of growth in 2007, was driven by policy reforms, improved business confidence

F O R

D E V E L O P I N GC O U N T R I E S

tied to European Union (EU) accession by several Central and Eastern European countries,
and continuing high oil prices that have fueled
a construction boom in several countries of
the Commonwealth of Independent States(CIS).
The falloff in external demand took hold inthe second half of 2007, slowing growth by
2 percentage points, as net exports continued
to deteriorate. Inflation has risen in several
countries, tied to sustained strong growth indomestic demand, rising fuel and food prices(the latter aggravated by drought in Bulgaria
and Romania), and higher world grain prices.
Rapid credit expansion in most of the region
has contributed to a worsening of externalbalances while exerting upward pressure on
asset, goods, and labor market prices (figure 1.11). Signs of overheating are evident in
Bulgaria and the Baltic states, for example,
where external positions have deteriorated
from already high levels. Effects on the region
stemming from the crisis in the U.S. subprime
mortgage market have thus far been limited.
Initial downward adjustments to asset prices

Figure 1.11 External positions vary widely
across Europe and Central Asia
Current account balance as a percent of GDP

Figure 1.10 East Asia now accounts for
one-quarter of China’s imports

20
15(percentage of total imports)

10

12

5

10

0

8

5

6

10

2007
2006
2005

15

4

20

2

nd
ila
Th
a

g
K
C ong
hi ,
In na
do
ne
Ko
si
re
a
a,
R
ep
.o
f
Ph
ilip
pi
ne
s
Si
ng
ap
or
Ta
e
iw
an
,C
hi
na

on
H

Source: National sources through Haver Analytics.

E
C ur
en op
tra e
l A anEa
st Ce sia den
In Co rn trade m Eu l ape mo ro ndnd nw peen et S alth
U tate of
R
zb s
us
ek
si
an
is
ta
Fe
n
de
ra
tio
n
U
kr
ai
ne
Po
la
nd
H
un
ga
ry
R
om
an
ia
La
tv
ia

25
0

Source: World Bank.

27

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8and currencies have since been recouped andbond spreads increased, but to a lesser extent
than in other markets.
Regional GDP growth is expected to slow
to 6.1 percent in 2008 and 5.7 percent in2009. Given tighter international credit conditions and weakening external demand, thegrowth falloff in 2008 is likely to affect almost
the entire region. Domestic demand is also
projected to soften slightly from its recent
strong growth, with contributions to GDP ofboth private consumption and investment
dropping by 0.2 percentage points during
2008.
Three exceptions to this growth forecast
for 2008 are Albania, Hungary, and Turkey. In
Albania, growth is likely to firm on continued
strong domestic demand, including an increase in public investment. That investment is
crucial to overcome substantial problems ininfrastructure, as power shortages now form asignificant bottleneck to growth. In Hungary
and Turkey, further easing in monetary policy
is expected to strengthen domestic demand,
leading to a pickup in growth.
External demand is projected to revive by2009 as GDP growth among the OECD countries picks up. After slowing GDP by 2.2 percentage points in 2008, net exports areprojected to boost growth by 1.7 percentage
points in 2009. This gain is expected to be offset by further slowing in domestic demand,
particularly investment in the CIS countries,
yielding GDP growth of 5.7 percent in 2009.
The expected falloff in investment in the CIS isdriven by the completion of hydrocarbon infrastructure projects that have supported production and export capacity in recent years.
In Latin America and the Caribbean, GDPadvanced by 5.1 percent in 2007, the fourthconsecutive year of sustained growth. The
average rate of output gains over 2005–07
was 5.3 percent, twice the 2.7 percent registered during the previous 15 years. Recent
growth has also been broadly based, with positive results shared across subregions: SouthAmerica, Central America, and the Caribbean(figure 1.12). A favorable external environ-28

Figure 1.12 Growth eases in 2007 for theLatin America and Caribbean region
Latin America
and the Caribbean
Venezuela, R.B. de
Argentina
Dominican
Republic
Colombia
HondurasChile
Brazil
2005
2006
2007

MexicoJamaica

0

3

6

9

12

GDP growth 2005–07 (percent)
Sources: World Bank and national agencies.

ment, together with better macroeconomic
management, helped improve fundamentals,
reduce the volatility of economic indicators,
and sustain growth. GDP in the region picked
up to a 5.9 percent pace in the first half of2007 on the back of continued strong activity
in Argentina, Brazil, Chile, and the República
Boliviarana de Venezuela. In addition, themid-2007 credit market turmoil that hit theUnited States seems to have had limited effects
on Latin America and the Caribbean to date.
To a degree, the recent upturn in growth willserve as a buffer. Even though any stagnationin the United States will eventually affect regional prospects, countries seem better prepared for exogenous shocks than during priorepisodes of financial market disturbance.
In contrast with previous expansion
phases—and indeed, with previous episodes ofcrisis—Latin America and the Caribbean is
now recording a healthy current account surplus and accumulating large stocks of international reserves. The improvements of recent
years might indeed be sufficient to ward off

P R O S P E C T S

some of the adverse effects of developments in
the United States. For example, at the time of
the 1998 Russian crisis, the current accountdeficit for the region was close to $89 billion
or 4.4 percent of GDP. In 2003, the deficit reversed to a surplus, and in 2006, the region
had a surplus of more than $46 billion, equivalent to 1.6 percent of GDP. Trade liberalization and flexible exchange rates are among thefrequently cited policies that facilitated these
improvements in external balances.
On the heels of strong growth in 2007,
regional GDP growth is expected to ease to
4.5 percent in 2008 and further to 4.3 percent
by 2009. Such measured regional slowdown
is underpinned by continued strong growthin Brazil and a rebound from a weak 2007 in
Mexico, while growth in other countries—
notably Argentina and the República
Boliviarana de Venezuela—is likely to slow.
Excluding the latter two countries, GDP moderated slightly from 4.7 percent in 2006 to
4.4 percent in 2007 and, following an anticipated dip to 4.2 percent in 2008 because of
weak import demand in the United States, is
expected to recoup to 4.3 percent by 2009.
Should these outturns be realized, they would
represent the longest positive growth spell for
Latin America and the Caribbean since the1960s. Despite a gradual worsening of current
account positions because of stabilizing commodity prices and slower growth in global
demand, strong growth is likely to persist,
supported by continued expansion in consumption and investment, buoyed by an environment of low inflation (excluding Argentina
and the República Boliviarana de Venezuela),
improved fiscal policy (particularly in Mexico),and continued strong capital inflows (especiallyto Brazil).
High oil prices have continued to support
growth for the oil-exporting countries in the
Middle East and North Africa, coming on theheels of a 5 percent regional GDP advance in2006, the fastest in a decade for the region’s
developing countries.4 Oil prices, which
spiked to almost $100 per barrel late in theyear and averaged $71 per barrel for 2007, are

F O R

D E V E L O P I N GC O U N T R I E S

further buttressing government revenues,
some of which are dedicated to infrastructure
spending in the developing oil exporters (principally Algeria and the Islamic Republic ofIran). At the same time, a solid pickup in
European growth over the course of 2007 hasfavored economic activity among the diversified exporters in the Maghreb and Mashreq,
which have especially close trade and services
ties with the Euro Area. GDP in the Middle
East and North Africa appears to have fared
well over the first half of 2007, though easingfrom 2006 to a 4.7 percent pace during the period, with the slowing tied in part to a returnto drought conditions that have affected
several countries in the Maghreb, notably
Morocco.
The run-up of surplus funds among oil exporters and the availability of new investment
opportunities across the region boosted foreign direct investment (FDI) flows to newhighs of more than $24 billion in 2006, or
3.4 percent of regional GDP. At the same time,
recovery of local equity markets offers
promise that after bouts of overheating during
2004–05 and stabilization following the recent tensions in global financial markets, a lessvolatile source of funds may play a larger rolein the region’s growth.
Developing country oil exporters in the
Middle East and North Africa registered
growth of 4.5 percent in 2007, half a percentage point up from 2006, as GDP in the Islamic
Republic of Iran advanced to 5 percent, while
output in Algeria almost doubled from thepoor 1.8 percent showing of 2006. Hydrocarbon revenues (oil and natural gas) flowing todeveloping country exporters amounted to$167 billion in the year, representing an increase of 5.7 percent, or $9 billion, over 2006
results. In contrast, export revenues for thehigh-income country exporters grew by 6 percent to $360 billion, an increment of $20 billion, over 2006 levels (figure 1.13).5
For diversified exporters, trade responded
well to increased European demand, and to adegree by a depreciation of local currencies inrelation to the euro. Exports of goods and29

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.13 Continued oil revenue gains
support growth among Middle East andNorth Africa oil exporters
Crude oil and product revenues ($ billions) oil price,
World Bank ($/barrel)$/bn$/barrel

550

75
70

500
450

65

Oil price(right axis)

400

60

350

55

300

50

250

45

200

40

150

35

100

30
25

50
2002

2003

2004

2005

2006

2007

Low- and middle-income country exporters
High-income exporters
Sources: UN Comtrade database; International Monetary
Fund; International Energy Agency; World Bank.

services for Jordan, Morocco, and Tunisia as agroup jumped to 10.2 percent growth in theyear, in step with a 2.5 percent increment inEuro Area demand, setting the stage for improved output growth. At the same time, a risk
facing the region’s textiles and clothing exporters, as well as many other low- and middle-income country exporters, is the coming
removal of remaining barriers to Chinese exports of specific textiles and clothing products(box 1.1).
A number of factors are likely to shape thegrowth profile for the Middle East and North
Africa region. A softening of OECD demand
is anticipated for 2008, although it may be accompanied by additional firming of global oil
prices tied to continued robust demand in
emerging markets. This should benefit the oil
exporters for a time, and should support
regional growth of 5.4 percent. As the global
environment improves by 2009, the Middle
East and North Africa region should be able
to maintain the broader pace of growth established in 2008 for several more years. Domestic conditions will vary decidedly across the30

disparate economies of the region, as will
efforts at reform, which in most cases are
aimed at spurring private sector or non-oil activity. Tensions related to continuing conflictin Iraq, unsettled conditions in the Levant,and international disputes with the Islamic
Republic of Iran will tend to affect global andregional investors’ confidence concerning theregion, and any projections exercise about theregion should take these into account as a risk.
In South Asia, regional GDP growth remained vibrant at 8.4 percent in 2007, thougheasing somewhat from the stellar 8.8 percent
gains of 2006. Industrial production and GDP
growth are being driven by strong domestic
demand, with private consumption and investment each contributing about 4 points to
GDP growth in the year. An expansion of
credit, rising incomes, and strong worker remittance receipts are underpinning private
consumption, while improvements in businesssentiment—both foreign and domestic—alongwith rising corporate profits, are providing afurther boost to investment. Despite more restrictive monetary policy and progress toward
greater fiscal consolidation in a number ofcountries, domestic demand growth has
picked up, building on the momentum of reforms undertaken in recent years. Moreover,because of tighter policy conditions, inflationpressures moderated during the first half of2007 in the larger regional economies of India
and Pakistan. The risks of revived inflation remain, in part because of the still incomplete
pass-through of high energy prices and upward pressures on food prices.
Current account balances deteriorated in a
number of countries in 2007, with deficits
reaching close to 5 percent of GDP in Pakistan
and Sri Lanka and about 2 percent in India.
Pakistan’s current account deficit is a concern,
having deteriorated by the equivalent of morethan 5 percentage points of GDP during thelast four years. In India, monetary tightening
and large capital inflows led to substantial appreciation of the rupee over the year, with thecurrency reaching a near decade high of Rs
39.30 against the dollar by late November

P R O S P E C T S

F O R

D E V E L O P I N GC O U N T R I E S

Box 1.1 Developing country exports in the wakeof the removal of barriers to Chinese exportsT

he system of quantitative restrictions that managed rich countries’ imports of textiles and clothing from developing countries for 30 years, especiallythose produced in China and India (the Multi-Fiber
Arrangement), was finally dismantled at the end of
2004, although restrictions for a number of categories of Chinese textile and clothing exports to the
EU and the United States remained because ofmeasures that are due to expire in 2008.
China’s exports of clothing soared 22 percent in2005 and 32 percent in 2006, increasing its market
share in those two years to 24 percent and 28 percent, respectively, but the impact on competitors has
been less drastic than some had feared. The increasein the size of the world market for clothing has
allowed exports from many other countries togrow, including the Arab Republic of Egypt, India,
Peru, Sri Lanka, and Turkey. In Bangladesh, where
1 million jobs were predicted to be lost, exports tothe EU and the United States gained continuously
between 2004 and the first four months of 2007.
Nevertheless, some countries have seen declines
in clothing exports that may entail substantial
adjustment. For example, exports to the U.S. andEU markets from Brazil, the Dominican Republic,
Swaziland, and Taiwan (China) declined substantially in 2005 and 2006. With the exception of
Swaziland, clothing exports from these countries
continued to decline into 2007. In addition, for
Sub-Saharan Africa as a whole, where the end of theclothing sector had been foreseen, exports to the EU
and the United States fell by 7 percent in 2004 and17 percent in 2005 (on a trade weighted average). In
2006, Sub-Saharan African textile exports to the EU
grew 3 percent, whereas exports to the United States
declined by 6 percent. In 2007, to the extent thatdata are available, Sub-Saharan African textile exports to both the EU and the United States grewby 7 and 2 percent, respectively. A number of countries, including Madagascar, Mauritius, and Swaziland, managed to reverse an initial decline in
clothing exports and return to growth in 2006 or
early 2007.
How vulnerable are other countries when the
final restrictions on Chinese textile and clothingexports to the EU and the United States expire?
In 2006, 19 percent of Chinese exports to the EU
and 20 percent of exports to the United States were
subject to quota restrictions, and exports of theseproducts will likely grow significantly after removalof the quotas. In the EU market, Colombia, theDominican Republic, Mauritius, Peru, and Sri Lanka
appear to be most at risk with more than 40 percentof their 2006 exports in product categories for which
China is currently still subject to quotas. For othercountries, the ratio is between 20 and 40 percent,and for Sub-Saharan Africa as a whole stands at
51 percent, mainly driven by the high exposure of
Mauritius (74 percent). In the U.S. market, exposure
is generally lower: only the Dominican Republic,
India, and Sri Lanka export more than 20 percentof their textiles and clothing in categories where
Chinese exports are currently subject to quotas. For
most other countries, the ratio is between 5 and20 percent. However, looking at the impact of theelimination of Multi-Fiber Arrangement quotas in2004, many competitors managed to defend theirmarket shares in recent years, and they might be able
to do so in 2008 as well.
The clothing sector still provides an opportunity
for export diversification and the expansion of manufactured exports for low-wage countries, even in
the face of unfettered competition from China. The
countries best able to expand their exports of clothing will be those that have a supportive business environment, low trade costs (efficient customs, ports,
and transport infrastructure), and competitive firmsthat are flexible enough to meet the changing demands of the global buyers that now dominate theindustry.
At the same time, significant adjustment pressures
may arise as more efficient firms expand, while thoseunable to compete in the global market decline. In
the absence of other employment opportunities, especially for women, workers made redundant fromthe textile and clothing sector may fall back intopoverty. Minimizing the costs incurred by released
workers and their families and facilitating their adjustment into alternative employment will be a major
challenge for a number of developing countries.

31

G L O B A L

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P R O S P E C T S

2 0 0 8Figure 1.14 South Asia growth is slowing
as the Indian rupee appreciates
Industrial output (annual percentage
US$-Rs index
change; year-on-year)(January 2005  100)
18

110

US$-Rs108
15

Industrial production

106
104

12

102
100

9

98
6

96
94

3

92
90
00

7

07

p.
2
Se

7
M

ay

20

00
Ja
n.
2

00

6

06

p.
2
Se

6
M

ay

20

00

5
00

.2
Ja
n

p.
2
Se

20
ay
M

Ja
n

.2

00

5

05

0

Source: World Bank.

(figure 1.14). The initial effects of increased
volatility in international credit markets
during the latter part of mid-2007 led to a falloff in equity prices for both India and Pakistan, though both countries have recouped
losses in the interim and returns remain wellin the positive territory for the year. In local
currency, equity markets are up 36 percent
in India (50 percent in dollar terms) and
20 percent in Pakistan (19 percent in dollar
terms) as of the end of November 2007.
Tighter credit conditions, greater market
volatility, increased risk of recession in the
United States, and easing growth in the EU
will place downward pressures on regional
exports before improvement sets in by 2009.
At the same time, increased competition from
China will be a factor in shaping the path ofexport growth over the next few years, and an
additional 18 percent increase in crude oil
prices in 2008 will contribute to a marked deterioration in external balances. On balance,these factors should lead to an easing ofregional growth from 8.4 percent in 2007 to
7.9 percent in 2008. Growth is projected
to pick up to 8.1 percent in 2009 as external
demand revives and given easing pressures on

32

the import bill as oil price gains diminish.
Domestic demand is anticipated to revive into
2009, assuming inflation conditions permit
some easing of monetary policy in the second
half of 2008.
Growth in Sub-Saharan Africa looks poised
to remain buoyant by historic standards,
maintaining a growth pace near 6 percent
from 2007 through 2009, notwithstanding
slowing demand in the United States and theEuro Area. GDP continued to grow strongly
in 2007, with output expanding 5 percent in
the first half of the year, and is expected toamount to 6.1 percent for 2007 as a whole.
This follows a solid 5.7 percent advance in2006, grounded in sharp gains for regional oil
exporters and South Africa (figure 1.15).
Global commodity demand and prices were
pushed higher in recent years, notably by continued brisk economic expansion in China.
Sub-Saharan Africa is one of few regions thathas witnessed a strong supply response tohigher oil prices, with crude oil production up
14.3 percent in 2004, an additional 7.6 percent in 2005, and 8.1 percent in 2006 (whenNigeria, which suffered from a number of
shutdowns of facilities, is excluded).

Figure 1.15 Oil exporters drive 2007
growth results for Sub-Saharan Africa
GDP growth (percent change)
9

2006
2005

2007

6

3

0
Sub-SaharanAfricaOilexporters

Oil importers, South Africa
excluding theRepublic ofSouth Africa

Sources: World Bank and national agencies.

P R O S P E C T S

Improved macroeconomic stability is also
playing an important role in sustaining
growth, as is a pickup in both domestic andforeign investment. Debt relief in recent years
has freed budgetary resources for spending on
infrastructure and social programs. A common trait across economies is a notable
pickup in capital spending focused on thetransport, telecommunications, and construction sectors. In addition, recovery fromdrought in many areas of the region is translating into improved performance in agriculture, adding impetus to growth, while theincome effects stemming from several years ofhigh non-oil commodity prices are stimulating
private consumption.
Recent turbulence in international financial
markets resulted in a moderate depreciation of
the South African rand against the dollar, but
this followed a period of appreciation of therand because of anticipated capital inflows related to merger and acquisition activity. Due
to weakness in the U.S. dollar, the nominal effective exchange rate of the rand has returned
to levels prevailing in July, declining 11.2 percent during the first 10 months of the year.
There are as yet no signs of a sharp sell-off ofSouth African assets, and there appears to be
little evidence of marked adverse effects on thedomestic growth outlook.
Much of the impetus for regional growthover 2008–09 will come from strong domestic
demand, notwithstanding softer private
demand in South Africa, the region’s powerhouse, where higher interest rates and an
erosion of real incomes are curbing real outlays. A sharp decline in farmers’ income incountries affected by recent floods will constitute a near-term drag on growth, and on
private consumption in particular, althoughgovernment and donor transfers and assistance
may mitigate some of the effects. Investment is
expected to remain strong, notwithstanding
the tightening of international credit conditions and lower commodity prices, in part because of large strategic investments by rapidly
growing developing economies such as China
and India. A notable activity is the Moatize

F O R

D E V E L O P I N GC O U N T R I E S

coal project in Mozambique, investment inwhich amounted to $1.44 billion in the firsthalf of 2007. Madagascar is also experiencing
huge investments in its economy. Against thisbackground, Sub-Saharan African GDP is
anticipated to be sustained at a pace above
6 percent through 2008, before slipping to
5.8 percent growth in 2009 as oil exporters
respond to international conditions and restrain output moderately.

World tradeThe globalization of markets for goods andservices is continuing at an unabated pace.
Over the past seven years, world trade volumes
have increased at an average rate of 6.7 percent, virtually the same as during the 1990s(table 1.4). Trade volumes are expanding morethan twice as fast as industrial production(global GDP has grown 3 percent a year since
2000, up from 2.8 percent a year during
the 1990s). In current dollar terms, world
trade doubled during the 1990s and has doubled again since 2000.
While world trade has grown steadily for thelast 15 years, developing country trade has
accelerated in recent years. During the 1990s,
developing country export volumes increased
at an annual pace of 6.8 percent, roughly thesame as the 6.9 percent export gains of the highincome countries. Since 2000, however, developing countries’ exports have been growing twice
as fast as exports from high-income countries:
10.8 percent a year versus 5.1 percent a year.
On the import side, the acceleration is evenmore impressive. During the 1990s, developing
countries’ import growth of 5.7 percent a year
lagged behind that in high-income countries(7.0 percent), but over the last seven years,
those positions have reversed. In 2006, import
growth in developing countries registered14.3 percent, compared with 7.9 percent in thehigh-income countries. Imports across developing regions were growing at double-digit
rates during 2006, as export revenues, which
had been boosted by high-volume growth andsharp increases in commodity prices, were33

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8

Table 1.4 Developments and prospects for world trade and payments
Estimate
Growth in percent

1991–2000

2000–05

World trade volume a (growth in percent)

6.8World exports (growth in percent)High-income countries
OECD high-income
United States
Japan
Euro Area

6.9
6.9
6.8
7.1
4.4
6.9

Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
World imports (growth in percent)High-income countries
OECD high-income
United States
Japan
Euro Area
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Current account (percent of GDP)
High-income countries
OECD high-income
United States
Japan
Euro Area
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

Forecast

2006

2007

2008

2009

5.7

9.8

8.7

7.4

9.3

5.7
4.3
3.6
1.9
5.9
3.6

10.1
9.2
8.8
8.4
9.6
9.0

9.2
8.2
8.7
7.8
6.5
11.9

7.6
6.3
6.5
8.5
4.0
7.2

9.2
7.6
7.7
9.0
4.3
8.6

6.8
11.7
0.9
8.1
4.4
9.0
4.7

10.4
15.4
9.1
5.3
6.1
11.2
5.4

12.7
17.7
10.3
7.8
9.5
9.0
4.4

12.0
17.8
9.2
4.8
4.3
8.5
5.7

11.0
15.2
8.5
5.5
3.8
8.4
7.3

13.1
18.5
8.7
5.8
5.2
10.5
6.6

6.7
7.0
6.8
9.3
3.6
6.3

5.8
4.5
4.1
4.3
3.9
3.4

9.5
7.9
7.4
5.9
4.6
7.5

8.3
6.8
6.8
2.0
3.6
10.1

7.2
5.4
5.0
1.3
3.0
7.4

9.5
7.9
7.8
6.8
5.2
9.4

5.7
11.3
0.9
10.7
1.6
7.9
4.4

10.1
13.7
10.5
4.2
9.7
12.9
8.5

14.3
14.8
14.2
13.3
19.1
12.1
12.4

12.5
14.9
12.8
9.2
12.0
12.1
8.2

11.9
14.3
11.6
9.3
10.0
10.5
8.7

13.3
19.2
10.4
8.1
7.4
11.9
8.8

ⴚ0.1
0.2
1.8
2.4
0.0

ⴚ0.8
1.1
4.9
3.1
0.2

ⴚ1.1
1.9
6.6
3.9
0.2

ⴚ0.7
1.5
6.0
4.1
0.4

ⴚ0.6
1.4
5.4
3.7
0.1

ⴚ0.5
1.2
5.1
3.8
0.1

ⴚ1.5
0.1
1.0
2.6
0.3
1.6
1.9

1.4
3.3
1.4
0.6
5.5
0.3
0.3

3.6
8.4
0.6
1.6
9.6
1.3
0.9

3.1
10.1
1.3
0.5
8.2
2.4
0.4

2.5
8.6
1.9
0.1
9.5
3.0
0.9

1.8
7.6
2.6
0.2
6.2
2.7
0.2

Source: World Bank.
Note: a. Exports and imports of goods and non-factor services in 2000 US$.

being expended. The pickup of trade in developing countries also shows in their shares ofworld markets: in current dollars, developing
countries’ market share increased gradually inthe 1990s from 20 to 25 percent, but since
2000, their share has jumped to 35 percent,supported in part by higher commodity prices.

34

The rapid growth of trade and production
in developing countries, seemingly independent of growth in the high-income countries,
is sometimes referred to as “delinking.” At thesame time, the rapid integration of developing
countries into global markets, a key factor
underlying high growth rates, could also be

P R O S P E C T S

Figure 1.16 Weak U.S. growth reduces
demand for developing country exports
Growth of investment and imports, four quarter moving
average, (percent)15
U.S. imports
10
5
0
5
U.S. investment

10

Source: World Bank.

07
20

06
20

05

04

20

20

03

02

20

20

01

00

20

20

19

99

15

D E V E L O P I N GC O U N T R I E S

Figure 1.17 Export opportunities forhigh-income countries(Percent) nominal growth in US$, 12-month moving
average30
Developing-country imports
20

10

0
High-incomecountry exports
3
06

M

3
M
04

20

3
M
02

20

3
M
00

20

3
20

98

M

3
19

M
96
19

94

M

3

10
19

considered as an intensification of the linkage
of developing countries to high-income
countries, as they have become an integral
part of the global business cycle. The combination of delinking in terms of growth rates
and increased linkage in terms of cyclicalchanges in growth gives developing countries
a prominent role in the current economic environment: they have become a driving force
for global trade, and their strong trade links
can help mitigate the slowdown in highincome countries. In 2007 and the years
following, developing countries are expected
to be the source of more than half of growthin global imports.
The shift of import demand away from theUnited States (and high-income countries generally) and toward developing countries isclearly visible in recent high-frequency data.
The slowing of high-income countries’ imports
and of developing countries’ exports reflects
much weaker investment and consumption
growth in the United States in line with thefallout in the housing market (figure 1.16).
At the global level, the slowing of U.S.
imports has been offset in part by a strengthening of import demand across developing
countries driven, among other factors, by ro-

F O R

Source: World Bank.
Note: M3  March.

bust domestic demand, especially in the large
emerging market economies (figure 1.17).
Looking forward, vibrant growth in developing countries should offer a cushion fromrecessionary conditions in the key OECDeconomies over the critical 2008 period.
Indeed, among recent regional developments, dollar-based import growth has beenstrong: Sub-Saharan African imports increased
23 percent over the year to May 2007; South
Asian imports jumped 32 percent through August, driven by strong investment and importdemand in India; and Latin America and East
Asia were importing at rates of 15 and 14 percent, respectively, through September. However, the key contribution to the pickup in imports stems from Europe and Central Asia (anincrease of 28 percent through September, up
from 20 percent a year earlier), where in Central and Eastern Europe, EU accession countries are increasing their import potential indollars with currencies effectively pegged to an
appreciating euro, while in the CIS, exportersof oil and other hydrocarbons continue tospend portions of their accumulated revenues.
Such rotation of trade growth is contributing to an unwinding of global imbalances that35

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.18 U.S. current account narrows
over 2007 and is likely to continue
doing soU.S. current account components ($ billions, three quarter
moving average)
50
0
50
100
150
200
Current account

250

Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2000 2001 2002 2003 2004 2005 2006 2007
IncomeServices

Oil balance

Transfers

Non-oil balance

Source: U.S. Department of Commerce.

started in 2006. The U.S. current accountdeficit declined from a peak of 6.8 percent of
GDP in the fourth quarter of 2005 to 5.5 percent by the second quarter of 2007. The
shrinking deficit reflected weaker U.S. imports,
caused in part by the housing slump, andstronger exports, supported by demand in developing countries and the falling dollar (figure 1.18). The mirror image of the narrowing
U.S. current account may be found in developing countries, as well as selected OECD countries, where surpluses are broadly in decline.
Based on the strong correlations shown in figure 1.16, export revenues in developing countries are likely beginning to slow in line withthe softening of import demand in the highincome countries. At the same time, spending
in developing countries remains strong. Such
gradual unwinding of global imbalances is
expected to continue, at least through 2009, as
oil price levels decline, driven by the sameelements that emerged in 2007.

36

Inflation and commodity
marketsIn high-income countries, inflationary pressures were sufficiently under control during
2007 to allow central banks to end a period ofmonetary tightening. In the United States, theFederal Reserve had become more concerned
about a possible recession than about accelerating inflation and lowered Federal funds by
50 basis points to 4.75 percent on September
18—the first reduction in four years. A further
25 basis point cut was enacted on October 31
and a like reduction on December 11, carrying
Federal funds to 4.25 percent. In Japan, inflation is not yet permanently in positive territory,
making it unlikely that the Bank of Japan will
follow its initial tightening steps with further
increases in interest rates. In Europe, inflation
is fluctuating around the European Central
Bank’s upper target, recently with more upward than downward momentum. Given expectations for softening growth in 2007, as
well as an appreciating currency, the European
Central Bank will probably hold its policy rate
at 4 percent.
The inflation picture is more diverse acrossdeveloping countries. In several rapidly growing economies, where inflation had picked up
over the last two years, policy interest rates
have been increased gradually. This occurred
across South Asia (India, Pakistan, and Sri
Lanka), where signs of overheating became
evident, and also in several Latin American
and Caribbean countries (Argentina, Chile,
Colombia, and the República Bolivariana deVenezuela). China and the Czech Republic are
examples of economies where monetary tightening continues. But in some countries(Belarus, Brazil, the Lao People’s Democratic
Republic, and the Philippines) inflation eased
and monetary policy, which was tight, is now
loosening moderately. In several countries
monetary policy has reversed. In Hungary andTurkey, for example, policy rates were cut in2007 after being on a long uptrend. This turnabout was a reaction to the recent slowdown
in growth after a long period of strong gains

P R O S P E C T S

Figure 1.19 Inflationary pressures arerising in the Middle East and North
Africa and Sub-Saharan Africa
Consumer prices (percent change, year-on-year)
9.0
Sub-Saharan Africa
7.5
6.0
4.5
3.0
1.5

Middle East and North Africa

Ja
n.

20
Ju 02
l.
2
Ja 002
n.
20
Ju 03
l.
2
Ja 003
n.
20
Ju 04
l.
2
Ja 004
n.
20
Ju 05
l.
2
Ja 00
n. 5
20
Ju 06
l.
2
Ja 006n.
20
07

0

Source: World Bank.

D E V E L O P I N GC O U N T R I E S

Figure 1.20 Inflation is broadly stableelsewhere, though at high levels
Consumer prices (percent change, year-on-year)
9.0

South Asia

Latin America
7.5
6.0
4.5
3.0

Europe andCentral Asia

00

06

r.
2

20
l.
Ju

.2
ct
O

Ap

5
00

05

4

20
n.
Ja

Ap

Ju

l.

r.
2

20

00

03

2
00

02
ct

.2

20
O

n.

7

East Asia

1.5

Ja

in domestic demand that led to large current
account deficits and inflation pressures.
Inflation has remained remarkably muted
after four years of global growth that has beenstronger than that experienced in the last
30 years. Average consumer price inflation in
high-income countries registered 1.8 percent
in 2007, slightly below that experienced during the downturn of 2001. Median inflation indeveloping countries registered a moderate (ina historic context) 5.9 percent, only 0.6 percentage points higher than at the beginning of
the decade. Hyperinflation, once a trademarkof several developing countries, has been eliminated, with Zimbabwe now being the notable
exception. The number of developing countries with double-digit inflation has halved
since the beginning of the decade.6 Inflation
was lower in the first half of 2007 than it wasin the previous year in more than 60 percent
of all countries, and among the 56 developing
countries for which inflation data are available for the first half of 2007, more countries
experienced an easing than a pickup of pressures. Moreover, average inflation is still on
the rise in just two of six developing regions(figures 1.19 and 1.20). In Sub-Saharan

F O R

Source: World Bank.

Africa, inflation is volatile, but is trending
higher, reflecting rising food prices, and the
Middle East and North Africa region shows aclear uptick in inflation, likely triggered by the
expenditure of burgeoning oil revenues in theregion, notably in the Islamic Republic of
Iran. In other regions, inflation is volatile, but
broadly trending flat or slightly downward.
Developing countries have played an
important part in restraining inflationworldwide. Improved macroeconomic policies
have tended to reduce domestic pressures on
inflation across a wide range of countries.
Independent monetary policy, more cautious
fiscal stances, strong currencies, and rapid
TFP growth have increasingly kept domestic
inflation under control. In addition, greater
engagement in international trade and competition has helped spread price restraint acrosstrading partners. In many countries, passing
cost pressures through to output and to consumer prices has become progressively moredifficult.
The lack of pass-through, in particular, hasenabled monetary policy in the high-income
countries to remain fairly passive in the face ofrising non-core prices. Partly as a consequence, global growth has been maintained at

37

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.21 Commodity prices continued
gains through 2007 led by metals

Figure 1.22 Copper, zinc, and aluminum
prices sharply affected by China

Commodity price indexes (January 2003 ⫽ 100)$/metric ton

350

9,000

Metals

300

7,000

250

6,000

Crude oil

5,000

200

4,000
3,000

150

2,000

Source: World Bank.

a higher rate much longer than in the past,
generating increasing capacity constraints incommodity markets. As a result, commodity
prices continued to increase and remained elevated into the fourth quarter of 2007. Commodities have become more volatile, however,and the increase in several commodity prices is
now moderating (figure 1.21).
The increased use of food crops for production of biofuels is an important factor that
led to large increases in the prices of vegetableoils and grains in 2007, which in turn contributed to an overall 15 percent increase in
the index of agricultural prices and a 20 percent rise in food prices. The latter is of special
concern for poor consumers in developing
countries.
The prices of metals have increased morethan other commodity prices over the last four
years, largely because of especially strong
demand in China. Underinvestment during
earlier periods of low prices and numerous
supply problems and delays in bringing on new
capacity have also played a part. Shortages ofequipment and skilled workers have significantly increased development costs, and ore
grades are deteriorating. The price of metals
for which China is a net importer, especially

07
20

06
3,
Ja

n.

3,

20

05

04
Ja

n.

3,

20

03
Ja

n.

3,

20

02
Ja

n.

3,

20

01
3,

20
n.
Ja

n.

3,
n.
Ja

3,

20

20

00

07

06
1,
n.
Ja

n.
Ja

Ja

n.

1,

1,

20

20

05

04
20

03
Ja

n.

1,

20

02
Ja

n.

1,

20

01
1,

20
Ja

n.

1,
n.

1,

20

00

0

Ja

n.

Zinc
20

50

Ja

Aluminum

1,000

n.

Agriculture

Ja

100

38

Copper

8,000

Ja

G L O B A L

Sources: London Mercantile Exchange and World Bank.

copper, have experienced sharp gains, while
those for which China is a net exporter—
mainly aluminum and to some extent zinc—
have increased much less (figure 1.22). Following the global credit squeeze in August and
September, the prices of metals dropped morethan 10 percent (metals tend to be particularly
sensitive to slowing economic activity andmay have been exposed to speculative pressures when investors closed their positions tofinance other losses in their portfolios). The
prices of metals are generally expected to peakin 2007, to decline by 5 percent in 2008, andto continue lower into 2009 as rising capacity
tips markets into surplus.
Nominal oil prices, measured in dollars,
broke historic records in November, reachingnearly $100 a barrel. Measured in euros, oilprices stood 4.5 percent above their 2006
peak, while in real terms (corrected for overall
inflation) oil prices remain 4.2 percent below
the peaks reached in November 1979.
Higher oil prices have reduced growth inglobal oil demand, particularly in high-income
countries. Oil demand in the OECD declined
for six consecutive quarters beginning in the
fourth quarter of 2005, with an average drop of
more than 0.4 million barrels a day (figure 1.23).

P R O S P E C T S

F O R

D E V E L O P I N G

Figure 1.23 Growth in the world’s demandfor oil slows

Figure 1.24 OPEC reduces output tosupport prices

Millions of barrels of oil/day

Millions of barrels of oil/day

4.5

C O U N T R I E S

54.0

World supply

4

World Demand

3.5
3.0

3

2.5

2

2.0

1

1.5
1.0

0

0.5

1

0

2

0.5
1.0

Other Asia

China

OECD

Sources: International Energy Agency and World Bank.

In non-OECD economies, the demand for oil
has grown by just over 1 million barrels of oil
a day since 2005, down sharply from the surgeof 2004. Supply in several producers that are
not members of the Organization of Petroleum
Exporting Countries (OPEC), especially
Russia and countries in western Africa, has increased in recent months, and among OECD
countries, Canadian production continues togrow, predominantly from oil sands, while
significant new output in the deep water U.S.
part of the Gulf of Mexico is starting up. These
increases have been partially offset by moderately falling production in the North Sea. As
demand eased and non-OPEC supply increased, OPEC countries reduced their output
to prevent further increases in stocks and a fallin prices (figure 1.24).
Because OPEC has limited spare capacity
and is holding down production, oil prices
will likely remain quite elevated and volatile;
however, high prices and increasing environmental concerns should continue to moderate
growth in demand. At the same time, rising

OPEC

07

06
Q

1,

20

20

05

1,
Q

Q

1,

20

Other

20

04

03
1,
Q

1,
Q

Q

1,

20

20

02

01
20

00

1,
Q

1,
Q

Q

1,

20

20

07

06
20

05

1,
Q

1,
Q

Q

1,

20

20

04

03
20

02

1,

20

Other

Q

Q

1,

1,
Q

Q

1,

20

20

00

01

3

Former Soviet Union

Sources: International Energy Agency and World Bank.

upstream investment in oil-producing countries (both in OPEC and in non-OPEC countries) should result in new capacity that exceeds the growth in oil demand. Nevertheless,oil markets are expected to remain finely balanced over 2007–09, in part because of production discipline by exporters, and prices are
expected to remain above $75 a barrel for the
coming two years. In the longer term, the oilmarket balance is expected to loosen andprices are projected to fall toward $50 per
barrel.
The rise in agricultural prices during 2007
was underpinned by strong demand for foodimports, especially by oil-exporting countries,
which contributed to a 20 percent increase inglobal food prices for the year. Higher cocoaand robusta coffee prices raised beverage
prices by 13 percent, while raw materials
prices were moderately higher (figure 1.25).
The increase in food prices was led by fats andoils, up 50 percent for the year, and grains, up
22 percent (figure 1.26).7 Among other commodities, sugar prices declined 32 percent, as

39

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 1.25 Agricultural prices surge over
2006–07
Commodity price indexes (2003 = 100)
175

Raw materials
Beverages

150

Food
125
100
75

7

6

00

00

,2

,2

.1

.1

Ja
n

Ja
n

Ja
n

Ja
n

.1

.1

,2

,2

00

00

5

4

3
00

2

,2

00
Ja
n

.1

.1

,2

,2
Ja
n

Ja
n

Ja
n

.1

.1

,2

00

00

0

1

50

Source: World Bank.

Figure 1.26 A rise in food prices, led by aramp-up of the prices of fats, oils, andgrainsCommodity price indexes (1990 = 100)
200
Fats and oils
175
150
Grains125
100
75

Other foods

7
,2

00

6
Ja
n.
1

,2

00

5
.1
Ja
n

.1

,2

00

4
Ja
n

,2

00

3
.1
Ja
n

,2

00

2
Ja
n

.1

,2

00

1
00
.1
Ja
n

,2
.1
Ja
n

Ja
n

.1

,2

00

0

50

Source: World Bank.

growing conditions in India, Pakistan, andThailand improved, and new plantings and favorable weather boosted Brazilian production.
Food prices have risen nearly 75 percent
since their lows of 2000. The increases stem
partly from the stepped-up use of food crops forbiofuels and partly from other more fundamental factors, such as rapid income growth in developing countries, high fertilizer prices, low

40

stocks, and droughts. Biofuels are playing an
increasingly important role in agriculturalcommodity markets as their share of global
production and trade increases. In 2006, biofuels accounted for 5–10 percent of the global
production of the primary biofuel feedstocks
and up to 77 percent of the volume of trade.
Among the largest biofuel producers, theUnited States used 20 percent of its maize production for biofuels; Brazil used 50 percent of
its sugarcane for biofuels; and the EU used
68 percent of its vegetable oil production,
primarily rapeseed, and also imported additional vegetable oils. Such large usage reduces
supplies of these crops for food and feed andhas contributed to substantial price gains(box 1.2).
The anticipated spike in grains prices, identified as a concern in the World Bank’s Global
Development Finance report published in
May 2007 (World Bank 2007a), has largely
materialized. Monthly wheat prices have increased 90 percent since mid-2007. Wheat
stocks are expected to fall to record lows relative to consumption, and prices may increase
further in 2008 before production recoups
enough to rebuild stocks. In the meantime, alarge number of food-importing countries
may suffer substantial terms-of-trade losses
over the course of 2007 and into 2008 (box1.3). Price increases for vegetable oils andgrains primarily affect low-income countries,
with the rise in prices since the end of 2004
leading to a terms-of-trade loss equivalent to
0.5 percent of GDP. This represents 1 percent
of GDP in 29 countries, and nearly 5 percent
of GDP for the most affected country, Eritrea.
The impact on middle- and high-income countries is considerably less because imports ofthese commodities represent a smaller share of
trade, and higher prices on other commodity
exports tends to offset terms-of-trade losses
resulting from higher food prices. Agricultural
prices are expected to remain nearly flat at
high levels in 2008, as biofuels production
continues to ramp up in response to consumption mandates and production subsidies,drawing resources from other crops.

P R O S P E C T S

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Box 1.2 BiofuelsBiofuels are not new: the first Ford automobile
was originally intended to run on ethanol. However, the interest in biofuels has increased in recent
years along with increases in energy prices andheightened concern about the environment. Countries want not only to achieve greater energy security,
but also to reduce the use of fossil fuels to lower
greenhouse gas emissions and improve air quality.
The demand for biofuels also got a boost whenmethyl tertiary-butyl ether was banned as a fueladditive to meet clean air regulations in many U.S.
states and localities and for fear it was contaminating groundwater. The political gain attached to supporting new demand for agricultural products, andthus enhanced crop prices, has added to interest on
the part of politicians and encouraged generous support policies in many countries, including EU countries and the United States.
Biofuels can be produced from a variety offeedstocks. Current technology, often called firstgeneration technology, relies primarily on food crops
such as sugarcane and maize to produce ethanol andon vegetable oils from rapeseed, soybeans, palms,
and other crops to produce biodiesel fuel. So-called
second-generation technology may be able to produce biofuels from an even wider range of feedstocks, such as switch grass, timber waste, andmunicipal garbage, but such technology is not yet
commercially viable and many experts do not expect
it to become so for at least a decade.
Global production of biofuels totaled about
45 billion liters in 2006, representing slightly morethan 1 percent of global road transport fuels on anenergy equivalent basis. Biofuels can be used to replace their fossil fuel counterparts or can be blended
with fossil fuels to achieve certain benefits, such as
reduced tailpipe emissions and increased octane

Risks and uncertainties:
Danger of a banking crisis anda U.S. recessionT

he baseline projections assume, on the realside of the economy, that the U.S. housing
recession does not spill over in a large-scale
way to the rest of domestic demand, as thelevels to improve engine performance. One of theirgreatest advantages is that they can be used in conventional gasoline and diesel engines without modification of the engines and can be dispensed throughexisting distribution channels.
Nevertheless, their use has some limitations.
Ethanol can be used in conventional gasoline engines
only up to about a 10 percent blend with gasoline
without engine or fuel system modifications. It also
requires special handling in transport to prevent contamination. Specially designed flex-fuel engines canuse a wider range of blends of ethanol and gasoline
and are available in Brazil and the United States.
Biodiesel fuel can be used in any blend with fossil
fuel diesel in standard diesel engines, but its use islimited in colder climates. The energy content of
ethanol is lower than that of gasoline, providing
about 20–30 percent fewer miles per gallon thangasoline, while biodiesel provides 5–10 percent
lower mileage than diesel.
While biofuels have thus far had little impact on
crude oil prices, they have already had large effects
on prices of commodities used as feedstocks for biofuels, as well as for competing crops. For example,
maize prices rose by about 60 percent from mid2005 to mid-2006, largely because of the increased
use of maize for ethanol production in the UnitedStates. This prompted a huge shift of land from
wheat into maize in the following season, which
contributed to a sharp increase in wheat prices.
Vegetable oil prices have also increased because of
their stepped-up use for biodiesel production in
Europe and the United States, with palm oil prices
up 48 percent in the last year and soybean oil prices
up 25 percent. These price shifts have set off a foodversus fuel debate that is causing some to question
the contribution of biofuels.

downward spiral in housing is mitigated bystrong export growth. On the financial side ofthe economy, the projections assume thatlosses on holdings of asset-backed securities
are widely distributed and that interventions
by the Federal Reserve, the European Central
Bank, and other institutions restore calm tofinancial markets. However, the effective cost41

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2 0 0 8Box 1.3 Policy responses to rising food prices

Higher prices of imported staples, strong growthof domestic and regional demand that pushes
up prices of domestically produced goods, and increased prices of production inputs such as fertilizers
and energy are causing rapid rises in food prices inmany countries. The price increases will hurt thepoor, who spend a large share of their income onfood, but will also help the rural poor who produce
a marketable surplus. Governments are under pressure to take action to blunt the impact of higher
food prices, but many countries have liberalized or
partially liberalized their domestic food markets andimports (Bangladesh, Brazil, Egypt, India, Mali,
Morocco, Russia, Ukraine, and the Republic of
Yemen, to name a few) and no longer have policy
instruments to control food prices. Those countries
that have targeted safety net programs can rely on
those channels to provide assistance to the poorest
people, but countries without safety net programs
will feel pressure to impose price controls or to reintroduce government controls. This would undo successful policy reforms and send a negative message tothe private sector.
Bangladesh offers an example of the success ofopen market food policies. It has transformed its
agricultural sector into one of the most productive inSouth Asia. The country is largely self-sufficient in
rice, a basic staple, and is an emerging exporter ofhigh-value agricultural products. One of the keys tothis success was the government’s decision to liberalize food imports in the early 1990s. Private tradersimported food grains during times of domestic shortfall, providing needed supplies and price stabilization, as well as removing a financial burden from thegovernment. By 2000, the private sector was importing 100 percent of imported food, and the govern-

ment reoriented its large public food distribution
system away from mass distribution in favor of atargeted safety net program for the poor. Such a
response would be effective in the current situationof high food prices, but a complicating factor is thatpart of the current price increases might be more
persistent than in the past.
Past periods of food price increases were temporary and lasted only two or three years, such as theincreases during the 1970s or the more recent increases in 1995–96; however, the current increases
have a structural component that may persist because it is closely tied to the rise in global energy
prices. If energy prices remain high, food crop prices
are unlikely to decline significantly. Over the longer
term, supplies of food are expected to increase andprices to fall, but the current price increases are expected to continue for several years, and thus mostcountries will not be able to shelter their consumers
from them. Current food price increases also have a
temporary component caused by low stocks and production shortfalls stemming from drought. These canbe expected to dissipate as supplies respond to highprices. Countries should aim to protect consumers
from temporary price increases caused by shortages,
but few countries can afford to protect consumers
against structural changes in food prices.
Consumers in food-exporting countries are also seeing their food prices increase as supplies are exported
at high international prices, and several countries have
imposed export bans to contain domestic food priceinflation. Such bans unfairly penalize the producers ofthese crops and may encourage smuggling and corruption. A more appropriate policy response is to provide
a targeted safety net program for the poor while allowing exports to continue unfettered.

of capital is likely to increase further, reflected
in tightened credit criteria for firms as well ashouseholds in the United States. Elsewhere,
however, tightening is expected to be more
moderate. Under such conditions, weakness in
U.S. housing would continue, but the contraction in residential investment will have bottomed out by mid-2008.

42

Should unexpected and large-scale newlosses occur in financial markets—concentrated among commercial and investment banks or among major investors—credit
conditions globally could tighten much more.
Such a scenario would tend to increase losses
on asset-backed securities, potentially carrying
financial markets and the real economy into a

P R O S P E C T S

downward spiral and requiring an aggressive
loosening of monetary policy.
Under such circumstances, contraction inquarterly GDP in the United States would become more likely, pushing growth in 2008 to
1 percent, or almost half of baseline growth.
Equity markets in high-income countries
would likely decline substantially, and the effective cost of capital could increase by some
200 basis points in 2008, compared with thebaseline. Such a pronounced credit crunch
would be reflected in a sharp decline in U.S.
business investment, declining employment,
weaker consumer outlays, and a prolonged
period of depressed consumer prices.
Adverse developments in the United States
would spill over to the rest of the world
through weaker U.S. imports and a substantial further decline in the dollar, spurred byan aggressive loosening of monetary policy.
The spillover could be exacerbated by a reversal of the yen carry trade and a reduced
appetite for U.S. assets among international
investors as growth slows and assets of financial institutions become more risky.
Largely because of reduced exports and investment growth, GDP growth in Europe andJapan could fall to 1.5 and 1.3 percent,respectively, about half a percentage point
below the baseline.
For a number of middle-income countries,
the most important transmission channel of
effects stemming from the OECD countries
would be a tightening in international credit
conditions, which would cut into investment
and reduce growth. Middle-income economies
with large current account deficits and countries whose currencies are pegged to the euro
would likely feel the greatest effects. Growthin middle-income countries would fall a percentage point below the baseline; however, theimpact would be quite diversified, in part
depending on how economies are linked
financially to the U.S. dollar. Central European economies that accumulated eurodenominated debt will be more vulnerable
than countries that hold dollar debt.

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D E V E L O P I N GC O U N T R I E S

The repercussions for low-income countries could also be sizable, as weaker global
demand for commodities (metals, agricultural
products, and fuels) could worsen their termsof trade by 2 percent of GDP, and the pace of
expansion could decline by 0.6 points in 2008.
Overall, given such a scenario, global growthmight decline by three-quarters of a percentage point in 2008 compared with the baseline.
The loosening of monetary policy in response to the subprime crisis might also
cause growth to overshoot. As a result, commodity markets could tighten further; inflationary pressures would mount, especially indeveloping countries; and financial imbalances would increase rather than recede.
Such a scenario could sow the seeds of amuch sharper growth slowdown in themedium term and illustrates the challenge
facing monetary authorities in both highincome and developing countries.

Long-term prospects andpoverty forecasts
A potential for catching up
Beginning in the mid-1990s, per capita income
growth in developing countries has accelerated, with growth being particularly vibrantsince 2000. Several factors suggest that thishigh growth will be sustained over the longer
term. First, economic policies are on a more
solid footing than in earlier periods, with bothinflation and fiscal deficits broadly under control, and structural policies more conducive totaking advantage of more open global markets, and a business climate more favorable
for investment. Second, many countries haveentered, or are entering, a period of demographic transition that combines rapid labor
force growth with declining dependency ratios.
This shift provides a window of opportunity
for rapid economic gains. Third, the income
disparity between developing and developed
countries is still large, but with broader accessto information and technology-laden capital43

G L O B A L

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2 0 0 8and imports, developing countries have theability—and the incentive—to narrow this gap.
The long-term forecast for 2010–30 projects sustained growth across developing
countries, albeit with a moderating trend (figure 1.27). For developing countries as a whole,
per capita growth is expected to ease from anaverage of 3.9 percent in the first decade of
the 2000s to 4.5 and 3.4 percent in the second
and third decades, mainly reflecting slowing
growth in the East Asia and the Pacific region.
Sub-Saharan Africa could see a slight acceleration, with average per capita income growth of
3.0 percent in the current decade, increasing toa more sustainable 3.2 to 3.4 percent in subsequent decades. This is a substantial improvement over the 1980s and 1990s, when percapita incomes in Sub-Saharan Africa declined.
Years of sustained increases in per capita
incomes should see average real incomes(stated in 2001 prices) more than double by2020, rising from $1,300 in 2001 to $2,800
by 2020. By 2030, they are projected to reachnearly $4,000. However, significant variation
will occur around these numbers, and despitea relatively optimistic growth scenario, thegap between rich and poor countries will remain extremely wide. The average citizen in adeveloping country is projected to earn only
7.8 percent as much as a citizen of a highincome country, a ratio that should rise toabout 10.0 percent by 2030.
This year’s long-term scenario represents asignificant upward revision from last year’s
long-term forecast. The revision reflects a confluence of factors, including the simple recognition that developing country growth has
accelerated over the last decade and has beenbroadly based and sustained. Among thefactors that likely contributed to sustaining
this high level of growth is the relatively rapid
convergence in technological achievement
between high-income countries and developing countries (see chapter 2). This progress is
projected to continue over the next 20 years,
and the returns to knowledge and capital willremain more or less constant. These sustained
returns combined with rising incomes willtranslate into increased investment in education and research and development, helping to

Figure 1.27 Long-term growth, 1980–2030
Annual per capita GDP growth (percent)10
2001–108

1991–2000 2011–20
1981–902021–3064
20

Source: World Bank data and simulations with the Linkage model.

44

E
C uro
en p
tra e al A nd
si
a
M
id
dl
e
N E
or as
th t
Af an
ric d
Su
a
bSa
ha
ra
n
Af
ric
a
La
tin
th Am
e er
C ic
ar a
ib an
be d
an

di
a
In

ia
As
h
So
ut

na
hi
C

H

ig
h
co -inc
un om
tri e
es
Lo
in wco am nde
co midun dltri eesEa
stth Asi
e a
Pa an
ci d
fic

2

P R O S P E C T S

Figure 1.28 Declining capital-led growthfor developed countries, 2002–30
Growth decomposition (percentage contribution per year)

D E V E L O P I N GC O U N T R I E S

Figure 1.29 Sustained high productivity
growth for developing countries
Growth decomposition (percentage contribution per year)

3.5

8.0

3.0

7.0

2.5

F O R

6.0

2.0

5.0

1.5
4.0
1.0
3.0

0.5

22

27

Labor

20

Capital

20

17

12

20

20

02
20

20

27

22
TFP

20

Labor

20

20

20

20

20

Capital

17

0

12

1.0

07

1.0

02

0.5

07

2.0

0

TFP

Source: Simulation results from the Linkage model.

Source: Simulation results from the Linkage model.

Note: TFP  total factor productivity.

Note: TFP  total factor productivity.

establish a virtuous cycle of further technological progress and increased incomes. Those
countries where technological progress has
stagnated are expected to benefit from a supportive global environment characterized byaccelerating exports and continued strong
income gains from commodities, partly explained by the growing importance of developing countries in global growth.
Part of the strong projected performance fordeveloping countries derives from stronger
labor force growth, but much can be attributed to technological progress, measured in figures 1.28 and 1.29 by TFP growth. The strong
TFP growth in developing countries of the last
several years is consistent with the findings inchapter 2 of this report, which suggest that(based on a different measure of technology)
the technology gap between middle- and highincome countries has narrowed over the last
10 years. Over the forecast horizon, the relative strength of TFP growth in developing
countries is expected to persist, which is also
consistent with the finding in chapter 3 that thedrivers of technological diffusion and absorption in developing countries have strengthened.
However, as stressed there, the realization ofthis potential during the coming decades will
depend on the extent to which countries, especially low-income countries, can strengthen
their technological absorptive capacity andremain open to new technology flows.

Poverty declines significantly in thebaseline, though not uniformly
The upward revisions to the long-term forecast generate a more positive poverty forecast
for 2015, albeit a modest improvement compared to the forecast presented in the Global
Monitoring Report for 2007 (World Bank
2007b). The percentage of the population indeveloping countries living on less than $1 a
day in 2015 under the current long-term forecast is 10.2 percent, down from 11.8 percent
in the Global Monitoring Report (table 1.5).
The rapid improvements in reducing poverty
in Asia since 1990 imply that the target ofhalving the percentage of the poor living on

45

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2 0 0 8

Table 1.5 Poverty in developing countries by region, selected years
Region or country

1990

2004

2015

Number of people living on less than $1/day (millions)
East Asia and the Pacific
China
Rest of East Asia and the PacificSouth Asia
India
Rest of South Asia
Europe and Central Asia
Middle East and North Africa
Sub-Saharan Africa
Latin America and the Caribbean

476
374
102
479
376
103
2
5
240
45

169
128
41
446
371
76
4
4
298
47

40
29
11
256
217
39
2
2
290
34

Total
Excluding China

1,247
873

970
841

624
595

Number of people living on less than $2/day (millions)
East Asia and the Pacific
China
Rest of East Asia and the PacificSouth Asia
India
Rest of South Asia
Europe and Central Asia
Middle East and North Africa
Sub-Saharan Africa
Latin America and the Caribbean

1,113
819
294
954
734
220
20
49
396
115

684
452
232
1,116
868
248
46
59
522
121

296
186
110
997
772
226
16
38
567
102

Total
Excluding China

2,647
1,828

2,548
2,096

2,017
1,831

Percentage of the population living on less than $1/day
East Asia and the Pacific
China
Rest of East Asia and the PacificSouth Asia
India
Rest of South Asia
Europe and Central Asia
Middle East and North Africa
Sub-Saharan Africa
Latin America and the Caribbean

29.8
33.0
22.1
43.0
44.3
38.9
0.5
2.3
46.7
10.2

9.1
9.9
7.1
30.8
34.3
20.6
0.9
1.5
41.1
8.6

2.0
2.1
1.6
15.1
17.6
8.5
0.3
0.7
31.4
5.5

Total
Excluding China

28.7
27.1

18.1
20.7

10.2
12.6

Percentage of the population living on less than $2/day
East Asia and the Pacific
China
Rest of East Asia and the PacificSouth Asia
India
Rest of South Asia
Europe and Central Asia
Middle East and North Africa
Sub-Saharan Africa
Latin America and the Caribbean

69.7
72.2
63.7
85.7
86.4
83.4
4.3
21.7
77.1
26.3

36.6
34.9
40.4
77.1
80.4
67.6
9.8
19.7
72.0
22.2

14.5
13.4
16.9
59.0
62.7
49.2
3.4
10.3
61.5
16.3

Total
Excluding China

60.8
56.8

47.6
51.6

32.9
38.7

Source: World Bank.

46

P R O S P E C T S$1 a day or less between 1990 and 2015 will
be achieved at the global level, though not necessarily at the country or regional level. The
new forecast leads to some improvement in
the outlook for Sub-Saharan Africa, but theregion is still significantly off target.8,9Agricultural productivity has important
poverty implications for low-income
countries
Agricultural technology is a particularly important determinant of overall technology andpoverty reduction in low-income countries(World Bank 2007c), mainly because in mosteconomies the majority of workers remain in
agriculture, and the poor are concentrated
in rural areas. Moreover, productivity growthin agriculture is one of the main drivers of
rising incomes in agricultural economies.
Increased agricultural productivity frees up
workers to take on more lucrative manufacturing jobs and reduces food costs relative towages. Moreover, by increasing yields, highagricultural productivity generates a marketable surplus that can be used to purchasehigher-quality inputs for production andconsumer goods, which in turns leads to a virtuous cycle between the agricultural andnonagricultural sectors of the economy. The
marketable surplus can also be used to increase exports or to reduce food imports.
In the baseline scenario, agricultural productivity is projected to increase by a uniform
2.5 percent a year (Martin and Mitra 1999).
Historically, however, not all countries haveachieved this average increase. For example,
the green revolution that lifted agricultural
productivity in South Asia over the last
40 years largely bypassed Sub-Saharan Africa,
where yields have largely stagnated. Looking
ahead, agriculture in Sub-Saharan Africa is
faced with some of the same challenges as in
the past, for example, lack of access to credit
and poorly integrated markets. Both South
Asia and Sub-Saharan Africa could be facing
additional challenges that will threaten future
gains in agricultural productivity, for instance,

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environmental degradation caused by global
climate change or insufficient investment in
new and locale-specific varieties of crops.
To illustrate the sensitivity of future outcomes to the possibility of weaker agricultural
productivity performance, an alternative scenario looks at the impact on global growth,
incomes, and poverty from assuming zero
agricultural productivity growth over the period 2008–15 in the two largely low-income
regions of South Asia and Sub-SaharanAfrica.10 One key result would be higher
prices for agricultural produce compared withthe baseline. Agricultural producer prices in
Sub-Saharan Africa would increase around
6 percent, with a more modest increase of
2 percent for processed food. The increase in
prices is more acute in South Asia: around
11 percent for primary agriculture, with a
4 percent increase in processed foods. These
increases lead to a loss of competitiveness inboth domestic and export markets.
In the case of Sub-Saharan Africa, importsof crops and livestock products rise by some
40 percent in 2015 relative to the baseline andexports drop by 30 percent. Overall output
declines by some 12 percent. Agriculturallabor demand barely changes, as the decline in
output is offset by a decline in productivity,
leaving overall labor demand more or less unchanged, albeit with depressed wages. In
South Asia, labor demand actually increases.
The output impact is a more modest drop of
9 percent, and the loss of productivity is reflected in an overall increase in labor demandof 1 percent, and thus less rural-to-urban
migration occurs. The difference between thetwo regional impacts is linked to the degree of
autonomy of their respective agricultural andfood markets. A greater share of Sub-SaharanAfrica’s agricultural output is exported and agreater share of its demand is imported. The
increase in domestic producer prices will
therefore be dampened by external markets in
Sub-Saharan Africa, compared with themore self-sufficient markets in South Asia.11
South Asia therefore witnesses more price47

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2 0 0 8adjustment and less volume adjustment relative to Sub-Saharan Africa.
Lower agricultural productivity, higher
prices, and lower wages for unskilled workers
increase poverty in both South Asia and SubSaharan Africa. In Sub-Saharan Africa, overall
consumer prices rise by 1.4 percent and foodprices by 4 percent. In South Asia, the increases are even more marked: 10 and 3 percent, respectively. Combined with a significant
fall in wages for the unskilled, which creates a
sharp drop in food wages (the quantity offood that can be purchased with the averagewage) that affects the poorest the most, thepoverty headcount index in Sub-SaharanAfrica would increase by some 5 percentage
points in 2015 relative to the baseline, eventhough the average income loss would be amore moderate 3 percent, suggesting that theloss in agricultural productivity harms thepoor, on average, more than others.12

Notes
1. Carry trade is an approach undertaken to leverage investments in higher-yielding securities intermediated through a low-interest cost center. For example, apurchase of emerging market equities or fixed income
securities through borrowing in yen at low Japanese interest rates and converting yen to local currencies tocomplete the transaction would be classified as a carrytrade. Even though estimates of funds intermediatedthrough the yen carry trade are highly uncertain, an indicator of their potential size can be discerned from thesubstantial weakness of the yen-dollar exchange rateduring 2006–7, when it fell some 5.8 percent.
2. A full analysis of recent developments and theoutlook for each region is available on the WorldBank’s Web site at http://www.worldbank.org/
prospects.
3. China is the largest overseas holder of U.S.
mortgage-backed securities, around $260 billion,
largely through China’s official reserve holdings andholdings of Chinese commercial banks. However,almost all of these instruments enjoy the backing of
U.S. government-sponsored enterprises Fannie Maeand Freddie Mac, and the risks associated with theseholdings appear to be minimal.
4. Developing countries of the Middle East andNorth Africa region, which account for regional

48

aggregate figures in this chapter, are Algeria, the Arab
Republic of Egypt, the Islamic Republic of Iran, Jordan, Lebanon, Morocco, Oman, the Syrian Arab Republic, Tunisia, and the Republic of Yemen. Low- andmiddle-income economies with insufficient data forcoverage are Iraq, Libya, and the West Bank and Gaza.
High-income countries of the region, which are excluded from aggregates in the chapter, are Bahrain,
Kuwait, Qatar, Saudi Arabia, and the United ArabEmirates.
5. Changes in the volume of oil and gas production
have been modest in recent years, ranging from 0.5 to
1.0 percent annual gains in Algeria to a decline in theIslamic Republic of Iran and the Republic of Yemen.
Hence the buildup in export revenues is largely due tothe large-scale increases in global oil prices during
2005 through 2007.
6. Inflation now exceeds 10 percent in Angola,
Argentina, Botswana, Costa Rica, Ghana, Haiti,
Indonesia, the Islamic Republic of Iran, Kenya,
Madagascar, Malawi, Mozambique, Sri Lanka,
República Boliviarana de Venezuela, and Zimbabwe.
7. Among individual vegetable oils, palm oil was
up 48 percent, coconut oil was up 41 percent, and soybean oil was up 25 percent. Among individual grains,maize prices rose 33 percent and wheat prices increased 30 percent.
8. Even though the revisions to the long-term forecast imply roughly a doubling of per capita growth for
Sub-Saharan Africa, that growth will have more impact after 2015 than before, as recent poverty forecasts
have already incorporated the strong upward trend in
per capita growth rates since the end of the 1990s.
9. The poverty numbers presented here do not yet
take into account the results of the recent International
Comparison Project, which will provide an updated setof price levels across countries. New purchasing power
parity exchange rates could—although not necessarily
will—lead to a new set of poverty estimates.
10. These projections involved six modeled countries or regions—Bangladesh, India, Pakistan, the restof South Asia, Nigeria, and the rest of Sub-SaharanAfrica excluding South Africa.
11. One plausible explanation for South Asia’s
greater self-sufficiency has been its higher agricultural
productivity over time because of the green revolution.
12. The poverty impact is generated by the WorldBank’s Development Economics Prospects Group’s
global income distribution dynamics poverty tool, andwas performed only for Sub-Saharan Africa because of
its high projected level of poverty in 2015. The global
income distribution dynamics tool probably underestimates the true poverty impact, because information on
consumption in most surveys is insufficient to factor inP R O S P E C T S

price changes fully. To the extent that the poor spend
a larger share of their meager budget on food, one
would anticipate an even greater negative impact forthe poor.

References
Martin, Will, and Devashish Mitra. 1999. “Productivity Growth and Convergence in Agriculture

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and manufacturing.” Policy Research Working
Paper Series 2171. World Bank, Washington, DC.
World Bank. 2007a. Global Development Finance2007. Washington, DC: World Bank.
_____. 2007b. Global Monitoring Report 2007. Washington, DC: World Bank.
_____. 2007c. World Development Report 2008:
Agriculture for Development. Washington, DC:
World Bank.

49

2
Technology and Technological
Diffusion in Developing Countries

Technological progress—improvements in thetechniques (including firm organization) by
which goods and services are produced, marketed, and brought to market—is at the heartof human progress and development. At thenational level, technological progress canoccur through invention and innovation;
through the adoption and adaptation of preexisting but new-to-the-market technologies;
and through the spread of technologies acrossfirms, individuals, and the public sector
within a country.
For developing countries, the bulk of technological progress occurs through the latter
two channels. Much of this chapter is concerned with measuring the extent to which
this process has occurred in countries in different regions and at different income levels.
Although the current state of technologicalachievement is itself illuminating, the pace atwhich it is changing is equally important, andthis is estimated by comparing the level oftechnological achievement in the early 1990s
with its current level and inferring the pace ofchange for different countries. The chapter
concludes by looking at the speed with which
specific technologies spread both across countries and within them. Armed with this broad
view of technological progress within developing countries, chapter 3 explores in moredetail the main factors that influence technological progress in individual developing
countries. That chapter places equal emphasison the international connections and networks that expose firms and individuals indeveloping countries to cutting-edge technologies and on the domestic factors that determine how successfully countries are able toabsorb and apply those technologies. To establish a baseline for future work, both chapters adopt a positive (empirical) rather than anormative or prescriptive approach. Nevertheless, some clear conclusions with policy
implications do emerge from the analysis.
This chapter begins its empirical examination by reviewing existing estimates of thecontribution of technological progress to economic growth as measured by gross domestic
product (GDP) and of income levels in developing countries. It reviews the mechanisms bywhich technology contributes to GDP and incomes, but also stresses the contributions oftechnology to other important development
goals that are not well captured by GDP
alone, such as health, education, and the environment. In addition, it discusses some of theprincipal limitations of this kind of empiricalanalysis and accompanying caveats. The chapter then discusses a wide range of previously
published indicators of the extent to which
various technologies have penetrated theeconomies of developing countries. For ease of
exposition, these indicators are arranged inthree groups: those showing the extent of scientific innovation and invention; those measuring the penetration of older technologies,

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2 0 0 8such as railroads and telephones; and thosemeasuring the penetration of newer technologies, such as personal computers and mobile
phones. The chapter then develops an aggregate measure of technological achievement
using a statistical technique (principal components analysis) that combines some 20 separate indicators of technological achievement
along these three dimensions, plus anadditional dimension, the extent to whichcountries are exposed to external technologies(explored in more detail in chapter 3). The
distribution of overall technological achievement across countries and changes over the
past decade are examined to evaluate both the
speed with which technological achievement
in countries is advancing and the dimensions
along which change is occurring most quickly.
The chapter concludes by examining a newlongitudinal data set (Comin and Hobijn
2004) that tracks both the speed with which
individual technologies are transmitted acrosscountries and the pace with which they diffuse
within countries.
Eight main results emerge from thischapter:
1. While technological achievement is related to income levels across countries, thenature of this relationship differs depending upon the dimension of technology being
examined.
• While a strong correlation exists between scientific innovation and invention and income in high-income countries, almost none of this kind of activity
is being performed in developing countries. As a result, virtually all technological progress in developing countries
comes from the adoption and adaptation of preexisting technologies.
• At an aggregate level, the use of older
technologies is positively related to income in developing countries. However,
the extent to which they are employedvaries substantially within income
groups, suggesting that developing

52

countries’ history, geography, and past
government success in delivering
infrastructural technologies are equallyimportant determinants of the extent towhich older technologies are used.
• Penetration rates of more recent technologies vary more regularly with income. In part this reflects their relatively
lower start-up and infrastructure costs
than those of older technologies andtheir more flexible delivery structure.
2. While technological achievement tends torise with income, it tends to level off. The levelof technological achievement at which this leveling off occurs differs across countries according to their geography, history, and level oftechnological absorptive capacity (discussed in
more detail in chapter 3). Thus, reflecting anemphasis on equal access to education andstate-provided technological services, countries
within the Europe and Central Asia region
have significantly higher levels of technologicalachievement than other countries at similar income levels. By the same token, countries in
Latin America and the Caribbean are somewhat less advanced than might be expected, as
earlier inward-looking policies and weak basic
technological literacy in the overall population
have limited the extent to which technologies
have permeated economic activity.
3. Technological achievement within countries can vary widely. Despite a level of technological achievement in major cities that canrival that in high-income countries, low levelsof technological advancement in rural areas
mean that, viewed as a whole, countries suchas China and India are not particularly technologically advanced. Moreover, because technology spreads slowly across firms, there arewide differences in the technological sophistication of production, even within the same
sector in the same country.
4. Overall, the technology gap between
middle-income and high-income countries has
narrowed over the past 10 years. Evidence ofcatch-up is particularly strong in Chile,
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technological achievement increased by morethan 125 percent during the 1990s.
5. On average, technology is advancing more
rapidly among low-income countries. Among
those low-income countries for which sufficient
data are available, the penetration of technology is progressing more rapidly than in either
middle- or high-income countries. However,this reflects very strong catch-up in some countries and more modest improvements, or evenrelative declines, in the majority. Moreover,technology in high-income countries is also advancing, and the absolute increase in thesecountries is larger than in developing countries.
6. The pace at which technology spreads
between countries is accelerating. Whereas a
new technology in the 1800s could take aslong as 100 years to reach 80 percent of theworld’s countries, for a new technology toreach 80 percent of the world’s countries now
takes less than 20 years.
7. Ultimately, however, what matters mostfor technological achievement is the speedwith which technology spreads within a country. Here too the evidence suggests a pickup in
the pace of internal diffusion, but there is also
widespread divergence across countries, evenacross those at similar income levels.
8. Changes in the regulatory environment
and in the nature of technologies partly explain the acceleration in the rate at which they
penetrate into developing countries. Many old
infrastructure technologies, such as roads,
railroads, sanitation, and fixed-line telephonesystems, are often provided by the government
and are thus subject to public sector budget
constraints and the risk of government failure.
By contrast, the most common new technologies, such as the Internet, mobile phones, andcomputers, are being delivered in a regulatoryenvironment that encourages competition andthat harnesses private capital (domestic andforeign) to provide basic infrastructure. Moreover, the past 10 years have been more stable
politically than the 1980s and 1990s, which
has likely given a boost to the diffusion ofnewer technologies.

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The role of technology
in development

Technological progress is at the heart ofhuman progress and development. As the1998 World Development Report on theknowledge economy (World Bank 1998) emphasized, the understanding of how things are
created and the communication of that knowledge are critical drivers of economic progress.
Central to understanding the role of technology is the recognition that technology andtechnological progress are relevant to a wide
range of economic activities, not just manufacturing and computers. For example, some estimates suggest that technological progress hasboosted productivity in agriculture four times
as quickly as in manufacturing (Martin and
Mitra 2001). Indeed, seemingly low-tech products such as corn or flowers can be the resultof relatively high-tech production processes,
while in some countries the production ofostensibly high-tech products such as computers is an outcome of relatively low-tech assembly activities. Finally, in many cases technology
is embodied in production and management
systems rather than in physical goods or software algorithms. A computer loaded with thelatest software that sits unused on a desk formost of the day is a very different manifestation of technology than the same computerthat is running a production process or managing an accounts payable system.
This report defines technology and technological progress in this wider sense, althoughdata limitations may give some of the measuresdeveloped the flavor of a more narrow, physical, and manufacturing-oriented definition.

Technology is both a critical determinant
and an outcome of rising incomes
Traditionally, economists view the process bywhich goods and services are produced as one
that combines capital, labor, and other factorsof production (land and natural resources)using a particular technology. The relative efficiency with which a given economy produces

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Table 2.1 Disparity among TFP levels
remains wide
TFP relative to thatof the United States,
2005(index,Regions
U.S. ⫽ 100)
East Asia and the Pacific8.4
Europe and Central Asia
21.7
Latin America and the Caribbean
19.3
Middle East and North Africa
13.3
South Asia
5.8
Sub-Saharan Africa
5.6
Income groups
High-income OECD
countries
High-income non-OECD
countries
Upper-middle-income
countries
Lower-middle-income countries
Low-income countries

Annual TFP
growth,1990–2005(annualpercentagechange)
5.1
2.2
0.2
0.5
2.3
0.2

77.1

1.3

53.1

0.7

23.7
9.6
5.2

1.2
3.2
1.7

Source: Poncet 2006.
Note: OECD ⫽ Organisation for Economic Co-operation andDevelopment; TFP ⫽ total factor productivity.

goods and services given a certain quantity oflabor and capital is called total factor productivity (TFP). TFP is commonly interpreted as ameasure of the technology of production andits rate of growth as a measure of technicalprogress.1
International comparisons of TFP suggestthat enormous gaps exist between highincome and low- and middle-income countries
in the efficiency with which they produce
goods and services (table 2.1). In 2005, the average level of TFP in low-income countries
was only slightly more than 5 percent of
U.S. levels. The technology lower-middleincome countries employed was roughly twice
as efficient and that of upper-middle-income
countries was approximately four times as efficient. While these gaps have been narrowing
for low-income and lower-middle-income
countries, upper-middle-income countries
have only managed to maintain their relative
position in relation to high-income countries.
At the regional level, these gaps have widened54

or remained stagnant in three of six developing regions, with TFP growing faster in highincome countries than in Latin America andthe Caribbean, the Middle East, and SubSaharan Africa.
The relationships between income growth,
technological progress, capital accumulation,
and welfare are, of course, much more complex
than can be summarized in a simple measureof TFP, partly because each factor of production and the technology with which factors
are combined are dependent on one another.
As discussed in chapter 3, capital goods often
embody significant technological progress andthere is no simple way to distinguish between
the contribution that each makes to growth.
Similarly, technology in the form of knowledge of business processes and of science andgeneral experience is embodied in labor.
Moreover, the contribution of technology towelfare is only imperfectly measured by its impact on GDP (box 2.1).

Technological progress can lower costs,
improve quality, create new products,
and help reach new markets
Even though measures of TFP and its progress
give us a sense of the relative dispersion oftechnological progress, they tell us little about
the mechanisms by which technology influences development. Technological progress involves much more than doing the same things
better or with fewer resources. It is more dynamic, involving both the creation of new andnew-to-the-market products and production
techniques, but also the spread of these techniques across firms and throughout the economy. While the mechanisms by which technological progress contributes to development
are in some sense obvious, the following deserve special mention:• Technological progress can spurdevelopment by lowering the costs ofproduction and enabling the exploitationof increasing returns to scale. By improving the efficiency with which existingT E C H N O L O G Y

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Box 2.1 Technology can contribute to welfare
without affecting measures of short-term output

W

hile the relative level of TFP provides a senseof the efficiency with which factors are combined, it ignores the welfare contributions of technology that do not have an immediate impact on GDP.
For instance, in national accounts, the purchase ofmachinery that reduces air and water pollution, suchas scrubbers for smokestacks, may not increase
GDP. While the purchase of machinery will berecorded as income accruing to the producing firm,
this may be offset by reduced profits and other factor payments of the purchasing firm. Thus, eventhough over the longer term the machinery may contribute to a reduction in days of work lost because of
respiratory illnesses, and therefore to an increase innational income, over the medium term the machinery would have little measurable effect on GDP or
TFP despite the improvement in air quality, which
would provide a general, if not monetized, benefit.
Similarly, technological advances that reduce the costof public services may have little impact on recorded

products are produced, new technologies
can open up the possibility of increasing
output and, assuming that markets areavailable, taking advantage of previously
unexploited increasing returns to scale.
• Technological progress in one sector cancreate new economic opportunities inother sectors. Lower production costs
can create whole new products, or evensectors. A new-to-the-market innovation in one sector can result in a flowering of activity in other sectors bycreating a demand for and supply of
goods and services that did not exist
previously (box 2.2).
• The benefits of a new technology can
extend well beyond the immediate
sector or good in which the technology
exists. This is the case if the initial
product is an important intermediate
good in the production of other goods,

income, but may have important implications for thequality of life.
In developing countries, the diffusion of suchtechnology as water and sanitation systems, oral rehydration techniques to treat diarrhea, immunization, malaria prevention, and contraceptives havebeen tremendously important for improving household well-being, but such innovations will affectoutput only over time as improved child health eventually pays off in terms of greater adult productivity(Alderman, Hoddinott, and Kinsey 2006; Behrman
and Rosenzweig 2004; Glewwe, Jacoby, and King
2001). These technologies may also have importantnoneconomic societal benefits, such as improved gender equality, which are not recorded in GDP because
women are more likely to engage in nonmarket production, or may appear only with a lag as improved
health technologies facilitate women’s entry into thelabor force over time (Bailey 2006; Miller 2005;
Schultz 2007).

for example, telecommunications orreliable electrical service.
• Technology can yield quality improvements. Such improvements can enable adeveloping country to penetrate moredemanding consumer and intermediatemarkets. This can be as simple as employing machinery and equipment that
produce goods and services that correspond to the more exacting expectations
and standards of consumers and business clients in high-income countries.
Technology in this sense extends beyond
engineering technology to include management techniques. For example, one of
the big challenges facing Ugandan fisheries was creating systems of quality assurance that allowed them to meet phytosanitary standards in the European
Union on a sustained basis (Chandra andKolavalli 2006).

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2 0 0 8Box 2.2 Technological innovation may spur further
innovation in upstream and downstream activities

In Chile, the creation of a viable internationalsalmon farming industry involved the simultaneousdevelopment of a number of related new-to-themarket products, including the domestic productionof fish tanks, fish eggs, salmon food, and vaccines,
and eventually the introduction of additional varieties of farmed fish. New process technology was
also introduced, including systems for feeding, processing, and stocking fish that met global quality
and phytosanitary standards.
The introduction of a cut flower industry in
Kenya to serve the European market represents theindirect effect of the successful introduction of theindustry in Colombia to serve the U.S. market. The
new activity generated a wide range of additional
new-to-the-market innovations in the form ofgreenhouses and postharvest care facilities topreserve the freshness of blossoms. Process

technology involved learning how to use chemicals
and mastering the logistical challenge of delivering
this fragile product to the local airport on time andwith sufficient regularity to meet customers’ just-intime requirements.
Success in one activity may well lead to further
innovation and technological deepening. The movefrom producing carnations to more fragile and expensive roses is an example. Another example is theshift to higher-quality products such as chilled rather
than frozen fish fillets. Yet another example of deepening is palm oil production in Indonesia, where newprocesses include the production of new varieties ofpalms; the introduction of new crude and processedpalm oil refining technologies; and, notably, the introduction of oleo chemical technologies.
Source: Chandra 2006.

Even relatively simple technologies canhave far-reaching development impacts
Technological advances do not need to be extraordinarily complex or reliant on the mostsophisticated technology to have importantdevelopment impacts. In many low-income
countries, fairly commonplace technologies
are often in short supply because of weak capacities to implement them (box 2.3), and relatively simple innovations can have profoundeffects. The green revolution is a dramatic example of the effectiveness that even modest
technological advances can have in boosting
incomes among the poor. In addition, greater
access to the technologies required to store
and process food can increase food security,
particularly in communities without access toreliable electricity or means of refrigeration.
The use of sawmill waste (sawdust, planershavings, and chipper dust) to produce carbonized briquettes for use in householdcooking can increase access by the poor to fuelfor cooking while reducing deforestation

56

pressures.2 Dissemination of the simple skills
required to build rainwater collection systems
can greatly improve access to clean drinking
water and reduce the incidence of diarrhea, amajor cause of infant mortality. Insecticidetreated mosquito nets are a well-known, costeffective strategy for preventing the spread ofmalaria, but the main challenge in many countries remains developing and implementing amechanism for distributing them to thosemost in need and ensuring that they are used.

Despite these advantages, technologicalchange can also be disruptive
While technological progress generates substantial benefits, it can also be disruptive, because its benefits are not necessarily evenly
distributed. In particular, while the introduction of an advanced technology may mean
new opportunities for the innovator andreduced costs for consumers, it can result insignificant short-term losses in incomes forcompetitors using older technologies. For

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Box 2.3 Promoting appropriate technologies
in Rwanda

A

recent study of Rwanda identified simple technologies whose greater use could have a substantial impact on development. For example, the study
identified a lack of qualified plumbers and water
sanitation technicians as a major factor holding backthe implementation of simple rainwater collection
strategies that have helped improve the quality ofdrinking water supplies in neighboring countries.
Similarly, a lack of basic skills, including those necessary to manufacture stainless steel products, prevents
the implementation of simple food processing

techniques, such as passion fruit pasteurization andpulping, that could reduce the share of crops lost to
spoilage, which sometimes results in the loss of asmuch as 30 percent of a crop. Public sector dissemination of best practices is hindered by poor skills andinappropriate incentives, which result in research
centers producing local products that take insufficient account of users' needs and requirements. The
table provides a snapshot of the status of efforts topromote the diffusion of simple technologies in
Rwanda.

Diffusion of selected “appropriate” technologies in Rwanda
Rural energy• Biogas for institutions: installations ongoing and spreading• Biogas for households: pilot program of 163 units to start 2007
• Micro hydropower: 6 projects in preparation, more in future?
• Biofuel: no national program or policy as yet• Wind: no program or policy as yet• Peat: large stocks but limited exploitation• Efficient stoves for urban areas: national program ongoing• Efficient stoves for rural areas: some programs ongoing• Rice and coffee husks for briquette production: limited programs• PV systems: technology available but slow market• Solar water heating: technology available but slow market

Water and sanitation• Roof water harvesting: only on limited scale for households• Boreholes: few and expensive• Hand pumps: imported from region or India• VIP and Ecosan latrines technology: available, limited uptake

Agricultural technologies
and transport• Irrigation through treadle and motorized pumps: limited uptake• Drip irrigation: starting• Animal traction for tillage and transport: promoted in certain areas• Small tractors for rice puddling and transport: few units imported• Rice threshing and winnowing: few machines available and locally
produced• Rice hulling: opportunities for small-scale processing• Maize milling: machines imported and locally made• Oil presses for sunflower, soya, essential oils: starting• Livestock spraying: locally made machine now available

Low-cost building• Rice and coffee husks and peat for brick burning: some use• Hand brick press machines: locally made and imported• Engine brick press machines: imported

Source: Watkins and Verma 2007.

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example, improved production and processingof sugarcane in Brazil has allowed production,
incomes, and employment in that country toincrease significantly, but it has done so at theexpense of sugar producers in other countries,
who have been unable to compete. While theassociated income losses may be painful,
the global impact tends to be positive, because
the income losses promote the reallocation of
resources and activity to more effective uses.
Technological progress may also benefit
certain classes of workers over others. Technological change that uses high-level skills
more intensively may hurt less skilled workers
in high-income countries by increasing the demand for skilled workers and simplifying
tasks or allowing the outsourcing of tasks that
previously were accomplished by relatively
well-paid semiskilled workers. Many economists cite the recent tendency for technological progress to benefit more skilled workers asa major source of the rise in earnings inequality in most advanced countries.3 Note, however, that technical change does not always
raise the demand for skilled workers relative
to unskilled workers, nor does the disruption
necessarily occur to the detriment of low-skill
workers. Thus the weaving and spinning machines that benefited lower-skilled workers byenabling them to produce textiles formerly
produced by skilled artisans were destroyed in
the Luddite and Captain Swing riots of the
19th century (Acemoglu 2002).
Moreover, if changes in earnings indeveloping countries are taken into account, it
is no longer clear that technical change has
been biased toward skilled workers. By somemeasures, global inequality has not increased
over the past two decades.4 Global income
distribution has benefited from the rapid
growth in China and India, which has enabled
hundreds of millions of people to escapepoverty. Technical change interacting with increased globalization may have increased inequality within some countries by increasing
the demand for skilled workers. By opening
up opportunities for technical progress
through the production of export goods that58

require relatively high-level skills, greater participation in international trade has led to increasing demand for skilled workers, and thus
to greater income inequality in some countries(Arbache, Dickerson, and Green 2004; Zhu
and Trefler 2005). At the same time, technicalprogress can be strongly pro-poor, for example, the discovery of simple technologies tostore and process food in areas with insufficient access to electricity or to enable low-cost
approaches to combating disease.
The disruptive nature of technologicalprogress can generate important benefits tosociety by spurring competition. For example,
the introduction of mobile phone technology
in several developing countries has introduced
an important element of competition not onlyin the telecommunications sector, but also inbanking and other information-sensitive sectors. Partly as a result, many of the informational asymmetries generated by a lack of effective communications that various middlemen
used to exploit have been eliminated, raisingproducer prices and lowering consumer
prices.5 These benefits are often accompaniedby shifts in the distribution of income whereby
some groups can lose either relative to others
or in absolute terms. These losses can be difficult for the poor to absorb, underlining theimportance of safety nets to minimize social
conflict and to ensure that overall progress
does not come at too high a cost for someindividuals.

Measuring technology
in developing countriesT

he remainder of this chapter is concernedwith measuring the level of technologicalachievement in developing countries and recent progress in this regard. This first section
goes beyond indirect measures of technology
like TFP, and seeks a more direct measure oftechnological achievement by exploring the extent to which specific technologies have permeated economic activity in developing countries and the intensity of scientific innovationand invention.

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Measuring technology directly is difficult,mainly because, unlike pencils or automobiles,
technology has no easily counted physicalpresence. Nor does it have a well-definedprice that would allow it to be measured andaggregated in the same way that services are.
Rather, technology is embodied in products,
intermediate inputs, and processes. As aresult, most efforts to measure it have been
forced to use indirect techniques (seeArchibugi and Coco 2005 for a review). Some
indexes emphasize inputs into technologicaladvancement, such as education levels, numbers of scientists and engineers, and expenditures on research and development (R&D) or
R&D personnel, for example, the index ofinnovation capability put out by the United
Nations Conference on Trade and Development (UNCTAD 2005). Other indexes also
incorporate information on the diffusion oftechnologies and on indicators of innovation,such as the number of patents granted. The
technology achievement index, published by
the United Nations Development Programme
is an example. Still other indexes focus on outputs, such as the share of high-tech activities
in manufacturing value added and exports, forinstance, the index of competitive industrial
performance published by the United Nations
Industrial Development Organization (UNIDO
2002). Some indexes focus more on the mechanisms by which technological progress isachieved (Sagasti 2003) or by which technological learning occurs (Soubattina 2006). For
example, the national innovative capacity
index reflects government and firm-level
policies associated with successful innovation(Porter and Stern 2003).
Each of these approaches has its strengths,
but none of them is entirely satisfactory, bothbecause the indicators used fail to do justice tothe broad definition of technology adopted
here (box 2.4), and because the methods bywhich these indexes are constructed are sometimes arbitrary (Archibugi and Coco 2005). To
overcome these deficiencies, the indexes developed in the remainder of this chapter include anumber of indicators not previously included

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in technology indexes. Summary indexes arederived from these along three dimensions oftechnological achievement: the extent of scientific innovation and invention, the diffusion ofolder technologies, and the diffusion of newer
technologies. We begin by reviewing current
levels of technology and their dispersion andrecent trends in a number of indicators that theliterature pertaining to these three dimensionsof achievement has used.
In a subsequent section, summary indicators of achievement along each of these dimensions are derived using principal components analysis. Their current levels and recent
trends are discussed, an overall index of technological achievement is generated from thesesummary indicators, and a fourth indicator(developed in chapter 3) summarizes the extent to which external technology is used in
the production process.

Scientific innovation and invention
Most technological improvements in developing countries are at least partially dependent
on the diffusion of technology from moreadvanced countries. Nevertheless, scientificinnovation is important in some developing
countries, and advanced technologies often
need to be adapted to local conditions, which
may require further innovation.

The intensity of innovation is closely
related to per capita income . . .
The degree of scientific innovation in developing countries, as measured by the number ofjournal articles and patents granted (scaled bypopulation), varies sharply with per capita income (table 2.2).6 Authors from high-income
countries report 7 times as many published articles than those from upper-middle-income
countries and 88 times as many as authors from
low-income countries. Variations for measuresof patents granted and license fees earned areeven larger. This result is generally reflected inregional data, with countries in regions withhigher incomes such as Latin America and the
Caribbean reporting higher levels of patents
and journal articles than regions such as South59

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2 0 0 8Box 2.4 Shortcomings of available measuresof technological achievement

Available indicators provide only a partial view ofthe level of technological achievement in developing countries and of the gap with high-income
countries. Most available indicators reflect the quantity of technology used, whereas the quality of delivery is often what is critical. For example, the value ofelectricity in production is a function of both theamount consumed and its reliability. In general,
global indicators of technology levels do not takedifferences in quality sufficiently into account. To theextent that quality of delivery varies systematicallywith income levels, the indicators likely understate
the differences between rich and poor countries. For
example, Kaufmann, Leautier, and Mastruzzi (2005)
find that access to infrastructure services (similar towhat we measure here) and the quality of infrastructure services in urban areas are both closely related
to the strength of governance, which is itself highly
correlated with income levels.
Nor do the available indicators reflect the disparity of achievement within countries. National indicators of technological achievement are based on country averages, but large gaps exist in the extent towhich technologies are used within regions, income

groups, and countries. For example, the relatively
low performance of South Asia reflects the slownessof technology diffusion from the relatively advanced
major cities to rural areas, as well as from the rich tothe poor within urban areas. Indeed, the degree oftechnological diversity across Chinese regions orIndian states mirrors the extent of diversity acrossdeveloping countries, with regions containing large
technologically sophisticated cities, such as Mumbai
or Delhi, being well ahead of areas that lag behind ineconomic development.
Finally, most indicators tend to be biased toward
goods (as opposed to services), and among these,
toward electronic and other high-tech goods. Most
measures also focus on product technology (goods
and services that themselves are highly technical)
rather than final (or intermediate) goods and services
that may be technologically unremarkable, but which
are the result of a technologically sophisticated production process, for example, maize that is produced
using sophisticated crop rotation methods, enhanced
irrigation and fertilization strategies based on satellite imaging, and bioengineered seeds.

Asia or Sub-Saharan Africa, which are dominated by lower-income countries. The ratio of
patents granted to residents to the total numberof patents a country grants (an indicator of theextent to which innovations are generated
domestically) is only weakly correlated withincome. Equally important influences include
the domestic economic structure, the country’s
openness to foreign direct investment (FDI) (seechapter 3), the domestic costs of making a patentapplication, local intellectual property rights,
and the legal environment—all factors that dictate the potential benefits from holding a patent.
Patent activity in middle-income countries
has increased over the past 20 years(figure 2.1), primarily because of a sharp jumpin patenting (relative to population) among

60

upper-middle-income countries in the early
1990s following the integration of thetransition economies of the former Soviet
Union into the world economy. The continuous increase in patent activity among lowermiddle-income countries mainly reflects activity in China, whose share in world patentapplications rose from about 1.5 percent in
the late 1980s to a peak of nearly 10 percent
in 2004. Excluding China, additional patenting activity in lower-middle-income countries has been relatively modest. Whilepatent activity has also risen in low-income
countries, it remains far below that in
middle-income countries both in the absolute numbers of patents issued and relative
to the population.

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D E V E L O P I N GC O U N T R I E STable 2.2 Scientific and innovative outputs
Scientific andtechnical journal
articles,
2003

Regions and income groups

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

17
90
35
18
9
5

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

111
584
85
21
7

USPTO
patents,
2006

EPO
patents,
2005(Number per million people)
0.7
0.01
0.9
0.40
0.7
0.21
0.1
0.03
0.5
0.07
1.4
1.16
38.6
135.1
1.4
0.6
0.4

11.4
42.6
0.40
0.01
0.07

Total
patents,
2003

Number ofpatents tononresidents
2003

Royalty andlicense fee
receipts
2004

37
95
46
—
1.4
157

(percent of
total)
77
28
98
—
60
100

(percent of
GDP)
0.02
0.06
0.03
0.02
0.00
0.06

127
331
91
46
3.5

41
38
42
64
56

0.27
0.33
0.04
0.03
0.00

Source: World Development Indicators, USPTO, EPO, and World Intellectual Property Office data.
Notes: EPO ⫽ European Patent Office, USPTO ⫽ U.S. Patent and Trademark Office. To reduce home bias, the total patents
granted by the USPTO to high-income countries exclude those granted to the United States, and the total patents granted by the
EPO exclude those granted to high-income European Union countries.
— ⫽ not available.

. . . although the Europe and Central Asia
region is an outlier
Reflecting a history of advanced scientificand engineering work in a number of former
Soviet bloc countries, the Europe and Central
Asia region has relatively high levels of scientific innovation and invention (table 2.2).

Figure 2.1 Patent activity is rising in
middle-income countries
Total patent applications per 10,000 people
1.8
Upper-middleincome countries

1.6
1.4
1.2
1.0

Lower-middleincome countries (LMY)

0.8
0.6

Low-income LMY excl. China
countries

0.4

Publication rates there are equal to those inmany high-income countries, and patent activity is more than twice the level in any otherdeveloping region. The region is also themost self-reliant of developing regions interms of patent activity, with only 28 percent
of patents being filed by nonresidents, a figure that is even lower than the high-income
country average of 38 percent. The East Asia
and Pacific region also scores high in terms ofpatents, although its publication record ismore in keeping with that of other developing regions. In some countries, such as China
and India, conscious efforts to raise R&D
spending have led to higher levels of scientificinnovation than might be expected based on
income (Lederman and Saenz 2005), while
low levels of innovation in Latin America
and the Caribbean reflect an academic research tradition with few links to industry(Maloney 2006).

0.2

95

93

91

97
19
99
20
01
20
03

19

19

19

89

19

87

19

19

19

85

0

Source: World Development Indicators.

Penetration of older technologies
The clear dominance of high-income countries
in the number of scientific and technical journal articles published, the number of patents

61

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2 0 0 8Box 2.5 Deepwater petroleum technology in Brazil

E

xperience in the extractive sectors can help generate new technologies that in turn can be used asa source of global comparative advantage. The experience of Brazil’s Petrobras, a majority state-owned
company, in exploiting that country’s considerable
deepwater oil and natural gas resources provides aninteresting example.
To exploit the Campos Basin, which lies in the
Atlantic at a depth of more than 100 meters andnow accounts for nearly 84 percent of Brazil’s oil
production, Petrobras created the anticipated production system on a floating platform. This advanced system, developed with the help of foreign
experts, cut the delay between discovery and early
production of deepwater fields from as long as six
years to a mere four months and has since become amodel for the industry worldwide.
Petrobras has successfully leveraged this experience, developing many patents both on its own andin conjunction with the rest of the industry, universities, and research institutes. It has invested heavily inresearch and education, creating its own R&D center, to which it allocates 1 percent of its gross income. The center, whose staff is increasingly made up
of Brazilian experts, has contributed significantly to

Petrobras’s many patents and continues to help develop cutting-edge technology for the company.
Petrobras is now recognized as a world leader in allphases of deepwater technology—from drilling; tounderwater completion, pumping, and production
using floating structures; to mooring and processing—with its particular expertise is in the areas of unmanned subsea installations, marine engineering, andfloating production systems. About two-thirds of its
production is at a depth of more than 300 meters, andat various times Petrobras has set a number ofrecords, including oil production at a water depth of
1,853 meters and the then-deepest exploration well(2,853 meters) in the giant Roncador field.
Petrobras has used its advanced technology toperform exploration and production work in
Angola, Argentina, Bolivia, Colombia, Nigeria,
Trinidad and Tobago, and the United States and has
acquired offshore exploration blocks and interests inEquatorial Guinea, Libya, Senegal, and Turkey(Black Sea). It has also recently signed various agreements in China, India, Mexico, Mozambique, andTanzania.
Source: World Bank.

granted, and the extent of licensing androyalty fees realized points to the relatively
minor role that at-the-frontier innovation
plays in determining technological progress indeveloping countries and the relative importance that adoption and adaptation of existing
technologies must play. We look first at the
diffusion of older technologies.
The major technological innovations of thepast two centuries—such as steam power, electricity, the internal combustion engine, thetelephone, radio, and television—exist to
some degree in virtually every country in theworld. However, the extent to which they areavailable within countries varies enormously,
depending both on the technical adaptive
capacity of the country (chapter 3) and on theaffordability of the technology.
Many of the most prominent technologies
are in the manufacturing sector. However, the62

efficient extraction of natural resources often
requires advanced technology and can encourage technological progress. Indeed, the failure
to absorb new technologies is an importantreason for the slow growth of many natural
resource-based economies in Latin America(box 2.5).

Affordability limits the penetration ofelectrical networks in some countries . . .
Affordability, exacerbated by fiscally constrained governments, helps explain themodest diffusion of many technologies criticalto development. This appears to be the casefor a number of infrastructure technologies
such as electricity (figure 2.2), rail and roadtransportation, and fixed-line telephony. In
each of these cases, a reliance on governments
to provide these services, coupled with weak
institutions and a lack of domestic capacity toT E C H N O L O G Y

A N D

T E C H N O L O G I C A L

Figure 2.2 Electrical consumption varies
markedly even at similar income
levels (2004)
Per capita electric power consumption(kilowatt hour per capita)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
0

5,000

10,00015,00020,000GDP per capita PPP (current $)East Asia and the Pacific

Europe and Central Asia

Latin America andthe Caribbean

Middle East andNorth Africa

South Asia

Sub-Saharan Africa

Sources: World Bank; World Development Indicators.

maintain systems, has limited their diffusion
in a number of low- and middle-income
countries.
Other factors, such as industrial structure,climate, tax policies, and preferences, are also
at play. In the case of electricity, the way a
country organizes its power sector (the process
technology employed) can also have a strong
bearing on the diffusion of the specific technology within the economy. For example,
many countries in the former Soviet bloc enjoy
near-universal access to electrical power andper capita consumption rates that are morethan double those in any other developing
region (table 2.3). This reflects a much earlier
decision to emphasize electrification and theprovision of subsidies under communist rule.
Access to power in other regions is more
spotty, with most of the population in mostlarge cities having access (or at least thepossibility of access) to the electrical power
grid, but with a large share of the rural population, particularly in the poorest countries,

D I F F U S I O N

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having no or only limited service. In India
for example, only 85 percent of rural villages
have access to the power grid. In Sub-SaharanAfrica, only 8 percent of the rural population
has access to electricity, compared with 51 percent of the urban population. In South Asia,
only 30 percent of the rural population has access to electricity, compared with 68 percent of
the urban population (Besant-Jones 2006).
Moreover, the reliability of the grids varies
enormously, partly because of the amount ofelectricity lost through pilferage or in transmission. Because of electricity’s importance as
an intermediate input, the reliability of theelectrical supply may be even more importantto the diffusion of other technologies than its
availability. Many machines are sensitive to thequality of electrical power and many processes
are intolerant of interruptions. As a result, unreliable power can be an important factor inpreventing the implementation of these technologies in some countries. For the world as awhole, electricity losses amount to an averageof 9 percent of the power produced. Countries
in East Asia and the Pacific and Sub-SaharanAfrica and members of the Organisation for
Economic Co-operation and Development(OECD) do better than this average, while
losses in South Asia approach 30 percent.
Furthermore, the impact of power reliability
differs across countries. In Bangladesh, forexample, where transmission and distribution
losses represent only 9 percent of produced
power, some 70 percent of managers indicatethat unreliable power is a serious constraint tobusiness. In contrast, in Cameroon andMoldova, where transmission losses are muchgreater than in Bangladesh, the share of managers making this complaint is much lower—
13 percent in Cameroon and less than 4 percent in Moldova (World Bank 2007e).

. . . and restricts access to efficienttransportation . . .
Like the electrical network, transportation
systems are old technologies that enable
other technologies, and their dissemination
within countries has been closely affected by63

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2 0 0 8

Table 2.3 Indicators of the diffusion of older technologies
Electric power consumption
2004

Electric power transmission
and distribution losses
2004

Telephone mainlines
2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(kilowatt-hours/capita)
1,343
3,637
1,674
1,289
414
550

(percentage of output)
7
12
17
16
26
9

(per 100 people)
19
26
18
13
4
2

Imcome groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

2,606
9,609
3,454
1,448
375

9
6
12
10
23

19
54
23
19
3

Price basket for residential fixed
telephone line
2004

Road density
1999

Rail density
2005

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(percentage of gross national
income/capital/month)
—
3.5
3.2
4.4
10.6
29.3

(kilometers ofroad/100 square kilometersof land area)
14.2
11.8
16.1
6.8
80.6
6.4

(kilometers ofrail/100 square kilometersof land area)
0.42
0.81
0.31
0.27
1.55
0.18

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

2.2
1.0
3.9
6.0
20.7

22.1
41.2
11.9
14.5
19.0

0.66
1.17
0.70
0.39
0.36

Agricultural machinery and tractors
2003

Irrigated land
2003

Air transport
2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(per 100 square kilometersof arable land)
93
184
123
141
143
13

(as a percentageof cropland)
—
11
11
32
39
4

(number of registeredcarrier departures/1,000
people)
1.1
2.1
2.8
1.2
0.3
0.5

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

202
433
173
113
90

18
12
10
24
24

3.7
18.0
3.2
1.3
0.3

Sources: World Bank; World Development Indicators.
Note: — ⫽ not available.

64

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government regulation and affordability.
Many process technologies (for example, theassembly, sorting, refrigeration, and delivery offresh fruit) depend on an effective transportation network. The diffusion of railroads
among developing countries varies widely,with the countries of the former Soviet bloc
having a much more extensive rail transportsystem than other developing countries at similar income levels. This variance is explainedin part by differences in population density(figure 2.3). The cost per passenger mile of a rail

D I F F U S I O N

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system tends to fall with population density,
which helps explain the particularly low density of railroads observed in Sub-SaharanAfrica (Stelling and Jensen 2001). Interestingly,
with the exception of Europe and Central
Asia, per capita income does not appear to be
an important factor in explaining the diffusionof either rail or road networks. Moreover, theobserved distribution of road networks is only
weakly correlated with population density.
Relative to other regions, Latin America andthe Caribbean has significantly more roads

Figure 2.3 Rail and road densities rise with income and population density (2004)
Rail density
By population density - 2004

By income per capita - 2004
14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0
0

5,000

10,00015,00020,0000100

GDP per capita PPP (current $)

200

300

400

People per square kilometer

Road density
400

400

350

350

300

300

250

250

200

200

150

150

100

100

50

50

0

0
0

5,000

10,00015,00020,000

0

200

400

600

800

1,000

People per square kilometer

GDP per capita PPP (current $)East Asia and the Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Sources: World Bank; World Development Indicators.

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2 0 0 8than would be expected on the basis of population and income, while the high averageroad density in South Asia mainly reflects highdensities in Bangladesh and India and low
densities elsewhere in the region.
Considerable disparities in access to roadand rail transport services are found withinmany developing countries. Rural areas in particular suffer from poor access to transport services. During 1994–2001, only an estimated61 percent of the rural population in lowincome countries lived within two kilometersof an all-season road (Briceno-Garmendia, Estache, and Shafik 2004). Poor access to transport facilities can cause the neglect of potentially productive land, limit yields of used
lands to levels below their potential, and reduce profits from the sale of produce, all ofwhich weakens incentives for farmers to maximize production, thereby limiting theprospects for alleviating poverty (World Bank
2006). Improving road access can thus have adramatic impact on growth in remote areas.

. . . and air transport and telephones
A well-developed air transport network is alsoessential for some technologies and may be aparticularly important enabling technology
for landlocked economies with poor access toports in neighboring countries. Air transport
is a newer technology, and its distribution
across countries tends to follow income at themost aggregated level. Thus high-income
countries registered 18 carrier departures per
1,000 people in 2004, compared with 0.3 departures for low-income countries. Although
middle-income countries have a higher number of carrier departures relative to population
than do low-income countries, the crosscountry correlation between income and airtransport intensity is relatively low for all developing countries (figure 2.4). This suggeststhat factors such as the importance of tourism
to the economy and access to alternative formsof transport—especially relevant for island
nations—are among the most important determinants of the intensity of air transport use.
The delivery of fixed-line telephone services
follows a similar pattern. On average, the incidence of this mature technology among
upper-middle-income countries is less thanhalf that in high-income countries, and in lowincome countries falls to almost 5 percent ofdeveloped country levels. Across regions, theFigure 2.4 Telephone densities are highly correlated with income, but air transport is not
Registered air carrier departures(per 1,000 people), 2005

Fixed-line and mobile phone subscribers(per 1,000 people), 2004

60

1,600
1,400

50

1,200
40

1,000

30

800
600

20

400
10

200

0

0
0

5,000

10,00015,00020,00025,0000East Asia and the Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Sources: World Bank; World Development Indicators.

66

5,000 10,000 15,000 20,000 25,000 30,000 35,000
GDP per capita PPP (current $)GDP per capita PPP (current $)T E C H N O L O G Y

A N D

T E C H N O L O G I C A L

D I F F U S I O N

I N

D E V E L O P I N GC O U N T R I E STable 2.4 Affordability of fixed-line phones falls rapidly with lower incomes(cost of fixed-line phone service as a percentage of monthly income in dollars and PPP)Per capita income

Price as a % of monthly income

GNI

PPP

Monthly pricefixed-line phone

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

1,630
4,143
4,045
2,198
692
746

5,194
9,152
8,116
6,084
3,142
2,004

5.9
9.5
10.0
7.3
5.1
14.0

4.3
2.8
3.0
4.0
8.8
22.5

1.4
1.2
1.5
1.4
1.9
8.4

Income groups
World
High-income countries

7,011
35,264

9,424
32,550

11.7
27.6

2.0
0.9

1.5
1.0

GNI

PPP

Sources: World Bank; World Development Indicators.
Note: GNI ⫽ gross national income; PPP ⫽ purchasing power parity.

incidence is once again much higher in Europe
and Central Asia, reflecting the heritage of thecommunist era. Elsewhere, East Asia and Latin
America have fewer than 20 phone lines per
100 people and South Asia and Sub-SaharanAfrica have fewer than 5 lines per 100 people.
In contrast to air transport, the crosscountry correlation between the availabilityof telephones and income levels is strong(figure 2.4). The cost of residential service is significantly higher in the low-income regions ofSouth Asia and especially Sub-Saharan Africa(8.4 percent) than in the predominantly
middle-income regions (table 2.4).

The adoption and adaptation of oldtechnologies varies by sector
The diffusion of old technologies has contributed to rapid growth in the agriculture sector in many developing countries. During
1967–92, TFP (often used as a proxy forincreases in technology) is estimated to haveincreased four times as quickly in agriculture
as in the manufacturing sector in both
high-income and developing countries (Martin
and Mitra 2001). In part this growth
represents the exit of underemployed farmworkers to better paying jobs in other sectors,
but it also represents significant improvements

in seeds; more capital intensive forms of
embodied technology such as tractors, fertilizer, and irrigation systems; and better process
technology, such as crop rotation and management techniques for disease-resistant crops(box 2.6).
At the same time, the diffusion of medical
technologies within low-income countries has
been slow. Some of the most important technological developments of the past 100 years
have been medical, including the discovery
and widespread distribution of antibiotics andthe eradication and effective treatment of awide range of previously deadly or debilitating
viruses, including retroviruses such as thosethat cause HIV/AIDS.
The diffusion of knowledge about treatments is generally relatively speedy and efficient within the medical community, but theirdiffusion and application within the population of the developing world is much slower. In
Europe and Central Asia, Latin America andthe Caribbean, and the Middle East and North
Africa, the average share of children immunized for measles, diphtheria, pertussis(whooping cough), and tetanus is 89 percent or
better, bringing them close to the immunization rates in high-income countries. East Asiaand the Pacific also posts immunization rates
above 80 percent. However, immunization

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2 0 0 8Box 2.6 The green revolution

Tby the late 1990s it was clear that poor people hadreaped substantial benefits from higher incomes, lessexpensive food, and increased demand for their labor.
The public sector was critical to this effort, because
the development of new seed technologies has some
aspects of a public good: developers cannot capture
the full benefits, because once the seed is widely
available, it can be easily reproduced. The green revolution also demonstrates some of unintended effects
that can accompany the adoption of new technologies: the excessive use of agrochemicals has polluted
waterways, wasteful irrigation has contributed towater scarcity, and high livestock concentrations nearurban areas have contributed to the spread of disease.

he green revolution is an example of the dramaticeffects that modest technological advances canhave in boosting the incomes of the poor. The green
revolution was a decades-long effort, guided primarily by public sector and nonprofit institutions, tocreate and disseminate agricultural technologies todeveloping countries. The principal technologies
involved were pesticides, irrigation, and synthetic
nitrogen fertilizer, which had long been available inindustrial countries, along with the development ofhigh-yielding varieties of maize, wheat, and rice.
Asia’s green revolution doubled cereal production between 1970 and 1995 while increasing the land area
devoted to cereals by only 4 percent (World Bank
2007b). Even though the impact of the green revolution on the poor was initially a source of controversy,

Source: World Bank 1998, 2007b.

rates in South Asia and Sub-Saharan Africa
average 59 to 63 percent (table 2.5). In part,
this reflects particularly low immunization
rates in some of the larger countries in these regions, notably India (less than 60 percent) andNigeria (less than 35 percent), which outweighthe better performance of some of the smaller
countries, for example, in Sri Lanka, 99 percent
of children aged 12 to 23 months are im-munized. The disappointing failure to deliver this basic technological service arises
despite the intense involvement of the international community in assisting, and in someinstances taking full responsibility for, thisprocess. Moreover, the pace at which these
rates are rising is disappointingly low as countries continue to struggle to implement
effective delivery systems. Partly as a result,

Table 2.5 Immunization rates lag significantly in South Asia and Sub-Saharan Africa(children aged 12–23 months immunized)
DPT
1993

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
High-income countries
World

Measles
2003(percent
immunized)
83
83
80
89
78
90
85
91
59
63
49
59
88
95
71
76

Sources: World Bank; World Development Indicators.
Note: DPT ⫽ diphtheria, pertussis, and tetanus.

68

1993

2003

(percent
immunized)
79
83
84
91
82
93
84
92
59
61
51
61
83
92
71
75

DPT

Measles

2003

2003

(ratio tohigh-income
countries)
0.87
0.94
0.95
0.96
0.66
0.62
1.00
0.80

(ratio tohigh-income
countries)
0.90
0.99
1.01
1.00
0.66
0.66
1.00
0.82

T E C H N O L O G Y

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T E C H N O L O G I C A L

D I F F U S I O N

I N

D E V E L O P I N GC O U N T R I E STable 2.6 Diffusion of both water and sanitation technology is low in rural areas
Improved water sources
Total population
1990

2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

71.8
91.7
82.8
87.5
70.6
48.9

78.5
91.7
91.0
89.5
84.4
56.2

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

76.4
99.8
88.1
74.2
64.3

82.7
99.5
92.7
80.8
75.0

Rural population
1990

2004

(percent of population with access)
61.4
69.8
83.4
79.8
60.0
73.0
78.9
80.8
64.9
81.3
36.1
42.4
63.2
99.1
73.5
62.9
56.7

72.2
98.5
77.8
70.9
69.4

Urban population
1990

2004

97.3
97.0
92.6
96.1
88.6
81.9

91.9
98.7
96.0
96.3
93.6
80.1

95.2
99.8
94.8
96.4
87.0

94.5
99.8
97.7
93.1
88.1

Improved sanitation facilities
Total population
1990

2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

29.7
86.1
67.4
69.9
17.4
31.5

50.6
85.0
77.1
76.2
37.2
37.2

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

44.4
100.0
76.7
37.3
21.3

57.0
100.0
81.4
55.4
38.3

Rural population
1990

2004

(percent of population with access)
15.3
36.1
72.0
70.3
35.4
48.7
52.0
57.9
6.3
26.6
23.8
28.2
22.8
100.0
52.6
19.7
11.6

37.7
100.0
59.9
38.8
28.5

Urban population
1990

2004

65.5
93.7
80.7
87.1
50.3
52.4

72.4
93.0
85.7
92.3
62.7
53.3

77.2
100.0
87.1
72.9
49.6

79.4
100.0
88.6
76.2
60.5

Sources: World Bank; World Development Indicators.

child mortality rates remain elevated in theseregions.
The health benefits of clean drinking waterand sanitation facilities have been understoodfor centuries. Nevertheless, one in five people
living in developing countries lack access toimproved water sources and only half haveaccess to improved sanitation facilities(table 2.6). In South Asia and Sub-SaharanAfrica, only some 37 percent of the population has access to improved sanitation services, while only slightly more than half of the
Sub-Saharan African population has access toimproved drinking water (this share rises to
65 percent if Nigeria, where only 35 percentof the population has access to improved
water, is excluded). The rest of the developingworld does much better on these measures.
For example, close to 90 percent of the population in Europe and Central Asia has accessto improved water (91.7 percent) and sanitation sources (85 percent). Nevertheless, thediffusion of these basics technologies is weakin rural parts of all developing areas, reflecting
more intense affordability issues and therelative scarcity of basic technological literacy

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2 0 0 8and the competencies necessary to install andmaintain such systems (see the discussion on
basic technological literacy in chapter 3). For
example, in China and India, only 44 and 33
percent, respectively, of the rural population
have access to improved sanitation.

Older technologies have become widely
diffused in many countries, but large
disparities remain
Older technologies have penetrated less completely into developing countries than into developed countries, but the gap is much lesspronounced than the gap for indicators of scientific innovation and invention. Moreover,
the relationship between income levels andthe diffusion of older technologies within thedeveloping world is relatively weak, suggestingthat the efficiency of the regulatory environment and the diffusion of basic skills withincountries are more important than incomes indetermining the actual level of diffusion ofthese technologies. Countries with the highest
achievement in each income group find themselves at about the median level of achievementof the next highest income group. Once again,
the level of diffusion of the older technologies
tends to be higher for countries of the former
Soviet bloc than for other countries at the same
income level, while both the upper-middleincome and lower-middle-income countries of
Latin America and the Caribbean tend to report lower levels of diffusion than other countries at similar income levels.
The striking differences between Europe
and Central Asia on the one hand and Latin
America and the Caribbean on the other handin the diffusion of older technologies may reflect differences in income distribution and in
the nature of R&D activities (box 2.7). Europe
and Central Asia had more equal access to
education combined with greater government
investment in infrastructure, which facilitatedmore rapid diffusion of technologies than in
Latin America and the Caribbean. In addition,
whereas R&D activity was clearly linked tothe industrial strategy of Soviet-era firms in
Europe and Central Asia, R&D in Latin

70

America was concentrated in universities, wasoriented toward research at the global frontier(but generally not of cutting-edge quality), andhad few links to firms (Maloney 2006).

Penetration of recent technologies
The relatively slow diffusion of many oldtechnologies in developing countries contrasts
sharply with the relatively rapid penetrationof newer technologies (table 2.7). Macroeconomic turmoil, civil strife, and fiscal constraints limited the within-country diffusion ofmany older technologies, but more hospitable
circumstances—including low inflation, low
government deficits, and a technical and regulatory environment that has better harnessedprivate sector financing of new technologies—
have contributed to the spread of more recent
technologies. In a few cases, newer technologies have leapfrogged over older ones, for example, mobile phones now have higher penetration rates in some countries than fixed-line
telephones.
Distinguishing between old and recent
technologies is necessarily arbitrary. To acertain extent, road infrastructure is an ancient technology, and yet the technology embodied in producing a kilometer of German
autobahn is completely different from that required to construct a kilometer of dirt track in
Somalia. Similarly, exports that are currently
classified as high-tech are in some cases evolutionary developments from relatively old technology (mobile phones, for example, evolved
from radios and fixed-line telephones).7
Nonetheless, the distinction is useful, because
in many cases the factors that have impeded
the diffusion of old technologies within developing countries are qualitatively different
from those that impede the distribution of
more recent technologies. For instance, thediffusion of many of the older technologies
depended upon the creation and maintenanceof expensive government infrastructure at atime when many governments were grapplingwith severe budget constraints and weak technical and governance capacity. Not only aretoday’s technologies being exploited in a more

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Box 2.7 Technology and growth in Latin America’s
natural resource-based economies

W

hile much of the value added from extractive
industries, such as crude oil production andmining, is a return to land, the technology employedin these activities is often very sophisticated. Someeconomies, such as Australia, Canada, and Sweden,
achieved rapid rates of growth over the 20th century
through the efficient exploitation of natural resources. By contrast, Latin America’s natural
resource-based economies achieved relatively limited
growth; until recently, substantial mineral deposits
have gone unexploited. Two central reasons explain
the failure to capitalize on Latin America’s natural
resource opportunities.
First, the region had low levels of human capitaland weak institutions that slowed the adoption andcreation of new technologies. Latin American countries
invested much less than other regions in promoting education systems, with the result that by 1870, the literacy rate was only one-third to one-fourth as high as in
Canada and the United States. Early industrializationreflected the cumulative impact of numerous small advances made by many individuals, but in Latin America, the lack of access to education translated into limited innovation and slower technological progress,
because colonial institutions deemphasized technicaleducation and universities failed to produce sufficientengineers and scientists through the 19th century.

relaxed and stable regulatory environment,
but also many of them are being financed andbuilt by private sector investors with access toample funds and outside expertise.

Exports of high-tech goods are only
loosely related to incomes
One frequently used indicator of the diffusion of recent technology is the share ofhigh-tech goods in total merchandise exports. To be sure, the informational content
of this measure has decreased with the proliferation of relatively low-tech assembly operations of high-tech goods, which in turnhas reduced the level of technological com-

Second, innovation was discouraged and firm
entry was inhibited by anticompetitive guilds, labormarkets that were excessively protective of insiders’rights, concentrated credit markets that only lent to
insiders, explicit trade barriers that impeded knowledge spillovers from trade interactions, and barriers
to FDI. The concentration of wealth also discouraged innovations by newcomers. Rights to organize
corporations and financial institutions were rationed
to protect the value of rights held by powerful interests and the costs associated with filing patents were
exorbitant. After the Great Depression, attempts toforce rapid industrialization through import substitution policies led to sectors that were out of line withcomparative advantage, that were walled off fromcompetition and sources of innovation, and that required substantial subsidies to survive. Natural resource sectors, the likely source of Latin America’s
comparative advantage, were starved of capital andworkers who were drawn to the heavily subsidized
and inefficient manufacturing enterprises.
The combination of inefficient industrialization
with the stifling of natural export sectors left many
countries in the region vulnerable to balance of payments crises and severely constrained growth.
Source: Lederman and Maloney 2007.

petence associated with a given level of export of high-tech goods. Nevertheless, theshare of high-tech exports is generally positively correlated with other indicators oftechnological achievement.8
Middle-income countries as a group have amuch higher share of high-tech exports than
low-income countries. Within the middle-income
group, however, the lower-middle-income
countries average a higher share of high-tech exports than the upper-middle-income countries(table 2.8). The East Asian countries have muchhigher shares of high-tech exports than theother regions, and the Middle East and North
Africa region has much lower shares than the71G L O B A L

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2 0 0 8

Table 2.7 Diffusion of recent technologies
Internet users

2005

Percentage change
1999–2005

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(per 1,000 people)
89
48
190
48
156
41
89
64
49
66
29
42

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

137
527
196
95
44

20
14
36
50
72
Personal computers

2004

Percentage change
1997–2004

Internet bandwidth

2004

Percentage change
1999–2004(megabytes/second)
8,735
149
6,670
132
4,513
121
899
91
2,249
114
114
62
43,856
121,433
5,611
5,533
708

108
107
126
134
120

Cellular subscribers

2004

Percentage change
1995–2004

Broadband subscribers

2005

Percentage change
2001–05(per 1,000 people)
26
236
21
208
16
89
—
—
1
131
—
—
42
163
21
23
1

59
45
147
187
143

Digital cellular subscribers

2004

Percentage change
1999–2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(per 1,000 people)
38
26
98
20
88
17
48
17
12
29
15
11

(per 100 people)
24
58
44
79
32
51
13
73
4
87
8
61

(per 1,000 people)
257
54
512
43
337
42
142
70
40
88
83
47

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

130
579
113
45
11

28
77
48
24
4

284
768
521
255
43

14
12
18
23
25

37
28
58
61
92

29
19
37
54
88

Sources: World Bank; World Development Indicators.
Note: Period growth rates are compound annual growth rates.
— ⫽ not available.

other predominantly middle-income regions. In
part these differences reflect the impact of longstanding policies in several East Asian countries
that emphasized exports of increasingly sophisticated products and these countries’ proximity
to transport corridors that facilitated their participation in international production networks.
Although well below half the level of East
Asia and the Pacific, Latin America and the
Caribbean’s share of high-tech exports relative
to the total of manufactured exports of 13 percent in 2004 was larger than that of the otherregions (table 2.8). This mainly reflects a highshare of high-tech exports in Mexico (20 per-72cent). The average share for individual countries in Latin America and the Caribbean is
8.6 percent, with high-tech exports representing 7 percent or less of the total merchandise
exports of Argentina, Colombia, Honduras,
Nicaragua, and Paraguay.

Personal computers have diffused
relatively slowly . . .
Personal computers (PCs) are among the recent technologies for which data exist for awide number of countries. PCs are a relatively
new technology that, despite their present-day
ubiquity in high-income countries, have

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Table 2.8 Share of high-tech products
in total exports(high-tech exports as a percent of manufactured exports)
2004

1999–2004

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

Percentage
point change
33.4
2.7
8.7
⫺0.7
13.1
⫺1.4
3.2
⫺0.4
4.1
0.5
—
—

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

21.3
22.3
16.2
22.2
—

⫺0.4
⫺0.4
⫺3.1
4.0
—

Sources: Centre d’Etudes Prospectives et d’Informations
Internationales; World Bank.
Note: — ⫽ not available.

actually diffused relatively slowly throughout
the world since their introduction in the
1980s, at least compared with the speed atwhich the use of mobile phones and the Internet has spread. Thus in 1995, France had justunder 145 computers per 1,000 inhabitants,
fewer than half as many as in the United Statesat the time (325) and roughly the same as in
Hungary today. France now has 575 computers per 1,000 inhabitants, compared with 762
in the United States, and many developing
countries in Europe and Central Asia andLatin America have PC ownership rates similar to Hungary’s. Indeed, the regional averagefor Europe and Central Asia is brought down
by low penetration rates in Turkey andUkraine (the second and third most populous
countries in the region, respectively), whichhave only 52 and 28 computers per 1,000 individuals, respectively. If we use the simple average of the penetration rate in individual
countries in the region, there are about 150
computers per 1,000 people, with many countries posting penetration levels close to the unweighted average for high-income countries(460 PCs per 1,000).9

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Nevertheless, three-quarters of low-income
countries have 15 or fewer PCs per 1,000 people and one-quarter have fewer than 5 per
1,000 people. Yet, several low-income countries have substantially more. Mongolia, forexample, reports having 133 PCs per 1,000
people, illustrating that even though the densityof PC ownership is correlated with income,substantial variations exist across countries atsimilar income levels.

. . . while diffusion of the Internet andmobile phones has been extremely rapid
The penetration of Internet use, a more recent
technology,10 offers an interesting comparison(figure 2.5). Internet bandwidth consumption
and the number of broadband subscribers
more than doubled from 1999 to 2004 in both
middle- and low-income countries. Highincome countries have almost as many PCs
per capita as there are Internet users in developing countries, which have twice as manyInternet users as PCs. The ratio rises as per
capita incomes decline, with four times as
many Internet users as PCs in the Middle East

Figure 2.5 The incidence of Internet use
varies widely across countries
Internet users per 1,000 people, 2004
600
500
400
300
200
100
0
0

5,000

10,00015,00020,000GDP per capita PPP (current $)East Asia and the Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Sources: World Bank; World Development Indicators.

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2 0 0 8and North Africa and South Asia. The capacity to share an Internet connection, either formally through a commercial venture such as
an Internet café or informally, makes Internet
use much more affordable than owning a PC
and lies at the root of this difference.
A lack of infrastructure helps explain weakpenetration rates in some low-income countries. For example, even though Internet penetration rates rose by 41 percent in SubSaharan Africa from 1999 to 2005, Internet
penetration in the region remains the lowest
among developing regions, in part because nohigh-speed, low-cost backbone exists to connect eastern and central Africa to the rest of
the world. As a result, Internet transactions
must be made via satellite, which provides
lower bandwidth at higher cost than fiber optics (Kenyan call center operators pay $7,000
per megabyte of bandwidth compared witharound $500 for operators connected by fiber
optic cable in India). As a result, prospects for
Sub-Saharan Africa are expected to improve
following the recent installation of a fiber
optic backbone along the western coast of thecontinent and the expected completion of asimilar backbone along the eastern coast
in 2008.
Technology is also providing solutions forovercoming infrastructure costs. In a numberof countries, wireless broadband connections
are outpacing digital subscriber line (DSL) andcable as a mechanism for distributing Internet
access to customers. So-called 3G mobile
phones already provide reasonable bandwidth
in many countries, while more advanced standards offer hope for even faster implementationand diffusion. Some 23 developing countries areplanning to, or already have begun to, deploy
WiMax systems, a wireless, broadband Internet
standard touted as the successor to today’s WiFi
and 3G systems. Those with existing WiMax
implementations include the Dominican
Republic, Pakistan, South Africa, and Uganda.
The ability to share the fixed costs of a mobile phone and its monthly subscription costs,
along with its portability, have facilitated the
diffusion of this technology in developing

74

countries. Although lack of competition anddifficulties innovative entrepreneurs encountered in getting licenses slowed the initial diffusion of mobile phone technology, much haschanged in recent years (Sullivan 2007).
Mobile phone ownership rates in developing
countries—even in the poorest countries—are
rising rapidly, having almost doubled in lowincome countries between 2000 and 2004. Indeed, new subscribers are signing up at such afast pace that the data in table 2.7 are alreadybroadly out of date.
Because the market is evolving so rapidly,with new applications for mobile phone
technology being developed on a regular basis,
evaluating its overall impact is difficult. Penetration rates in Europe and Central Asia andLatin America and the Caribbean are alreadyhigh, rivaling those observed in high-income
countries less than 10 years ago. Penetration
rates in East Asia and the Pacific are somewhat
lower on average; however, looking at only the
middle-income countries in the region and excluding small island economies, the average
penetration rate in East Asia and the Pacificis higher than in Latin America and the
Caribbean. Penetration rates in low-income
countries are much lower, on average, although some countries have reached levels
comparable to those in middle-income countries. As of 2005, six Sub-Saharan Africancountries (Botswana, Gabon, Mauritius, theSeychelles, Sierra Leone, and South Africa) had
mobile phone penetration rates above 30 percent. Although penetration rates in South Asia
are also low, the large populations of thesecountries and the pace at which firms areadding customers means that globally, a substantial proportion of new mobile phone
subscribers comes from developing countries.11
The rapid penetration of mobile phone
technology reflects in part the process bywhich it has been financed. Unlike most fixedwire telephone systems, railroads, and electrical grids, mobile phone technology has been
introduced into most developing countries bywell-funded private operators working withina relatively competitive environment. As a

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result, the creation of the necessary infrastructure for these systems has not been held backby the government financing and bureaucratic
constraints that slowed the diffusion of older
technologies. Moreover, microfinance techniques have facilitated expansion of the demand side of the business (Sullivan 2007).
The technological and economic implications of the rising penetration of mobile phones
are only now being assessed. In poor, rural
areas, where the transportation of goods andpeople is heavily constrained by poor infrastructure, the introduction of cheap, personalcommunications may be of great value both asa substitute for moving people and to assurethat the movement of people or goods is worthwhile. In particular, the availability of relatively
cheap and efficient communications has reduced informational asymmetries in a number

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of sectors, increasing producers’ revenues andlowering consumers’ costs (albeit at the expense of middlemen). In addition, this technology is increasingly being used to enable a degree of arm’s-length financial intermediationthat many argue is critical to development, butthat has largely been unavailable in the past
because of a lack of infrastructure (box 2.8).

The diffusion of new technologies has
encouraged rapid growth in businessservices
The Internet, greater availability of computers, and faster communications have combined to greatly expand the potential for developing countries to supply services from a
distance in a process called offshoring. Initially offshoring services were concentrated onlower-end software services and businessBox 2.8 Innovative use of communications technology
is improving financial access for the poorThe poor confront considerable challenges in gaining access to well-functioning savings and payments services. Financial institutions do not exist in
many rural areas, and those that do often impose
high minimum balance requirements (reflecting highunit transaction costs for small accounts) that are
well beyond the reach of poorer households. However, the adaptation of technology has allowed someinnovative financial institutions in Sub-SaharanAfrica to extend financial outreach to the poor.
For example, the Equity Bank in Kenya has outfitted a series of vans with laptops and telecommunications facilities to act as mobile banking units. It
has also designed flexible savings mechanisms withemergency loan facilities. Teba Bank of South Africa
has developed a smart card that uses existing mobile
phone technology to provide low-cost, electronicbanking services (savings and payments) for lowincome customers. The program was originally developed to handle wage payments for migrant workers. The value of the cards can be topped up or thecards can be used to make purchases at any of thesimple wireless terminals that have been placed in
shops frequented by low-income clients. Remote

Transaction Systems in Uganda is introducing asimilar, but more sophisticated scheme. A systemdeveloped by Celpay allows clients in the Democratic
Republic of Congo and Zambia to use their mobile
phones to pay bills. The client establishes an accountwith Celpay and can then make purchases by texting
a request to Celpay, which will transfer money to themerchant’s account. Security is provided by the useof a personal identification number, which is needed
to complete the transaction.
In a series of surveys of banking services in three
middle-income and four low-income countries, Bankable Frontier Associates (2007) found that eventhough only 1.5 percent of the adult population inSouth Africa was using mobile phone banking, thepotential for the service was large. Between 7 and41 percent of the unbanked population of the countries surveyed (Botswana, Kenya, Namibia, South
Africa, Tanzania, Uganda, and Zambia) has access(including shared access) to a mobile phone, andthese penetration rates are rising.

Source: Bankable Frontier Associates 2007; World Bank 2007c.

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2 0 0 8processes as well as call centers. More recently, offshoring has moved into such areas
as investment and financial services, humanresources, health services, retail functions,logistics, and customer support functions(World Bank 2005). In addition to increasing
demand for labor and boosting export revenues, offshoring of services to developing
countries can improve their incentives to provide education and training, help improve thequality of services provided domestically, encourage technology and knowledge transfers,
and minimize (compared with manufacturing)
the environmental consequences of economic
growth. By one account, the most attractive
locations for offshoring global services (basedon costs, the availability of workers with appropriate skills, and the overall business environment) include Brazil, Chile, China, the Czech
Republic, India, Malaysia, the Philippines,
and Thailand (A. T. Kearney 2007). As thecomplexity of services offshored increases,
geographic proximity to major markets has
become more important and has provided
greater opportunities, for example, for the
Czech Republic to supply Western Europe andfor Mexico to supply Canada and the UnitedStates. The advantages of fluency in English
and French, along with shared time zones, haveincreased the potential for African countries tosupply services to the European market.12
While India has dominated the outsourcing
market, rapid expansion of the business may
be running into capacity constraints as thepool of unemployed and underemployedskilled workers dries up and wages are bid
up.13 Eventually, rising labor costs may partly
erode the advantage of the current major offshore centers, providing greater room forcompetition from poorer countries. A recent
survey found that the relative cost advantageof the leading offshore destinations fell in2006 (A. T. Kearney 2007). However, partly
because of learning by doing, these countries’scores along other dimensions, including people skills and the business environment, haveincreased. As a result, they have been able tomove up the value added ladder by increasing76

the sophistication of the services they deliver
even as their costs rise. This development underlines a major message for policy makers
and businesses in developing countries: improving the skills of the labor force by devoting more resources to education and training,along with improving the overall climate forinvestment, is essential for competing in technologically sophisticated markets.

Logistics represent an important
process technology
As noted earlier, the spread of modern communications technology and the diffusion ofcomputers, coupled with quality improvements in transportation services, have combined to greatly improve the rapid and efficient delivery of goods and services, enablingjust-in-time inventory processing and more efficient supply chain management (this subsection is based on Arvis and others 2007). The
World Bank’s logistics performance index provides an overall evaluation of the perceived sophistication with which countries are able todeliver goods and services (figure 2.6). It contains several subindexes that measure services
critical to logistics, including customs, infrastructure, ability to track shipments, and business processes (competence) along with thetimeliness and cost of deliveries of domestic
logistics companies (table 2.9).
The overall quality of logistics services isclearly correlated with income. The top performers are high-income countries (Singapore,with an index of 4.19, ranks number 1), while
the worst performers are the poorest countries
that are landlocked or that suffer from severe
governance problems or conflict (Afghanistan,with an index of 1.21, ranks last). On average,
low-income countries score significantly lower
than middle-income countries.
Nevertheless, index levels show considerable dispersion among countries with similar
income levels. Countries where trade has
played a significant role in promoting growth(for example, Chile, China, India, Malaysia,
South Africa, Thailand, and Vietnam) tend toscore high relative to their income level.

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Vietnam, a low-income country, ranks 53rdamong 150 countries, or slightly above the average for upper-middle-income countries. In
contrast, countries where growth has been generated by oil and mineral assets, for example,
Algeria, Bahrain, and Saudi Arabia, score low
relative to income. The absence of a strong

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manufacturing sector in these latter countries
tends to reduce the political impetus for the reforms that would improve logistics. Ultimately,
countries that achieve high scores on the logistics performance index are those that havevigorously pursued reforms to improve the effectiveness of public sector institutions and to

Table 2.9 The quality of logistics services in 2005 varies by income(score on logistics performance index)
OverallCustoms

InfrastructureInternational
shipments

Logistics
competence

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
South Asia

2.58
2.59
2.57
2.42
2.35
2.30

2.41
2.39
2.38
2.24
2.21
2.06

2.37
2.39
2.38
2.27
2.11
2.07

2.64
2.61
2.55
2.44
2.36
2.28

(Index)
2.54
2.53
2.52
2.33
2.33
2.32

Income groups
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

3.67
2.85
2.47
2.29

3.45
2.64
2.31
2.12

3.66
2.70
2.27
2.06

3.52
2.84
2.48
2.32

3.64
2.80
2.40
2.29

Tracking andtracing

Domestic
logistics costs

Timeliness

2.53
2.55
2.58
2.35
2.31
2.32

3.04
2.97
2.97
2.95
2.98
3.12

3.01
3.04
3.02
2.88
2.77
2.73

3.71
2.83
2.45
2.25

2.58
2.94
3.01
2.99

4.05
3.31
2.93
2.71

Source: Arvis and others 2007.
Note: The maximum score attainable is 5; the minimum is 1.

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2 0 0 8encourage the efficiency of private sector institutions through competition.14
Among the components of the index, assessments of the quality of infrastructure, the quality of services, and the ease of customs clearance processes are highly correlated acrosscountries. In contrast, the cost of services varies
less across countries (with the exception ofmarkedly high road freight rates in SubSaharan Africa) and thus makes a more limited
contribution to cross-country differences in theoverall index. This highlights the importance ofthe speed and reliability of shipping in globally
integrated production networks. Interestingly,
the gap between the best and worst performers
in relation to the overall assessment of the reliability of the supply chain is twice the average
gap across various dimensions of supply chain
performance. The reliability of the supply chain
tends to be determined by its weakest link.

Evaluating overall technologicalprogressT

he preceding sections of this chapter havediscussed technological achievement in developing countries along three dimensions: scientific innovation and invention, the diffusionof old technologies, and the diffusion of newtechnologies. In this section we calculate summary indexes of technological achievement
along each of these dimensions, as well as an
overall index that combines these subindexes
with additional information about the extent
to which countries are exposed to technology
through trade and FDI, issues that are discussed in more detail in chapter 3.

Summary indicators for scientificinnovation and technology
penetration
A statistical approach to summarizing
technological progressIn creating the summary indexes, a statisticaltechnique, principal components analysis, isused to combine subindicators in a flexible
manner.15 This approach has been widely usedin health economics (Gwatkin and others

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2000a, 2000b, 2000c; McKenzie 2003;
Montgomery and others 2000; Vyas andKumaranayake 2006), in poverty analysis(Sricharoen and Buchenrieder 2005), in regulatory policy analysis (Nicoletti, Scarpetta,
and Boylaud 1999), in constructing crosscountry measures of capital controls (Chinn
and Ito 2006) and in the analysis of e-readinessin India (Government of India 2006). It
contrasts with most existing efforts toconstruct overall indexes of technologicalachievement, which tend to aggregate
subindexes using arbitrary weights with aweak theoretical or empirical basis, by using
the statistical properties of the underlying data
to determine the weights used in calculating
the summary and overall indexes. Principal
components analysis is used to generate
aggregate indexes at two points in time,the early 1990s and the early 2000s,16 forscientific innovation and invention, thepenetration of older technologies, andthe penetration of newer technologies. Thesesummary indexes are then combined with anindex of the extent to which countries are
exposed to foreign technologies (throughtrade and FDI), which is developed inchapter 3, to generate an aggregate index oftechnological achievement. Table 2.10 lists theindicators that are summarized in both theoverall index and each of the summary
subindexes. The technical annex to thischapter explains the steps taken to calculatethese weights in more detail.

The relationship between technologicalachievement and income varies dependingon the dimension observed
Figure 2.7 reports the distribution of the summary subindex for each of the three dimensionsof technological achievement discussed in thischapter (the summary index of the extent of exposure to foreign technologies is presented inchapter 3). A quick glance reinforces the earlier
conclusion that, by and large, developing countries are not participating in scientific innovation at the technological frontier. Indeed, only ahandful of countries, eight of which are former

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D E V E L O P I N GC O U N T R I E STable 2.10 Indicators included in summary indexes of technological achievement
Indicator

Scientific innovation and invention
Scientific and technical journal articles
Patents granted by the U.S. Patent
and Trademark Office
Patents granted by theEuropean Patent OfficeMeasureSourcepopulation

World Development Indicators

population

Lederman and Saenz 2005

population

Lederman and Saenz 2005

Penetration of older technologies
Group AElectrical power consumption
International outgoing telephone traffic
Air transport, registered carrier
departures worldwide
Agricultural machinery: tractors

kilowatt-hours/capita
minutes

World Development Indicators
World Development Indicators% of GDPper 100 hectares of arable landWorld Development Indicators
World Development Indicators

Group B
Main lines
Exports of manufactures
Medium-tech exports

per 100 inhabitants% of merchandise exports% of merchandise exports

World Development Indicators
World Development Indicators
CEPII BACI databaseper 1,000 people
per 1,000 people
per 100 inhabitants% of total exports

World Development Indicators
World Development Indicators
World Development Indicators
World Development Indicators
CEPII BACI database% of GDP% of GDP% of GDP% of GDP% of GDP

World Development Indicators
World Development Indicators
CEPII BACI database
CEPII BACI database
CEPII BACI database

Penetration of recent technologies
Internet users
Personal computers
Cellular subscribers
Percentage of digital mainlines
High-tech exports
Exposure to external technology
FDI net inflows
Royalties and license fee payments
Imports of high-tech goods
Imports of capital goods
Imports of intermediary goods

Source: World Bank.
Note: BACI ⫽ Banque analytique de commerce internationale, CEPII ⫽ Centre d’Etudes Prospectives et d’Informations
Internationales, EPO ⫽ European Patent Office, FDI ⫽ foreign direct investment, GDP ⫽ gross domestic product,
USPTO ⫽ United States Patent and Trademark Office.

Soviet bloc countries, have anything like thesame level of at-the-frontier scientific activity
as the high-income countries. While this may
reflect an innate bias in the indicators used
(number of journal citations and patent applications), the results are consistent with the viewthat most technical progress in developing
countries occurs through the adaptation andadoption of new-to-the-market or new-to-thefirm technologies rather than through thecreation of new-to-the-world technologies.
Moreover, notwithstanding that some firms—
and even some cities—in developing countries
do participate actively at the technologicalfrontier, when viewed from the national level,
not even the most advanced developing countries participate at levels comparable to thoseprevalent in high-income countries.

The distribution of technological achievement across the other indicators (diffusion of
old innovations and of new innovations) isalso skewed toward high-income countries, butmuch less so. Thus the intensity with which
upper-middle-income countries exploit botholder and newer technologies is between 50
and 60 percent of the level in high-income
countries. This ratio is between 30 and 40 percent for lower-middle-income countries and isabout 23 percent for low-income countries(table 2.11). However, the dispersion of thesummary indicator of the penetration of older
technologies within income groups is very
wide. Many low-income countries reporthigher utilization rates for older technologies
than do many upper-middle income countries.
This report suggests that other factors—such as

79

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2 0 0 8Figure 2.7 Distribution of technological achievement by dimension
Scientific innovation and invention (2000–03)
Index
0.25

0.20

0.15

0.10

0.05

0
High-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Penetration of older technologies (2000–03)
Index
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0
High-income
countries

Upper-middle-income
countries

Penetration of recent technologies (2000–03)
Index
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0
High-income
countries
Source: World Bank.

80

Upper-middle-income
countries

T E C H N O L O G Y

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T E C H N O L O G I C A L

D I F F U S I O N

I N

D E V E L O P I N GTable 2.11 Technological achievement indeveloping countries relative to that in
high-income countries

Table 2.12 Increase in technologicalachievement in developing countries
relative to that in high-income countries(percent of level in high-income countries)(index, percent increase in high-income countries = 100)

Scientific
Penetration Penetration
innovation andof olderof recentinventiontechnologies technologies

High-income countries
Upper-middle-income
countries
Lower-middle-income
countries
Low-income countries

100.0

100.0

100.0

3.3

58.4

49.6

0.6
0.1

41.6
23.7

31.8
22.7

C O U N T R I E S

Scientific
Penetration Penetration
innovation andof olderof recentinventiontechnologies technologies

High-income countries
Upper-middle-income
countries
Lower-middle-income
countries
Low-income countries

100.0

100.0

100.0

191.6

220.8

162.3

157.1
63.7

251.8
480.4

145.8
411.3

Source: World Bank.

Source: World Bank.

history, effectiveness with which governments
have delivered some public sector technologicalservices, and past turmoil—may have had agreater influence than income in explaining the
integration of these technologies into theireconomies.17 In contrast, the diffusion of recent
technologies is more correlated with income
and shows both much less variation and lessoverlap across income groups. These results are
consistent with the view that nonfinancial impediments to technological diffusion have constrained the diffusion of more recent technologies by less than they have for older ones.
In terms of scientific innovation and invention, middle-income countries have been catching up, at least in relative terms, but as alreadynoted, the gap between them and high-income
countries remains large. In addition, the gap
between most low-income countries and thetechnological frontier has widened further
both in relative and in absolute terms.
The story on the diffusion of technology ismore encouraging. On average, in middleincome countries older technologies are diffusing at 2.5 times the rate as in high-income
countries and more than four times as fast as
in low-income countries (table 2.12). While
this result appears to be robust for middleincome countries (figure 2.8), the variance ismuch higher among low-income countries.
Several low-income countries have recorded
substantial increases in technological progress,for example Benin, Ghana, and Togo record
more than 100 percent improvements. In manyothers, however, progress has been slower

than in high- and middle-income countries,
implying that the technology gap for thesecountries is either stable or widening.
Not surprisingly, the most rapid increases intechnological achievement recorded over the
past decade or so are for more recent technologies, whose starting points are relatively low
even in high-income countries (figure 2.8).
Clear indications of catch-up are evident for
newer technologies, with the penetration rates
in upper-middle-income countries increasing
1.5 times as quickly as in high-income countries.
The pace of increase among low-income countries was more than four times as rapid, but thisreflects, to a significant degree, very large percentage improvements in a few countries thatstarted off with very low levels. Notwithstanding these caveats, most developing countries aremaintaining pace with high-income countries
and many, especially among the upper-middleincome countries, are gaining ground.

New technologies are not as diffused as
old technologies, but the gap between
income groups is smaller
Overall, the penetration of recent technologies
in the economic life of developing countries isless extensive than for older technologies,
which is entirely understandable given thelength of time that has passed since the older
technologies were introduced. Nevertheless,the gap between countries at different income
levels is not as striking as one might expect.
Many upper-middle-income countries haveachieved levels of technological achievement81

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2 0 0 8Figure 2.8 Increase in summary technological achievement subindexes, 1990s–2000s
Scientific innovation and invention
Percent change in index, 2000–03 over 1990–93
1,600
1,400
1,200
1,000
800
600
400
200
0
⫺200
High-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Penetration of older technologies
Percent change in index, 2000–03 over 1990–93
350
300
250
200
150
100
50
0
⫺50
⫺100
High-income
countries

Upper-middle-income
countries

Penetration of newer technologies
Percent change in index, 2000–03 over 1990–93
50
40
30
20
10
0
High-income
countries

Upper-middle-income
countries

Source: World Bank.
Note: Countries are ranked according to the level of technological achievement in 2000.

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similar to those in high-income countries,and substantial overlap is apparent between
upper- and lower-middle-income countries
and between lower-middle-income and lowincome countries. Interestingly, the clear advantage countries in Europe and Central Asia
enjoy along other dimensions of technologicalachievement is less marked here, with East
Asian countries performing better than might
be expected.

Overall technological achievement
To understand overall technological achievement, two alternative summary indexes weregenerated. The first combines the three summary subindicators of achievement discussed
earlier, while the second includes an additional

D I F F U S I O N

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D E V E L O P I N GC O U N T R I E S

summary indicator that measures the extent towhich economies are using imported technology in their production processes. The underlying components and their recent evolution
are discussed in more detail in chapter 3 in thecontext of the channels by which external
technology is transmitted to developing countries. These overall summary indexes are calculated using the same basic technique used to
calculate the subindicators (see the technicalannex to this chapter for details), with one
difference: rather than using the raw data as
inputs, the previously calculated summary indicators are used.
Figure 2.9 reports levels of technologicalachievement in 2000 according to these twosummary indicators. The country coverage
differs somewhat between the two indexes. To

Figure 2.9 Alternative summary indexes of technological achievement (2000s)
Technological achievement, excluding external channels
Index
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0
High-income OECD
countries

High-income
non-OECD countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Overall technological achievement index
Index
0.25
0.20
0.15
0.10
0.05
0
High-income OECD
countries

High-income
non-OECD countries

Source: World Bank.

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2 0 0 8be included, each country must have data for
all variables, and as additional variables areadded, some countries are lost from the sample. Reflecting this requirement, only 20 lowincome countries are included in the firstindex and 16 in the second, down from 46 in
the case of the subindicator with the best coverage.18 Although these are relatively diverse
groups of countries, they cannot be considered
representative of all developing countries. Particular care should be taken in extrapolating
results derived from these countries to all lowincome countries.

Countries with similar income levels canhave very different levels of technologicalachievement
While the influence of income on technological achievement is well established, considerable variation occurs within income groups(figure 2.10). The top performers within developing country income groups achieve atechnology rating about equal to that of themedian country in the next highest income

group, and scores for countries at roughly thesame income level show substantial dispersion. Overall, the relationship between technological achievement and income per capita
is nonlinear, with the rise in technologicalachievement tending to flatten out for countries with per capita incomes between $10,000
and $25,000, a group that includes uppermiddle-income countries and some of the lesswealthy high-income countries such as Greeceand Portugal. Countries in Latin America
have weak technology scores given their income levels. Despite the perceived technological prowess of countries in East Asia, except
for Malaysia, the highest-scoring country in
the region, the developing countries in the region do not particularly distinguish themselves, in part because technological diffusionin these countries remains concentrated in a
few urban centers and has not diffused widely
elsewhere.
Focusing only on developing countries inthe second panel of figure 2.10, the correlation with income remains, but the same

Figure 2.10 Technological achievement rises with income levels
All countries

Developing countries only

Index

Index

0.30

0.25

Europe and Central Asia

0.25

Europe and Central Asia

0.20

0.20

All countries

0.15

0.15

0.10

0.10
0.05
Latin America and the Caribbean

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

0

0

00
20
,

0

High-income OECD countries

Latin America and the Caribbean

00

00Europe and Central Asia

High-income other countries

18
,

00
,0

14

16
,

0

00
,0

12

0

00
10
,

0

00
8,

Per capita income (PPPs)

East Asia and the PacificSource: World Bank.

84

00

0

Per capita income (PPPs)

6,

00
4,

0

00

0

00

00
40
,

00

,0
35

,0

00
30

00

,0
25

,0
20

00

,0
15

00

,0
10

5,

00

⫺0.10

0

⫺0.05

⫺0.10

0

⫺0.05

0

0

0

2,

0.05

T E C H N O L O G Y

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T E C H N O L O G I C A L

tendency for a flattening in the relationship isstill observable. For countries in Latin America and the Caribbean, the relationship between technological achievement and income
per capita flattens out at even lower income
levels, while for countries in Europe and Central Asia, the pattern follows more closely thatof the overall sample, which includes highincome countries. Among developing countries(excluding those in the Europe and Central
Asia region), technological achievement flattens out at an index level of around 0.15 forcountries with per capita incomes around

D I F F U S I O N

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D E V E L O P I N GC O U N T R I E S$5,500. While not conclusive, these results are
consistent with a view that other factors, suchas technological absorptive capacity (see chapter 3) limit the level of technological achievement that some developing countries canattain even as incomes continue to rise.

Technological convergence appears to beconstrained by weak absorptive capacity
in some regions
Figure 2.11 reports values for the two overallsummary indexes at two points in time,

Figure 2.11 Comparison of levels of technological achievement, early 1990s and early 2000s
Technological achievement, excluding external channels
Index
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0
High-income OECD
countries

High-income
other countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Overall technological achievement index
Index
0.25
0.20
0.15
0.10
0.05
0
High-income OECD
countries

High-income
other countries

1990s

2000s

Source: World Bank.

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2 0 0 8roughly the early 1990s and the early 2000s.
Both indexes offer a broadly consistent viewof technological achievement. They both confirm that the absolute size of the increases intechnological progress over the decade islarger among higher-income countries thanlower-income countries, but that the relative
improvement in developing countries has outpaced that in high-income countries, implyingthat catch-up is occurring.
The extent of apparent catch-up is strongest
when considering the narrower definition oftechnological achievement that includes only
scientific inputs and the penetration of oldand new technologies. According to this measure, low-income countries for which data
are available have shown the largest percentage improvement. If changes in the extent towhich countries are making use of external
technologies through imports and FDI are
included, the extent of convergence declines
for all developing country groups except theupper-middle-income countries. This findingreflects that high-income countries have also
increased their imports of high-tech goods
and have also benefited technologically fromthe operation of technologically sophisticatedforeign-owned firms on their soil. However,trade may contribute more to technologicalimprovement in the South than in the North(Lumenga-Neso, Olarreaga, and Schiff2005).
Among upper-middle-income countries,
catch-up is particularly strong in Chile, Hungary, and Poland, where the level of technological achievement rose by more than
125 percent during the 1990s. For mostcountries the pace of convergence was muchslower. As indicated earlier, relatively weakdata coverage across low-income countries
makes generalizing about their progress difficult. Only 16 low-income countries (10 in thecase of the summary index that includes imports of technology and FDI) have sufficient
data for both the early 1990s and the early
2000s to permit an estimate of their rate oftechnological progress. Although generalizations to all low-income countries are not86

possible, some commonalities do emerge
from this subsample, namely:• The absolute increase in the overall
index of technological achievement for
low-income countries is about the same
as for lower-middle-income countries(and thus the percentage increase in
low-income countries is much greater),strongly suggesting a catch-up effectrelative to the lower-middle-income
countries (table 2.13).
• The percentage increase in achievement
along the scientific innovation and invention dimension for all eight SubSaharan African countries for which data
are available, along with Bangladesh
and India, lies well below the averagefor middle-income countries. Only Vietnam approaches the performance of
middle-income countries.
• The picture for the diffusion of old innovations is decidedly more mixed, with 5 ofTable 2.13 Overall technological progressin absolute and relative terms
Technologicalachievement excluding Overall technologicalexternal channels
achievement

High-income
Upper-middle-income
Lower-middle-income
Low-income
Low-income(excluding Sudan)

High-income
Upper-middle-income
Lower-middle-income
Low-income
Low-income(excluding Sudan)

High-income
Upper-middle-income
Lower-middle-income
Low-income
Low-income(excluding Sudan)
Source: World Bank.

(Percent change in the index)
94
77
127
109
137
103
227
161
160

124

(Percent change relative
to high-income countries)
100
100
135
141
146
133
241
208
170

160

(Absolute change in the index)
0.096
0.068
0.057
0.046
0.036
0.028
0.024
0.022
0.024

0.022

T E C H N O L O G Y

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T E C H N O L O G I C A L

16 low-income countries showing stagnation or declines in the index between theearly 1990s and early 2000s, while 6
recorded large percentage increases, comparable to those displayed by the more
successful middle-income countries.
• Even for the diffusion of recent innovations, where successful examples of mobile phone and Internet diffusion havebeen much publicized, only 5 of 25 lowincome countries (Guinea, Mongolia,
Pakistan, Sudan, and Zimbabwe)
achieved increases in the index thatexceeded the middle-income average.
However, low-income countries did increase penetration rates for recent innovations more quickly than high-income
countries.19 Given that new technologies sometimes substitute for older technologies, such as mobile phones for
fixed-line telephones, transmission of information over the Internet for transmission involving travel and telephones,
the previous finding suggests that theoverall pace of convergence in lowincome countries may be accelerating,particularly as data for 2005 and 2006
suggest continued high growth in the
diffusion of mobile telecommunications
and Internet technologies.20
Econometric evidence supports the viewthat the relationship between income andtechnological diffusion follows an S-curve:
technological diffusion is slow at very low
incomes, in part because of difficulties in affording new technologies, in part because lowlevels of human capital severely constraintechnological progress. As incomes rise, technological diffusion increases rapidly, particularly in percentage terms, because of the lowbase level. At some level of income, however,the pace of technological diffusion slows. One
explanation for this slowdown at higher income levels is the slow pace of improvement inan economy’s ability to absorb new technologies (its technological adaptive capacity), as
determined by the level of human capital, theD I F F U S I O N

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D E V E L O P I N GC O U N T R I E S

governance structure, and the infrastructure(Howitt and Mayer-Foulkes 2005; Klenow
and Rodriques-Clare 2004; Lederman and
Saenz 2005). According to this view, technology in a country tends to converge toward alevel consistent with the country’s technological adaptive capacity. As a result, countries
may experience relatively rapid technologicalprogress for a period, but may subsequently
stagnate at a given level unless they take steps
to further raise their technological adaptive
capacity. Chapter 3 develops the componentsof technological adaptive capacity and describes trends in developing countries.

Technological diffusion overthe long termSo far, we have emphasized the technological
performance of countries at different income levels over the recent past. Thanks to a
new data set developed by Comin and Hobijn(2004), we can now analyze the process oftechnological diffusion over the longer term.
This data set traces the extent of diffusion ofsome 100 technologies in 157 countries during the period 1750–2003.21 For each technology, only countries for which publisheddata exist are included, implicitly restricting
the sample to countries (and technologies)
where a significant degree of diffusion has
occurred. The data analyzed here are further
restricted to include only those countrytechnology pairs (a data set with one country
and data for 7 technologies would have 7
country-technology pairs) where the intensityof use has reached at least 5 percent of the average level of the 10 countries with the highest
recorded level of diffusion. Under this restriction, there are 1,181 country-technology
pairs, 699 of which correspond to developing
countries, heavily weighted to technologies
discovered in the late 19th or early 20th
centuries.22
Two important points emerge from thisanalysis. First, the diffusion of technology
across the globe has accelerated over time.

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2 0 0 8

Table 2.14 Successful diffusion has accelerated
Period technology was initially discovered
Technology

1750–1900

1900–50

1950–75

1975–2000

Number of countries(years following discovery until technology reached 80 percent of reporting countries)
Transportation
Shipping (steam)Shipping (steam motor)
Rail (passenger)
Rail (freight)
Vehicles (private)
Vehicles (commercial)
Aviation (passenger)
Aviation (freight)
Communications
Telegram
TelephoneRadio
Television
Cable television
PC
Internet use
Mobile phone
Manufacturing
Spindle (ring)
Steel (open hearth furnace)
Electrification
Steel (electric arc furnace)
Synthetic textiles
Medical (OECD only)
Cataract surgery
X-ray
Dialysis
Mammography
Liver transplant
Heart transplant
Computerized axial
tomography (CAT) scan
Lithotriptor

Average (excluding medical)
Average (including medical)

83
180
126
124
96
63

21
57
93
99
153
123
109
103

60
60

91
99
69
59
50
24
23
16

111
125
78

50
50
155
91
75

92
36

251

19
27
29
18
29
27

93
33
33
28
28
18
15

106.9
118.9

77
156
154
156
98
134
151
150

60.9
61.3

23.5
25.7

29
26

16.0
15.5

Source: Calculations from CHAT database (Comin and Hobijn 2004).

Table 2.14 reports, for several old and newtechnologies, the number of years that elapsed
between the discovery of the technology andthe time it reached 80 percent of the countries
currently reporting data for that technology.23
The acceleration in the pace at which technologies spread across countries is particularly

88

striking in the communications field, forwhich data are relatively good and country
coverage is extensive. Thus telephone andtelegram services were invented in the middleof the 19th century, and more than 90 years
passed before those services reached 80 percent of the countries that currently report data

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T E C H N O L O G I C A L

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D E V E L O P I N GC O U N T R I E STable 2.15 The pace at which technology diffuses has picked up among
successful adaptors
1800–99

1900–50

1950–75

1975–2000

Threshold
5%
25%

Threshold
5%
25%

Threshold
5%
25%

Threshold5%
25%(years from discovery until threshold reached)Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

60
47
54
58
52
56

69
57
72
67
62
69

23
25
30
25
—
—

28
30
35
29
—
—

18
18
18
18
—
18

21
21
21
21
—
21

91
112
110
114

46
57
51
57
56

60
65
64
69
68

20
20
26
—
—

24
25
31
—
—

13
15
18
20

17
18
21
22

102
111

52
54

65
67

22
26

26
31

16
18

19
21

91
71
97

117
105
118

85

109

Income groups
High-income OECD countries
Other high-income countries
Upper-middle income countries
Lower-middle-income countries
Low-income countries

63
95
83
86

World
Developing countries

76
84

Source: World Bank calculations using the CHAT database (Comin and Hobijn 2004).
Note: The sample is restricted to only those 567 country-technology pairings where the 25 percent threshold was reached andthat were below 10 percent when they appeared in the database; — ⫽ no data.

for them. In contrast, mobile phones, computers, and cable television reached 80 percent of
the countries that currently report data in lessthan 25 years. The same sort of acceleration
can be observed for the dissemination oftransportation, manufacturing, and medical
technology.
Second, and consistent with the first point,
technological diffusion appears to accelerate
above a certain threshold. Table 2.15 considers only those country-technology pairs thathave reached a level of penetration equal to25 percent of the average level observed in the
10 countries where the technology is employedmost intensively. Looking at the results for theworld as a whole, the amount of time required
to go from the 5 percent level to the 25 percent
level (averaged across country-technology
pairs) is much smaller than the time required
to reach the 5 percent level. For example, inthe first half of the 20th century, for a technology to reach the 5 percent threshold took, on
average, 52 years, but only an additional 13

years to reach 25 percent. Moreover, the paceof acceleration has increased over time. For
technologies introduced since 1975, a group
dominated by electronics and information
technologies, on average, it took 16 years fromits invention for a technology to reach the 5
percent threshold in a given country, but only
another 3 years to reach the 25 percent threshold. Although the pace of diffusion was somewhat slower in developing countries than in
high-income countries, it too follows the same
pattern. Because table 2.15 excludes countrytechnology pairs where the 5 percent thresholdhas been reached, but not the 25 percent
threshold, the recorded diffusion times areprobably lower-bound estimates.24 This pattern is consistent with the existence of significant economies of scale and barriers to entry
among these technologies, such that once thebarriers are overcome and the technology is inplace, scaling up occurs relatively quickly.
While diffusion has occurred relatively
rapidly among successful diffusers, successful

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2 0 0 8

Table 2.16 Slow diffusion means that many developing countries never reach the 25 or
50 percent threshold
1800s

5%

1900–50

Threshold25% 50%5%

1950–75

Threshold25% 50%5%

1975–2000

Threshold25% 50%5%

Threshold25% 50%(number of country-technology pairs that have reached threshold)Regions

East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

18
56
80
28
7
27

0
19
11
4
0
4

0
6
1
1
0
0

38
47
95
44
11
83

9
23
34
16
3
21

3
6
8
6
3
8

7
40
31
9
0
11

2
18
3
1
0
0

1
3
0
0
0
0

6
23
19
6
1
12

2
13
4
2
0
3

0
6
0
0
0
0

Income groups
High-income OECD countries
Other high-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

150
25
90
109
17

114
16
30
8
0

75
7
6
2
0

134
28
112
130
76

93
23
53
38
15

55
14
16
12
6

96
14
61
33
4

87
10
24
0
0

75
8
4
0
0

28
7
29
33
5

26
6
19
5
0

23
6
6
0
0

Total number of country-technology pairs
World
Developing countries

391
216

168
38

90
8

480 222318 106

103
34

208 121
98
24

87
4

102
67

56
24

35
6

Source: World Bank calculations using the CHAT database (Comin and Hobijn 2004).
Note: Sample restricted to only those 1951 country-technology pairings that were below 10 percent when they appearedin the database.

diffusion is the exception rather than the rule.
For example, of 102 country-technology
pairings first recorded in 1975–2000, only 56(55 percent) have reached the 25 percent
threshold and only about 35 (34 percent) havereached the 50 percent threshold (table 2.16).
For developing countries, the pace (and extent) of diffusion is significantly slower(lower) than in high-income countries, with
only 24 (36 percent) developing countries having reached the 25 percent threshold and only
6 (9 percent) having reached the 50 percent
threshold. This slower diffusion is true evenfor extremely old technologies, a result consistent with the idea that affordability and competency issues are binding constraints on thefurther diffusion of technologies in thesecountries. This result is broadly consistent
with the observation that for some groups ofcountries, overall technological achievement
appears to stop increasing after a given level isreached, and many developing countries may
thus face severe barriers to achieving accelerated technological progress.

90

Slow diffusion within countries reflects
a nonlinear process
As noted earlier, the surprisingly low level ofoverall technological achievement in countries
such as China and India contrasts with popular
perceptions, which are based on the relativetechnological sophistication of some of the twocountries’ major cities and trading centers.
However, the same kind of technological diversity observed across countries is visible withincountries as well (see box 2.9 for the case ofIndia). For example, although one might haveexpected India to have scored substantially better than many Sub-Saharan African countries
in overall technological diffusion, in fact, it
does not. Several technologically advanced
cities in India notwithstanding, technologies
have not penetrated deeply in many parts of the
Indian countryside. Here the challenge is to put
in place a basic infrastructure in the countryside that can support the kind of sophisticatedtechnologies that the elites in the country arecapable of supporting. As one observer put it,
an energy technology revolution must precedeT E C H N O L O G Y

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Box 2.9 The technological divide within India

Large segments of the Indian economy are technology sophisticated. Its high-tech industries are important global players, its premier education and
R&D institutions are recognized internationally.
Along with China, it has the largest pool ofskilled manpower, including those with degrees inengineering and other technical disciplines. Moreover, India has become one of the world's largest
markets for telecommunications technology, is aleader among developing countries in exports of software and information technology-enabled services,and has demonstrated its potential to be a major
player in biotechnology-pharmaceuticals and theautomobile and engineering sectors, with Bangalore
having emerged as a major international center fortechnological production and innovation.
Nevertheless, on a per capita basis, India continues to lag behind middle-income countries in the rate
Urban and rural teledensity(fixed and mobile), India, 1998–2007
Number of subscribers per 100 people
60
50
40
Rural areas
30
Cities20
1001998 1999 2000 2001 2002 2003 2004 2005 2006 2007aof technological diffusion, R&D expenditures, attainment levels of basic and higher education, availability
and quality of logistics services, and size of revenues
and employment in software and other high-tech industries. In addition, India does not score substantially better than many Sub-Saharan African countries
in terms of the overall penetration of technologies.
The juxtaposition of India's increasing technological prowess and relatively poor access to technology
in per capita terms largely reflects the limited penetration of technology in rural areas, which account for
more than 70 percent of the population, but less than
30 percent of GDP. For example, in June 2007
tele-density—the number of subscribers (wired andwireless combined) per 100 individuals—was
52.3 percent for urban dwellers compared with 6.5 forrural inhabitants (see the box figure). Although the gap
remains large (especially in terms of quality and reliability), and indeed, has widened, a surge in rural mobile phone access means that by mid-2007, tele-density
in rural India was equal to the level recorded for urban
areas in 1998. Older technologies, such as radio, television, bicycles, and motorized two-wheelers, tend to
be more evenly diffused than newer ones, such as mobile phones, computers, and the Internet, given thelonger time since the former were introduced.
The digital divide between rural and urban areas
promises to narrow over the long term, particularly
in high-income states and near major cities. However, in some states, in the more remote rural areas,
and among tribal and other linguistic groups that lag
behind in economic development, the gap may wellincrease over time.

Source: Telecommunications and Regulatory Authority of India.
a. Estimated.

any information technology revolution (Friedman 2007). The rise in China’s index of diffusion of new technologies is almost double thatof India, in part because the more technologically backward regions in China have madeprogress in closing the gap with the more technologically advanced regions on the coast (Jefferson, Rawski, and Zhang 2007).
The technology employed by firms within
sectors in individual countries also exhibits
tremendous variation. In India, most firms,

Source: Mitra 2007.

especially small ones, tend to use low levels oftechnology, and only a few operate near thenational technological frontier. In most sectors,
productivity at the national technological frontier is about five times the mean level for all
firms (Dutz 2007). For small formal enterprises, average productivity is even lower:
about one-sixth of the level at the technologicalfrontier for each sector and only one-eighththat of top local performers. Smaller informal
enterprises are likely to be even less productive.

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2 0 0 8The skewed distribution of enterprise productivity implies potentially huge productivity andoutput increases are possible, if already existing
within-country knowledge were to diffuse fromtop performers to the rest of the economy.
Assuming that domestic competencies wereavailable (or created) to efficiently use the technologies employed by enterprises at the national frontier, Indian GDP could be 4.8 times
higher if those technologies were successfully
applied by their less productive rivals. Similarly,
in Brazil, the productivity of innovative firms
with more than 10 employees, which accountfor 26 percent of total sales, is, on average,
6.5 times higher than that of similarly sized
firms classified as weakly innovative (which
account for 11 percent of sales, but 38 per percent of employment).

ConclusionA

ll told, the evidence reviewed in this chapter suggests that for most developing countries technological progress is mainly a processof adaptation and adoption of technologies
from abroad rather than the creation of newto-the-world technologies. The pace of technology dissemination across countries has picked
up considerably over the past 100 years, andmost technologies are available at some level inmost countries, but the extent to which technologies are available differs enormously.
Many developing countries made progress inclosing the technology gap with advanced
countries during the 1990s. However, despite
more rapid improvement in technologicalachievement among the poorest countries,
enormous gaps in technological achievement
remain. Even upper-middle-income countries
have less than one-third of the level of TFP of
high-income OECD countries, and low-income
countries have only 7 percent. The gap in TFPlevels between high-income countries and Latin
America and the Caribbean, the Middle Eastand North Africa, and Sub-Saharan Africa has
widened since 1990. Moreover, the gap between major centers and lesser cities and rural
economies remains large even in the most successful countries.

92

At the same time, income is not the only
determinant of technological progress. Although innovation at the technological frontier(as measured by patents and scientific journal
articles) drops off quite sharply as income levels decline across countries, considerable overlap among income groups exists in the extent
of diffusion of old technologies. Thus the mostadvanced middle-income countries demonstrate greater technological achievement in oldtechnologies than the least sophisticated highincome countries, while the more advanced
low-income countries rate higher than thelowest-ranking middle-income countries.
The technological gap between highincome and developing countries is more pronounced for new technologies; however, many
developing countries are acquiring new technologies at a more rapid pace than older technologies. Given that some new technologies,
such as mobile phones and to some extent
computers, are substitutes for old technologies, the rapid diffusion of new technologies
holds promise for a substantial, widespreadadvance in technological achievement. This
progress likely reflects several factors: the reduction of regulatory constraints on economic
activity that has occurred over the past
15 years in many developing countries; the enabling of private sector investors, who are freeof local government budget constraints), totake the lead in implanting many of these technologies; the growing incomes in developing
countries that have improved the affordabilityof new technologies; and the improvements inthe technological absorptive capacity of developing countries and the increased exposure tointernational technology through trade flows,
FDI, and a growing international diaspora.
This last issue is the subject of chapter 3.

Technical Annex: Constructionof the summary indexesT

he summary indexes, the overall index oftechnological achievement, and the technological adaptive capacity index reported inchapter 3 were calculated by aggregating someT E C H N O L O G Y

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34 separate variables, with the weights used in
the aggregation calculated by principal components analysis (see below). This approach
distinguishes these indexes from most of thosereported in the literature, which even though
they are based on similar underlying base data,
use arbitrary weighting schemes with limited
theoretical or empirical bases (see Archibugi
and Coco 2005 for a review).
A number of existing measures of technological achievement or technological progress emphasize inputs into technological advancement(numbers of scientists and engineers, R&D expenditure, or levels of R&D personnel), including, in some cases, even more indirect inputs,
such as the general level of education of the population and governance factors that facilitate
the absorption of technology (see, for instance,
UNCTAD 2005). Other measures focus on outputs, that is, on indicators of technological
performance, such as the shares of high-tech industries in exports and in manufacturing value
added (UNIDO 2002). Still others focus moreon the mechanisms by which technologicalprogress is achieved (Sagasti 2003) or technological learning occurs (Soubattina 2006). A
noncomprehensive list of prominent technology
indicators includes the following:• The index of innovation capability is
published by the United Nations Conference on Trade and Development (UNCTAD 2005) and consists of an unweighted average of an index of humancapital (calculated as a weighted averageof tertiary and secondary school enrollment rates and the literacy rate) and atechnological activity index (calculated
as an unweighted average of three indicators: R&D personnel, U.S. patents
granted, and scientific publications, all
per million population).
• The index of competitive industrial performance is published by the United
Nations Industrial Development Organization (UNIDO 2002) and is calculated as a simple average of four basic
indicators: manufacturing value added

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per capita, manufactured exports per
capita, share of medium- and high-tech
activities in manufacturing value added,
and share of medium- and high-tech
products in manufactured exports;• The technology achievement index is
published by the United Nations Development Programme (UNDP 2001) and combines (a) the indicators of human skills(mean years of schooling in the population age 15 and older and enrollment ratio
for tertiary-level science programs); (b) the
diffusion of old innovations (electricity
consumption per capita and telephones
per capita) and of recent innovations (Internet hosts per capita and high- andmedium-tech exports as a share of all exports); and (c) the creation of technology(patents granted to residents per capita
and receipts of royalties and license feesfrom abroad). The index is constructed as
simple averages of these indicators within
subgroups and then across groups.
• The national innovative capacity index(Porter and Stern 2003) focuses on government- and firm-level policies associated with successful innovation. It is composed of four subindexes: proportion ofscientists and engineers in the population,
innovation policy, innovation linkages
and what they call the cluster innovation
environment. The overall index is calculated as an unweighted sum of the four
subindexes, but the weights assigned toeach indicator in the subindexes are determined by the coefficients obtained
from a regression of the number of U.S.
Patent and Trademark Office patents on
the relevant indicators controlling for
total population, the proportion of scientists and engineers employed, and thestock of international patents generated
by the country between 1985 and 1994.

Estimating weights for variables
using principal components
All the measures discussed above assign
essentially arbitrary weights to the different

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2 0 0 8indicators included in the indexes, or in the caseof regression analysis, use weights derived from
specific assumptions about functional forms
and the data generating process. This report has
followed a statistical approach, principal components analysis, to weighting variables. Thisapproach is widely used in health economics(Gwatkin and others 2000a, 2000b, 2000c;
McKenzie 2003; Montgomery and others 2000;
Yvas and Kumaranayake 2006) and in poverty
analysis (Sricharoen and Buchenrieder 2005). It
has also been used in regulatory policy analysis(Nicoletti, Scarpetta, and Boylaud 1999) and inconstruction of cross country measures of capital controls (Chinn and Ito 2006). Most recently
in the technology field, it has been used in a government of India study of e-readiness (Government of India 2006). Principal components
analysis permits the calculation of weights foreach indicator included in the overall index in an
objective manner, with the weights being determined by the data—not by subjective judgment.
Principal components analysis is a statisticaltechnique for reducing the dimensionality of
data, thereby summarizing the informational
content in a large set of data by calculating orthogonal linear combinations of the original
data series. Essentially, it is a procedure thathelps to reduce the number of variables in theanalysis by calculating combinations of the underlying series that contain most of the information in the larger data set. It involves an examination of the correlation matrix for the variables
and the extraction of the principal componentsof the data obtained from the eigenvectors of thecorrelation matrix whose eigenvalues are largest.
Intuitively, the procedure followed here isakin to an unobserved variable problem. It is
assumed that there is some unobserved variable called T (technology), and that thisvariable is correlated with a number of othervariables (X), such as R&D expenditures,
share of high-tech goods in total manufacturing, and so on. These correlated variables aregrouped together into a single data set and theeigenvalues of its correlation matrix are examined to identify a limited number of linear
combinations (principal components) of the94

originating data that explain most of the variance in the original data set (at the limit, if all
the eigenvalues were used, all the variancewould be explained).
The first principal component is the linear
combination of the underlying data that accounts for the largest amount of variability inthe sample, the second principal component is
the one that accounts for the next largest
amount of variance, and so on successively
until all the variance is explained. All components are orthogonal to (uncorrelated with)each other; therefore each can be interpreted
as an underlying force (visible in varying
degrees in each original variable). By selecting
the n eigenvectors that explain a large share of
the total variance, the overall dimensionalityof the data set can be reduced to n.
It is assumed that the main correlate in theunderlying data reflects some form of technology and therefore that the principal components can be used as an index of technology. Thisis essentially the same process as taking a simple
average of several indicators, but with theattached weights being determined by the datarather than being imposed by the researcher.
As a large set of indicators are used thatreflects a wide array of country characteristics, more than one principal component is required to adequately capture the informationin the overall data set. One approach would
be to calculate each of these purely datadriven, but necessarily arbitrary, components
and use them to calculate the overall index.
An alternative approach that uses a multistage
procedure and subdivides the data into groups
that are economically or statistically highly
correlated or both was adopted. A principal
components analysis on these subgroups canbe used to create a subindex for those variables, which can then be used in a second
stage to calculate an overall summary index.
Two methodologies for determining thesubgroups were employed. The first was basedon an ex ante grouping of the indicators following an economic rationale, and the second
consisted of an ex post grouping of indicators
based on an analysis of the correlation matrix

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and a graphical analysis of component loadings
to identify groups of indicators that are highly
correlated with each other. Because the overall
technological achievement indexes obtained bythese two methodologies are very similar, withcorrelation coefficients of 0.99, the remainderof the discussion is limited to the results obtained from the ex ante grouping given its morestraightforward economic interpretation.

0 and 1 by subtracting from each variable theminimum observed value in the sample(across countries and time periods) and dividing by the difference between the maximum
value in the sample and the minimum value.26
Hence the value for indicator j for country iand time t is given by

Data preparation

Applying principal components
analysis to technology

To maximize the economic comparability of
the underlying cross-county data, all data
were scaled, that is, expressed as a percentage
of population, a percentage of GDP, a
percentage of exports or imports, or a percentage of arable land, as relevant. So
researchers could minimize the influence ofoutliers and one-off events, the scaled data
were averaged over two time periods for eachcountry: 1990–93 and 2000–03.25 All data
were converted into an index bound between

C O U N T R I E S

xijt ⫽ (Xijt ⫺ Min Xj ) (Max Xj ⫺ Min Xj)

For the purposes of this study, 34 variables wereidentified that bore an ex ante relationship withtechnology and for which adequate country
coverage existed over the 1990–2006 period to
support the calculation of two indexes, one forthe early 1990s and the second for the early
2000s. The variables related to technologicalachievement and their sources are reported intable A2.1 and those related to technologicalabsorptive capacity are reported in table A2.2.

Table A2.1 Indicators used to calculate the summary indexes and overall index related
to technological achievement
Scientific innovation and invention

Scientific and technical journal articles by population
Patents granted by the United States Patent and Trademark Office by population
Patents granted by the European Patent Office by population

World Development Indicators
Lederman and Saenz 2005
Lederman and Saenz 2005

Penetration of older technologies

Electrical Power Consumption kilowatt-hours/capita
International outgoing telephone traffic percent of GDP per 1,000 people
Main lines per 100 inhabitants
Air transport, registered carrier departures worldwide percent of GDP per 1,000 people
Agricultural machinery: tractors per 100 hectares of arable landExports of manufactures percent of merchandise exports
Medium-tech exports percent of total exports

World Development Indicators
World Development Indicators
World Development Indicators
World Development Indicators
World Development Indicators
World Development Indicators
CEPII BACI database

Penetration of recent technologies

Internet users per 1,000 people
Personal computers per 1,000 people
Cellular subscribers per 100 inhabitants
Percentage of digital mainlines
High-tech exports percent of total exports

World Development Indicators
World Development Indicators
World Development Indicators
World Development Indicators
CEPII BACI database

Exposure to external technology

FDI net inflows percentage of GDP
Royalties and license fee payments percent of GDP
Imports of high-tech goods percent of GDP
Imports of capital goods percent of GDP
Imports of intermediary goods percent of GDP

World Development Indicators
World Development Indicators
CEPII BACI database
CEPII BACI database
CEPII BACI database

Source: World Bank.
Note: BACI ⫽ Banque analytique de commerce internationale, CEPII ⫽ Centre d’Etudes Prospectives et d’Informations Internationales, EPO ⫽ European Patent Office, FDI ⫽ foreign direct investment, GDP ⫽ gross domestic product, USPTO ⫽ UnitedStates Patent and Trademark Office.

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2 0 0 8

Table A2.2 Indicators used to calculate the summary indexes and overall index
of technological absorptive capacity
Macroeconomic environment
General government balance as percentage of GDP
Annual CPI inflation rate
Real exchange rate volatilty

IMF/WEO and World Bank
Thomson Datastream and World Bank
J.P. Morgan, IMF and World Bank

Financial structure and intermediation
Liquid liabilities percent of GDP
Private credit percent of GDP
Financial system deposits percent of GDP

Beck, Demirgüç-Kunt, and Levine 2000
Beck, Demirgüç-Kunt, and Levine 2000
Beck, Demirgüç-Kunt, and Levine 2000

Human capitalPrimary educational attainment percent of population aged 15 and overSecondary educational attainment percent of population aged 15 and overTertiary educational attainment percent of population aged 15 and over
Governance
Voice and accountability
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption

Barro and Lee 2000
Barro and Lee 2000
Barro and Lee 2000
Kaufmann, Kraay, and Mastruzzi 2007
Kaufmann, Kraay, and Mastruzzi 2007
Kaufmann, Kraay, and Mastruzzi 2007
Kaufmann, Kraay, and Mastruzzi 2007
Kaufmann, Kraay, and Mastruzzi 2007
Kaufmann, Kraay, and Mastruzzi 2007

Source: World Bank.

An initial analysis of the two data sets
revealed the existence of two principal
components that explained 10 percent or moreof the overall variance and three eigenvalues
that exceeded 1—a widely used rule of thumbfor determining the underlying dimensionalityof a data set—in each of the data sets being
used (tables A2.3 and A2.4). Bartlett’s test for
sphericity confirms that the basic indicators arecorrelated for both indexes, which confirms
the meaningfulness of applying principal com-ponents analysis to this data. The Chi-squarestatistics are 1,520.88 (p-value of 0.00) and
1,572.10 (p-value of 0.00), respectively. Those
statistics indicate a strong rejection of the null
hypothesis that variables are not correlated.
Subsequently, as outlined earlier, principal
components analysis was performed on ex ante
economically motivated subgroups of the data
for each summary index. In most cases, the firstprincipal component from these subgroupings
explained more than 60 percent of the total

Table A2.3 Share of total variance explainedby principal components, technologicalachievement index

Table A2.4 Share of total variance explainedby principal components, technologicalabsorptive capacity index

Technological achievement index (2000–03)

Technological absorptive capacity index (2000–03)

Component

Eigenvalues

Share ofvariance explained

1
2
3
4
5
⯗
19

9.91
3.59
1.49
0.92
0.85
⯗
0.00

0.52
0.19
0.08
0.05
0.04
⯗
0.00

Bartlett’s test: Chi-sq (171)

Source: World Bank.

96

Cumulative
share ofvariance explained

Component

0.52
0.71
0.79
0.84
0.88
⯗
1.00

1
2
3
4
5
⯗
15

1520.88 (p-value 0.00)

Eigenvalues

Share ofvariance explained

Cumulative
share ofvariance explained

8.76
1.95
1.27
0.89
0.66
⯗
0.01

0.58
0.13
0.09
0.06
0.04
⯗
0.00

0.58
0.71
0.80
0.86
0.90
⯗
1.00

Bartlett’s test: Chi-sq (105)

Source: World Bank.

1572.09 (p-value 0.00)

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variance for the subgroup,27 suggesting that it
adequately summarized the information in theoverall grouping (table A2.5). Bartlett’s test
for sphericity rejects the null hypothesis of nocorrelation between variables in all cases at the
1 percent level.

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Indicators of the penetration of old technologies constitute a notable exception. When
all seven indicators were included, two eigenvalues exceeded unity. In addition, while thefirst principal component explained 55 percentof the variance, the second component

Table A2.5 Share of total variance explained by principal components for each sub-groupof indicators
Technological achievement index (2000–03)

Component

Eigenvalues

Share ofvariance explained

Cumulative
share ofvariance explained

Scientific invention and innovation

1
2

1.49
0.51

Bartlett’s test:

Chi-sq (1)

3.28
0.92
0.57
0.19
0.05

Bartlett’s test:

Chi-sq (10)Eigenvalues

Cumulative
share ofvariance explained

Penetration of old innovations

0.75
0.25

0.75
1.00

126.58 (p-value 0.00)

Penetration of recent innovations

1
2
3
4
5

Component

Share ofvariance explained

1
2

1.46
0.54

Bartlett’s test:

Chi-sq (1)

0.73
0.27

0.73
1.00

26.32 (p-value 0.00)

Exposure to external technology

0.66
0.18
0.11
0.04
0.01

0.66
0.84
0.95
0.99
1.00

605.16 (p-value 0.00)

1
2
3
4
5

3.43
0.80
0.54
0.22
0.01

Bartlett’s test:

Chi-sq (10)

0.69
0.16
0.11
0.04
0.00

0.69
0.85
0.96
1.00
1.00

250.32 (p-value 0.00)

Technological absorptive capacity index (2000–03)

Component

Eigenvalues

Share ofvariance explained

Cumulative
share ofvariance explained

Human capital

Component

Eigenvalues

Share ofvariance explained

Cumulative
share ofvariance explained

0.79
0.18
0.03

0.79
0.97
1.00

Macroeconomic environment

1
2
3

1.87
0.77
0.37

Bartlett’s test:

Chi-sq (3)

0.62
0.26
0.12

0.62
0.88
1.00

47.16 (p-value 0.00)

Governance

1
2
3

2.36
0.55
0.09

Bartlett’s test:

Chi-sq (3)25.53 (p-value 0.00)

Financial structure and intermediation

1
2
3
4
5
6

5.30
0.33
0.23
0.09
0.03
0.02

Bartlett’s test:

Chi-sq (15)

0.88
0.05
0.04
0.02
0.01
0.00

0.88
0.93
0.97
0.99
1.00
1.00

1
2
3

2.69
0.30
0.02

Bartlett’s test:

Chi-sq (3)

0.90
0.09
0.01

0.90
0.99
1.00

633.96 (p-value 0.00)

2077.61 (p-value 0.00)

Source: World Bank.

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2 0 0 8accounted for a non-negligible 22 percent of
the variance. The group was therefore further
divided into two subgroups: industrializationand penetration of other old innovations. For
each subgroup only the first principal component presented an eigenvalue greater than 1
and accounted for more than 70 percent of thevariance in both instances. Subsequently, another stage of principal component analysis
was performed to calculate an aggregate
subindex for the penetration of old innovations, and the results are presented in the table
A2.9 on the following page.28 The overall conclusions obtained do not change substantiallywhen the two groups are entered separately
into the overall technological achievement

Table A2.6 Factor loadings and variableweights for technological achievement
subgroups (2000–03)
Factorloadings

Variableweights (%)

0.70710.7071

68.42
31.58

Scientific innovation and development
Patents
Scientific and technical articles

index (rather than combined into one
subindex).29
As expected, the principal components
analysis assigned each subindex unequal
weights in the overall index. Table A2.6 summarizes the weights assigned to each indicator series in the summary subindex oftechnological achievement for each of theeconomic variables. Table A2.7 reports thesame data for the components used to calculate the overall index of technologicalabsorptive capacity.
In a second stage, we conducted a principal components analysis on the subindexes.
In the case of the technological achievement
and the technological absorptive capacity
indexes, the first principal component explained
79 percent and 65 percent, respectively, of theoverall variance (table A2.8), suggesting thatthe first eigenvector of the correlation matrix
provided a satisfactory summary of the information included in each of the subindexes.

Table A2.7 Factor loadings and variableweights for technological absorptive
capacity subgroups (2000–03)

Penetration of old innovations
Industrialization
Main telephone lines per 100
inhabitants
Exports of manufactures
Exports of medium-tech goods

0.707167.43

0.58150.55970.5904

30.82
42.67
26.51

Other old innovations
Electric power
International telephone traffic
Air transport
Agricultural machinery

0.70710.40670.51370.5396
0.5288

32.57
32.66
21.00
20.06
26.28

0.5282
0.52140.50600.1846
0.3987

25.45
24.52
28.25
6.39
15.40

0.49690.4384
0.4624
0.49140.3248

28.55
16.35
17.59
28.20
9.30

Penetration of recent innovations
Internet users
Personal computers
Cellular subscribers
Percentage of digital mainlines
Exports of high-tech goods
Exposure to external technology
Net FDI inflows
Royalties and license fee payments
Imports of high-tech goods
Imports of capital goods
Imports of intermediary goods
Source: World Bank.
Note: FDI ⫽ foreign direct investment.

98

Factorloadings

Variableweights (%)

0.46480.61530.6367

24.92
39.27
35.82

0.39180.37600.42240.41400.42500.4179

19.14
15.42
17.98
11.85
18.39
17.22

0.499028.95

0.61000.6156

34.40
36.66

0.59100.54240.5971

30.79
38.58
30.63

Human capitalPrimary educational attainment
Secondary educational attainment
Tertiary educational attainment
Governance
Voice and accountability
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
Macroeconomic stability
General government balance
Annual consumer price index
inflation rate
Real exchange rate volatility
Financial structure and intermediation
Liquid liabilities
Private credit
Financial system deposits
Source: World Bank.

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Table A2.8 Share of total varianceexplained by main principal componentsof technological achievement andtechnological absorptive capacity using
the sub-indexes (2000–03)
Component

Eigenvalues

Share ofvariance explained

Technological achievement
1
3.17
2
0.60
3
0.14
4
0.09
Bartlett’s test: Chi-sq (6)Cumulative share ofvariance explained

0.79
0.15
0.04
0.02

0.79
0.94
0.98
1.00

I N

D E V E L O P I N GC O U N T R I E STable A2.9 reports the implicit weights attached to each subindex in the two summary
indexes.
A similar process was undertaken, withsimilar results, for the data from the 1990s. In
calculating the percentage changes in eachsubindex and in the overall index, the factor
loadings from the 2000s estimation procedure
were used to ensure comparability of the data
sets.

332.49 (p-value 0.00)

Technological absorptive capacity
1
2.61
0.65
2
0.80
0.20
3
0.32
0.08
4
0.27
0.07
Bartlett’s test: Chi-sq (6)D I F F U S I O N

0.65
0.85
0.93
1.00

138.31 (p-value 0.00)

Source: World Bank.

Table A2.9 Factor loadings and variable weights obtained from second-stage principal
components analysis (2000–03)
Scientific innovationand invention

Penetration of oldinnovations

Penetration ofrecent innovations

Exposure toexternal technology

0.527221.74

0.540423.99

0.440934.79

0.4855
19.48

Human capital

Governance

Macroeconomic environment

Financial structure
and intermediation

0.539225.29

0.557936.98

0.349310.66

0.525427.06

Technological achievement
Factor loadings
Subindex weights (%)

Technological absorptive capacity
Factor loadings
Subindex weights (%)
Source: World Bank.

Notes
1. TFP simply measures all influences on GDP
growth other than increases in capital and labor. Thus
changes in TFP could reflect changes in the composition of output (for example, a shift from agriculture to
manufacturing), changes in the quality of labor or capital not reflected in the data (for example, educationlevels), or any other variable that is an important determinant of growth but whose influence is not explicitly accounted for in growth equations.
2. See http://www.itto.or.jp/live/PageDisplay
Handler?pageId=217&id=280.
3. See, for example, Haskel and Slaughter (2002)
and Krugman (2000). The rise in the global supply of

goods produced by unskilled and semiskilled labor, andthe influx of low-skilled immigrants, are also cited ascontributing to earnings inequality in high-income
countries.
4. This is an important conclusion of Global Economic Prospects 2007. Although intercountry inequality (where each country is accorded equal weight) has
worsened, weighting country observations by population shows an improvement in income distribution.
Taking into account within-country inequality, global
inequality has remained roughly constant since the late1980s.
5. Anecdotal evidence indicates that access tomobile phones improved returns to producers at the99

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2 0 0 8expense of middlemen for fishermen in Porto da
Manga, Brazil, and Moree, Ghana, and for farmers in awholesale market in Sri Lanka (de Silva and Zainudeen2007). The advent of the Internet and automated teller
machines had a similar effect in the United States, overcoming the anticompetitive effects of state banking regulation and strong lobbying in state legislatures.
6. The focus on patents and scientific publications reflects academic research on technology. Patents have theadvantage of being more clearly associated withprocesses rather than products (by definition, a patent is
not granted on a product, but rather on the method bywhich it is produced). The disadvantage is that patents
exclude a number of important forms of innovation, notably software (until recently) and processes for managing multinational production and distribution networks.
7. The definition of a high-tech export used here
includes products with high R&D intensity, such as
aerospace-related items, computers, pharmaceuticals,scientific instruments, and electrical machinery. As
such, it excludes a number of services such as software
engineering that may, by their nature, be even more
technologically intensive.
8. For example, the correlation coefficient of theshare of high-tech exports in total foreign sales withadult literacy was 43 percent in 2005 and withexpected years of schooling was 22 percent.
9. Regional and income group data in table 2.7 areweighted averages of individual countries, with theweights given by their populations. The simple
averages cited in the text give equal weight to every
country independent of the size of its population.
10. The core technology for the Internet can trace
its history back to the early 1960s and a network
developed by the U.S. Defense Department’s Advanced
Research Projects Agency. However, the Internet as it isunderstood by most people today—the World Wide
Web and HTML web pages—was first introduced in
the early 1990s, with the first web browser, Mosaic,
being released in 1993.
11. According to the Cellular Operators Association of India, the country had more than 121 million
subscribers in March 2007.
12. For example, South Africa is beginning to attract companies for business process outsourcing. One
British executive (Ranger 2006) noted that his
U.K. customers were more comfortable with the South
African accent than with the Indian accent and citedthe advantages of working at similar times as the parent company.
13. A 2005 report from Gartner Inc. stated thatIndia had captured 80 to 90 percent of total offshore
outsourcing revenue (Tucci 2005).
14. The scores in large countries may be biased,
better reflecting the scores in coastal trading cities and100

less the score in the interior. Thus the Russian Federation’s weak overall score in comparison with China’s
may be explained by the relative absence of large port
cities close to major Russian manufacturing centers,
whereas in China, port cities and manufacturing centers tend to be in close proximity.
15. Principal components analysis involves examining the eigenvectors of the correlation matrix of aset of related data and extracting from it a weighting
scheme that describes as much of the information contained within the data set as possible using a minimum number of orthogonal linear combinations of
the original data. By construction, a data set that consists of 100 series will have 100 of these eigenvectorsthat fully describe all the information in the data set.
However, the first five of these eigenvectors (five different linear combinations of the initial 100 series)
may describe 90 percent of the total variance. In sucha case, principal components analysis would involve
calculating an overall index based on these fivesubindexes. In a two- or three-stage procedure such as
the one used here, the data are divided into subgroups
either based on the ex ante characteristics of thesubindexes or on the basis of statistical correlations.
Then a separate principal components analysis is doneon each of these subindexes, which are subsequently
combined in a second or third round to determine theoverall index.
16. To minimize the influences of outliers, the component indicators of the subindexes for each time period are calculated as the four-year average of values
for the period 1990–93 and 2000–03. To maximize
country coverage, missing data are gap-filled by using
more recent or older data generally from within theanalytical period. For the transition economies of theformer Soviet bloc, data as recent as 1995 are used forthe early 1990s data point in cases where data do notexist or are unreliable.
17. The relationship between income and technological achievement is complex. The level of income affects the ability to gain access to technology, while thelevel of technology helps to determine income levels(see the earlier section on “The role of technology indevelopment”).
18. Low-income countries included in the firstindex are Bangladesh, Benin, Côte d’Ivoire, Ethiopia,
Ghana, India, Kenya, the Kyrgyz Republic, Mozambique, Nepal, Nigeria, Pakistan, Senegal, Sudan,
Tanzania, Togo, Vietnam, the Republic of
Yemen, Zambia, and Zimbabwe. The second index
includes all of these except Nepal, Vietnam, theRepublic of Yemen, and Zimbabwe.
19. The penetration of new technologies during
1990–2000 increased by 102 percent in high-incomeOECD countries, 256 percent in upper-middle-income

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countries, 219 percent in lower-middle-income countries, and 123 percent in low-income countries.
20. For low-income countries, the number of Internet users per 1,000 people rose by 172 percent between
1999 and 2005, the number of secure Internet servers
per 1 million people increased by almost 30 percent a
year between 2004 to 2006, and the number of mobile
phone subscribers per 1,000 people rose by 92 percent
between 1995 and 2005 (World Bank 2007d).
21. Measurements of the extent of diffusion differ
by technology, but generally involve available statistics
on technology flows per country scaled by income or
population, whichever is more appropriate. For example, the diffusion of electricity is measured by kilowatt
hours consumed per person and the diffusion of railroads is measured by tonnage moved divided by grossnational product.
22. Of the 699 country-technology pairs related todeveloping countries, 216 refer to a technology thatwas first recorded in the 19th century, 318 date fromthe first half of the 20th century, 98 come from thethird quarter of the 20th century, and 67 from the final
quarter of the 20th century.
23. The data set includes an estimate of the date ofdiscovery for each technology.
24. That is, there are country-technology pairs, notconsidered in this analysis, that have reached the 5 percent level but are taking a long time to reach the
25 percent level.
25. When missing data issues occurred over thistime period, the earliest available observation for agiven indicator in the period from 1988–96 and
1998–2006 was used so as to expand country coverage. The budget balance indicators and the real exchange rate volatility indicators were averaged over theperiods 1990–96 and 2000–06 to purge out cyclicaleffects. The real exchange rate volatility series is theyearly average of the absolute value of monthly change
in the real effective exchange rate.
26. For this operation the authors used a combined
data set including observations from both the 1990s
and 2000s to ensure that data for each period had thesame underlying scaling.
27. Frequently more than 70 percent of the variance was explained by the first principal component.
28. A data-driven grouping of indicators was also
conducted and used to generate a two-step index similar to the one reported in the main text. As the indexes
derived from this procedure did not differ materiallyfrom the one reported here, they are not reported.
29. Furthermore, results for the overall technological achievement index remain unchanged when the entire old innovations indicator group is included, that is,when no division into subgroups is made and thesecond principal component is ignored.

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3
Determinants of Technological
Progress: Recent Trends andProspects
As discussed in the previous chapter, the paceat which technologies spread between andwithin countries has picked up. As a result,most developing countries are narrowing thetechnological divide that separates them fromhigh-income countries. Nevertheless, the technology gap remains large; for many, including
several low-income countries, it is widening
rather than closing, in part because of theslowness with which technologies spreadwithin countries. For virtually all developing
countries, the domestic pace of technologicalprogress is determined mainly by the speedwith which already existing technologies are
adopted, adapted, and successfully applied
domestically, and done so throughout theeconomy, not just in the main cities.
This chapter explores some of the major
determinants of this kind of within-country
diffusion of technology. It adopts an analytical framework that distinguishes between thefactors that dictate the extent to which an
economy is exposed to external technologies
on the one hand and the efficiency with which
it absorbs them on the other hand. Among themost important channels through which lowand middle-income countries are exposed toforeign technologies are trade; foreign direct
investment (FDI); and contacts with highly
skilled diaspora members (nationals working
abroad) and with other information networks, including those of academia and the
media. Maintaining an open environment tosuch flows is critical for accessing technology

at least cost. However, no matter how compellingly useful a technology may be, theprocess by which it spreads within a country
can be lengthy.
The speed with which a country absorbs
and adopts technology depends on many factors, including the extent to which a country
has a technologically literate workforce and ahighly skilled elite; promotes an investment
climate that encourages investment and permits the creation and expansion of firms
using higher-technology processes; permits
access to capital; and has adequate public sector institutions to promote the diffusion ofcritical technologies where private demand or
market forces are inadequate.
The process of technology absorption is also
subject to virtuous circles. Scale economies
in technologically sophisticated sectors and inlearning by doing tend to make the acquisitionof technology a nonlinear process, characterized initially by slow penetration until somethreshold is reached, followed by a period of
rapid acceleration, and finally by a period ofslower diffusion as saturation is achieved. As
a consequence, while gaps in technologicalachievement create opportunities for accelerated growth and convergence in lagging
economies, they can also lead to divergence if
the conditions for technology adoption inlagging countries are insufficient. Many technologies operate synergistically to reinforce
the demand for each other and the effectiveness and capacity of supply.

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Although the process of technological diffusion has a clear logic, the process is by nomeans mechanical. It occurs through interactions among individuals, entrepreneurs, firms,
and governments. The role of government isboth direct, as a supplier of many technological services, and indirect. In particular, theefficiency with which firms can diffuse technology within the domestic economy depends
on the overall political and economic context,
the level and distribution of human capital,
the quality of the macroeconomic environment, and the rules and regulations governing
the conduct of business, all of which are heavily influenced by governments.
This chapter discusses the principal channels through which developing countries are
exposed to advanced technology, analyzes themain determinants of domestic absorptive
capacity, and indicates likely future trends intechnological diffusion. The following six
main messages emerge from this analysis.
The principal channels by whichdeveloping countries are exposed toexternal technology—which include
trade, FDI, and a highly skilled diaspora—have increased substantially overthe past several decades. The share ofimported high-tech products in grossdomestic product (GDP) has risen bymore than half in both low- and middleincome regions since the mid-1990s,
that of imports of capital goods by 37
percent, that of imports of intermediate
goods by 26 percent, and that of FDI inflows by sixfold since the 1980s. Finally,
the size and sophistication of global diasporas has increased markedly, alongwith substantial improvements in thetechnology by which migrants can transmit their know-how and interact with
their home economies.
The ability to absorb foreign technology, which depends on domestic policies
and institutions, has also improved inmany developing countries. Reflecting
rising school enrollment, literacy rates in
low-income countries have increased

106

from less than 50 percent in 1990 tomore than 62 percent, and among youth
they now exceed 74 percent. In addition,
the macroeconomic, governance, and investment climate that innovative firms
and entrepreneurs need to operate is improving. More countries are operating
in a context of close to stable prices (median inflation in low-income countries
declined from 9.2 to 4.2 percent between 1990 and 2006) and flexible exchange rate regimes, while government
finances are better balanced.
Technological diffusion among
middle-income countries has benefited
from the reorientation of global production processes. Advances in communications and transport technology havegiven rise to the growth of global production networks, facilitating increased
trade and technological advances inmany developing countries, particularly
middle-income developing countries.
Until recently, low wages and a solid, iflow, level of basic technological literacy
have been sufficient to capture a significant role in global networks in many
countries. As wages rise, however, thesecountries will need to make substantial
additional investments in human capitalto maintain their share of global production and continue the technological convergence of the past few years. They will
also need to adopt a more proactive approach to developing local competencies
and to using research and development(R&D) and outreach programs to bolster the diffusion process.
For low-income countries, poor technological adaptive capacity and limited
dissemination of often simple technologies to the countryside are severely constraining technological progress. Despite
progress in basic technological literacy,
extremely low levels of income, weak
governance structures, and, in somecases, ongoing conflict continue tostymie the ability of low-income, andD E T E R M I N A N T S

especially Sub-Saharan African, countries to obtain and absorb new technologies. Nevertheless, the potential fortechnological progress through thegreater dissemination of relatively simple technologies is huge.
The absence or low quality of somebasic technologies that governments historically provide hinders technologicaldiffusion by the private sector. These
basic technologies often represent essential complementary technologies whose
absence can prevent the successful adoption of a new-to-the-market technology.
The relatively rapid disseminationof new communications technologies
throughout the developing world, including in low-income countries, offers
a ray of hope. These potentially transformational technologies are enabling,
often for the first time, the kinds ofarm’s-length transactions that may be
critical to firm development and the
spread of technology in these countries.
New technologies are frequently introduced and promoted by members ofnational diasporas, both directly throughnetworks and indirectly through investments financed from remittances.
The rest of this chapter is devoted to
exploring how developing countries absorb
external technology. The next section presents
an analytical framework for technologicalprogress. This is followed by a discussion of
how trade, FDI, and migration expose countries to new technologies and can promote internal diffusion of those technologies. The section also discusses trends in these flows andthe potential magnitude of associated technological progress and how this may havechanged over time. The chapter then turns toan analysis of the domestic factors that facilitate the absorption of new technologies. Thissection first examines how government policies, and the business environment in general,facilitate the creation and expansion of innovative firms. It then looks at how levels of humancapital—from literacy rates to R&D capacity—

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affect countries’ ability to absorb technology
from abroad. The chapter concludes with a
speculative view of the prospects for technological progress and some policy messages.

Drivers of technologicalprogress: A frameworkThe process by which countries adopt,
adapt, and absorb external technologies iscomplicated. The overall framework followedin this chapter (depicted in figure 3.1) draws on
previous work done at the World Bank, in particular, the 1998 World Development Reporton the knowledge economy (World Bank 1998)
and several regional and country-specific policy
analyses of technology and technological competencies. In addition, it relies upon the academic literature on technology diffusion, including an excellent review article by Keller (2004);
several articles by Coe and Helpman concerning the role of FDI; case studies of the processof technology diffusion by Chandra andKolavalli (2006); empirical work on the technological influence of imports by LumengaNeso, Olarreaga, and Schiff (2005); and thediscussion by Rodrik (2004) on the impact ofmarket failures on innovation incentives.

Exposure to external flows interacts
with domestic capacity to diffuse
technology
For the purposes of analytical simplicity, theframework presents technological progressin developing countries as a process whereby
an economy is exposed to higher-technology
business processes, products, and services
through foreign trade; FDI; and contacts withits diaspora and other communication channels, including academic and international organizations (the large arrows at the top of the
figure). Exposure to new ideas and techniquesis, however, not sufficient to ensure technological progress on the ground. The extent towhich these flows are translated into technological progress depends on the technical absorptive capacity of the economy (represented
by the ringed drum). This in turn depends on

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2 0 0 8Figure 3.1 Domestic absorptive capacity both conditions and attracts external flows

Technological absorptive
capacity

Transmission
channelsTechnological frontier

Trade

FDI

Diaspora
and other
networks

Governance and the business climate

Policies to- create competencies- build infrastructure- foster an innovationfriendly business climate

Basic technological literacy

Finance of innovative firms

Technologicalabsorption

Pro-active policies

Spillovereffects

Returns to
scale

Dynamic
effects
magnifytechnology
transfer

Domestic technological achievement
Source: World Bank.

the extent to which the business and macroeconomic climate fosters an environment inwhich firms—the main mechanism for technological diffusion within a country—are able
to form, grow, and expand. Absorptive capacity also depends on the levels of basic technological literacy and advanced skills found in
the country, which together dictate the country’s capacity to implement technologies on
the one hand and to do the research necessary
to understand, implement, and adjust imported technologies on the other hand. Also
important are government actions designed tohelp overcome market failures that might
limit the financing of innovative activity, plus
actions that focus technology policy on adapting and adopting those existing technologies
for which there is a market and for which adequate domestic competencies exist. Criticalhere are outreach and dissemination policies,

108

which need to serve as a two-way conduit,
both informing the population about technological solutions and providing feedback toproviders concerning the usability of and demand for proposed solutions. Taken together,
these factors act as filters (the rings in thedrum) that dictate how much of the potential
technological flow is actually absorbed
domestically.
The overall process is, of course, more
complicated, with both technological flows
and technological adaptive capacity influencing each other. For example, international
trade is perhaps the most important vector forthe transmission of technology, but the extent
of a country’s openness to trade depends significantly on the amount of FDI that has occurred, the existence of a vibrant and technologically literate diaspora, and the domestic
business climate. Similarly, the quantity of FDI

D E T E R M I N A N T S

and its overall effectiveness depends on thequality and technological literacy of the labor
force.

Increasing returns and spillover effects
can magnify these effects. . .
Both domestic and external determinants oftechnological transfer are affected to varying
degrees by increasing returns to scale andspillover effects that can magnify the absorptive impact of these flows. Access to foreign
markets may allow domestic firms to grow andexploit economies of scale associated withsome technologies, raising the overall wealthand technological sophistication of an economy. Meanwhile, the technological spillovers
that can be expected from FDI, including
demonstration effects and the transfer of business process and human capital to domestic
firms through employee turnover, are likely to
be greater the more qualified is the labor force.
Both FDI and trade can contribute to cluster
effects and networking externalities that increase the potential for spillovers and to technological diffusion from individual sectors andfirms to the rest of the economy. Alternatively,
economies of scale and agglomeration effects
may prevent entry by new firms in some markets, cutting off otherwise promising opportunities for technological learning. In addition,
imitators may limit entrepreneurs’ ability tocapture the returns to new-to-the-market
innovations, thereby reducing incentives fortechnological progress.

. . . but a lack of financing can stymie
innovation
Affordability issues can influence both the sizeof initial inflows and a country’s technologicalabsorptive capacity. Even if profitable investments in technology are available and the domestic environment encourages the absorptionof new technologies, low incomes may makenew technologies unaffordable to individuals
and firms in developing countries. At the extreme, individuals near subsistence levels may
be unwilling to risk adopting a new-to-themarket technique, may be unable to generate

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adequate savings to invest in a new technology, or may lack the collateral required to borrow. Thus poverty is a major cause, as well asa result, of low levels of technology.
Affordability is also an issue at the macrolevel. Low incomes constrain government finance, limiting the government’s capacity to
put into place both the level of physical infrastructure and the investments necessary todevelop a level of domestic human capital
capable of supporting and exploiting evensimple technologies.

Policy should not impede innovative
firms
Finally, firms, entrepreneurship, and government action that actively supports the diffusion of economically relevant and profitable
technologies are the grassroots mechanisms bywhich technologies diffuse within countries.
Firms must be able, and entrepreneurs permitted, to profit from the exploitation of new-tothe-market-technologies if those technologies
and products are to diffuse. This means thatpolicy must be welcoming of such profits andthat both R&D and dissemination efforts not
only need to focus on creating or adapting
products and ideas (domestic or foreign) to
the local market, but also must give priority toassisting firms to exploit them.

External transmission channelsT

his section presents data and describes recent trends concerning the external channels through which developing countries are
exposed to foreign technologies. Where relevant, it also draws on the literature to comment on how specific elements in a country’s
technological absorptive capacity (discussed in
more detail later in this chapter) interact withthese external flows to determine the extent towhich these channels translate into technological achievement.

Trade
Trade is one of the most important mechanisms
by which embodied technological knowledge(in the form of both capital and intermediate109

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2 0 0 8

goods and services) is transferred across countries. Imports of technologically sophisticatedgoods help developing countries raise the quality of their own products and the efficiency
with which they are produced. Countries canalso absorb new technology by exporting tocustomers who implicitly or explicitly provide
guidance in meeting the specifications required
for access to global markets. For developing
countries with low R&D intensity, trade openness and exposure to foreign competition
provide powerful inducements to adopt moreadvanced technology in both exporting andimport-competing firms and are likely to produce large technology spillovers and productivity gains (Schiff and Wang 2006a).
However, the extent to which exposure toforeign technologies is reflected in the export
and import patterns of individual countries
depends on, among other things, the absorptive capacity of individual countries. As Soubbotina (2006) discusses, countries with relatively weak domestic scientific capacities tend
to follow a more passive approach to technology absorption that is characterized by limited
efforts to leverage the technology imported byforeign firms operating on their soil. For thesecountries, most technology transfers takeplace either through imports of high-techgoods, or perhaps through an apparently
high-tech export sector that is, in reality, dominated by assembly operations associated withelevated imports of high-tech goods. Where
sophisticated domestic capacities coexist witha significant degree of basic technological literacy in the population, technology diffusion
is enhanced and, in general, the technologicalcontent of exports is higher.
Following Soubbotina (2006) classifications, “traditionalist slow learners,” such as
Bangladesh and Burkina Faso, which have lowlevels of technological competency and technological literacy, tend to rely to a large extent
on imports of machinery and equipment.
Other countries, such as Malaysia, Mexico,and the Philippines, appear to follow a “passive FDI-dependent” learning style. For thesecountries, the share of high- and medium-tech

110

goods in their manufactured exports is higher
than these goods’ share in manufacturing
value added, reflecting the dependence of
their high-tech exports on imports of technologically sophisticated components and therelatively low technological complexity ofdomestic manufacturing operations. By contrast, “active FDI-dependent” countries, suchas Chile and Hungary, strike a better balance
between the share of high-tech goods and services in overall exports and domestic value
added, reflecting greater domestic technological competencies. For the Russian Federationand some of the other countries that belonged
to the former Soviet Union, a strong technological base and relatively low import sharesof high-tech goods reflect their more advanced
learning style, which places greater emphasison domestically developed technologies.
Nevertheless, these technologies mainly feed
into products that serve the local market,
because both high costs and quality concerns
keep these sectors from being internationallycompetitive.

The potential for technology transfer
through imports has risen
Imports improve domestic technology because
embodied technology both allows firms to employ more efficient production processes andaffords the possibility that firms can copy
more advanced products and processes. At thesame time, competition from technologicallysuperior imports may boost domestic productivity.1 Developing countries that have a large
share of imports from high-income countries
with large R&D expenditures have significantly higher productivity than developing
countries that import from advanced countries with lower R&D expenditures (Coe,Helpman, and Hoffmaister 1997).2 There also
is evidence for a positive relationship between
access to imported intermediate goods andperformance (Handoussa, Nishimizu, andPage 1986). More recent literature highlights
the indirect benefits for developing countries
from North–North trade in R&D. The exchange of high-tech goods and services among

D E T E R M I N A N T S

high-income economies contributes to an increase in the global stock of knowledge andeventually becomes available to developing
countries through North–South trade. Finally,
technology diffusion, like trade, tends to be regional, with the largest transfers coming fromnatural trading partners, for example, Jordan
benefits more from the European Union and
Mexico benefits from Canada and the UnitedStates (Schiff and Wang 2006b).
However, the extent to which imported
technology boosts the sophistication of domestic technological activity either directly or
indirectly through spillovers depends on thequality of a country’s technological absorptive
capacity. Thus while using an imported capital
good can lift the technological content of activity in a country, to the extent that importers
pay competitive prices for the technology,
there may be no net gain to the country (Eaton
and Kortum 2001). Moreover, the businessclimate may be too weak or the technologicalliteracy of the local labor force may be too
low to successfully adapt the machinery to
local conditions (Dahlman, Ross-Larson, andWestphal 1987; Rosenberg 1976). As a result,the country may not realize the potential productivity improvements available from imported technology (Pack 2006).

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Developing countries’ high-tech imports
have increased
To the extent that a developing country canmake use of or imitate sophisticated goods, its
level of technological achievement should increase in line with the quality and technologicalsophistication of imported goods. Since the mid1990s, the share of imported high-tech products
in GDP has increased by more than 50 percent in
low-income countries and by 70 percent in middle-income countries (table 3.1).3 Among developing regions, East Asia and the Pacific has
the highest share of high-tech imports in GDP(8.4 percent), with the highest share being for
Malaysia (37 percent) and the Philippines(18 percent), but Europe and Central Asia has
experienced the largest increase, reflecting thetransition of many of the region’s countries tomarket economies and their improved access tohigh-tech products following the relaxation ofCold War export restrictions. Among regions
dominated by middle-income countries, hightech imports represent 3.8 percent of GDP in
Latin America and the Caribbean and 3.6 percent of GDP in the Middle East and North Africa,
less than in Sub-Saharan Africa (4.5 percent).
Low-income countries have also improved
their exposure to high-technology embedded
in foreign products. After hovering around

Table 3.1 Trade in technology goods has increased in developing countries
Imports of high-tech goods
1994–96

2002–04% change

Imports of capital goods
1994–96(% of GDP)

2002–04% change

Share of high-tech exports
in world high-tech exports
1994–96(% of GDP)

2002–04% change(% of GDP)

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America
and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

5.9
3.2

8.4
7.2

42
125

11.6
7.1

12.8
14.7

10
107

9.9
1.0

19.0
2.7

93
163

2.4
2.5
1.4
3.2

3.8
3.6
2.1
4.5

61
44
53
39

5.4
6.3
3.1
9.3

7.2
8.9
3.8
10.5

32
42
22
14

2.1
0.1
0.2
0.1

3.4
0.2
0.3
0.1

61
29
58
4

Income groups
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

3.4
4.2
3.2
1.8

4.7
7.2
5.4
2.7

38
71
70
53

5.5
8.7
6.9
4.9

7.0
13.1
9.2
5.7

27
51
33
17

86.5
6.6
6.7
0.3

74.3
9.6
15.7
0.4

⫺14
47
137
53

Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales’ database, Banque Analytiquede Commerce International.

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2 0 0 8Figure 3.2 Rising share of high-tech imports
By region

By income group

Percent of GDP

Percent of GDP

12

9Upper-middle-income countries

8

10

7

8

6

High-income
countries

5

6

4

4

3

Lower-middle-income countries22

Low-income countries

1

South Asia

Europe and Central Asia

Sub-Saharan Africa

Latin America andthe Caribbean

Middle East andNorth Africa

04

03

20

02

20

01

20

00

20

99

20

98

19

97

19

96

19

95

19

19

19

04

03

20

02

20

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94
19

19

East Asia and the Pacific

94

0

0

Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales database, Banque Analytique deCommerce International.

1.8 percent between 1994 and 2001, the average share of high-tech imports in low-income
countries’ GDP began to rise in 2002, reaching
3.2 percent in 2004 (figure 3.2). Both South
Asia and Sub-Saharan Africa have enjoyed significant increases, although the ratio of hightech imports to GDP remains extremely low inSouth Asia, less than 3 percent of GDP. In mostcountries in Sub-Saharan Africa, the share ofimported high-tech goods fluctuates between
2 and 5 percent of GDP from year to year.
Mauritius and South Africa import the mosthigh-tech goods relative to the size of theireconomies, between 6 and 8 percent of GDP in
any given year, while Somalia imports theleast, less than 1 percent of GDP.
Despite developing countries’ increased exposure to foreign technology through trade, its
distribution across regions within countries
tends to be extremely uneven, with foreign
trade concentrated in a few major cities or regions. For example, 70 percent of high-techtrade (both imports and exports) in China originates in four regions and is highly correlatedwith R&D intensity and foreign firms (OECD112

2007). As a result, the benefits of exposure to
trade also tend to be unevenly distributed.

Capital goods imports have also increased
Although imports of high-tech goods provide
an indication of an economy’s exposure totechnology, this indicator does not distinguishbetween imports of technology for consumption and imports for production, nor does it
indicate the extent to which these imports improve the technological content of a country’s
economic activities. Technological content
depends importantly on the structure of theeconomy and the nature (assembly or highvalued added transformation) of the work
done with the imports (box 3.1).
Imports of capital goods, such as machineryand equipment, which enable the production ofhigher quality and more technologically sophisticated goods, have a less ambiguous impact ona country’s technological capacity. For countries operating within the technological frontier, a higher share of imported capital goods
in GDP can reflect the presence of strong investment activity; a process of technologicalD E T E R M I N A N T S

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Box 3.1 Technology imports: Different paths fordifferent countries

B

ased on a breakdown of trade flows by technology level and by production stage, Lemoine andÜnal-Kesenci (2003) highlight the following divergent
integration paths adopted by China, India, and Turkey,
which all started from a relatively similar degree ofindustrial specialization about 10 years ago:
• China has become an assembly country,
strongly integrated into the international segmentation-of-production processes in Asia.
Most of China’s imports of high-tech products
are parts and components. These high-tech imports are predominantly incorporated into the
production of exports and are not used to modernize domestic production capacities. Given its

upgrading; and, over the longer term, a
relatively sophisticated structure of production.4 As a result, relatively technologically sophisticated middle-income countries import
more capital goods (as a share of GDP) than lesssophisticated low-income countries (table 3.1).
Overall, the share of capital goods in the
GDP of developing countries has risen substantially over the past decade. Upper-middleincome countries saw a 51 percent increase in
the share of these goods in GDP, while lowermiddle-income countries have boosted their reliance on such goods by 33 percent. The formergroup of countries continues to have the largest
share of capital goods in GDP, about 13 percent, more than double the share of lowincome countries. As a consequence, the gap
between low-income countries (especially the
Least Developed Countries [UNCTAD 2007])and other developing countries has widened.
Europe and Central Asia saw the biggest regional increase in imports of capital goods,
reflecting the substantial economic recovery inthese countries following the recession that accompanied the transition to market economies.
As was the case for high-tech imports, South
Asia has the lowest level of imports of capital
goods and has shown little improvement,

level of development, China’s exports display an
outstandingly strong high-tech content.
• India is characterized by limited participation ininternational division-of-production processes
and by a low level of imports in high-tech products. These high-tech imports are evenly distributed among the different stages of production
and the different sectors, while high-tech exports
are concentrated in chemical industries.
• Turkey’s high-tech imports consist mainly of capital goods and correspond to a classical form oftechnology transfer aimed at upgrading indigenous industrial capacities. Turkey’s foreign tradeis strongly structured by its traditional complementaries with Europe.

presumably reflecting the relatively autarchic
policies that governments in the region havefollowed until recently. By contrast, Sub-Saharan Africa imports substantially more capital
goods, although the ratio of capital goods imports to GDP has increased less than in otherdeveloping regions since the mid-1990s, withthe exception of East Asia and the Pacific. The
story is particularly varied in Latin America,
where some countries, such as Costa Rica and
Mexico, increased their imports of capital
goods following liberalization policies in theearly 1990s, while others did not. The increasein the share of capital goods in GDP was particularly notable in Costa Rica, where it rosefrom about 7 percent in the mid-1990s to about
18 percent in 2002–04.

Exports of technological goods havealso expanded
Participation in high-tech export markets has
also been identified as a channel through which
technology is diffused within developing countries. Many case studies suggest that exporting
firms in developing countries benefit from implicit and explicit technological transfers that
occur as a result of their interactions with foreign buyers. Benefits accrue because foreign

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2 0 0 8buyers may have higher quality standards thandomestic buyers. Foreign buyers may also assist with process improvements and provide information about and experience with foreign
markets. Moreover, the additional demandthat foreign markets provide may allow for the
exploitation of economies of scale that justify
more capital-intensive production (see, for example, Hobday 1995 and Rhee, Ross-Larson,
and Pursell 1984 on the effects of learning byexporting in East Asia). Technology transfers
through exports may be most important inproduction networks with clearly articulated
supply chains (Gereffi 1999; Hobday 1995).5
Spillovers may also be common in labor-intensive sectors where production processes are relatively simple and the relevant knowledge is
widely available in industrial countries (Enosand Park 1987; Hou and Gee 1993).
Unfortunately, these efficiency benefits fromexporting are not confirmed by econometricstudies (Keller 2004), which generally find thatthe positive relationship between exportingand productivity results largely from the selfselection of firms into the export market.6
Whatever the magnitude of spillovers fromexports and of concerns surrounding the reexport nature of some high-tech exports, theexport of technology products is neverthelessan important indicator of technologicalachievement. High-tech exports offer better
prospects for future growth than lower-techgoods because their market has been expanding
more rapidly and because they offer superior
spillover potential by transmitting skills andgeneric knowledge that can be used in other activities (Guerrieri and Milana 1998). High-tech
exports are also less vulnerable to easy entry bylower-wage competitors, substitution by technical change, and market shifts (Lall 2001).
Although high-income countries continue todominatetheworldmarketforhigh-techgoods,7
middle-income countries have substantially increased their market share since the mid-1990s.
Lower-middle-income countries more than doubled their global share of high-tech exports, increasing them from 6.6 percent in the mid-1990s
to 15.7 percent in 2002–04 (3.4 to 5.0 percent

114

Figure 3.3 Exports of low-, medium-, andhigh-technology goods
Percent of total merchandise exports
40
35
30
25
20
15
10
5
0
1994–96 2002–04 1994–96 2002–04 1994–96 2002–04
High-techexports

Medium-tech
exports

Low-tech
exports

High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries
Source: World Bank calculations using Centre d’Etudes
Prospectives et d’Informations Internationales database,Banque Analytique de Commerce International.

if China is excluded). Moreover, the share ofhigher-technology goods in the total merchandise exports of these countries has also been increasing (figure 3.3). Much of this increase reflected the transfer of manufacturing processes
from high-income countries to developing
countries, notably those in East Asia and the Pacific. China was a major beneficiary of thisprocess, increasing its global market share ofhigh-tech exports from about 3 percent to 11 percent, but so too were other countries. The
Philippines, for example, increased its market
share from 0.9 percent to about 2.0 percent.
Upper-middle-income countries made less spectacular progress, increasing their global market
share from 6.5 percent to 10.5 percent, althoughsome countries, such as Costa Rica, the Czech
Republic, and Hungary, were able to increase
their high-tech markets significantly.8 In SubSaharan Africa, South Africa is the largest exporter of high-tech products, but its share has remained small and stable at about 0.08 percent.
The relative performance of different
middle-income regions reflects different levels

D E T E R M I N A N T S

of technological capabilities and learning
styles. Since the early 1990s, Latin America
has almost doubled its share of high-tech
products in world markets and now has thesecond largest market share after East Asiaand the Pacific. However, in contrast with Europe and Central Asia and the Middle Eastand North Africa, it has done so with relatively little input from imported technology(imports of high-tech and capital goods as ashare of GDP in Latin America and the
Caribbean are half the rate of Europe andCentral Asia). Partly as a consequence, Europe
and Central Asia has gained market share inhigh-tech goods much more quickly than
Latin America, and based on recent performance, is poised to overtake that region soon.
Low-income countries remain marginal
players in the world market for high-techgoods, and even though their global share ofexports of medium-tech goods has doubled, between the mid-1990s and 2002–04, it remains
low at 0.8 percent. The share of low-income
countries in world exports of low-tech goods
is more substantial and has increased from
3.5 percent to 5.2 percent. Among these countries, Vietnam has improved its global market
share of low-tech products from 0.2 to 0.8 percent, a 250 percent increase. India remains themost important exporter of low-tech productsin this income group with 2 percent of theworld market, second after China among developing countries, which accounts for about
17 percent of the world’s low-tech exports.

Overall exposure to foreign technologies
has increased
Overall, the increased participation of developing countries in global trade has substantially increased their exposure to foreign technologies. For middle-income countries, thisexposure and the attendant expansion of hightech exports have likely yielded important side
benefits that are reflected in the sustained
acceleration in developing country growth
rates over the past 15 years. While the increasein trade openness has been generalized, theextent to which countries have been able to

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translate that into improved export performance and an increase in the technologicalsophistication of their own exports has varied,with countries like those in Europe and Central
Asia that have relatively well-educated populations and a strong institutional structure having extracted the greatest benefits. Amongother countries, notably low-income countries,
weak absorptive capacity may be restricting
the extent to which their economies have benefited from the increased exposure.

Foreign direct investment
Like trade, FDI can be a powerful channel forthe transmission of technology to developing
countries by financing new investment, bycommunicating information about technology
to domestic affiliates of foreign firms, andby facilitating the diffusion of technology tolocal firms.

Foreign investors bring both equipment
and know-how
Measuring the technological contribution of
FDI is particularly difficult, in part because
the standard measure from the balance of payments includes both physical (brownfield andgreenfield) investments and financial investments (mergers and acquisitions). This said,
FDI inflows to developing countries rose from$10 billion in 1980 to an estimated $390 billion in 2007, or from 0.4 to 2.9 percent ofGDP, with the bulk of the increase occurring
during the late 1990s in response to the liberalization of FDI policies.9 Assuming that foreign firms employ a higher level of technology
than the average domestic firm, then this rising trend will have increased the average levelof technology in these countries, as well as
their exposure to higher technologies.
FDI as a share of GDP has risen in all developing regions and income groups since the1980s, but the increase has been concentrated
in middle-income countries, where FDI rose toalmost 3 percent of GDP (table 3.2). East Asiaand the Pacific had the highest ratio during the
1990s, but it has since declined, in part because of a collapse in FDI inflows to a few

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Table 3.2 Foreign direct investment as a percent of GDP
1970–79

1980–89

1990–99

2000–06

All developing countries

0.5

0.4

1.5

2.7

By region
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

0.5
0.3
0.6
0.5
0.0
0.7

0.5
0.1
0.7
0.5
0.1
0.4

2.8
0.9
1.5
0.6
0.4
1

2.3
2.2
3.5
1.1
0.7
2.5

By income groups
Low-income countries
excluding India
India
Middle-income countries

0.3
0.6
0.0
0.5

0.2
0.4
0.0
0.4

0.8
1.4
0.3
1.6

1.1
1.8
0.7
2.9

Source: World Bank 2007a.

countries affected by the East Asian financial
crisis in the late 1990s (particularly Indonesia),
and in part because FDI inflows to China, although still high, have failed to keep pace withthe rapid growth of output. Meanwhile in
Latin America and the Caribbean, efforts to increase trade openness resulted in a boom of FDI
inflows, which reached an average of 3.5 percent of GDP in 2000–06. In Europe and Central Asia, FDI rose from next to nothing before
the breakup of the Soviet bloc to 2.2 percent of
GDP in 2000–06. In the Middle East andNorth Africa and South Asia, FDI remains low
at around or less than 1 percent of GDP. Most
recently, FDI inflows to Sub-Saharan Africa
have surged, reflecting substantial investment
in oil and mineral production and a moregeneralized interest in the region stemmingfrom increased political stability, liberalizationof FDI policies over the past 15 years, andimproved growth performance.
One way that FDI boosts technology
transfer is by financing new machinery andequipment purchases. The share of FDI indeveloping countries’ fixed capital formation
increased from 2.9 percent in the 1970s to 10.7
percent in this decade (table 3.3), with the increase in middle-income countries being more
pronounced than in low-income countries.
However, FDI includes mergers and acquisitions that may involve no additional physicalinvestment, and the share of mergers and acquisitions, including privatization transactions,116

in total FDI has been rising. Nevertheless, theforeign component of aggregate investment indeveloping countries has likely been risingalong with the extent of technological transfer
through this channel. Moreover, the transfers in
know-how, business process technology, andmarket knowledge associated with mergers andacquisitions can occur whether or not any associated physical investment is involved, and may
even be more important.
Foreign firms may also improve the technological capacity of developing countries by
Table 3.3 Foreign direct investment as apercent of fixed capital formation

Regions
East Asia andthe Pacific
Europe andCentral Asia
Latin America
and the Caribbean
Middle Eastand North Africa
South Asia
Sub-Saharan Africa
Income groups
Low-income countries
Middle-income countries
All developing
countries
OECD countries

1970s

1980s

1990s

2000s

1.9

3.0

12.2

8.4

2.8

—

8.1

15.5

3.3

0.1

11.3

13.1

2.8
0.3
3.6

2.1
0.4
2.2

3.7
2.5
9.3

6.5
4.1
18.6

2.2
2.9

1.3
1.9

5.6
11.0

6.7
11.3

2.9
13.5

1.8
11.3

10.4
3.5

10.7
11.5

Source: World Bank 2007a.
Note: — ⫽ not available; OECD ⫽ Organisation for
Economic Co-operation and Development.

D E T E R M I N A N T S

Figure 3.4 Share of foreign affiliates inbusiness R&D expenditure
Percent
70
60
50
40
30
20
10

M

H

un

ga
r
B y
Li razex thu il
ic a
o ni
(2 a
0
Th 01
ai )
la
n
C d
Ar hin
ge a
nt
in
La a
Sl
ov P tvia
ak o
Tu Re lanrk pu dey b
(2 lic00
C Es 0)hi tole n
In (2 ia
di 00
a
(1 2)
99
9)

0

Sources: OECD; Activity of Foreign Affiliates database.
http://www.sourceoecd.org; UNCTAD 2005; Eurostat;
R&D statistics.
Note: The year is 2003 unless otherwise indicated.

financing R&D. Multinational corporations
undertake most of their R&D activities intheir home country or in other high-income
countries.10 Nevertheless, the role of developing countries appears to be rising. R&D
spending in developing countries by majorityowned foreign affiliates of U.S. parent companies increased from $0.9 billion in 1999 to$1.6 billion in 2003 (Bureau of Economic
Analysis 2007). The contribution of multinationals’ R&D to total measured R&D activity
in developing countries varies from more than
60 percent in Hungary to less than 5 percent inIndia (figure 3.4).

FDI may generate technology spillovers
In addition to its technological impact on thefirm directly touched by the investment, FDI
may also affect the level of technology indomestic firms.11 Spillovers can arise when
workers receive training or accumulate experience working for multinationals and thenmove to domestic firms or set up their own enterprise (Fosfuri, Motta, and Ronde 2001;
Glass and Saggi 2002). For example, within
six years of the beginning of FDI-led exportO F

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P R O G R E S S

growth in Mauritius, 50 percent of all firms
operating in export-processing zones were locally owned, founded, managed, and staffed—
in many cases by employees who had received
on-the-job training in foreign enterprises andhad left to set up their own companies (Rhee,
Katterback, and White 1990).
Already existing local firms may also observe the actions of foreign firms and learn
about new products, equipment, marketing
techniques, and management practices. For example, 25 percent of the managers of Czech
firms and 15 percent of the managers of Latvian
firms report that they learned about new technologies by observing foreign firms as they entered their industry (Javorcik and Spatareanu
2005). In Morocco and Tunisia, domesticallyowned international call centers have risen in
imitation of foreign firms (box 3.2).
If multinational entry leads to an increasein demand for intermediates, it may result in
the expansion of upstream domestic industries(see the experience with Zambian supermarkets in box 3.3). Downstream industries may
also benefit from the increased competition
and added variety of inputs created by the foreign investment. In addition, foreign investors
may provide advice, designs, direct production assistance, or marketing contacts to suppliers, which the latter can then deploy more
broadly than simply providing cheaper ormore reliable inputs to the foreigners.12
The entry of multinationals is likely to increase competition for the domestic firms
within the industry, potentially forcing themto improve their efficiency and introduce
new technologies or business strategies(Blomstrom, Kokko, and Zejan 2000), as in
Wal-Mart’s joint venture in Mexico (box 3.4).
Such competition can make surviving domestic competitors stronger, but other domestic
firms may be driven out of business, lose market share, and experience a loss of high-skilledworkers and higher costs for intermediate
goods resulting from increasing demand fromthe foreign-owned firms.13 These effects mayvary by industry depending on factors suchas the market structure before the entry of117

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2 0 0 8Box 3.2 European call centers in the Maghreb
have inspired local entrepreneurs and prompted a
specialization in high-value-added services

Leading call center companies from France andSpain have paved the way for domesticallyowned and export-oriented call centers in Morocco
and Tunisia. Although call centers existed in
Morocco and Tunisia before the first European callcenters outsourced operations to the region in theearly 2000s, domestically owned firms served the
local market and provided only basic telecommunications services. Only after Atento (a Spanish-owned
subsidiary) set up a call center in Morocco andTeleperformance (a French-owned firm) settled in
Tunisia to serve clients in Europe did local entrepreneurs jump into the European market.
This transition was not without problems. Locallyowned call centers lack the international namerecognition of large foreign-owned firms and have
had difficulty obtaining contracts from foreigncompanies. In addition, most of them are small, witha maximum of 100 to 200 employees, compared withmore than 2,000 positions at some foreign-owned callcenters.
Interestingly, many domestically owned firms,
such as Outsourcia in Morocco, have chosen todifferentiate themselves by targeting higher value
added services. High turnover rates have also helped
domestically owned firms to hire experienced agents
who were trained in the foreign call centers.

Source: World Bank forthcoming.

Box 3.3 South African investment in Zambia’s retailsector has improved the quality of local produce andfarmers’ earnings

T

he liberalization of the Zambian distribution sector allowed the inflow of foreign retail companies,
which replaced some of the traditional retail sector
with modern supermarkets and added both upstream
and downstream benefits to the domestic economy.
Consumers benefited from lower costs, while local
suppliers learned new production and marketing techniques that enabled them to improve the quality, efficiency, and revenues of their operations.
When Shoprite of South Africa first opened supermarkets in Zambia, it found that the quality andquantities provided by individual local smallholder
farmers were too low and too unreliable, and therefore imported 90 percent of its fresh produce from

118

South Africa. Farmers’ cooperatives that benefited
from donor-funded technical assistance have sincemanaged to improve the quality of their products andservices, and Shoprite is now sourcing 90 to 95 percent
of its fresh produce from Zambian farmers. In the caseof one cooperative, farmers’ cash income has increased
from $2 to $3 a month to $50 to $70 a month, andlocal access to health care and education services has
improved. The supermarkets themselves are providing
local farmers with technical assistance. Agricultural experts from the retailer’s subsidiary visit farms, give advice on crop sequencing, and provide inputs.
Source: Mattoo and Payton 2007.

D E T E R M I N A N T S

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Box 3.4 Wal-Mart’s entry in Mexico boosted the
Mexican soaps, detergents, and surfactants industryT

he Aurerra–Wal-Mart joint venture, which created Walmex, followed Mexico’s reduction in
tariffs and liberalization of FDI in the late 1980s. By
exercising its bargaining power, Walmex squeezed
profit margins among the major soaps, detergent,and surfactants suppliers, offering them higher volumes in return.
Local firms that were not efficient enough to meet
Walmex’s terms lost market share, and many failed.
Those that survived grew and became more efficientand innovative. The quality and efficiency of theiroverall operations benefited from their interactions
with both their client (Wal-Mart) and with foreign-foreign multinationals, the R&D intensity ofthe products, and the links between foreign
firms and domestic firms in upstream anddownstream sectors.14

Outsourcing decisions, domestic policies,
and absorptive capacity all affect spillovers
Evidence indicates that spillovers to local suppliers are not uniform across countries or
across industries within a country.15 Multinationals may choose not to source inputs locally because of concerns about the quality of
local inputs or the time required to develop
relationships with local suppliers or becauseof centralized sourcing arrangements that may
provide volume discounts or access to customized inputs (UNCTAD 2001). In hostcountries with underdeveloped upstream sectors or in cases of FDI with very specialized
input needs, the scope for spillovers to upstream sectors may be limited. Policies may
also reduce the potential for spillovers. For example, in a highly protected market, foreign
plants may operate at an inefficiently small
scale (Moran 2007). Requirements that foreign firms enter into joint ventures with local
companies may discourage use of the most advanced technology to avoid leakage to potential competitors (Beamish 1988).

owned suppliers, with many firms adopting techniques
and products first introduced into the market by theirmultinational competitors.
As a result of these spillovers and labor shedding,the surfactants sector rapidly improved its value added
per worker. The newly found competitiveness and exposure to the requirements of Walmex and other foreign retailers on the domestic market has allowed the
Mexican surfactants sector to expand its exports andmarket share in the United States, targeting the Latino
community in which their brands are known.
Source: Javorcik, Keller, and Tybout 2006.

The level of spillovers also depends on thedomestic absorptive capacity. For example,
other advanced countries tend to gain fromtechnology spillovers from the activities ofsubsidiaries of U.S. multinationals, while poor
countries do not (Xu 2000). Firms using advanced technology in low-income countries
fail to achieve the same level of productivity as
firms in industrial countries (Acemoglu andZilibotti 2001) or the same kinds of spillovers
as in middle-income countries, in part because
the gap between the quality and human capital of the domestic workforce and that for
which the equipment was originally designed
is too large (Borensztein, de Gregorio, and Lee1998). In general, spillovers may be morecommon when the difference in technologicallevels between the foreign multinational andthe domestic economy is not too large.
As discussed earlier, the extent to which a
country benefits from spillovers to the rest of
the economy also depends on the country’s
policy stance on basic technological literacy
and more advanced skills and on promotionof the adoption and diffusion of technologies
within the economy. For example, some countries such as Mexico and the Philippines havebenefited relatively little from FDI spillovers
because FDI inflows, although abundant, have119G L O B A L

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P R O S P E C T S

2 0 0 8been oriented toward exploiting low wages
and have not built many links to the domestic
economy. In contrast, countries like Singapore
have actively sought to maximize the technology spillovers from FDI by investing in thedomestic skills and competencies necessary tosupport high-skill and high value added industries and by welcoming and promoting FDI insuch sectors (Lall 2003).

Spillovers might be highly concentrated
in certain regions within a country
Geographic proximity also determines theextent of technological spillovers observed.
The closer a local firm is to a foreign-owned
firm, the more frequently will the firms’ employees interact with each other, increasing the
likelihood that employees (and their acquired
knowledge) will move between the two firms.
The spatial aspect is also important for vertical spillovers between foreign-owned firms
and their local suppliers, which are often located close to each other (Jaffe 1989).
The existence of such cluster effects may
explain why FDI tends to be geographicallyconcentrated within a country mainly aroundlarge cities or coastal states. In Russia, for example, more than two-thirds of the FDI stockin 2000 was in Moscow and three surrounding regions (Broadman and Recanatini 2005).
Similarly, almost half of FDI flows in India go
to the Mumbai and Delhi areas (Reserve Bankof India 2007), while in China, almost 90 percent of FDI flows go to the western coastal region (Kui-Yin and Lin 2007). This said, because of data limitations and conceptual
problems, econometric support for the notionthat such clusters generate important technology spillovers is limited (Lipsey and Sjohom2005), with some studies supporting their existence (see Girma and Wakelin 2001 for theelectronics sector in the United Kingdom) andothers not (see Aitken and Harrison 1999 for
Venezuela and Sjoholm 1998 for Indonesia).

120

licensing of technologies are two other, more
direct mechanisms by which developing countries acquire foreign technologies and researchexpertise.
Over the past 20 years, firms domiciled indeveloping countries have increasingly turned
to foreign acquisitions as a means of expanding
their market share and gaining control overtechnology. Cross-border mergers and acquisitions by multinational corporations located indeveloping countries increased from $400 million in 1987 (less than 1 percent of global
merger and acquisition transactions) to almost$100 billion in 2006 (almost 9 percent of global
merger and acquisition transactions) (WorldBank 2007a). Although technology may not be
the primary motivator in many of these purchases, technology transfer is associated withnearly all of them in the form of control overpatents and knowledge of manufacturing
processes, marketing, and business process expertise. Table 3.4 summarizes some of the more
technologically important recent acquisitionsof high-tech firms by developing country firms.
Developing country firms may seek to acquire a brand or a marketing or distribution network. Examples include the Thai Union Frozen
Company’s purchase of the Chicken of the Sea
brand; the South African Brewery’s purchase ofMiller Brewing (a major U.S. beer maker); andMalaysian Berjaya’s purchase of Taiga, thelargest Canadian distributor of building materials. Developing country firms may also purchaseforeign firms to acquire R&D capacity. For example, the Chinese company Shanghai Automotive Industry Corporation bought Sangyong of
the Republic of Korea to enhance its R&D
capabilities in sport utility vehicles. Accessing
foreign technology also takes the form of establishing R&D centers in developed countries. For
example, Huawei Technologies and ZTE
Corporation, both Chinese companies, haveestablished R&D centers in Sweden.

Developing countries also purchase foreign
high-tech firms

Developing countries can also license
foreign technologies

Outward FDI, that is, the purchase of foreign
firms by domestically owned ones, and theDeveloping countries can also gain access totechnology through licensing, which typicallyD E T E R M I N A N T S

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T E C H N O L O G I C A L

P R O G R E S STable 3.4 Selected purchases of high-tech firms by companies in developing countries,
early 2000s
Acquiring company

Country of acquirer

NetcareSouth Africa
Tata Tea
India
Videocon Industries Ltd.
India
ChalkisChina
Essel Propack
India
Wipro
India
Orascom
Egypt, Arab Rep. of
Lenovo
China
TCL
China
Ranbaxy
India
BOW Technology GroupChina
PKN Orlen
PolandYear

Acquired firm

Country of acquired

Industry

2006
2006
2006
2005
2005
2005
2005
2004
2004
2004
2003
2002

General Health Care
TetleyDaewoo Electronics
Le Cabanon
Telcon Packing
New Logic
Wind
IBM
AlcatelRPG
Hynix
BP (500 petrol stations)

United Kingdom
United Kingdom
Korea, Rep. ofFranceUnited Kingdom
Austria
Italy
United States
FranceFranceKorea, Rep. of
United Kingdom

HealthTea
Electronics
Food processing
Tube packing
Semiconductors
Telecommunications
PC manufacturing
Telecommunications
Pharmaceuticals
PC manufacturing
Downstream oil

Source: World Bank 2007a.

involves the purchase of production or distribution rights for a product and the underlying
technical information and know-how for producing it. As measured by the payment of international royalties and fees in countries’balance of payments, licensing fees paid by developing countries increased from $7 billion in1999 to $22 billion in 2006, about a fivefold
increase when expressed as a percentage ofdeveloping country GDP.16 The increase was
sharpest for oil- and mineral-exporting countries, reflecting higher prices for oil andcontracts that often expressed these fees as apercentage of revenues or profits. Nevertheless,licensing fees paid by other developing countries also tripled, and for both low- and middleincome countries these fees represented a larger
share of overall GDP than they did for oil- andmineral-exporting countries (figure 3.5).
Licensing can be used as a substitute for
FDI. Uncertainty about the policy environment may lead multinationals to sell technology rather than to exploit the technology
through foreign investment (domestic firms
may have more information or may be better
placed than foreigners to deal with a poor policy environment). Evidence suggests that both
FDI and licensing respond to an adequate business environment, and factors such as patent
protection may shift incentives for investors
from FDI toward licensing (Maskus 2002).
Where protection of intellectual property

rights is weak, multinationals may be less willing to license technology for fear of it being
copied by domestic firms. Alternatively, they
may only be willing to license out-of-datetechnologies (Maskus 2000). Data on U.S.
multinationals show that the likelihood ofentering into licensing agreements increases asdeveloping countries increase their protectionof intellectual property rights (Antras, Desai,
and Foley 2007).
Some countries have pursued a licensingbased strategy of technology acquisition in the

Figure 3.5 Licensing payments have risen
sharply
Percent of GDP
0.25

Middle-income countries

Low-income countries

0.20
0.15

2000–06
1995–99

0.10

1990–04

0.05
0
Oil andmineralexporters

Other

Oil andmineralexporters

Others

Sources: Balance of Payments Database (IMF) and World
Development Indicators.

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2 0 0 8belief that domestic firms will be able to upgrade their own technological capacities byworking with licensed technology. For example, in the 1950s and 1960s, Japan kept its
economy relatively closed to FDI to encourage
multinationals that wished to gain from thegrowing Japanese market to license technology to domestic firms (Pack and Saggi 1997).
China has also encouraged joint ventures, as
opposed to FDI, to maximize technology
transfers to local firms. This strategy is likely
to work only if the country has sufficient market power. Moreover, such discriminatory
policies run the risk of resulting in the transferof substandard technologies (Hoekman andJavorcik 2006). In contrast, several Latin
American countries discouraged the licensingof technology from abroad because of concerns about unfair pricing and competition
with local technologies, a strategy that retarded or skewed technological developmentin that region (Pack and Saggi 1997).
The bulk of international royalties and fees
stems from intrafirm transfers. In part, thismay reflect a preference by multinationalfirms to transfer more advanced technologies
only to wholly owned subsidiaries rather thanto partially owned affiliates and to enter markets through wholly owned subsidiaries rather
than through joint ventures (Javorcik 2006;
Mansfield and Romeo 1980). However, it may
also mean that these fees are being used as amechanism for repatriating profits, perhaps
for tax reasons. As a result, the level of royalties and fees may not be a market-based reflection of the value of technology purchasedby the local subsidiary (Robbins 2006).
Partly because of intrafirm payments and of
the close relationship between licensing and
FDI, economists have had difficulty in evaluating the impact of licensing on technology
transfer. Nevertheless, a few case studies havedocumented its benefits. Brazil and Korea
achieved considerable success in absorbing
new technologies through licensing (Correa
2003), and licensing agreements were an
important factor for the success of floriculture in Kenya, maize in India, and the122electronics sector in Taiwan, China (Chandra
and Kolavalli 2006). The latter study also
highlights that even though licensing may enable rapid acquisition of product and process
know-how, it also requires a significant level of
local technological capability to put thelicensed technology to work.

International migration
Along with trade and FDI, international migrants are another important channel for thetransmission of technology and knowledge.
From the perspective of developing countries,
however, the direction of technology transfer
can be both outward (as migrants take away
scarce skills) or inward (through contacts withthe diaspora).
The direction and scale of technology flowsthat result from international migration areless clear than for FDI and trade. On the one
hand, the brain drain associated with better
educated citizens of developing countries
working in high-income countries is a serious
problem for many developing countries. On
the other hand, the contribution that these individuals would have made had they stayedhome is uncertain given the lack of opportunities in some countries. Moreover, developing
countries can benefit from the immigration,
albeit often temporary, of managers and engineers that often accompanies FDI; the returnof well-educated developing country emigrants; and the contacts with a technologicallysophisticated diaspora.
High rates of skilled out-migration imply a
net transfer of human capital and scarce resources (in the form of the cost of educatingthese workers) from low- to high-income
countries (UNCTAD 2007; World Bank
2006a). For some countries, the brain drain
represents a significant problem: emigration
rates of highly educated individuals can exceed 60 percent in some small countries (figure 3.6), and since 1990, the highly educateddiaspora of developing countries has doubled
in size.17 However, the share of developing
country tertiary-educated individuals living
abroad remained stable and relatively low,D E T E R M I N A N T S

Figure 3.6 The brain drain is a severe
problem in a number of small countries% of tertiary-educated individuals in OECD countries, 2000
Suriname

90

Guyana86

Jamaica

83

Haiti

82

Trinidad and Tobago

78

Tonga

74

St. Kitts and Nevis

72

Antigua and Barbuda

71

Cape Verde69

Grenada67
0 10 20 30 40 50 60 70 80 90 100% of low-, medium-, and high-skilled individuals living inOECD countries, 2000
14

Low skilled

12

Medium skilled

10High skilled

8
6
4
2

an

d

E
th as
e tA
Pa s
ci ia
fic
E
C uro
en p
tra e
l A andansd Lath tin ia
e
C Am
ar e
ib ri
be ca
an
an
d Mi
N dd
or le
th E
Af as
r ic t
a
So
ut
h
As
ia
Su
bSa
h
Af araric na0

Source: World Bank staff calculations based on Docquierand Marfouk 2004.
Note: OECD = Organisation for Economic Co-operation andDevelopment.

ranging from 5 to 13 percent depending on theregion (figure 3.6), because the number ofsuch individuals also doubled.
The emigration of professionals who makea direct contribution to production, such asengineers, may result in reduced rates of domestic innovation and technology adoption(Kapur and McHale 2005a). Emigration rates
for scientists, engineers, and members of the
medical profession tend to be higher than for
the general university-educated population.
For example, in India, the emigration rate for

O F

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those with a tertiary education is 4 percent,but the rate for graduates of the elite Indian
Institutes of Technology ranged from 20 to30 percent in the 1980s and 1990s (Docquierand Marfouk 2004; Khadria 2004).
More moderate migration rates may be beneficial, especially when domestic opportunities
are limited, because of technological transfersfrom the diaspora and because most migration
is not a one-way flow. For example, a majorityof foreign students from many developing
countries who earn their doctorates in the
United States return home (figure 3.7), bringing with them a great deal of technological andmarket knowledge that represents an important technological transfer in favor of the developing country.
The share of recent doctoral graduates fromdeveloping countries who remain in the hostcountry varies significantly across countries oforigin. In part, these cross-national differencesreflect differences in opportunity costs. The
likelihood that a student remains in the UnitedStates after graduation falls as average percapita incomes in the home country rise. However, even at a given income level, the length ofstay varies significantly across countries, withfewer graduates returning home to countries
such as Argentina, China, India, and theIslamic Republic of Iran than would be expected based on income alone. Other factors
explaining high retention rates include thequality of living conditions and research facilities in high-income countries, as well as thedensity of research networks and the size of thepreexisting diaspora. Factors favoring a return
include proximity to family, cultural affinities,
and emigrants’ desire to contribute to technological progress in their native country.18

The diaspora is a major source of skills
and capital
Repeated waves of emigration have led to thecreation of vibrant diasporas that possess
cutting-edge technology, capital, and professional contacts. For example, developing
countries accounted for three-quarters (approximately 2.5 million) of the 3.3 million

123

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2 0 0 8Figure 3.7 Share of Ph.D. students still living in the United States five years after graduationb. Higher home-country incomes are associated withlower retention rates

a. Share of foreign Ph.D. graduates who remain in
the United States for five or more years
Percent

No. of graduates, 1996

100

80

Number graduating in
1996 (right scale)

1,600

Percent
100

CHN
IND

Stay back rate
(left scale)

80
1,200
IRN

60

60
TUR

800
40

EGY

ARG
ZAF

PER

40

COL
BRA

400
20

0

IDN

0
6.0

6.5

KOR

7.0

7.5

8.0

8.5

9.0

9.5

Log of per capita gross national income in 2001

C

hi
n
In a
di
Eg
Ar Ir a
ge an
yp
n
t,
Ar T tinab ur aSo R key
ut ep.
h o
Af f
Ta
ric
iw
an Pe a, C ru
C h
ol in
om a
M bia
ex
ic
C o
Ko
h
re B ilea, raR zIn ep ildo . o
ne f
si
a

0

CHL MEX20

Source: World Bank calculations based on Finn 2003.
Note: Country mnemonics follow ISO standards.

124

Figure 3.8 High-skilled emigrants
are disproportionately represented
in the diaspora
Percent of emigrants, 2000
60
50
40

High skilled
Medium skilled

30
20
10

E
th as
e tA
Pa s
ci ia
fic
E
C uro
en p
e
La tra atin l A nds
th Am iae e
C r ic
ar a
ib a
M
be nd
id
an
dl
e
N E
or as
th t a
Af nd
ric
a
So
ut
h
As
ia
Su
bSa
h
Af ara
ric n
a

0

an
d

immigrant scientists and engineers living in the
United States in 2003.19 Moreover, because
out-migration rates are higher for high-skilledindividuals than for low-skilled individuals, on
average, the diaspora is much more skilledthan the home-country population and represents an important concentration of expertise(figure 3.8). Notwithstanding the size of thediaspora, relatively little rigorous empiricalresearch exists on whether and to what extent
it influences technology adoption and creationin emigrants’ home countries.20 The primaryevidence of diaspora contributions to knowledge transfers comes in the form of case studies. At a minimum, the technical, market, andmarketing knowledge of national diasporas isa huge potential technological resource.21
Returning migrants can be a major sourceof entrepreneurship, technology, marketingknowledge, and investment capital (Brinkerhoff 2006a, 2006b; Kapur 2001).22 Migrants
returning to Egypt tend to have higher levels ofhuman capital than nonmigrants and are likely
to be more entrepreneurial the longer they

Source: Docquier and Marfouk 2004.

work abroad (McCormick and Wahba 2003;
Wahba 2007). Returning migrants and members of national diasporas who are still abroadD E T E R M I N A N T S

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Box 3.5 Technological transfers through the diaspora
and return migrants: Some examplesAn émigré from Bangladesh working in the financial sector in the United States returned to help
create the Grameen Phone network and make mobile
phones available to poor people in remote villages(Sullivan 2007). Through its successful Village Phone
Program, the network has provided business opportunities to some 260,000 Village Phone operators,
mostly poor rural women. Grameen Phone now has
15 million customers, more than 10 times the maximum potential client base initially estimated by
Bangladesh Telecom.
In India, Sam Pitroda, a global entrepreneur who
divides his time between India and the United States,
founded the Center for Development of Telematics,
which developed rural automatic telephone exchanges
and introduced shared public call offices all overthe country, thus expanding access to cheap and reliable domestic and international calling. The relatively low-cost telephone exchanges are designed tooperate without air conditioning and require significantly less maintenance than conventional exchanges. The technology has been exported to several other developing countries.

have made major contributions to technological progress in their home countries (box 3.5).
The diaspora also contributes to technology
transfers and adoption by strengthening tradeand investment linkages. The high-skilled diaspora of countries such as India has contributed
to the growth of the information technology
sector, outsourcing (Kapur and McHale 2005b;
Pandey and others 2006), and FDI in theirhome countries. The flow of outward FDI fromthe United States is strongly correlated with thestock of migrants from the origin country.23
Nearly half of the $41 billion in FDI that China
received in 2000 may have originated from its
diaspora abroad (Wei 2004). Similarly, 60 percent of the increase in bilateral trade in differentiated products within Southeast Asia may be
attributable to ethnic Chinese networks (Rauchand Trindade 2002).24 Moreover, technology
appears to diffuse more efficiently throughBata Shoes of the Czech Republic is an early example of technology diffusion through migration and return. Faced with the threat of bankruptcy at his small
shoemaking business in the early 1900s, the founderof the company, Tomas G. Bata Sr. went to the UnitedStates in 1904 to learn more efficient mass production
methods. Bata returned to the Czech Republic toapply these production techniques. He eventually
expanded production to several other countries, including India, Poland, and the former Yugoslavia, andbecame the world’s leading footwear maker by the
1930s. Faced with nationalization in 1945, thefounder’s son moved his family and the company’s
headquarters to Canada, returning to the Czech Republic once again in 1989 with a further transfer oftechnology and business know-how acquired over theintervening years. Since then, the Bata company has
continued to spread technology. It has opened stores in
Croatia, Poland, Russia, and Slovenia, as well as a
production facility in China, and is modernizing its
Batanagar factory complex in India.
Source: http://www.bata.com; Factiva; Telenor press releases.

culturally and nationally linked groups, andshared ethnicity appears to counteract the kindof home bias effects that underpin the geographic network or the cluster effects that givehigh-density R&D zones an innovation advantage (Agrawal, Kapur, and McHale 2004).

Diaspora networks and returnees help
promote technology adoption
The diaspora’s political engagement in homecountries can also improve local technologicalabsorptive capacity, both through return andby exercising pressure on home country politicians from afar. Many leaders of developing
countries were educated abroad and returned
to strengthen political institutions in their countries of origin (Easterly and Nyarko 2005). In
addition, migrants have often played a valuablerole in the transfer of market-based institutions,such as venture capital, entrepreneurship, and125

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2 0 0 8

corporate transparency, to their countries oforigin.25 Overseas Taiwanese engineers andreturnees, for example, worked closely with
policy makers to establish a successful venture
capital industry. This has provided local entrepreneurs with an alternative source of finance,
which has helped them overcome the constraint
posed by the reluctance of state-owned financial institutions to lend to high-risk entrepreneurial activities in the technology sector(Kuznetsov 2007).
Expatriate knowledge networks have beencreated to foster regular contacts; transfers ofskills; and opportunities for business with researchers, scientists, and entrepreneurs in the
country of origin. Brown (2000) identified 41
such networks for 30 different countries.
These networks tend to be rich depositories oftalent with high concentrations of memberswith advanced degrees, many earned in thehost countries.26 Colombia’s Red Caldas network, set up with government assistance in
1991, was one of the first diaspora networks
that succeeded in promoting collaborative research between domestic scientists and Colombian researchers abroad through workshops
and symposiums, joint research programs, visiting researchers, scientific events, publications, and research and training opportunities(Chaparro, Jaramillo, and Quintero 2006).
Less formal networks played an important rolein the transition of the Republic of Korea andTaiwan (China) from developing to highincome economies.27 Some diaspora networks
have failed, principally because they were too
ambitious, particularly in cases where the policy and institutional environment in the homecountry were not supportive.28 Research suggests that the most successful models startsmall to build up trust and credibility before
attempting to sponsor a major research projector cooperative agenda (Kuznetsov 2006).

Remittances can promote technology
diffusion by making investments
more affordable
Remittances to developing countries havegrown steadily in recent years, reaching $207

126

billion in 2006, and are now are larger than
FDI and equity inflows in many countries, especially small, low-income countries. Remittances can support the diffusion of technology
by reducing the credit constraints of receiving
households and encouraging investment andentrepreneurship (Fajnzylber and López 2007;
Puri and Ritzema 1999; Woodruff and
Zenteno 2007; World Bank 2006a). A surveyof self-employed workers and small firms in
Mexico found that remittances were responsible for one-fifth of the capital invested in microenterprises in urban Mexico (Woodruff
and Zenteno 2001). In the Philippines, households work more hours in self-employment
and become more likely to start relatively
capital-intensive household enterprises in response to an exogenous increase in remittances (Yang 2006).
Remittance flows have also contributed
to the extension of banking services (often
by using innovative technologies), including
microfinance, to previously unserved, often
rural, sectors. This has improved the accessof households and firms to financial services(box 2.8; Gupta, Pattillo, and Waugh 2007),and their ability to purchase and invest intechnology. For example, remittance revenues may have helped Ghana’s ApexLink
and Mongolia’s Xac banks to expand their
networks and services (Isern, Donges, andSmith 2006). Cell phone money transfers,
such as G-cash and Smart Padala in thePhilippines, and card-based remittances are
becoming prevalent in a number of countries,
including Mozambique, South Africa, andthe United Arab Emirates, and are likely to
expand to other countries in the coming
years (Helms 2006; Jordan 2006). Remittances have also helped domestic banks
foster links with banks in high-income
countries. In turn, such links have fostered
technology transfers as banks in high-income
countries have helped local partners to upgrade their systems to comply with the antimoney-laundering, antiterrorism, and knowyour-customer regulations in developed
countries.

D E T E R M I N A N T S

A summary index of trends in the
exposure of developing countries
to external technology
The preceding paragraphs have argued that developing countries gain access to foreign technology through trade, FDI, and the diaspora
and that these links have been increasing overtime. This section reports on the results of aneffort to summarize these trends by applying
principal components analysis to five data series covering trade and FDI following the same
basic methodology as used in chapter 2 to create the index of technological achievement.29
The index shows that the relationship between income levels and exposure to external
technology is relatively weak across countries.
Even though the average exposure is higher
as one moves from low-income to uppermiddle-income developing countries, substantial variation is apparent across countries. Thisvariation partly reflects issues of country size
(smaller countries tend to be more open thanlarger countries), but it also stems from varying
degrees of specialization among countries.
The index also shows that many countries
have increased their exposure to technology during the 1990s (figure 3.9). Of thedeveloping countries for which data are available, 17 experienced a reduction in exposure
to foreign technologies over the 1990s and 70
saw their exposure rise. The average percentage increase was highest in low-income andin upper-middle-income countries, with the increase among lower-middle-income countries
actually being below that observed among
high-income countries. These average results
reflect a mix of strong increases in excess of
100 percent in a number of countries and less
spectacular increases in others.
Much of the variation is attributable tostrong increases in the degree of openness
among the transition economies. The average
improvement in the index of exposure to foreign technology for the countries of Europe andCentral Asia was 80 percent. Excluding thesecountries from the sample lowers the averageincrease in middle-income countries signifi-

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cantly, resulting in a clear negative relationshipbetween the observed increase in exposure toforeign technologies and incomes (table 3.5).
This is particularly encouraging for lowincome countries, as the gains from such exposure tend to be nonlinear and enduring(Lumenga-Neso, Olarreaga, and Schiff 2005).
For middle-income countries and South Asia,
however, this result suggests that many countries (notably those in South Asia) may be
missing out on the potential benefits to beachieved from increased openness.

Nurturing technological
adaptive capacityO

penness to trade, FDI, and international
communication through the diaspora,other networks, and various media all serve toexpose a country to technologies and applications of technologies that may not have been
exploited domestically. Exposure does not,however, guarantee that these new technologies will spread and grow within the domestic
economy. Too often technologically sophisticated processes or products are limited to a few
major centers or foreign-owned enclaves. How
far these technologies diffuse within a country
is determined by its technological adaptive capacity, that is, the quality of its labor force andthe business environment (including access tofinance) in which firms operate and are able(or unable) to start up, expand, and reap the financial rewards of their new-to-the-market innovations. In the following sections we explore
recent trends in technological adaptive capacity among developing countries and the roles
firms, governments, and individuals play increating and supporting that capacity.

Governance and the businessclimateA stable and predictable economic environment reduces the risk that returns to investments in technology and innovative businessactivities will be lost to conflict or widely variable inflation and exchange rates. A stable
regulatory environment that facilitates the
conduct of business by enforcing property127

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2 0 0 8Figure 3.9 Most developing countries have increased their exposure to external technology
Exposure to external technology
Index
0.25

0.20

0.15

0.10

0.05

0
High-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Changes in exposure (2000s versus 1990s)
Percent change in index
200
150
100
50
0
⫺50
⫺100
High-income
countries

Upper-middle-income
countries

Source: World Bank.

rights, by limiting corruption, and by not imposing onerous requirements that make thecreation or expansion of firms or theiradoption of new technologies unnecessarily
difficult also contributes to an economy’s technological adaptive capacity.

Political and macroeconomic stability
have improved countries’ ability to
exploit technology
Over the past 15 years, the number of countries involved in international or domestic

128

conflict, as measured by the International
Crisis Behavior Project, has declined significantly (figure 3.10). The decline has been mostpronounced in Sub-Saharan Africa, where thetotal number of countries in conflict declined
from a peak of 10 in 1998 to only 2 in 2004.
Among its many benefits, the cessation of
conflict can provide an environment that ismore conducive to both private and public
sector investments in technology. For example,
12 years after the end of hostilities, the government of Rwanda launched an ambitious

D E T E R M I N A N T S

Table 3.5 Increases in exposure to external
technologies index, 1990s to 2000s(excluding Europe
All countries and Central Asia)

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the
Caribbean
Middle-East and North Africa
South Asia
Sub-Saharan Africa(percent change)
13.4
83.7
33.4
37.8
13.7
33.4

Income groups
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

27.7
45.1
36.2
33.5

27.7
24.4
31.7
33.5

Source: World Bank.
Note: Values are unweighted averages of country-specificchanges.

program of technological capacity building(Watkins and Verma 2007).
Improved macroeconomic stability andgrowth in developing countries has also contributed to an environment that is morefriendly toward technological investment.30
High and variable inflation and high exchange
rate volatility increase the risk involved ininvestments in technology and increase thereturns to financial manipulation relative to

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investment. High government deficits and debt
also increase uncertainty, especially whencombined with a rigid exchange rate regime, a
combination that increases the likelihood of an
abrupt revaluation that would further cloud
expected future returns. The median inflation
rate in developing countries fell from 19 percent in the early 1990s to 4 to 6 percent during
the first half of this decade, exchange rate
volatility is down, and government deficits
have declined across the board and are now
below 3 percent of GDP in every developing
region except South Asia. Moreover, the acceleration of per capita income growth over the
past 15 years, which has been most marked
over the past 6 years, has improved the overall
affordability of technology (table 3.6).

A weak business environment and poor
governance can impair technologicalprogress
Regulatory restrictions that impair the economy’s flexibility may limit the absorption oftechnology. Restrictions on labor mobility andrules that constrain firms’ ability to reallocate
workers within the firm can be importantbarriers to the adoption of new technologies(Parente and Prescott 1994). For example,

Figure 3.10 Number of countries in conflict worldwide
Number of countries
35
30
25
20
15
10
5

High-income countries

Upper-middle-income countries

Lower-middle-income countries

05
20

00
20

95
19

90
19

5
19
8

80
19

5
19
7

0
19
7

65
19

19

60

0

Low-income countries

Source: International Crisis Behavior database. http://www.cidcn.umd.edu.icb.

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2 0 0 8

Table 3.6 Macroeconomic stability has improved in developing countries
Median inflation rate aReal effective exchange rate volatility b

1990–94

2002–06

Difference

1990–94

2002–06

11.1
3.4
19.2
16.3
9.2
18.8
7.1
326.8
17.1
8.9
9.8
9.2

3.6
2.1
4.5
4.7
4.0
4.2
3.4
4.3
5.5
3.7
5.4
4.6

⫺7.5
⫺1.3
⫺14.7
⫺11.6
⫺5.2
⫺14.5
⫺3.7
⫺322.5
⫺11.6
⫺5.2
⫺4.4
⫺4.6

3.7
1.6
2.8
6.5
3.9
4.5
1.3
10.6
2.9
1.9
1.4
3.9

1.4
0.8
1.4
1.2
2.0
1.5
1.2
1.2
1.3
1.2
1.1
2.1

World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

General government balance c

World
High-income countries
Upper-middle-income countries, excluding ECA
Lower-middle-income countries, excluding ECA
Low-income countries, excluding ECADeveloping countries, excluding ECA
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

Difference

2.3
0.8
1.4
5.3
1.9
3.0
0.1
9.4
1.6
0.7
0.3
1.8

General government debt d

1990–94

2002–06

Difference

1990–94

2002–06 Difference

⫺5.0
⫺4.3
⫺2.3
⫺3.8
⫺5.4
⫺4.1
⫺2.0
⫺9.4
⫺2.2
⫺6.6
⫺7.7
⫺5.3

⫺1.5
0.8
⫺2.1
⫺2.9
⫺1.9
⫺2.2
⫺2.1
⫺1.9
⫺2.8
⫺2.8
⫺6.1
⫺1.4

3.5
5.1
0.2
0.9
3.5
1.9
⫺0.1
7.5
⫺0.6
3.9
1.5
3.9

62.6
58.7
55.1
64.3
97.9
73.3
45.6
38.9
67.5
71.6
78.2
88.6

64.1
55.6
74.5
57.5
106.5
78.7
57.0
37.2
69.7
71.3
76.3
97.6

1.5
⫺3.0
19.4
⫺6.8
8.7
5.4
11.4
⫺1.7
2.2
⫺0.3
⫺1.9
8.9

GDP per capita growth e
1985–94World
High-income countries
Upper-middle-income countries, excluding ECA
Lower-middle-income countries, excluding ECA
Low-income countries, excluding ECADeveloping countries, excluding ECA
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

1.8
2.1
2.9
1.1
⫺0.5
2.0
3.7
⫺2.4
2.1
3.2
2.6
0.6

1995–2006 Difference

2.5
2.5
2.1
2.1
1.6
2.0
2.5
4.9
1.7
2.1
3.3
2.6

0.7
0.4
⫺0.8
1.0
2.1
0.0
⫺1.1
7.3
⫺0.5
⫺1.1
0.7
2.0

Source: DataStream, International Monetary Fund, JP Morgan, World Bank.
Note: ECA ⫽ Europe and Central Asia.
a. Calculated as the mean over each indicated period of the median monthly (year over year) Consumer price index inflation rates of the countries in each grouping.
b. Calculated as the period average of the absolute value of the month-over-month percent change of the real effective exchange rate of countries in each grouping.
c. Calculated as the period average of the simple mean across countries of the central government budget deficit as reported by the International Monetary Fund.
d. Calculated as the period average of the simple mean across countries of the government debt as reported to the WorldBank (for low- and middle-income countries and as per the IMF for high-income countries).
e. Calculated as the period average of the simple mean across countries of the growth in GDP per capita.

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D E T E R M I N A N T S

stringent labor market regulations in Brazil
undermine productivity and technical efficiency (World Bank 2005), and the removal oflabor market regulations that result in involuntary overstaffing would increase labor productivity by 7 percent in India (World Bank
2004b). Similarly, restrictions on firm exit andentry can impede technological progress bypropping up inefficient firms and limiting the
expansion and creation of innovative firms.31
Rules and regulations governing firm startup can be particularly important, because they
have the potential to prevent a new technology or new-to-the-market product or processfrom seeing the light of day. The World Bank’s
indicators on doing business suggest substantial room for improvement in most developing
regions. On average, an entrepreneur seeking
to begin a new business must undertake morethan 9 separate procedures, which can take almost 50 days to complete (table 3.7). Among
high-income countries that belong to theOrganisation for Economic Co-operation andDevelopment (OECD), the equivalent figuresare 6 procedures and 17 days. Moreover, indeveloping countries the associated fees are
particularly onerous given income levels, consuming more than an amount equivalent to
1.5 years worth of per capita income for a person living in South Asia, compared with
5 days worth of the per capita income ofO F

T E C H N O L O G I C A L

P R O G R E S S

someone in an OECD country. Minimum
capital requirements are also high comparedwith income and likely limit the size of formal
small and medium enterprise sectors, particularly in the Middle East and North Africa andin Sub-Saharan Africa, where they represent
more than two years of average earnings.
Ensuring timely and efficient exit by failed
businesses also promotes technologicalprogress by freeing unemployed and underemployed capital and workers for more efficientuses. Developing countries, on average, require
much more time to resolve insolvencies (ranging from 2.7 years for East Asia and the Pacificto 5.0 years for South Asia) than OECD countries (which require an average of 1.3 years). In
addition, the amount recovered averages lessthan 30 cents on the dollar in all developing regions (and only 20 cents in South Asia and17 cents in Sub-Saharan Africa), compared with
74 cents on the dollar in OECD countries.32
The quality of regulation, including its enforcement, and of the business legal environment are critical determinants of the capacityof new and innovative firms to grow and expand. For example, the ability of such firms
to finance their initial operations or conductarms-length operations, both of which are
crucial for technologically advanced companies that require a large customer base to
exploit economies of scale, depend on the

Table 3.7 The regulatory burden is heavier in developing countries than in the OECD

East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Developing-country average
OECD countries
Memo:
Ratio of developing-country
average to OECD average

Procedures

Duration

Cost

Minimum capital requirements(number)
8.2
9.4
10.2
10.3
7.9
11.1
9.5
6.2

(days)
46
32
73
41
62
33
47.8
16.6

(% of GNI per capita)
43
14
48
75
163
47
65
5

(% of GNI per capita)
60
54
18
745
1
210
181
36

1.5

2.9

12.2

5.0

Source: World Bank; Doing Business. http://www.doingbusiness.org
Notes: Procedures required to register a firm, average time spent during each procedure, offical cost of each procedure, andminimum capital required as a percent of income per capita; GNI ⫽ gross national income.

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2 0 0 8Figure 3.11 Efficiency of contract
enforcement
Number of procedures

Days

45

1,200

Figure 3.12 Developing country
governance scores relative to OECDaverage
Political stability

40

1,000

35

800

30
25

600

20

400

15

Government
effectiveness
Regulatory
quality
Control ofcorruption
Rule of law

10

200

5

0

Voice andaccountability
40

45

50

55

60

Index, OECD ⫽ 100

Ea

st

O
EC
D
A
th s
e ia
Pa an
c d
E ifi
C uro cen p
tra e aln
Su As db- iaSahAf araric n
a
La Sou
tin
th
As
th Am
ia
e e
C ric
ar a
ib a
be nd
M
id
an
dl
e
N E
or as
th t a
Af nd
ric
a

0

Procedures (left axis)

Time (right axis)

Sources: World Bank; Doing Business.
http://www.doingbusiness.org.

system’s ability to enforce contracts, establish
property rights, and enforce court decisions ina timely and cost-effective manner.
Although the number of procedures required to enforce a court decision in the caseof a contract dispute in developing countries issignificantly higher than in OECD countries,
the time taken to reach a decision is not too
much greater (with the notable exception ofSouth Asia), generally less than 25 days, compared with 13 days in OECD countries (figure3.11). However, the time required to enforce
legal decisions approaches two years in four ofsix regions. This seriously affects firms’ (andconsumers’) ability to effect arms-length transactions with confidence, and is therefore an
important inhibitor to the growth of technologically sophisticated firms.
Corruption can also prevent entrepreneurs
from making investments in technology andexpanding their businesses in a manner thathelps extend the penetration of technologies
into the economy, while increasing the relative
return to activities aimed at influencing policy
makers. Moreover, better governance is also132

Source: Kaufmann, Kraay, and Mastruzzi 2007.

associated with improvements in process
technology, particularly in the delivery of government and regulated services. For example,
Kaufmann, Kraay, and Mastruzzi (2007)
estimate that an improvement of one standard
deviation in the summary governance indicator is associated, in the long term, with a twothirds reduction in infant mortality and a
tripling of incomes.
Surveys suggest that developing countries
lag behind high-income countries on a wide
range of governance indicators (figure 3.12).
For example, government effectiveness andregulatory quality are typically considered to
be at half of OECD levels, with indicators forcorruption, rule of law, and voice and accountability being even lower.
These aggregate results hide a certain
amount of variation across countries andregions (figure 3.13). Governance in the
Caribbean and in Eastern Europe and theBaltic countries appears to be much stronger(more than 70 percent of the OECD level)
than in the rest of the developing world, while
countries in the former Soviet Union and SubSaharan Africa have the lowest ratings, only 34
and 28 percent of OECD levels, respectively.
In contrast to other indicators of performance, such as inflation and openness, there islittle evidence that developing countries have

D E T E R M I N A N T S

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T E C H N O L O G I C A L

P R O G R E S S

quality of governance in many developing
countries, an improvement that would encourage technological progress.

Figure 3.13 Regional averages of six
governance indicators
OECD

Basic technological literacy

Caribbean
Eastern Europe
and Baltic
countries
East Asia
Developingcountry average
Latin America
Middle East andNorth Africa
South Asia
Sub-SaharanAfricaShare of OECD average
Percentile rank (1–100)

FormerSoviet Union
0

20

40

60

80

100

Sources: World Bank; Doing Business.
http://www.doingbusiness.org.

markedly improved their governance over the
past decade. Despite individual country improvements and marked gains in the regulatory environment in Europe and Central Asia,
on average, the quality of governance aroundthe world has not improved much over the
past decade (see the World Bank’s GovernanceMatters series). For each country that hasdone well, one has experienced deteriorationin its governance indicators. Two countries
that have experienced notable deterioration
are Belarus and the República Bolivariana deVenezuela. Many countries have not experienced any significant change in either direction. On the positive side, the GovernanceMatters series shows that where countries arecommitted to reform, improvements cantake place relatively quickly. For example,
during the relatively brief period of 2002–06,
Kenya, Liberia, and Ukraine made significant
advances in voice and accountability, while
Algeria and Angola made substantial progressin political stability. Thus the potential exists
for a rapid, substantial improvement in the

While the policy environment is critical to theabsorption of technology, technologicalprogress also requires a literate workforce.
The process by which external technologies
are absorbed, adapted, and integrated into an
economy is not a mechanical one, but one that
depends on the quality, quantity, and distribution of human capital, that is, on the technological competencies and the health of thepeople that use and implement the technology.
For this reason, efforts to increase the technological competency, knowledge, and understanding of populations, firms, and governments lie at the heart of the World Bank’s
technology agenda. Especially among poor
countries and in rural areas, existing deficits interms of basic skills are a binding obstacle totechnological progress and income growth.

Low incomes and poor health impair skill
formation for technological progress
Low income and poor health are perhaps
among the most basic constraints to technological progress. Even if profitable investments
in technology are available, inadequate income
limits the ability to generate resources forinvestment. At the level of the economy, low
income is both a cause and an effect of low levels of human capital, limited funds allocated toresearch, thin financial markets, often poor
governance, and sometimes violence andmacroeconomic instability, all of which limit
the ability to absorb technological innovations.
Recent developments in relation to income
levels are heartening. Growth rates of GDP
per capita have picked up throughout thedeveloping world over the past 15 years(figure 3.14). The number of people living in
absolute poverty has declined by more than
250 million, and their share in the populationof the developing world is expected to fallfrom 18 percent in 2004 to around 11 percent
by 2015 (chapter 1).

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2 0 0 8Figure 3.14 Per capita incomes haveaccelerated in recent years
Average growth in annual per capita incomes6

2001–06
1990s

5

1980s

4
3

1970s
1960s

2
1
0
⫺1
⫺2
Low-income
countries

Middle-income
countries

Sub-SaharanAfricaSource: World Bank.

Similarly, welcome developments havetaken place in basic health. Life expectancy atbirth has reached 70 years in middle-income
countries and continues to converge to stillrising high-income country levels (figure 3.15).
Among low-income countries, life expectancy
is also converging with high-income countries.
Excluding Sub-Saharan Africa, where life expectancy has been declining because of HIV/
AIDS, life expectancy in low-income countries
increased from 59 years in 1990 to 64 years in
2005, suggesting that in much of the world,
poor health should be decreasing as a factor
impeding technological progress.
Figure 3.15 Except in Sub-Saharan Africa,
life expectancy is improving
Life expectancy at birth (years)
80

Lower-middleincome countries

High-income countries

70
South Asia

60
Upper-middle-income
countries

Low-income
countries

50

Sub-Saharan Africa

Source: World Development Indicators.

134

5

0

20
0

5

20
0

19
9

19
85
19
90

19
80

19
65
19
70
19
75

19
60

40

In Sub-Saharan Africa, the combination ofincomes that are still extremely low and theravages of HIV/AIDS are more problematic.
The failure to control HIV/AIDS is itself an
example of poor dissemination of technology
and problems of affordability, as both theknow-how to limit the spread of the disease
and to control its health effects are wellknown, even though implementation strategies are controversial and tend to be country
specific. Some countries, such as Uganda, havesucceeded in reducing HIV infection rates.
Other countries in western Africa have succeeded in limiting its spread. Still others, notably Botswana, are doing better at treating
those infected than in preventing new infection. In too many countries, however, theepidemic continues to grow more or lessuncontrolled, with widespread societal consequences (World Bank 2007b). Estimates suggest that in Burkina Faso, Rwanda, andUganda, HIV/AIDS is likely to increase thepercentage of people living in extreme poverty
by as much as 6 percentage points between
2000 and 2015 (UNDP 2003). In Kenya,
HIV/AIDS may reduce GDP per adult by 11
percent by 2040 compared with what it would
have been in the absence of HIV/AIDS (Bell,
Bruhns, and Gersbach 2006). In addition to
the incalculable human costs implied, continued high death rates in the adult population
will have further negative implications for theability of these countries to acquire and to
apply technology, both because the experienceand technological competencies of the adults
expected to die will be lost and because theeducational attainment and literacy of theirchildren and dependents will be impaired(Bell, Devarajan, and Gersbach 2004).

Illiteracy is declining, but still blocks
countries’ ability to absorb newtechnologies
The level of human capital is a major determinant of an economy’s ability to adapt and absorb both sophisticated and even more basic
technologies.33 In both high-income (Eaton
and Kortum 1996) and developing countries

D E T E R M I N A N T S(Caselli and Coleman 2001), the extent towhich a given technology is used within acountry depends importantly on the educational attainment of the population, both because such skills help individuals learn how tomake effective use of a new-to-the-firm or farmtechnique, and because they increase the likelihood that firms will learn of new innovations
beyond the scope of their local communities.
Although the gap between the educational
attainment of individuals living in developing
countries and those in high-income countries
remains wide, it is closing, both in termsof the most basic indicators (literacy andO F

T E C H N O L O G I C A L

P R O G R E S S

primary school completion rates) and moresophisticated indicators, such as tertiary education enrollment rates (table 3.8). Over the
past 15 years, literacy rates have increased
throughout the developing world, with thebiggest increases recorded among low-income
countries, particularly in South Asia. Reported
literacy rates in Europe and Central Asia rival
those in high-income countries, while in East
Asia and the Pacific and Latin America andthe Caribbean, literacy rates are at or close to
90 percent. Elsewhere literacy lags considerably, with only 73 percent of the population in
the Middle East and North Africa being able toTable 3.8 Educational attainment indicators
Adult literacy rate
1990–2005(% point
Regionschange)East Asia and the Pacific
10.7
Europe and Central Asia
1.3
Latin America and the Caribbean
2.3
Middle East and North Africa
14.7
South Asia
11.6
Sub-Saharan Africa
5.1
Income groups
World
High income
Upper middle income
Lower middle income
Low income

6.0
0.3
0.8
9.2
9.3

2005a

1990–2005

2005a(% of population
aged 15and older)
91
97
90
73
58
59

(% pointchange)
14.9
1.8
2.6
16.5
12.8
5.2

(% of female
population aged
15 and older)
87
96
89
63
46
50

82
99
93
89
61

7.3
0.3
1.9
12.0
10.1

77
98
92
85
50

Primary completion rate
1991–2005

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Income groups
World
High income
Upper middle-income
Lower middle-income
Low income

Female literacy rate

2005

Secondary completion rate
1990–2000

2000(% pointchange)
⫺1.7
2.2
16.9
13.7
18.1
11.5

(% of relevant
age group)
97.7
94.9
98.5
90.7
83.5
60.8

(% pointchange)
1.5
0.1
1.1
2.1
0.5
0.5

(% of population
aged 15 and older)
13.7
13.5
8.7
10.0
7.0
2.3

n.a.
n.a.
10.3
2.7
17.0

87.6
97.4
98.5
96.6
75.9

0.4
⫺0.7
0.7
1.4
0.5

11.9
18.6
12.4
12.4
6.1

Expected years of schooling
2001–05

2005(years of(% change) schooling)
1.9
11.2
0.8
12.7
0.5
13.1
2.1
11.7
4.0
9.7
3.5
8.0
2.0
0.4
0.5
2.0
3.5

10.9
15.8
13.3
11.5
9.0

Tertiary completion rate
1990–2000

2000

(% of
population(% point
aged 15change) and older)
0.8
2.5
1.6
5.5
1.2
4.9
1.4
3.4
0.5
2.0
0.4
1.0
1.0
2.9
1.4
0.9
0.4

4.9
13.3
4.9
2.9
1.8

Source: World Development Indicators.
a. Actual reference year varies by country.

135

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P R O S P E C T S

2 0 0 8read and write and about 60 percent in South
Asia and in Sub-Saharan Africa. Moreover,there are concerns about the comparability ofthese data, as some low-income countries reportedly define literacy as the ability to read
and write one’s own name.
Divergence in the literacy rates for women
explain much of the disparity. For example, inSouth Asia fewer than half of women age 15
and older are literate. Women in the Middle
East and North Africa and Sub-Saharan Africa
fare somewhat better, with literacy rates of
63 and 50 percent, respectively. Although
the technological consequences of such widespread illiteracy are difficult to quantify, illiterate mothers are much less successful in assisting their children to learn (Behrman and others1999), have much more difficulty in absorbing
new techniques and instructions that are transmitted in written form, and are likely to be lesseffective workers than their better educatedpeers. Indeed, female illiteracy and the resulting relative ignorance of best practices in childrearing may be a major causal factor in poor
child health care and poor female labor force
outcomes (Rosenzweig and Wolpin 1994).

Rising primary school completion rates
should drive further improvements inadult literacy
The rise in literacy rates is due in no small partto increased and longer participation in formal education. Primary school completion
rates approach 100 percent in about half ofthe developing regions and have increased
substantially among poorer regions, notably
South Asia and Sub-Saharan Africa. Althoughreflective of the average literacy in the geographical region, these numbers hide important variations across countries. Thus the lowscore for South Asia reflects mainly low literacy in India, and it masks the fact that some95 percent of Sri Lankan youth can read andwrite. Similarly, China’s relatively high literacy rates and its large weight in East Asia
aggregate mask the less than 90 percent literacy rates of less populous countries such as
Cambodia and the Lao People’s Democratic

136

Table 3.9 Relatively high youth literacy
rates
Youth literacy rate
1990–2005

2005a

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(% pointchange)
3.43
1.67
2.29
12.23
13.72
5.42

(% of
populationage 15–24)
98
99
96
88
73
70

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

4.16
0.23
1.82
3.68
10.41

88
99
98
96
73

Source: World Bank; World Development Indicators.
a. Actual reference year varies by country.

Republic. In particular, the gap between
school completion rates for girls and boys has
narrowed significantly. Partly as a consequence, youth literacy rates are much higher
than adult literacy rates in South Asia and
Sub-Saharan Africa, which over time should
be reflected in better literacy scores for womenand improved transmission of knowledge andtechnology to future generations (table 3.9).
Of course, progress in providing effective
basic education is a necessary precursor of
more formal secondary and tertiary education. Nevertheless, the more advanced technical and problem-solving skills that are taught
at the basic level can significantly increase students’ capacity to learn to work with, adapt,and maintain more technologically advanced
goods. Indeed, the main obstacle to deepening
the use of a given technique or process in acountry is frequently a lack of sufficient numbers of individuals trained to maintain andinstall systems. For example, in Rwanda ashortage of plumbers and sheet metal workers
has been identified as a principal factor constraining the deployment of the simple kindof rain-harvesting technologies that havesucceeded in increasing the supply of sanitary drinking water in neighboring countries

D E T E R M I N A N T S(Watkins and Verma 2007). While nearly 19percent of the population completes secondary
school in high-income countries, secondary
school attainment rates range between 10 and
14 percent in East Asia and the Pacific, Europe
and Central Asia, and the Middle East andNorth Africa, but are below 9 percent in Latin
America and the Caribbean, South Asia, and
Sub-Saharan Africa (table 3.8). Between 1990
and 2000, secondary completion rates morethan doubled in the Middle East and North
Africa, East Asia and the Pacific, and Latin
America and the Caribbean, but remain low. In
contrast, improvements have been much lessmarked in South Asia and Sub-Saharan Africa,
and no appreciable gain was apparent in Europe and Central Asia. By income grouping, thestrongest gain in the secondary completion rate
is reported by the lower-middle-income countries with an increase of 1.4 percentage points
during 1990–2000, compared with half as
much or less of an improvement among otherincome groupings.
This same general pattern is observed for
tertiary-level students. In East Asia and thePacific, South Asia, and Sub-Saharan Africa,
2.5 percent or less of the population aged
15 years or older has completed tertiary education. Europe and Central Asia and Latin
America and the Caribbean have almost double
the number of tertiary-level graduates, while
the Middle East and North Africa falls in between these two groups of regions (table 3.8).
The share of secondary graduates who go on
to tertiary studies is relatively high in Latin
America and the Caribbean, 60 percent, compared with 70 percent in high-income countries. However, the share of university
students following a scientific as opposed to asocial science curriculum is relatively low(Maloney 2006). Elsewhere, the ratio is 42 percent or lower, with only 18 percent of secondary graduates going on to the tertiary levelin East Asia and the Pacific.
This performance in educational attainment
across levels of schooling is largely consistent
with patterns of public expenditures dedicatedto education. For example, public expendituresO F

T E C H N O L O G I C A L

P R O G R E S S

Figure 3.16 Educational expenditures haverisen in some regions
Public expenditures as a percent of GDP
6.0
High-income countries

5.5

Upper-middleincome countries

5.0
4.5
4.0
3.5
3.0
2.5

Low-income
countries

Lower-middleincome countries

2.0
1970

1975

1980

1985

1990

1995

2000

Sources: UNESCO Institute of Statistics; World Bank.

on education among lower-middle-income
countries averaged about 3.3 percent of
GDP during the 1970s and 1980s and rose
to a fairly steady 4.3 percent during 1990
through 2000 (figure 3.16). Among lowincome countries, the share of public outlaysrose by about half a percentage point to an
average of 3.3 percent of GDP during
1990–2000, up from an average of 2.9 percent
during 1980 through 1985. These sharescompare with government expenditures on
education of close to 5.3 percent of GDP in
high-income countries, down from a peak ofjust over 5.6 percent during the mid-1970s.34
While educational attainment rates and expenditure data are available for a fairly wide
number of countries, the data are silent on thequality of the education (or knowledge) received, and it is the quality of education that
determines the effectiveness with which individuals can absorb and exploit technology.
Here significant concerns have been raised,particularly for poorer countries where thequality of educators and limited resources sap
the value of time spent in school. This suggeststhat the education deficits in developing regions could be larger than indicated by national indicators, which, in turn, implies thatthe expansion of knowledge attained (and thecapacity to adopt and adapt technological137

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E C O N O M I C

P R O S P E C T S

2 0 0 8Figure 3.17 Many developing country students fail to meet literacy standards
Fourth grade reading performance on OECD test

Sixth grade reading performance on South African
regional test

Percent

Percent

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0
TurkeyArgentina

Colombia

Morocco

Percent ever enrolled

South Africa

UgandaNamibia

Malawi

Percent enrolled and achieved minimal literacy

Source: World Bank 2007d.

knowledge) is not necessarily rising in accordance with higher educational attainment.
The availability of international test scores
across countries is very limited outside ofhigh-incomes countries, but some data underscore these concerns. For example, in a number of middle-income countries, the majorityof primary school students fail to meet OECD
literacy standards. In Sub-Saharan Africa, despite enrollment rates of close to 100 percent,in some countries fewer than half of grade six
students are deemed literate (figure 3.17).
Although based primarily on data from highincome countries, research suggests thatteacher quality is a key determinant of differences in student outcomes (Hanushek andWoessmann 2007).

Financing innovative firms
So far, the discussion has described how the policy environment and human capital can promote technology diffusion. At the same time,and as indicated in chapter 2, affordability, bothat the level of the firm and of the consumer, canbe a major impediment to the diffusion of technology within a country. In this regard, the success with which an economy’s financial system
succeeds in channeling resources (savings)

138

toward their most productive use (investments)
is an important determinant of its technological
adaptive capacity.

Limited financial intermediation restricts
technology diffusion
Neither the banking system, nor equity markets, nor private sector bond markets in developing countries have channeled savings into
the private sector to the same extent as they
have in high-income countries (table 3.10). As
a result, the arm’s-length channels throughwhich private savings can be directed towardinnovative firms are limited. While banks inhigh-income countries play a significant role inrelaying private savings to investors (privatesector debt is equivalent to some 50 percent of
GDP in high-income countries), this kind of intermediation occurs at about half that level in
middle-income countries and almost not at all
in low-income countries. On a more encouraging note, the run-up in international investors’
appetite for risk has increased market capitalization in developing countries by significant
margins since 2000 (with the exception of East
Asia, where valuations declined). Valuation
ratios are now much closer to those observedin high-income countries.

D E T E R M I N A N T S

O F

T E C H N O L O G I C A L

P R O G R E S STable 3.10 Weak financial intermediation hinders technology in developing countries
1990

2000

2005

% change
2005/1990

Financial system deposits

1990

Income groups
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

40.9
23.8

41.7
22.8

45.6
31.2

11.5
31.0

38.7
8.5

44.1
13.8

51.3
19.7

32.5
130.8

31.1

39.9

39.8

28.1

11.7

28.2

46.4

298.3

46.5
22.5
18.5

47.4
33.3
19.9

59.8
43.7
24.4

28.7
94.0
31.4

16.0
6.7
31.0

26.1
13.4
27.0

63.8
26.1
34.9

298.3
290.0
12.4

76.0
34.3
36.0
16.7

87.0
43.6
34.3
17.4

91.4
45.2
39.4
21.8

20.4
31.8
9.7
30.7

45.1
37.7
13.4
7.6

105.0
36.5
20.4
10.8

112.2
50.2
34.3
22.3

148.7
33.4
156.7
194.7

Private-sector debt(% GDP)

Income groups
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries% change
2005/1990(% GDP)

Private-sector credit

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa

2005

Stock market capitalization(% GDP)
Regions
East Asia and the Pacific
Europe and Central Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa

2000(% GDP)

30.3
22.3

36.7
18.2

44.9
27.9

48.2
25.3

—
—

37.5
12.7

31.0
12.2

..
.

28.6

40.6

32.1

12.3

—

27.2

23.3

..

35.3
16.2
17.4

40.5
21.6
16.3

46.1
34.1
18.2

30.7
110.4
4.4

—
—
—

—
1.9
20.1

—
4.0
30.2

..
..
..

81.1
32.8
27.3
14.9

94.2
42.5
29.3
13.4

108.2
40.5
31.9
16.4

33.3
23.6
16.7
9.7

—
—
—
—

47.9
27.5
27.7
1.9

50.0
26.1
23.4
4.0

..
..
..
..

Source: Beck, Demirgüç-Kunt, and Levine 2000. Financial Structure Dataset updated March 20, 2007. For Private Sector
Debt the source is World Bank, Financial Sector Development Indicators. http://www.financial-indicators.org (February 2007).
Note: — ⫽ not available; .. ⫽ undefined.

Barriers to the finance of high-risk
activities severely impede the spreadof technology
Although weak intermediation is a general
problem in developing countries, the problem
for innovative firms or companies seeking toemploy an untested new-to-the-market technique or product is more severe. Innovation
can involve high risk, and traditional sourcesof capital—banks, stock exchanges, andbond markets—often lack the technical expertise to evaluate innovative investments. Thusin the absence of demonstrated cash flows
or enforceable collateral, innovative firms orentrepreneurs are less likely to obtain financing than experienced entrepreneurs operatingwith proven techniques. Coupled with thinmarkets, this translates into higher capitalcosts for innovative firms in developing countries than for those in high-income countries, afact that is reflected in lower R&D intensities(Lederman and Maloney 2006) and a reduced
likelihood that their financing needs are met.35
Innovative firms in developing countries
are also less likely to have access to equity
financing than do their counterparts in highincome countries because of strict listing
requirements imposed by the regulators of139

G L O B A L

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P R O S P E C T S

2 0 0 8emerging-market exchanges36 (Pfeil 2000).
Less stringently regulated, so-called new markets, modeled after the NASDAQ in the UnitedStates, have been developed to fill the void.
Many of these markets help investors by providing some, albeit less rigorous, due diligenceof listed firms and by offering risk-pooling
services (offerings of bundled shares that reduceinvestors’ exposure to any one firm). Such capital pool companies allow listing firms to accessequity finance in amounts that are too large forangel investors to provide, but are too small for
institutional investors. However, the fullpromise of such markets has yet to be felt, inpart because many of them have been obliged tomaintain relatively strict listing requirements to
attract foreign investors (Yoo 2007).
Increasingly, venture capitalists and “business angels” are playing a role in financing
new technologically sophisticated firms indeveloping economies.37 These investors tend
to have more technological know-how thando traditional lenders and to be better able tojudge the potential profitability of new ventures. Often the transfer of business and marketing expertise is as important as the infusionof capital in determining the difference between success and failure for young firms(Avnimelech and Teubal 2004; Mayer 2003).
Even though empirical evidence is still scarce,
this activity appears to be translating into
increased innovation (Pfeil 2000). Westernbased venture capitalists are increasingly becoming involved in markets in Asia (China
and India), Eastern Europe (notably the Czech
Republic, Hungary, and Russia), and South
Africa. Notwithstanding this increased activity, Nastas (2007) reports that only 1 in 200
small and medium enterprises in emerging
markets is likely to secure venture capital financing, and the ratio is undoubtedly lower
for firms in less-developed countries.

Supporting innovative firms with
R&D and outreach
While the process of technological advanceoccurs fundamentally at the firm level,
the government, along with international140

and national organizations, including
nongovernmental ones, can play a role in promoting the dissemination of knowledge
within the domestic economy. In addition to
the formal education system, less formal
continuing education—notably, outreach programs and R&D programs that focus onadapting technologies to local conditions—have a central role to play.

R&D efforts to adapt existing technology
to local conditions are expanding
Domestic R&D capacity is critical indetermining an economy’s capacity both togenerate new technologies and to absorb technologies from abroad. Foreign technologies
frequently need to be modified so that they aresuitable for domestic circumstances. For example, equipment and processes may need tobe adapted to differences in the quality of inputs and in the relative abundance of laborand capital, and a stock of researchers is often
necessary to understand and evaluate advanced technology (Cohen and Levinthal1989). Building up R&D capacity facilitates
the imitation and adaption of foreign technologies and improves the extent to which positive spillovers from FDI and trade accrue tothe rest of the economy (Fagerberg 1988; Kinoshita 2000). Moreover, countries tend to acquire technology more readily when domestic
firms have R&D programs and when publicresearch laboratories and universities have relatively close ties to industry (Maskus 2000).
Available data indicate that most developing regions have been increasing their R&D
expenditures relative to GDP (table 3.11).38
East Asia and the Pacific has experienced aparticularly rapid rate of increase in R&D expenditures and also has the highest level ofsuch expenditures among those regions forwhich data are available. In contrast withother regions, in Latin America and the
Caribbean, both the number of researchersand expenditures on R&D have been fallingor stagnant, reflecting both a reorientation ofpolicy away from university-led R&D (Maloney 2006) and tighter fiscal policies.

D E T E R M I N A N T S

O F

T E C H N O L O G I C A L

P R O G R E S STable 3.11 R&D intensities have increased
R&D expenditure

Researchers in R&D

1997–2002

2002

1997–2002

2002

Regions
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa(% point change)
0.45
0.06
0.01
—
0.13
—

(% of GDP)
1.06
0.88
0.57
—
0.77
—

(% change)
4.4
–1.4
—
—
—
—

(per million people)
545.3
2008.7————

Income groups
World
High-income countries
Upper-middle-income countries
Lower-middle-income countries
Low-income countries

0.12
0.12
0.09
0.46
0.18

2.18
2.43
0.71
1.01
0.80

—
2.6
—
3.9
—

—
3750.0—499.9—

Source: World Development Indicators.
Note:* Interpolation applied where appropriate; — ⫽ not available.

While developing countries spend less on
R&D than high-income countries, the gap is
not extreme. Relative to GDP, low-income
countries spend about one-third as much on
R&D than high-income countries. One issue
with the data is that the coverage of commercial R&D expenditures is poor in many
developing countries, so the figures largely reflect R&D expenditures by the public sector
and universities. As firms in many developing
countries probably focus on adapting foreigntechnology to local conditions, a significant
portion of this important activity may therefore not be captured.

Firm-level R&D is most effective
in promoting technological progress
All R&D can contribute to an economy’s capacity to create, adapt, and adopt technology.
Nevertheless, because of the fundamental rolethat firms play in diffusing technology
through the economy, the most productive
R&D tends to be that conducted by firms orby public or university laboratories working
actively with the private sector. Across developing countries, the share of R&D conductedby firms (as opposed to government oruniversity laboratories) is highest in East Asiaand the Pacific, where it rivals the share in

Table 3.12 Private-public sector R&D
Sector of performance

R&D spendingWorld
High-income countries
Developing countries
East Asia and the Pacific
Europe and Central Asia
Latin America andthe Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

Business

Government

Sector of funding
Highereducation(share of total)

Business

Government

Highereducation(% GDP)
2.28
2.45
0.83
1.44
0.94

(share of total)

63
—
62
43

13
—
22
29

27

49

34

2.1

14
20

54
38

35
54

2.3
0.5

0.56
—
0.73
—

29
—
—
—

27
—
—
—

33
—
—
—

33
—
—
—

37
—
—
—

27
—
—
—

Source: Gill and Karas 2007.
Note: — ⫽ not available.

141

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2 0 0 8high-income countries (table 3.12). Note,however, that in China, despite rapid technological progress, the efficiency of R&D spending is relatively low and the impact of R&D isimpaired because of poor linkages among government R&D institutes, businesses, and universities (Zeng and Wang 2007). In Europe
and Central Asia and in Latin America and the
Caribbean, academia and the government are
responsible for a much higher share of R&D.
Moreover, in the latter region coordination
between R&D carried out by government institutions and private firms has been poor,
reducing the impact of R&D on productivity
growth (de Ferranti and others 2003).
Research on OECD countries suggests thatthe more R&D is conducted at the firm level,
the higher the rate of return to public and academic R&D, presumably because having R&D
expertise close to the firm increases the likelihood of successful adaptation of a technology
created in government, academic, or even foreign laboratories (Guellec and Pottelsberge dela Potterie 2004). Maloney (2006) concludes
that state-funded R&D that is too academic
and/or too disconnected from the private sector is less effective at promoting technologicalprogress than firm-conducted R&D or statesupported R&D that has a strong connection
to business needs. Indeed, the relatively highshare of private sector R&D in East Asia andSouth Asia may have contributed to the more
rapid technological progress in those regions
than in Latin America and the Caribbean andEurope and Central Asia.

Outreach plays a critical role in bringing
technology to the broader population
Too often the overall effectiveness of R&D
undertaken by government and specialized research institutes is reduced because such organizations are divorced from their eventual
clients and their incentives are poorly alignedwith the ultimate dissemination of their inventions and adaptations.39 Especially in poor
countries plagued by illiteracy and weak communication networks, technology outreachprograms can play a critical role in increasing142

the diffusion of often simple but important
technologies. Agricultural outreach programs
were instrumental to the green revolution,even though it took much longer than initially
expected for those programs to bear fruit(World Bank 1998). Difficulties encounteredin other efforts to disseminate technology
include a lack of skilled personnel to staff
the outreach program and the need to earn thetrust of the local population. Here challenges
include minimizing the risks people run intrying a new technology, listening to their experiences, and adapting techniques as a consequence (World Bank 2007d). Enhancing therole of farmers in agricultural outreach programs and relying more on cooperation between government and the private sector—in
those areas where private benefits fromtechnology transfer can be substantial—may
improve both the impact and financial sustainability of outreach efforts.

Direct government policies topromote technology
Innovation requires entrepreneurs: people
who are willing to take risks to invest in uncertain projects and who have the organizational skills required to bring new products tothe market. Given the high risks involved, thereturns to successful entrepreneurship mustbe high, but the returns to investment in newtechnology in developing countries can be limited, because potential profits may be reduced
by imitation, because of a lack of coordination
between firms that produce complementary
inputs, or because economies of scale and agglomeration generate threshold effects thatprevent firms from breaking into mature markets (box 3.6).

Government policy can play a central rolein helping firms overcome market failures
The difficulties that these externalities pose forfirms in certain sectors and those seeking to
adopt a new-to-market (or even new-tothe-firm) technology imply that specificgovernment interventions may be necessary to
encourage
investmentintechnology.

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Box 3.6 Principal market failures impeding
technological progress in developing countries
he nonpatentability of new-to-the-market products and processes. The vast majority of innovation that occurs in developing countries involves theadaptation of already discovered techniques andproducts to the domestic market, and such innovation is not patentable. Lack of patent protection
facilitates imitation, which may speed diffusion, but
reduces the returns to the individual or firm introducing the technique or product to the domestic
market. As a result, private entrepreneurs underinvest in easily reproduced techniques, even though
they could have large social benefits.
Coordination failures limit investment in technology. Some technologies rely on the availability ofcomplementary inputs. Coordination failures canarise when new industries exhibit scale economies
and some of the inputs require geographical proximity. For example, producing cut flowers for export
requires an adequate electrical grid, irrigation, logistics and transport networks, quarantine and otherpublic health measures, and resources devoted tomarketing the country as a dependable supplier(Rodrik 2004). However, these services have highfixed costs and will not be supplied unless demand issufficient, creating a vicious circle where demand is
not forthcoming because of the lack of supply. The
market for training is another example of potential
coordination failure, as workers will demand training only if a demand for trained workers exists, but
in the absence of training there is no demand(Rodriguez-Clare 2005). Perhaps reflecting suchfactors, in almost all the successful case studies ofinnovation reported in Chandra (2006), government
played an important role by providing infrastructure,marketing, or training support.
Threshold effects caused by economies of scale inmany manufacturing sectors prevent entry by firms
into global markets or the introduction of a new

T

Governments in developing countries have undertaken a host of direct interventions in
productive activities to provide demonstration
effects, encourage innovation that otherwise
would not occur because imitators reap thelion’s share of benefits, resolve coordination
failures, and move an industry toward efficient

process in a small market dominated by a preexisting,large-scale competitor. Economies generated fromlearning by doing and the productivity boosts generated by the accumulation of small innovations are
related impediments that imply that start-ups mustendure an initial period of relatively high costs, whichin the absence of adequate intermediation, may prevent them from accumulating sufficient experience orscale to attain adequate levels of profitability. For example, Arrow (1962) cites evidence that productivity
in the production of airframes is a decreasing functionof the total number of airframes of the same type produced previously.
Knowledge spillovers tend to be geographicallybounded within a region where the new economic
knowledge is created (Audretsch and Feldman 2004).
Audretsch and Feldman (1996) find that the propensity of innovative activity to cluster geographicallytends to be greater in industries where new economic
knowledge plays a more important role as has occurred in, for example, Silicon Valley and Bangalore.
Studies also find that access to venture capital in the
United States is heavily skewed by region (Sorenson
and Stuart 2001).
Agglomeration effects, whereby firms benefit fromthe knowledge and human resource spillovers arisingfrom the geographical proximity of firms in the same
area of business, may also prevent developing economy firms from breaking into established markets(Glaeser and others 1992). The absence of such effects
represents an important barrier to development in
Sub-Saharan Africa and in more remote areas ofChina and India, where lack of physical proximity
both raises trading costs and minimizes the potential
for benefits from interactions with more rapidly
growing areas.
Source: World Bank.

technologies that it would not otherwise adopt
because of capital market imperfections. These
steps have included the following:• Providing support for industry-specificresearch. For example, Malaysia
funded industry-specific R&D, provided

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2 0 0 8Box 3.7 Government sponsored innovation:
Brazilian biofuelsBrazil launched its National Alcohol Program in1975 to reduce its dependence on crude oil imports and to guarantee the profitability of the sugar
industry by allowing excess sugar production to beconverted into alcohol (ethanol) in special distilleries
located near sugar mills.
Government support for the initiative has been extensive. Initially it was supported by legislation thatmandated that 24 percent of fuel sold for automobiles
must be in the form of ethanol. This requirement wascomplemented by sponsored research into the production of, and eventually the subsidization of sales of,cars that ran entirely on ethanol. Moreover, government credit guarantees and low-interest loans to construct the refineries amounted to some 29 percent of
the overall investment cost of these ventures. At thesame time, the state oil company, Petrobras, wasrequired to make infrastructure investments inethanol distribution and to keep the cost of ethanol toconsumers significantly cheaper than the cost of gasoline. Overall, the government spent $12.3 billion on
the National Alcohol Program during 1975–98.
During periods of high oil prices the program has
been relatively successful, with ethanol-powered cars
representing 90 percent of sales between 1983 and1988. However, as oil prices fell, the technology became less attractive and the costs of supporting the industry rose. At the same time, world sugar prices roseand sugar growers shifted their cane to the productionof sugar for export instead of ethanol for the domestic
market. Ethanol shortages developed and ethanolpowered car sales dropped. As a result, the government gradually rescinded the program’s incentives andsubsidies, although it still mandated that all gasoline
contain roughly 20 percent ethanol, citing environmental benefits to justify the mandate.
The flex-fuel car engine, which was able to run on
any combination of ethanol and gasoline, was introduced in 2002 and, along with the surge in crude oil
prices, led to a revival of ethanol in Brazil. With therecent rise in oil prices, ethanol-based cars are once
again competitive, and ethanol produced from Brazilian sugar can be produced for less than the equivalentquantity of gasoline. Other developing countries are
increasingly interested in adopting the Brazilian technology to reduce their energy dependence and also to
support their sugar sectors.
Source: Coelho and Goldemberg 2004; World Bank 1994; Xavier
Marcos 2007.

financing, built infrastructure, and offered tax incentives to encourage theprocessing of palm oil (Chandra andKolavalli 2006).40 Governments havealso encouraged innovation by improving
networking among enterprises, universities, and government research institutes(Goldman and Ergas 1997). For example,
government-funded technology parks in
Taiwan, China, encouraged research byproviding high-quality facilities and byfacilitating interactions among scientists.
Many governments finance agriculturalresearch and support farmers’ efforts to
exploit new technologies.
• Providing direct subsidies for specificproducts. The government started thefirst commercial-scale salmon farming

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operation in Chile to demonstrate its
feasibility (Rodrik 2004). Korea andJapan provided fiscal subsidies to create“national champions” in key sectors(Hoekman, Maskus, and Saggi 2005).
Similarly, the Brazilian aircraft andbiofuel sectors (box 3.7), the Indian
pharmaceuticals sector, and the South
African automobile industry were developed using tax incentives, regulatory
policies that encouraged domestic competition, science and technology support,
and collaboration with foreign firms(UNCTAD 2003).
• Imposing more dirigiste policies. Somecountries, particularly in East Asia, haveguided production decisions throughinitially high import tariffs, export

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Box 3.8 A successful government program oftechnological development and innovation financing
in the Republic of Korea

G

DP per capita in Korea increased from $150 in
1960 to $16,000 in 2005, with GDP growing
particularly rapidly during the 1980s and early
1990s as technological progress accelerated. Although
an outcome of many factors, Korea’s technologicallyintensive growth spurt had a strong public policy
element. Government-funded research institutes, including the Korea Science and Engineering Foundation in the 1970s, recognized the need to enhance cooperative research between universities and industry(80 percent of the nation’s research capability was
university based in the 1970s). The government created research centers located within corporations to
supply industry with high-tech research capability
and industry dictated the focus and area of research.

subsidies, government influence over the
allocation of production, and directedcredit programs. The extent to which suchpolicies were necessary to these countries’
success has generated some controversy(Hernandez 2004), and the forms ofintervention in high-growth East Asian
economies were by no means identical.
For example, Korea (box 3.8) favored tariff protection and constraints on FDI tomaximize technology transfer; Singapore
encouraged FDI; and Hong Kong, China,
practiced laissez-faire policies. Nevertheless, some observers doubt that such interventions were pervasive in many of themost successful East Asian economies.

But government efforts at promoting
technological champions have often failed
Notwithstanding the wide range of support
policies that governments have tried and theexistence of many apparent success stories,
such policies have often been spectacular failures. Even among the examples cited, it is notclear that all should be considered successes.
For example, the Brazilian aircraft makerWith time, industry realized that domesticallydeveloped technology could be internationally competitive and began investing heavily. As a result, Korean
industry transformed itself from a low-tech, laborintensive exporter to one of the world's leading hightech producers. Private sector expenditures on R&D
have increased rapidly since 1990—almost doublingover the past decade—and are now the main source of
R&D financing. Nanotechnology, information
technology, and biotechnology are the main axes of
the government’s focus on R&D at the generation
stage.

Source: World Bank.

Embraer did not become commercially successful until it was privatized. More generally,
the import-substitution policies followed bymany countries in Latin America and Africa
and India’s inward-focused policies severely
hampered economic and technological development. To take two of the countless examples, first, rather than promoting the development of a technologically sophisticated exportindustry, the tariffs, price harmonization, andimport licensing programs imposed in Côte
d’Ivoire diminished incentives for efficiency inits textile industry, making it internationallyuncompetitive. Second, Brazil’s attempts topromote its domestic personal computer sector by banning imports and FDI, awarding licenses for production, providing fiscal incentives, and establishing a public research center
resulted in an inefficient industry, high domestic prices, and lagging technology (WorldBank 1998).
Two important issues distinguish industrial
policies in the successful East Asian countries
with those in many other countries. First, incontrast to Latin America, where subsidies
were often provided free of performance145

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2 0 0 8

criteria, East Asian countries conditioned
subsidies on performance (often export performance), essentially relying on external
competition to discipline the market.41 Second, East Asian countries maintained highquality bureaucracies that for the most part
avoided capture by industrial interests, thereby
maintaining a balance between knowledge
and involvement in productive activities andstate autonomy. In Latin America, industrialists often captured bureaucracies, while inmany Sub-Saharan African countries, the interests of industrialists or corrupt officials
dominated government interventions.

Imitation opportunities may boost
technological diffusion, but have costs
The possibility of adopting technologies
already elaborated in more technologicallyadvanced economies represents a fundamental
advantage of less-advanced developing
economies and is the basis for much of their
R&D and outreach activity. Indeed, many developing countries with relatively advanced
levels of technological achievement (Brazil,
China, India, the Republic of Korea, Mexico,and Malaysia), as well as Japan, initially used
an explicit policy of copying foreign technologies. While this strategy proved successful to apoint, eventually the successes that these
economies had in the markets of their highertechnology competitors meant that thesecompetitor countries became increasingly
unwilling to share technology with them.
A substantial literature attempts to grapple
with the trade-off between the impact of
weaker intellectual property regimes and thepotential for increased technological diffusion
in a host country and with the impacts thatsuch regimes might have on foreign partners’
willingness to undertake FDI and licensing
agreements. Although the theoretical literature emphasizes the importance of intellectual
property regimes (Lai 1998; Taylor 1994), theempirical evidence is ambiguous overall.
Some studies find no relationship between
the level of intellectual property rights and
FDI or licensing (Primo Braga and Fink 2000;

146

Branstetter, Fisman, and Foley 2005; Maskus
and Konan 1994). Other studies show a positive effect of strong intellectual property
regimes on FDI both in influencing location
decisions by multinational corporations andin inducing foreign firms to invest in production rather than in distribution activities(Javorcik 2004; Lee and Mansfield 1996;
Mansfield 1994; Maskus 1998).42 Some evidence suggests that while a stronger intellectual property rights regime is associated witha rise in flows of knowledge to affiliates and ininward FDI toward middle-income and large
developing countries, this is not the case forpoor countries (Fink 2005; Hoekman,
Maskus, and Saggi 2005; Smith 2001).
Overall, the impact of intellectual property
rights on FDI depends on the nature of thesector. Intellectual property rights appear tohave little impact on investment in lowertechnology goods, such as textiles and apparel; services sectors, such as distribution andhotels; or in sectors where the sophisticationof the technology itself or the cost of production already serves as an effective barrier toentry. Indeed, the increased ease with whichsome products such as pharmaceuticals, chemicals, food additives, and software are reproduced

Figure 3.18 Levels of intellectual property
protection
Index
5High-income countries
43
Upper-middleincome countries2

Low-income
countries
Lower-middle-income countries

1
1970 1975 1980 1985 1990 1995 2000 2005
Source: World Bank calculations based on individual country
data provided by Walter Park, American University.
Note: A higher score on the index indicates stronger
intellectual property rights.

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may explain the rising interest in establishing intellectual property rights (Maskus 2000).
Perhaps reflecting such considerations, ageneral trend toward strengthening the legal
protection afforded by intellectual property
rights has been apparent since the latter half ofthe 1980s (figure 3.18). Among developing
countries, the legal basis for such rights has
progressed most in upper-middle-income
countries, where levels of protection now exceed the levels in high-income countries in the
mid-1990s. Progress in lower-middle-income
and low-income countries has been lessmarked, reaching about the same level as inhigh-income countries in the 1990s and 1970s
respectively (note, however, that the index infigure 3.18 refers to the protection offered instatutes, not in practice).

Governments can also promotetechnological progress in their own
operations . . .
In many developing countries the government
accounts for a significant share of productive
activities. Using technology to increase the productivity of government operations can help
raise the efficiency of the economy as a wholeby improving health and education services(see chapter 2 and the foregoing discussion ofhuman capital); enhancing the effectivenessand reducing the costs of publicly-provided
power, telecommunications, and water andsanitation; providing approaches to regulationand tax administration that are less burdensome to firms; and demonstrating the feasibility of new technology that firms can copy. One
area where dramatic efficiency gains are possible is greater use of technology in government
procurement. Countries that have implemented Internet-based procurement systems
include Brazil (including in some local governments), Chile, Mexico, and the Philippines.43
Implementing e-procurement systems may require changes in laws and policies governing
government operations (for example, ensuringthat government agencies can contract withforeign firms that can provide such systems.
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corruption and is frequently biased in favor of
local products (most developing countries provide preferential treatment to local suppliers ingovernment procurement [Kohr 2007]), theuse of advanced communications and information technologies can raise the transparency
and efficiency of government procurement
and can ensure greater competition, thereby
contributing to an overall improvement in thequality of government services.
More broadly, the integration of information and communications technology tools
has tremendous potential for improving accessto government information, increasing public
participation in government decision making,and making government services more readily
available to the public (World Bank Information for Development Program and Center for
Democracy and Technology 2002). In addition to enhancing government efficiency, such
improvements can help reduce costs and improve services to private sector firms, thereby
increasing the potential for technologicalprogress. While many industrial countries
have used the Internet to improve local accessto information and services, its potential remains largely unexploited in many developing
countries. Nevertheless, some developing
countries are implementing e-government systems that are as or more sophisticated thanthose used in some high-income countries(United Nations 2003). Also, the use ofelectronic systems has helped improve the efficiency of customs services in many countries.
A survey of case studies in developing
countries outlines some initial steps in use of
the Internet to improve tax administrationand general services and to enhance the transparency and efficiency of government operations (Ndou 2004). The survey underlines theimportance for the success of e-government
initiatives of appropriate stocktaking of thecurrent state of telecommunications networks;of raising awareness of the potential for, information and communications technology
beginning with relatively small projects to test
feasibility; of stimulating collaboration among
government departments; and of making

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2 0 0 8substantial investments in equipment and software, human capital, and appropriate organizational changes. Other important issues pertinent to implementing e-government systems
include its coverage (comprehensive, national
efforts may be appropriate for small countries,
but may be too complex and difficult in large
countries); the ability of the enabling environment to support e-government initiatives, forinstance, adequate infrastructure, an appropriate legal framework, political commitment,
and public involvement; and the availability ofstrong project management skills (Bhatnagar
and Deane 2002).

. . . and encourage improved technology
through product standards
Governments can play a key role in boosting
technological progress by defining and promoting standards for products made by private firms and by facilitating quality control
to help firms comply with standards. Good
standards support technological progress byincreasing consistency and ensuring minimum
product performance; facilitating the connection of components in complex systems bystandardizing the interfaces between different
parts of the system; offering buyers a greater
choice of suppliers at lower risk and lower
cost and the prospect of faster and morereliable system development; and offering
manufacturers and vendors easier entry tomarkets, economies of scale, and lower product liability risks (Yokota and Weiland 2004).
The transmission of information about standards can be an extremely useful channel fortechnology transfer. Implementing well-defined
standards, including testing and sanctions fornoncompliance, can be critical in maintaining
a country’s reputation for quality, which is important for establishing and maintaining access to global markets.
The value of a country’s reputation, the benefits of coordination, and the protection ofhealth and safety underline the government’s
role in promoting and enforcing standards,
even in competitive product markets, but the
government’s specific role will depend on the148

product and the market structure involved.
Standards may be defined by private firms withdominant market shares or agreed on througha collaborative process negotiated within thecontext of professional organizations. They
may also be imposed by government regulation, or they may derive from some combination of collaboration and imposition. Participation in international organizations can help
developing countries understand and influence international standards. The International Organization for Standardization, with132 developing country members, is a forum
for agreement on technical specifications for avariety of products.44

Coherent policies and committed
government leadership are critical fortechnological progress
No single blueprint for technological progress
exists, but most success stories have involved
strong central leadership to ensure a consistent and effective policy framework that supports the development and commercializationof innovations. Technological progress islargely implemented by private firms. However, progress at the firm level requires government support, elements of which include
the following: an appropriate incentives
framework, including overall political andeconomic stability and government transparency, along with specific technology policies such as protection of intellectual property
rights; investments in human capital, including general education and technical training
where firms underinvest in training because of
the potential mobility of trained staff; support
for R&D of new-to-the-market technologies
because of difficulties in appropriating the full
benefits from such efforts; and, where appropriate, government interventions to overcome
market failures involving coordination,
threshold effects, and agglomeration effects(box 3.6). Most technological success stories,
including Germany in the 19th century, Japan
before and after World War II, the East
Asian miracle countries, Chile, Ireland, andIsrael have involved strong national leadership

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Figure 3.19 Level of and recent changes in technological absorptive capacity
Technological absorptive capacity
Index
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
High-income
countries

Upper-middle-income
countries

Lower-middle-income
countries

Low-income
countries

Lower-middle-income
countries

Low-income
countries

Change in technology absorptive capacity (2000s versus 1990s)% change
40
30
20
10
0
⫺10
⫺20
High-income
countries

Upper-middle-income
countries

Source: World Bank.

and a coherent strategy for promoting
technology.

An overall index of technologicalabsorptive capacity
Figure 3.19 summarizes countries’ level oftechnological absorptive capacity andchanges over the past 10 years. The overall
index was generated following the same
methodology used to construct the index oftechnological achievement discussed in chapter
2 and the index of exposure to external technologies discussed earlier in this chapter. As
was the case for technological achievement, atwo-step procedure was followed. The firststep was to estimate a separate summary
index of the quality of the macroeconomic
environment, financial market intermediation, human capital, and governance. The
technical annex to chapter 2 describes
the estimation process used and the results ofthe principal components analysis in moredetail than provided here and table A2.2
summarizes the individual indicators thatwent into the index.
The most important determinants of theoverall index are the governance variables(with a 37 percent weight), followed byhuman capital variables (with a 25 percent

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2 0 0 8weight), and financial intermediation (with a
27 percent weight), followed by the macroeconomic environment (with an 11 percent
weight).
Compared with the technological achievement index, technological absorptive capacity
is more clearly correlated with income, withless of an overlap across countries in different
income groups. This probably results from thecomplex causal relationship that may exist between technological absorptive capacity, technology, and income, in which technology is afunction of technological absorptive capacity
and affordability, income is a function of technology, and affordability is a function of income, with income being both an indirectcause and an effect of technological absorptive
capacity.
Reflecting the complexity of the institutions that generate technological absorptive
capacity and the difficulties of reformingsome of the measures included in the index(see technical annex to chapter 2), progresshas been more limited than was the case fortechnological achievement (where the index
increased by 160 percent for low-income
countries). Relatively few countries improved
their overall score for absorptive capacity bymore than 10 percent between 1990 and2000 (the strongest negative score in lowincome countries was recorded by Zimbabwe
and reflects mainly the deterioration in
macroeconomic and governance conditions
there in recent years). Moreover, in contrast
to technological achievement, there is little
sign of catch-up. Developing countries are
improving their technological absorptive capacity at about the same rate as high-income
countries.45
The relatively weak improvements in absorptive capacity notwithstanding, the relative
strength of the technological improvement observed to date might be comforting. At thesame time, the relatively weak increases in technological achievement in Latin America andthe Caribbean and in the Middle East andNorth Africa may reflect that technologicalprogress (and TFP growth) in those countries

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has reached the limits that can be achieved
from relatively easy adoption and imitation ofexisting technologies given current levels of absorptive capacity and that further improvement
may require substantial enhancement of absorptive capacity.

Conclusion

Technology diffusion in developing countries depends both on access to foreigntechnology (through trade, FDI, internationalmigration, and other networks) and on theability to absorb technology (as determined by
the quality of government policy and institutions, the stock of human capital, the efforts at
R&D, and the financial system). One implication of the analysis and data presented in thepreceding two chapters is that prospects forfurther technological progress in low- andmiddle-income countries are good. Over the
past 15 years, the main international channels
through which technology is transferred haveincreased. Developing countries’ imports ofhigh-tech goods and of capital goods haverisen relative to GDP, and their share in global
high-tech export markets has increased. Inflows of FDI have increased sixfold relative todeveloping countries’ output, and opportunities to purchase technology have risen alongwith FDI outflows.
Simultaneously, the absorptive capacity ofdeveloping countries has been increasing, albeit more slowly. Youth literacy rates are as
much as 15 percentage points higher than for
the adult population. As a result, the basic
technical literacy of the population has been
increasing, and it should continue to do so formany decades. The macroeconomic instability
that plagued developing countries during the1970s and 1980s has declined, and the business climate has improved, although not by
as much or as uniformly as one might have
hoped. Technological achievement should
continue to rise over the medium term as longas these trends continue and assuming there
are no major disruptions to global trade andfinancial systems.

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Of particular note is the speed with which
communications technologies are evolving
and diffusing in the developing world. Only
27 years after the introduction of cell phone
technology, mobile phones are being used in
virtually every country, and penetration rates
are rising rapidly. Moreover, the range of economic activities that were once heavily dependent on infrastructure and that are now being
conducted using mobile phone technology isimpressive and growing daily. Already mobile
phones are bringing banking, remittances, andarm’s-length financial transactions to regionsof the world that until recently were unserved.
Given the pace at which things are changing,most developing countries should continue
to see a rise in their ability to communicate
and process information over the next few
decades, which should help speed the diffusion of other technologies as well.
For middle-income countries, the relatively
rapid technological progress of the past few
years and the improvements in both openness
and technological adaptive capability suggestthat their level of technological sophistication
should continue to converge with that of higherincome countries. However, even the most advanced of the middle-income countries will be
unable to benefit fully from the new technologies that are expected to become both technically and economically viable over the next
several years because of inadequacies in theirinfrastructure (unreliable power or communications systems), insufficient technical literacy,or the absence of a critical mass of scientists andengineers necessary to exploit the technology(box 3.9). For some countries, the relative slowness with which technological absorptive
capacity has been advancing could slow thepace of convergence as missing competencies
become an increasingly binding constraint on
the absorption of additional technologies.
For low-income countries, the prospects are
more complex. On average, among the lowincome countries for which sufficient data are
available to calculate recent increases intechnological achievement, convergence isoccurring and is doing so more quickly than in

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middle-income countries. However, this finding reflects rapid progress in a few countries
and more modest performance in many others
that are only maintaining their ground relative
to high-income countries.
Notwithstanding strong technologicalprogress in some cities and greater openness totechnological flows, the gap between existing
competencies and those needed to converge
with technological progress in high-income
countries is immense, especially in rural areas.
Moreover, the pace at which absorptive capacity is rising is disappointing. While somecountries have recorded significant increases,on average, developing countries are notcatching up to high-income countries, suggesting that the gap in their technology potential
is not closing. As a result, unless substantial
steps are taken to raise basic competencies
and invest in local networks that successfully
disseminate technologies and technologicalcompetencies, many of these countries are notexpected to be able to master anything morethan the simplest of forthcoming technologies(box 3.9).
One bright spot is the relatively rapid diffusion of some new technologies in lowincome countries. Declining computing costs
and prospects for rapid declines in the costof wireless Internet connections may enhance the efficiency of ongoing economic
activities in low-income countries and may
enable them to leapfrog into more advanced
technologies (Primo Braga, Daly, and Sareen2003).46 However, successful exploitation ofthese new technologies will require steppedup investments in human capital and reforms
in policy and regulation to provide an appropriate incentives structure for investments in information and communications
technology.
A rigorous road map for achieving rapid
technological progress does not exist. Nevertheless, the evidence presented in this report
points to a number of conclusions, principles,and policy directions that appear likely to promote technological progress and that may beable to guide policy makers. Exactly how

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2 0 0 8Box 3.9 Technology in 2020

A

recent report by the Rand Corporation (Silberglitt and others 2006) examines some 56 emerging technologies expected to be commercially available by 2020 and evaluates in detail the 16 judged tobe most important on the basis of technical feasibility, marketability, and societal impact. These applications include improvements in health services (targeted drug delivery, improved diagnostic and surgicalmethods), in access to information (rural wirelesscommunications, quantum cryptography), and in theenvironmental sustainability of products and services(improved water purification, green manufacturing,hybrid vehicles). It then examines the technical basea country requires to make effective use of each technology and the likelihood that each of 80 representative economies, including both high-income and developing countries from every region in the world,
will be able to exploit these technologies by 2020.
While many countries are expected to be able totake advantage of some of the simpler-to-use technologies, a wide range of countries are not expected
to be able to do so because they lack the required
technological infrastructure, because their population
is not sufficiently technically literate, or because acritical mass of scientists and engineers is not present

to exploit the technology (see the table). The reportfinds that most high-income countries will be able toadopt and exploit all the technologies effectively. A
second group of countries, including China, India,
Russia, and the countries of Eastern Europe, are foundto have a considerable level of scientific and technological proficiency in specific applications. However,barriers to technology adaptation are likely to limit
their ability to take advantage of the most sophisticated network applications. A third group of middleincome countries, which consists of several Latin
American countries, Indonesia, South Africa, andTurkey, lacks more prerequisites and is therefore expected to exploit fewer of these technologies. A final
group that comprises most of the world’s poorest
countries, including most of the countries of Africa,
the Middle East, and Oceania, is projected to makeuse of only the simplest of the new technologies.
This analysis provides a useful snapshot of theprospects for technological progress based on current
data. However, it does not incorporate the potential for
dynamic improvements in technological progress, forexample, through the rapid dissemination of existing
new technologies, which could rapidly improve developing countries’ ability to absorb new technologies.

Technological adaptive capacity may restrict the diffusion of future technologies

Technology application

Most of Africa,
Middle East,
Oceania

Latin America,
South Africa,
Turkey, Indonesia

China, India,
Russia,Eastern Europe

Industrial countries

Requires increased technological sophistication

Technologies likely to be mastered by 2020 (¸)
Cheap solar energy

¸

¸

¸

¸

Rural wireless communication

¸

¸

¸

¸

Genetically modified crops

¸

¸

¸

¸

Filters and catalysts

¸

¸

¸

¸

Cheap autonomous housing

¸

¸

¸

¸

Rapid bioassays

¸

¸

¸

Green manufacturing

¸

¸

¸

Ubiquitous RFID tagging

¸

¸

¸

Hybrid vehicles

¸

¸

¸

Targeted drug delivery¸¸

Improved diagnostic and surgical techniques¸¸Quantum cryptography¸¸

Ubiquitous information access¸

Tissue engineering¸

Pervasive sensors¸

Wearable computers¸

Source: Silberglitt and others 2006.
Note: RFID ⫽ radio-frequency identification.

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D E T E R M I N A N T S

much weight to give to each of these conclusions and how they interact depends on specific country circumstances and should be thesubject of future research. These policy directions include the following:• Openness to external technologies
through foreign trade, FDI, diasporas,
and other international networks is critical for technological progress for bothlow- and middle-income countries,
where most progress occurs through the
adoption, adaptation, and assimilationof preexisting but new-to-the-market or
new-to-the-firm technologies.
• The capacity of firms or individuals to use
a technology depends critically on thebasic technological literacy of workers andconsumers. The level of technological literacy, in turn, depends on the government’s
capacity to deliver a quality education to
the largest number of people possible.
• The preeminent vehicles for the dissemination and diffusion of technology in a market economy are firms and entrepreneurs.
Their success in doing so depends on theirability to undertake and expand new activities. This requires a stable macroeconomic
environment, together with a regulatoryenvironment that effectively enforces
property rights and the rule of law, does
not excessively restrict firms’ ability to hire
and fire, and does not impose excessive
regulatory or financial burdens.
• The capacity of firms or individuals totake advantage of a technology can beconstrained by affordability and by liquidity, thereby placing a premium on theefficiency with which the financial systemintermediates between savers and borrowers both domestically and abroad.
• Given the existence of market failures,the government has a role to play in assisting firms to learn how to adapt,
adopt, and market new technologies. In
addition to focusing on R&D in new-tothe-market technologies, applied R&D
agencies need to emphasize outreach,O F

T E C H N O L O G I C A L

P R O G R E S S

testing, marketing, and dissemination
activities. The huge rural–urban divide inboth technology and absorptive capacity
in many developing countries underlines
the importance of such activities to inclusive development.
• The government can also have an important impact on economic progress by integrating new technology into its own
operations, including in the provision of
education, health, and publicly-provided
infrastructure; in the procurement ofgoods and services; in the provision of
information and in fostering public dialogue; and in the definition of standards
for commercial products.
• The principal challenge facing many lowincome countries is not their access totechnology, but their absorptive capacity,
including physical, human, and institutional capacity; their limited financial
resources; and the extent to which theirsocial and political environments aresupportive of entrepreneurship, investment, and technological progress.
These conclusions highlight the critical roleof the government in establishing the generalconditions that support rapid technologicalprogress, in helping to overcome market failures that constrain innovations by firms, andin providing (and purchasing) high-quality
goods and services. Countries that haveachieved sustained and rapid technologicalprogress have generally benefited from committed national leadership that follows coherent development policies, although the natureof these policies—in particular, the degree of
public sector intervention in private markets—has varied enormously.

Notes
1. The econometric evidence is mixed. Harrison(1994) for Côte d’Ivoire and Haddad, de Melo, andHorton (1996) for Morocco find no statistically significant impact of import penetration on productivity following trade liberalization. Nishimizu and Page (1982)
for the former Yugoslavia; Tybout, de Melo, andCorbo (1991) for Chile; and Tybout and Westbrook

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2 0 0 8

(1995) for Mexico find a positive relationship between
import penetration and firm efficiency. Grether (1999)
and van Wijnbergen and Venables (1993) for Mexico,
Earle and Estrin (2001) for Russia, Falk and Dierking(1995) for Poland, Levinsohn (1993) for Turkey, andRoberts (1996) for Colombia find a positive impact ofimport penetration on either industry markups or measured labor productivity.
2. Keller (1998) casts doubt on these results byshowing that the relationship also holds for randomly
generated import shares, but Lumenga-Neso, Olarreaga,
and Schiff (2005) find that imports from countries thatimport from other R&D centers are positively related
to productivity and that these indirect spillovers are atleast as important as direct spillovers.
3. Lall (2000, 2001) identifies four categories of
products: resource-based products; low-tech products,
which include textiles and fashion; medium-tech products; and high-tech products. According to this classification, which is defined using SITC 3-digit rev. 2,
technological products do not include agricultural
products, moderately processed food products, tobacco products, minerals, construction materials, andenergy products.
4. Available data provide only a rough indication of
the sophistication of economic activity, because ascertaining the level of sophistication of the capital goods
imported is not possible. Also some countries may import relatively sophisticated capital goods for use in enclave production (for example, oil and minerals) withlittle spillover into the rest of the economy.
5. Chandra and Kolavalli (2006) cite important
spillover effects from exporting electronics and software.
6. The contradictory evidence from case studies
and econometric studies may be due to the different
impacts of exports across industries and countries, aswell as difficulties inherent in classifying firms (somestudies classify exporters on the basis of surveys with
yes-no answers rather than measuring the volume ofexports) (Keller 2004). Also the argument for technology transfers through exports refers only to some
exports—namely, new products or products that have
evolved over time, and export statistics may not capture such subtleties. Firms that export the same product that is not subject to significant upgrading may notbenefit from spillovers. If some firms improve theirproductivity through exports and some do not, andavailable data do not permit distinguishing between
these firms, measuring the extent of productivity improvements over time may be difficult. For specific examples, see Tybout and Westbrook (1996), who findthat trade liberalization in Mexico benefited exporters
because of declines in prices of imported inputs, but
had no effect on productivity. Soderbom and Teal

154

(2000) find that Ghanaian firms with higher technicalefficiency become exporters. Isgut (2001) finds thatexporting firms in Colombia had higher labor productivity than nonexporters three years before entering theexport market, but that afterward there is no differencein the growth of labor productivity of exporters as compared with nonexporters. Fafchamps, Zeufack, andEl Hamine (2002) find that in Morocco, more productive firms move into exports. However, after initiating
exports they do not achieve more rapid reductions in
production costs than nonexporters, although they dolearn to improve product design to suit foreign markets.
7. Following Lall (2001), the nomenclature used is
SITC 3-digit, Rev. 2.
8. Costa Rica has emerged as a high-tech platform
for foreign investors and increased its world market
share of high-tech products from 0.01 to 0.20 percent
between the mid-1990s and 2002–04.
9. Between 1992 and 2003, developing countries
made some 2,563 favorable changes to national laws
and regulations relating to FDI. The most frequentchanges concerned FDI promotion and incentives(855), sectoral restrictions (497), operational conditions (406), guarantees (304), and corporate regulations (153). During the same period, 113 developing
countries became members of the World Trade Organization, which required the elimination of many restrictions and impediments to FDI, particularly in theservices sector (World Bank 2004a).
10. The world’s largest R&D investors conducted
an average of 28 percent of their R&D outside theirhome territory in 2003 (UNCTAD 2005).
11. This section builds on many studies of FDI
spillovers that have identified possible channels fortechnology transfers and knowledge spillovers
through FDI (Görg and Greenaway 2004; Görg andStrobl 2001; Javorcik 2007; Lipsey 2002; Moran
2007; Saggi 2002).
12. Javorcik (2004) finds that the TFP of Lithuanian firms is positively correlated with the extent of potential contacts with multinational customers in downstream sectors. Blalock and Gertler (forthcoming) andKugler (2006) find strong evidence that vertical supply
chains were a channel for technology transfers in
Colombian and Indonesian manufacturing sectors.
Swinnen and others (2006) show that investments byforeign companies in processing and retailing in Eastern Europe have introduced higher standards, which inturn led to significant efficiency gains by suppliers.
13. Javorcik (2007) documents the increased competitive pressures from foreign entry in Czech and Latvian firms, and the McKinsey Global Institute (2003)
cites case studies where competition is a key factor in
diffusing FDI-introduced innovations.

D E T E R M I N A N T S

14. Ayyagari and Kosova (2006), using Czech FDI
data for 1994 to 2000, show that spillovers vary substantially across industries. Although service industries
benefited from huge FDI spillover effects through bothhorizontal and vertical channels, manufacturing industries did not show any significant positive spillover effects from FDI.
15. Belderbos, Capannelli, and Fukao (2000) findthat the proportion of inputs sourced locally by Japanese multinationals increases with the number of yearsof operation in a given host country.
16. These data are incomplete, as only 90 of 150
developing countries (on average across 1999–2006)
reported royalty and license fee payments. The data
may also overstate payments for technology transfer, as
developing countries with mineral or oil investments
abroad may report the payment of substantial royalties
that represent fees for extraction rights rather than forthe purchase of technology.
17. Between 1990 and 2000, the number of tertiaryeducated emigrants from developing countries that
resided in OECD countries rose from 19.1 million to37.8 million (Docquier and Marfouk 2004).
18. Even though a majority of Argentine doctoral
graduates in the United States prefer to remain in thehost country, most respondents in a survey of highskilled Argentine diaspora members in Europe, theUnited States, and elsewhere expressed their willingness and interest in helping develop science, technology, and education in their home country (Kuznetsov,
Nemirovsky, and Yoguel 2006).
19. Of these technologically sophisticated émigrés,
56 percent were born in Asia, with Latin America andthe Caribbean accounting for another 15 percent(Kannankutty and Burrelli 2007).
20. Agrawal, Kapur, and McHale (2007), using
patent data, find evidence of the influence of the diaspora in technology transfers to home countries.
21. The Mexican Ministry of Science and Technology views the presence of 1 million tertiary-educated
Mexican migrants in the United States, with an estimated 400,000 in managerial positions, as a unique, unexplored opportunity for knowledge transfers(Kuznetsov 2006). Emigrants from China and India
were running almost 30 percent of Silicon Valley’s(California) technology businesses by the end of the
1990s (Saxenian 2000, 2002). In addition, 25 percent of
all engineering and technology companies started in the
United States during 1995–2005 had a foreign-born person as a key founder (Wadhwa and others 2007).
22. Page and Plaza (2006) argue that technology
transfer by migrants takes place through several channels: (a) licensing agreements between diaspora-owned
or managed firms in host countries and firms in

O F

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sending countries, (b) knowledge spillovers when returning migrants assume managerial positions in theirhome country, (c) networks of diaspora researchersand scientists performing research directed at the needsof their country of origin, (d) “virtual” return throughextended visits and electronic communication in fields
such as medicine and engineering, and (e) return topermanent employment in the country of origin aftergaining work experience in the host country.
23. Estimates suggest that a 10 percent increase inskilled migrant stock in the United States is associatedwith a 4 percent increase in the flow of FDI (in current
dollars) to the home country (Mattoo, Özden, andNeagu 2005).
24. This result is supported by work on highincome countries that shows immigrant ties have been
important determinants of U.S and Canadian bilateral
trade (Gould 1994; Head and Ries 1998; Wagner,
Head, and Ries 2002).
25. Kuznetsov (2007) argues that diasporas can act
as global search networks by leveraging their contextual knowledge of their home countries’ economy andinstitutions to identify untapped resources and opportunities, such as research capabilities, availability oftechnical manpower, and business-friendly local governments.
26. Among members of the Philippines Brain Gain
Network, 35 percent have a master’s degree and 23 percent hold a doctorate, while 49 percent of the membersof the South African Network of Skills Abroad have amaster’s degree and another 30 percent have a doctorate (Brown 2000).
27. The Taiwanese diaspora and returning migrants
were active conduits for technology transfers. For example, in 2000, 113 out of 289 companies at the Hinschu Science-Based Industrial Park in Taiwan, China,
were started by U.S.-educated Taiwanese (O’Neil 2003).
28. Countries with strong institutions such as
Chile, the Republic of Korea, and Scotland have beenable take advantage of their high-skilled diasporas,
while others such as Argentina, Armenia, andColombia have not succeeded as well despite having
many programs (Kuznetsov 2006).
29. Finding a relevant, available indicator of thesize of the diaspora to include in the index proved difficult. The data series used included FDI net inflows,royalties and license fee payments, imports of hightech goods, imports of capital goods, and imports ofintermediate goods—all as a percent of GDP. Imports
of intermediate goods and net FDI inflows have thelargest weight in the calculation, accounting for morethan half the total.
30. The productivity benefits from the adoption of
new technology are best realized in the context of low

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2 0 0 8inflation, stable exchange rates, sustainable government
finances, and positive income growth (Pack 2006).
31. Liu and Tybout (1996) and Roberts and Tybout(1997) present data from Chile, Colombia, andMorocco confirming that the entry and exit of firms
makes an important contribution to productivity
growth.
32. Data are taken from the World Bank’s Doing
Business Web site (http://www.doingbusiness.org).
33. See Keller (2004) for a survey of the economic
literature on this topic. Education levels are typicallyimportant in empirical studies of cross-country differences in growth rates and in labor productivity (Chenand Dahlman 2004), but these studies do not determine the channel through which human capital contributes to growth.
34. In some countries, the limited rise in public expenditures on education may have been balanced by increases in private expenditures.
35. Ayyagari, Demirgüç-Kunt, and Maksimovic(2007) find a positive correlation between financial
market depth (proxied by credit to the private sector asa percent of GDP) and R&D intensities.
36. These requirements are generally imposed toreduce volatility in these often thin markets and to
bolster investor confidence in the safety of investingin listed firms. While they enable some wellestablished firms to access global capital markets byproviding the exchanges with legitimacy, they exclude
more speculative firms less well. Similarly, the use of
American deposit receipts, which make investing inemerging-market firms easier for foreign investors, islargely restricted to large, well-established, andmainly export-oriented firms (Claessens andSchumkler 2007).
37. The OECD (2005) defines venture capital “ascapital provided by firms who invest alongside management in young companies that are not quoted on
the stock market. The objective is high return from theinvestment. Value is created by the young company inpartnership with the venture capitalist’s money andprofessional expertise.” The flow of venture capitalfrom the investor to a start-up company and back canbe thought of as a cycle that runs through several
phases. The International Finance Corporation monitors about 90 venture capital funds active in developing countries.
38. Internationally comparable data have been
available only since 1997.
39. See the discussion from the World Bank
Global Forum on Science, Technology, and Innovation,
February 13–15, 2007, in Washington, DC. http://
go.worldbank.org/DWODQ7E3E0.
40. Note that an OECD (2003) study found that
fiscal incentives to support R&D in rich countries were156

not very effective on average, with success being heavily dependent on the design of the tax measures.
41. Such programs are more difficult to implement
today in light of World Trade Organization restrictions
on export subsidies (Rodrik 2004).
42. The intellectual property regime is only one
consideration among many, including various local
market and sector characteristics, that enter into multinational corporations’ decisions on how to deploy
technology internationally (Mansfield 1994, 1995).
43. See World Resources Institute Digital Dividend(http://www.digitaldividend.org) and the Working
Group on E-Government in the Developing World(http://www.pacificcouncil.org/pdfs/e-gov.paper.f.pdf).
44. See http://www.iso.org.
45. There is a slightly inverted U shape to the distribution of improvements in technological absorptive
capacity, with high-income countries recording a
9.1 percent improvement, compared with 9.4 percent
for upper-middle-income countries, 9.8 percent forlower-middle-income countries, and 8.6 percent
among those low-income countries for which data are
available.
46. The development of simple, low-cost computers
and the spread of open-source technology has alreadyenhanced the affordability of new technologies for
low-income countries.

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Appendix
Regional Economic Prospects

East Asia and the Pacific
Recent developments
Growth in the developing countries of East
Asia and the Pacific strengthened in 2007,
with gross domestic product (GDP) advancing
a full 10 percent in the year, up from 9.7 percent in 2006. The expansion was powered by
China’s 11.3 percent gain, with other countries in the region growing at a 5.9 percent
pace (figure A1). Domestic demand was a key
driving force for many economies, as a downturn in the global high-tech cycle for most of
2006–07 served to blunt the momentum of

Figure A1 East Asian growth moves up in
2007
GDP growth (percent)
12
10
2007
2006
2005

8
6
4

rie

s

am
al

lc

ou

nt

Vi
et
n

Sources: World Bank and national agencies.

Sm

C
hi
a
na
ex and
cl th
ud e
in P
g ac
C ifi
hi c
So
na
ut
h
Ea
st
As
ia

Ea
st
As
i

Ea
st
th Asi
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Pa an
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fic

2

exports for technology-producing countries in
the region. The pickup in regional growth was
all the more notable because it occurred
despite a slowdown in the U.S. economy: total
U.S. imports fell from 5.8 percent growth in2006 to 2 percent in 2007. Regional exports
nonetheless advanced 17.8 percent, a modest
pickup from 2006 outturns.
East Asia appears to have absorbed the effects of the financial turmoil in the highincome markets well. Stock markets in themain East Asian economies dropped a median
14 percent during July and early August, withequity prices increasing a median 22 percent
to mid-October. Similar developments were
witnessed in foreign exchange markets and insovereign bonds. Since the beginning of theyear, several East Asian currencies have appreciated sharply against the dollar, with thePhilippine peso up 12 percent and the Thaibaht up 11.3 percent. The Chinese yuan continued its gradual rise against the dollar, a
4.7 percent gain since the beginning of theyear, but at the same time, the yuan depreciated against many other currencies.
On the policy front, East Asian central
banks generally tightened monetary conditions from mid-2004 to the early part of 2006
to curb rising inflation. As a result, inflation
stabilized in 2007 (although headline inflation
rates, which include fuels and food, haveturned up recently in some countries becauseof higher food price inflation), allowing central banks to keep policy rates stable, andeven to begin easing in Indonesia and Thailand

165

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2 0 0 8efforts, relatively low interest rates, and sustained economic growth since 2001.
External conditions during 2007 remained
sufficiently positive for surplus positions towiden across countries. Central banks in
China, Indonesia, Malaysia, the Philippines,
and Thailand continued to build up reserves as
their current accounts remained in surplus.
East Asia’s aggregate current account surplus as a share of GDP increased to 10.1 percent in 2007, up from 8.4 percent in 2006.
Gross capital flows, including bond and equity
issuance and net bank borrowing, amounted
to a remarkable $170 billion over the year
through October. This contrasts favorablywith inflows of $153 billion for all of 2006
and $107 billion for 2005, indicating that market access has remained largely unencumbered.
At the same time, the contribution of net exports to GDP growth increased 3 percentage
points, as exports expanded by 17.8 percent,significantly outpacing the 15.3 percent
growth in imports (table A1).

Figure A2 Except for China, inflation is
now stabilizing across East Asia
Consumer price inflation (percent change year over year)
8

Indonesia (right axis)

China

18
15

6

Philippines

12

4

9
6

2
3
Malaysia Thailand
0
Jan.
2006

0
May
2006

Sept.
2006

Jan.
2007

Sept.
2007

May
2007

Source: World Bank.

(figure A2). Fiscal balances have improved andgovernment debt has declined over the courseof the decade in most of the larger East Asian
economies thanks to fiscal consolidation

Table A1 East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

GDP per capitac
Purchasing Power Parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

8.4
7.1
—
7.3
9.0
10.3
11.7
11.3
0.3
0.1
6.5
⫺0.7

9.0
8.1
9.2
6.8
6.7
11.5
22.6
20.6
1.8
3.4
6.1
⫺1.5

9.1
8.2
9.3
7.5
10.9
12.7
17.8
10.5
3.9
5.7
3.8
⫺1.4

9.7
8.8
9.9
7.4
8.5
10.9
17.7
14.8
2.8
8.4
4.3
⫺0.5

10.0
9.1
10.2
7.6
9.0
11.3
17.8
15.3
3.0
10.1
4.6
⫺0.9

9.7
8.8
9.9
7.6
8.5
9.9
15.2
14.2
2.3
8.6
2.9
⫺1.1

9.6
8.7
9.7
7.6
8.6
9.6
18.5
19.4
2.1
7.6
3.8
⫺1.2

Memo items: GDP
East Asia, excluding China
China
Indonesia
Thailand

4.8
10.4
4.2
4.5

6.1
10.1
5.1
6.2

5.4
10.4
5.7
4.5

5.7
11.1
5.5
5.0

5.9
11.3
6.3
4.3

5.9
10.8
6.3
4.6

6.2
10.5
6.5
5.2

GDP at market pricesb

Source: World Bank.
Note: — = not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.

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R E G I O N A L

In China, growth continued at a robust
pace in 2007, underpinned by strong contributions to GDP from net exports and by
buoyant domestic demand, led by investment.
Growth achieved a 11.5 percent run-up in thefirst half of the year, including an exceptional
11.9 percent advance during the second quarter. The soaring current account surplus of
about $380 billion in 2007, some 12 percent
of GDP, is adding to domestic liquidity andcontributing to asset price increases, while
supporting, along with other factors such as
sharp gains in food prices, an upward drift inconsumer price inflation.
Elsewhere investment growth picked up
in most economies, as capacity utilization
reached high levels, corporate profits rose,and the health of balance sheets improved. In
Indonesia, fixed investment surged 11.3 percent (seasonally adjusted annual rate) in thesecond quarter, and GDP growth increased to
6.3 percent, up from 5.5 percent in 2006.
Against this background, inflation is now a
growing concern, reaching 6.9 percent in
September (year-on-year), at the upper end of
the central bank’s target range. GDP growth
should register a solid 6.3 percent for the year.
Malaysia suffered subpar export performance during the first half of 2007, tied inpart to sluggish demand for semiconductors
and other high-tech inputs, slow hydrocarbon
shipments, and difficulties in several exportable food and raw material commodities.
Export growth declined to 2.5 percent in thefirst half of 2007, down from 6 percent in thesecond half of 2006, contributing to a slowdown in GDP growth to 5.6 percent in thefirst half of the year. Equity markets were depressed for a short time during the period of
global financial stress, but have bounced backsharply since mid-August. Domestic demandis expected to sustain growth, offsetting weakness in trade and allowing Malaysia to register
5.7 percent GDP growth for 2007.
In the Philippines, GDP growth ramped up
to 7.3 percent during the first half of 2007
based on strong investment outlays and apickup in services; growth for the year is

E C O N O M I C

P R O S P E C T S

expected to register 6.7 percent. The country
is beginning to enjoy the benefits stemmingfrom the substantial fiscal adjustment, public
debt reductions, and balance-of-payments
surpluses of recent years. The current accountsurplus rose sharply as a result of large remittance inflows and a diminishing trade deficit.
Foreign direct investment (FDI) inflows increased 70 percent from 2006 to $1.6 billion
in the first half of the year, while international
reserves have increased to some $30.7 billion,
enough to cover 5.5 months of imports.
In Thailand, where continuing political andpolicy uncertainties have significantly dampened business and consumer confidence, GDPis anticipated to grow by 4.3 percent in 2007,
down from 5 percent in 2006. Growth hasrelied on conditions in the external environment, where the news is somewhat discouraging, given an 11 percent appreciation of thebaht against the dollar over 2007 to date andsluggish conditions in the U.S. market.
Growth has also continued to run at strong
7 to 10 percent rates in several low-income
economies of the region, including Cambodia,
the Lao People’s Democratic Republic,
Mongolia, and Vietnam, powered by acrossthe-board strength in exports and domestic
demand. Growth is also above historical rates
in some of the small island states of the region,
pushed up by high commodity prices, and insome cases by improved economic management. At the same time, political instability
and social tensions continue to undermine
performance in some of the Pacific islands,
including Fiji, where GDP is expected tocontract this year.

Medium-term outlook
Growth in East Asia and the Pacific is projected to remain strong, with GDP easing by
just 0.3 percentage points to 9.7 percent in2008 and retaining strength in 2009 with anadvance of 9.6 percent. Growth in China is
expected to slow modestly, dropping less thana percentage point over the period to 10.5 percent by 2009, as authorities’ long-standing attempts to rein in certain investment projects

167

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2 0 0 8

Table A2 East Asia and Pacific country forecasts(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

Cambodia
GDP at market pricesb
Current account balance/GDP (%)

—
—

10.0
⫺3.7

13.5
⫺7.1

10.8
⫺5.8

9.5
⫺7.8

8.0
⫺11.2

9.0
⫺9.0

China
GDP at market pricesb
Current account balance/GDP (%)

10.4
1.5

10.1
3.6

10.4
6.9

11.1
9.4

11.3
11.9

10.8
10.3

10.5
9.1

Fiji
GDP at market pricesb
Current account balance/GDP (%)

2.1
⫺3.1

5.3
⫺16.8

0.7
⫺22.7

3.6
⫺22.2

⫺3.1
⫺20.1

1.9
⫺24.0

2.8
⫺26.2

Indonesia
GDP at market pricesb
Current account balance/GDP (%)

4.2
⫺0.4

5.1
0.6

5.7
0.4

5.5
3.1

6.3
2.7

6.3
1.5

6.5
0.9

Lao People’s Democratic Republic
GDP at market pricesb
Current account balance/GDP (%)

—
—

6.4
⫺6.3

7.1
⫺26.4

7.6
⫺18.7

7.1
⫺16.8

7.9
⫺19.0

7.5
⫺19.0

Malaysia
GDP at market pricesb
Current account balance/GDP (%)

7.1
⫺0.4

7.2
12.6

5.0
15.3

5.9
17.1

5.7
13.8

5.9
12.2

6.0
10.2

Papua New Guinea
GDP at market pricesb
Current account balance/GDP (%)

4.8
2.2

2.7
⫺1.5

3.4
2.6

2.6
4.4

5.2
2.7

4.0
3.6

4.2
2.8

Philippines
GDP at market pricesb
Current account balance/GDP (%)

3.0
⫺3.1

6.2
1.9

4.9
2.0

5.4
5.3

6.7
4.3

6.2
2.4

6.5
1.8

Thailand
GDP at market pricesb
Current account balance/GDP (%)

4.5
⫺1.2

6.2
1.7

4.5
⫺4.6

5.0
1.6

4.3
2.4

4.6
1.4

5.2
1.5

Vanuatu
GDP at market pricesb
Current account balance/GDP (%)

4.1
⫺8.2

4.0
⫺19.7

6.5
⫺20.2

7.2
⫺22.1

5.0
⫺19.9

5.0
⫺20.8

5.0
⫺20.4

Vietnam
GDP at market pricesb
Current account balance/GDP (%)

7.6
⫺5.1

7.7
⫺1.0

8.4
⫺0.3

8.2
1.1

8.3
⫺1.1

8.2
⫺0.6

8.3
⫺1.8

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. American Samoa, Dem. Rep., the Federated States of Micronesia, Kiribati, Korea, Northern Mariana Islands, Marshall Islands, Mongolia, Myanmar, Palau, Solomon Islands, Timor-Leste, and Tonga are not forecast because ofdata limitations.
— ⫽ not available
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

and to avoid overheating in several sectors
come to fruition (table A2 and figure A3).
Substantial reform efforts in several countriesof the Association of Southeast Asian Nations
should yield acceleration in activity throughthe forecast period. Growth among East Asian
economies other than China is expected toregister 6.2 percent by 2009.

168

A projected slowdown in export growthfrom 17.8 percent in 2007 to 15.2 percent in2008 echoes a softening in demand by countries of the Organisation for Economic
Co-operation and Development (OECD)—
with U.S. imports increasing by a meager
1.3 percent—as well as second-round effects
on intraregional trade. However, the decline

R E G I O N A L

Figure A3 Performance improves for
East Asian countries other than China
GDP growth (percent change)
China

12

East Asia
Excluding China

10

8

6

4
2005

2006

2007

2008

2009

Source: World Bank.

should not make a serious dent in regional
GDP, and the contribution of net trade to
growth is projected to fall only moderately,
from 3 percentage points in 2007 to 2.3 in2008. Largely reflecting developments in
China, the momentum underlying fixed investment begins to dissipate during 2008, easing from 11.3 percent in 2007 to 9.9 percent.
By 2009, the external environment is expectedto feature a revival in U.S. GDP growth complemented by recovery in Europe and Japan.
OECD import demand is forecast to increase
from 5 percent in 2008 to 7.8 percent in 2009,
and conditions in financial markets are expected to stabilize.

Risks
The year 2008 will likely be challenging forpolicy makers, with a large number of interrelated downside risks. These include the possibility of a full-fledged recession in the UnitedStates, higher oil prices, and further escalationof turbulence in financial markets linked to
the U.S. subprime debacle.
Among principal concerns is the extent towhich both financial and real side effects of
the U.S. subprime crisis might increase in the

E C O N O M I C

P R O S P E C T S

coming year. China should be well positioned
to weather the continuing turmoil in financial
markets. The impact on Chinese financial institutions holding overseas collateralized debt
obligations and other U.S. mortgage-backed
securities appears likely to be small in relation
to the size of China’s economy and its huge international reserves ($1.4 trillion), but othercountries may be more vulnerable to effects
flowing through both direct and indirectchannels.
Should losses by large international institutions mount to substantial levels, other investments, including those in East Asia, could
be called in an effort to rebalance portfolios
and mitigate the effects on trading profits.
Several countries in East Asia are exposed tothis risk, particularly those that have been recipients of large capital inflows intermediatedthrough the yen carry trade. Policy makers
will need to keep a close eye on the volume,
direction, and volatility of short-term flows,
including those into local equity markets.
Nevertheless the large holdings of foreign exchange reserves and the current account surplus positions of most East Asian economies
should provide a significant buffer and reduce
macroeconomic vulnerability to a reversal incapital flows.
The obverse of this risk is that interest rate
reductions in high-income economies may
boost liquidity to the point of touching off another upward cycle in equities, including inemerging markets, setting the stage for aneven more pronounced adjustment later. Evenin the absence of such a scenario, many
economies in the region have been struggling
to curb liquidity growth caused by burgeoning
current account surpluses and large-scalebuildup of reserves. If not managed properly,
excess liquidity could jeopardize price stability, form asset price bubbles, and expose acountry to serious financial and macroeconomic vulnerabilities. Finally, a slowdown in
the high-income countries that is more severe
than projected would subject many East Asian
economies to a substantial downdraft in export growth.

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G L O B A L

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2 0 0 8Europe and Central Asia

increase standards of living, are not without
shadow costs. Capital inflows have createdchallenges for macroeconomic management;
inflation remains high relative to that in theEuro Area, making it more difficult for several
countries to maintain effective exchange rate
pegs; and current account deficits in many oilimporting countries have become unsustainably high.
At the subregional level, growth in Central
and Eastern Europe (CEE) moderated to a stillrobust 6.0 percent in 2007 from 6.5 percent in2006 (figure A4), buoyed by rapid growthin credit and in real wages, strong capital
inflows, and high remittance inflows. The
falloff in growth in CEE is attributable in large
measure to a slowdown in Hungary, wherea program of fiscal consolidation pushed
growth down 3.2 percentage points to 2.2 percent in 2007. The decline in growth in CEE
also stems from continued moderation in

Recent developments
GDP growth in the Europe and Central Asia
region eased slightly, from 6.9 percent in 2006
to 6.7 percent in 2007, reflecting a modest softening of both external and domestic demand(table A3). With a stable population in the region, this means that per capita production
continued to increase at remarkable rates ofmore than 6 percent. High productivity gains
have been made possible by technology
diffusion, double-digit growth in investment
supported by rapid credit expansion throughlending by domestic and foreign banks, highenergy prices for hydrocarbon exporters, andlarge remittance inflows from workers overseas. These same factors have boosted private
consumption and consistently raised import
growth 3 or more percentage points above thealready robust expansion of exports. These developments, which have helped to rapidly

Table A3 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

GDP at market pricesb
GDP per capitac
Purchasing Power Parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

⫺1.0
⫺1.2
⫺0.9
0.5
0.1
⫺6.6
0.9
⫺1.6
0.9
—
118.5
⫺6.1

7.4
7.4
7.6
8.6
2.3
14.1
12.4
17.4
⫺1.7
0.8
6.6
⫺0.7

6.1
6.2
6.1
7.8
3.4
11.5
7.0
10.2
⫺1.4
1.5
5.8
2.0

6.9
6.9
7.1
7.4
5.0
16.5
10.3
14.0
⫺1.8
0.6
7.3
2.9

6.7
6.7
7.0
7.3
4.5
14.9
9.2
12.8
⫺2.0
⫺1.3
6.9
1.6

6.1
6.0
6.2
6.9
5.4
13.0
8.5
12.2
⫺2.3
⫺1.9
6.4
1.6

5.7
5.7
5.8
6.8
3.4
10.3
8.7
11.2
⫺1.9
⫺2.6
5.5
1.5

Memo items: GDP
Transition countries
Central and Eastern Europe
Commonwealth of Independent States
Russian Federation
TurkeyPoland

2.0
1.2
⫺4.2
⫺3.9
3.6
3.8

6.9
5.7
8.0
7.1
8.9
5.3

5.7
4.7
6.8
6.4
7.4
3.6

6.3
6.5
7.8
6.7
6.1
6.1

5.7
6.0
8.2
7.5
5.1
6.5

5.5
5.5
6.8
6.5
5.4
5.7

5.3
5.2
6.2
6.0
5.7
5.1

Source: World Bank.
Note: — = not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.

170

R E G I O N A L

Figure A4 Mixed growth outturns acrossEurope and Central Asia

E C O N O M I C

P R O S P E C T S

Figure A5 External positions vary widely
across Europe and Central Asia
Current account balance as a percent of GDP (%)
20

GDP growth (% year-on-year)
9.0

2007
2006
2005

15
10

7.5

5
0

6.0

5
10

4.5

15
20

Sources: World Bank and national agencies.

Turkish GDP, which slowed by 1 percentage
point to 5.1 percent in 2007 from an unsustainable 8.9 percent pace posted in 2004.
In contrast with CEE, growth in the Commonwealth of Independent States (CIS) accelerated sharply from 7.8 percent in 2006 to
8.2 percent in 2007 (figure A4). A strong increase in public consumption and investment,
combined with a slightly improved contribution from net exports, formed the foundation
for this pickup in growth. Revenue gains forthe oil-exporting economies, notably Azerbaijan, Kazakhstan, and the Russian Federation,
continue at robust rates, given increasing oil
prices, and are providing ongoing support todemand growth through fiscal linkage. A construction boom in residential, commercial,and civil engineering (infrastructure) projects
is contributing to a rise in the non-oil sectors.
Among the smaller CIS economies, highworker remittance inflows, FDI, and vibrantdemand from regional oil exporters (notably
Russia) and from Asia (especially China) are
underpinning growth. Gross worker remittances represented a substantial share of GDP
for several of the region’s countries in 2006,

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2005
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2007

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ranging from the equivalent of 4 percent of
GDP to as much as 38 percent: Albania(15 percent), Armenia (19 percent), Azerbaijan(4 percent), Georgia (7 percent), the Kyrgyz
Republic (12 percent), Moldova (38 percent),
and Tajikistan (20 percent). Remittances are
anticipated to maintain this strong level in2007.
Europe and Central Asia’s regional current
account position shifted to a modest deficit
equivalent to 1.3 percent of GDP in 2007 after
posting a surplus of 0.6 percent in 2006 (figure A5) and an average surplus of nearly 1
percent of GDP over 2000–05. Strong domestic demand is driving import volume growthof 12.8 percent, well in excess of exports at
9.2 percent. Sizable current account deficits
among countries in CEE have been financed toa large extent by FDI, although for the Baltic
states, foreign borrowing by banks has cometo represent a substantial share of external finance, leading to higher external debt-to-GDP
ratios. In the case of Latvia, that ratio reached
112 percent in 2006 and is projected to remain above 100 percent during 2007–09.
Moreover, short-term debt as a share of total

171

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8external debt is high in a number of countries,
reaching more than 40 percent in Latvia,
Lithuania, and the Slovak Republic. These indicators point to potential future problems
with currency and maturity mismatches.
In the CIS, worker remittances havehelped finance significant external deficits ina number of smaller countries. In Kazakhstan
and the Kyrgyz Republic, external debt as ashare of gross national income stood at 83
and 86 percent, respectively, in 2005, and in
the case of Kazakhstan, this share has increased by 12 percentage points since 2001.
Indeed, the rise in the international indebtedness of Kazakh banks has recently focused
attention on the country, given the turbulence
in international financial markets. In the Kyrgyz
Republic, debt burdens remain at high levels,
but they have been reduced sharply since
2000—by more than 50 percentage points asa share of gross national income—largely because of debt rescheduling by the Paris Clubin 2002 and an improvement in debt management strategy.
Fiscal positions in the region generally
deteriorated in 2007, with the largest shifts
posted in the CIS. The most notable decline
has been in Tajikistan, where the fiscal balance shifted from a surplus of 1.6 percent of
GDP in 2006 to a deficit of 10.3 percent. This
reflects, in part, an effort to offset weakening
exports to sustain domestic consumption andinvestment. Marked deteriorations in fiscal
positions of 2 percentage points or moreduring 2007 have been recorded in Belarus(2.0 points), Bosnia and Herzegovina(3.4 points), Kazakhstan (3.0 points), Russia(2.2 points), and Turkey (3.4 points). In contrast, notable consolidation has been achievedin Hungary, where the austerity program reduced the deficit from 9.2 percent of GDP in2006 to 6.4 percent. Firming government revenues underpinned by stronger than expected
GDP growth helped manage a reduction of
Poland’s deficit from 3.9 percent of GDP in2006 to 3.0 percent in 2007. In Azerbaijan,
increasing oil revenues and new productive
capacity have led to a considerable rise in the172

fiscal surplus, which is equivalent to 5.0 percent of GDP, up from 0.1 percent in 2006.
Monetary policy across the region has
become more restrictive to counter rising inflationary pressures. Price increases are stemmingfrom sustained high domestic demand growth
and rising fuel and grain prices, the latteraggravated locally by drought conditions in
Bulgaria and Romania and globally by thesurge in the use of cereals for biofuels.
Moldova posted the largest escalation in prices.
In Hungary and Latvia, prices were up 3 percentage points; inflation in Hungary is being
driven by increases in indirect taxes and administered prices and in Latvia by rapid credit
expansion tied to vibrant capital inflows. In
Azerbaijan, inflation is expected to rise to
16 percent in 2007, double the rate of 2006; inUkraine and Uzbekistan inflation is expected toaverage 17.5 and 17.0 percent, respectively.
In several countries, however, inflationarypressure has eased. In Romania, consumer
prices fell from 6.6 percent during 2006
to 4.6 percent in 2007, thanks to currency
appreciation and a delay in regulated priceadjustments. The Slovak Republic is also projected to see an easing of inflation of some2 percentage points. Tighter domestic conditions and exchange rate appreciation helped
moderate inflationary pressures in Croatia,
Kazakhstan, and Turkey during the year.
Nonetheless, inflation pressures are expected
to rekindle, in part reflecting higher foodprices and energy costs, which are affecting awide spectrum of countries.
The impact of market turbulence tied to the
U.S. subprime mortgage market has been fairly
limited in the region, and initial downside adjustments in currency and asset prices havelargely been recouped. Bond spreads increased,
but not as much as in other markets. Nevertheless, concerns about potential spillovers remain for a number of countries in the region,
particularly those that have experienced rapid
credit growth and private sector borrowing
from abroad, the proportions of which may
be underestimated. Signs of overheating areclearly evident in Bulgaria and the Baltic states,

R E G I O N A L

where already worrisome external positions
have deteriorated even further during 2007.
Given that foreign inflows are financing muchof the credit expansion in these economies, increased market volatility points to heightened
concerns in relation to currency mismatches,sudden stops, and contagion. A potential exchange rate risk is present in a number of countries where loans denominated in foreign currencies make up a large share of total loans by
domestic banks. In the Baltic states, Hungary,
Kazakhstan, Romania, and Ukraine, this ratio
was 40 percent or more in 2006, and in thecase of Latvia, the share increased by morethan 15 percentage points since 2001 to nearly
80 percent in 2006.

Medium-term outlook
From GDP gains of 6.7 percent in 2007,
growth is projected to continue easing, falling
off to 6.1 percent in 2008 and to 5.7 percent
in 2009 (tables A3 and A4, figure A6). The
slowdown in 2008 is expected to be widespread across countries in the region, given
heightened risk aversion and volatility on international financial markets, which could

Figure A6 Growth in Europe and Central
Asia eases into 2009
Real GDP (annual percent change)
10

Forecast

Europe andCentral Asia

8
6
4
2
0
2
7.5

20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09

4

Central and Eastern Europe
Commonwealth of Independent States
Source: World Bank.

TurkeyE C O N O M I C

P R O S P E C T S

spill over to the region both directly and also
indirectly through a faltering of external
demand. Slower growth in the OECD countries, especially in Germany and the EuroArea, may dampen export growth for CEE
during the year. Difficulties among European
financial institutions would also have repercussions throughout Europe and Central Asia.
Domestic demand growth is anticipated tomoderate from recent highs, with the contribution to growth from both private consumption and investment projected to fall by
0.2 percentage points during 2008. The contribution of trade to growth—reflecting weakened external demand, and despite a degreeof softening import growth—is expected to
become still more negative in 2008.
Three notable exceptions to the projected
growth slowdown in 2008 are Albania, Hungary, and Turkey. In Albania, continued strong
domestic demand is expected to help firm up
growth. A key component of that demand isincreased public investment to mitigate thepower shortages that have created a bottleneck to growth. In Hungary and Turkey, improvements in domestic conditions should
permit additional easing of monetary policy,
bolstering demand sufficiently to bring abouta pickup in GDP growth.
By 2009, external demand is projected tostrengthen in concert with GDP growth in theOECD, leading to an improvement in contributions to growth from net exports, equivalent to 1.9 percentage points in 2009 (following a drop by 2.3 percentage points in 2008).
A further falloff in domestic demand growth;particularly the investment in the CIS countries, is projected to offset this improvement
somewhat, resulting in modest deceleration inregional growth to 5.7 percent in 2009. In
large measure, the projected slowdown in the
CIS is driven by the near completion of majorhydrocarbon investment projects that led tothe expansion of production and export
capacity in recent years.
Despite a rise in external demand and continued moderation in domestic demand, theregional current account is anticipated to173

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8

Table A4 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)
Forecast

174

1991–2000a

2004

2005

2006

2007

2008

2009

Albania
GDP at market pricesb
Current account balance/GDP (%)

1.4
⫺5.6

5.9
⫺4.8

5.5
⫺7.8

5.0
⫺7.2

5.5
⫺8.4

6.0
⫺8.4

6.2
⫺8.0

Armenia
GDP at market pricesb
Current account balance/GDP (%)

⫺3.8
⫺12.0

10.5
⫺4.5

13.9
⫺4.4

13.3
⫺4.7

11.0
⫺5.7

8.5
⫺5.6

7.5
⫺4.8

Azerbaijan
GDP at market pricesb
Current account balance/GDP (%)

⫺5.2
⫺15.8

10.2
⫺29.8

26.4
1.3

34.5
18.2

33.5
24.2

19.4
31.6

14.9
33.3

BelarusGDP at market pricesb
Current account balance/GDP (%)

⫺1.2
—

11.4
⫺5.2

9.4
1.8

9.9
⫺4.1

7.8
⫺8.0

6.4
⫺8.4

5.7
⫺8.3

Bulgaria
GDP at market pricesb
Current account balance/GDP (%)

⫺1.7
⫺2.3

5.7
⫺6.9

5.5
⫺12.2

6.3
⫺15.8

6.1
⫺19.2

6.0
⫺18.1

5.2
⫺17.3

Croatia
GDP at market pricesb
Current account balance/GDP (%)

⫺1.5
1.1

3.8
⫺5.2

4.3
⫺6.7

4.8
⫺7.7

5.8
⫺8.4

4.9
⫺8.0

4.5
⫺7.9

Georgia
GDP at market pricesb
Current account balance/GDP (%)

⫺9.3
—

5.9
⫺8.3

9.6
⫺9.8

9.8
⫺13.8

10.0
⫺15.0

9.0
⫺14.1

8.0
⫺12.0

Hungary
GDP at market pricesb
Current account balance/GDP (%)

0.8
⫺5.4

5.2
⫺8.5

6.0
⫺6.8

5.4
⫺5.7

2.2
⫺4.2

3.1
⫺5.0

3.8
⫺5.9

Kazakhstan
GDP at market pricesb
Current account balance/GDP (%)

⫺3.6
⫺1.8

9.6
0.8

9.7
⫺1.9

10.7
⫺2.2

8.5
⫺2.0

7.1
⫺4.6

6.4
⫺7.7

Kyrgyz Republic
GDP at market pricesb
Current account balance/GDP (%)

⫺4.0
⫺10.6

7.0
⫺4.6

⫺0.6
⫺9.3

2.7
⫺6.6

7.5
⫺17.9

7.0
⫺15.1

6.7
⫺12.2

Lithuania
GDP at market pricesb
Current account balance/GDP (%)

⫺3.3
⫺5.9

7.0
⫺7.7

7.5
⫺7.1

7.4
⫺10.8

7.8
⫺13.3

6.8
⫺13.6

6.0
⫺12.3

LatviaGDP at market pricesb
Current account balance/GDP (%)

⫺2.8
⫺1.6

8.6
⫺12.9

10.2
⫺12.7

11.9
⫺21.4

9.7
⫺22.7

7.4
⫺19.5

6.4
⫺15.3

Moldova
GDP at market pricesb
Current account balance/GDP (%)

⫺9.8
—

7.4
⫺2.2

7.5
⫺9.0

4.0
⫺9.3

6.0
⫺8.0

6.8
⫺14.9

7.0
⫺12.7

Macedonia, FYR
GDP at market pricesb
Current account balance/GDP (%)

⫺0.9
—

4.1
⫺8.0

4.1
⫺1.5

3.0
⫺0.4

5.0
⫺2.9

5.0
⫺5.0

5.5
⫺6.1

PolandGDP at market pricesb
Current account balance/GDP (%)

3.8
⫺3.5

5.3
⫺4.2

3.6
⫺1.9

6.1
⫺2.4

6.5
⫺4.3

5.7
⫺5.3

5.1
⫺5.7

Romania
GDP at market pricesb
Current account balance/GDP (%)

⫺1.7
⫺4.8

8.4
⫺8.5

4.1
⫺8.7

7.7
⫺10.5

6.1
⫺13.9

5.9
⫺15.3

5.5
⫺14.9

Russian Federation
GDP at market pricesb
Current account balance/GDP (%)

⫺3.9
—

7.1
10.0

6.4
11.1

6.7
9.7

7.5
5.7

6.5
4.3

6.0
2.2

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Table A4 (continued )(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

Slovak Republic
GDP at market pricesb
Current account balance/GDP (%)

0.3
—

5.2
⫺3.1

6.6
⫺8.4

8.8
⫺8.0

8.7
⫺4.3

7.1
⫺3.5

6.8
⫺3.1

TurkeyGDP at market pricesb
Current account balance/GDP (%)

3.6
⫺1.1

8.9
⫺5.2

7.4
⫺6.2

6.1
⫺8.1

5.1
⫺7.5

5.4
⫺7.7

5.7
⫺7.6

UkraineGDP at market pricesb
Current account balance/GDP (%)

⫺8.0
—

12.1
10.7

2.7
2.9

7.1
⫺1.5

6.3
⫺3.6

5.5
⫺6.5

5.0
⫺7.4

Uzbekistan
GDP at market pricesb
Current account balance/GDP (%)

⫺0.2
—

7.7
10.1

7.0
14.9

7.3
18.7

7.7
14.3

5.0
11.9

5.0
8.7

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Bosnia and Herzegovina, Serbia and Montenegro, Tajikistan, and Turkmenistan are not forecast
because of data limitations.
— = not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

continue to deteriorate through 2009, largely
because of declines in the terms of trade forhydrocarbon-exporting countries as oil prices
begin to soften. Inflationary pressures arelikely to ease over the medium term, withmedian GDP inflation coming down from
6.9 percent in 2007 to 6.4 percent in 2008 and5.5 percent in 2009. This decline is tied togenerally tighter credit conditions in both international and domestic markets. However,this somewhat sanguine picture masks an expected rise in inflation pressures in Belarus
and Georgia and slower progress toward stabilization of consumer price inflation among
oil exporters (as well as in Moldova andUkraine) because of strong demand pressures.
Among the new EU member countries, only
the Slovak Republic is anticipated to join theEuro Area in the coming years following
Slovenia’s entry in 2007.

Risks
Downside risks to regional growth are tied topotential overheating and a sudden unwindingof large external imbalances. The presence oflarge foreign banks in several countries in theregion, and the fact that many of these countries

share common creditors and investors, appears
to expose them to higher contagion risk in theevent of a nondiscriminatory pullout, similar towhat occurred in East Asia in 1997. In particular, large current account deficits (equivalent toabout 12 percent or more as a share of GDP)in Bulgaria, Georgia, Latvia, Lithuania, andRomania remain a concern.
Risks to growth are also associated withthe slowing of reform momentum in the new
EU member states and other countries in CEE.
In the CIS, slow progress with economic reforms and only gradual diversification from
commodity market dependence remain a concern, pointing to slower medium-term growthprospects. And a more protracted workout of
the housing situation in the United States andassociated financial distortions there and inother OECD markets present a substantial
downside risk.
Higher than anticipated oil prices also present risk for energy-importing countries in theform of higher import bills and increased inflationary pressures. With respect to the latter,
while countries with free-floating currency
regimes in CEE have direct policy levers tomanage inflationary pressures, those with175

2 0 0 8

Latin America andthe Caribbean
Recent developments
Marking the fourth consecutive year of sustained advances, GDP growth in Latin America and the Caribbean registered 5.1 percent in
2007, following a 5.6 percent gain in 2006.
The average yearly rate of output growth since2004 has been 5.3 percent, twice the 2.7 percent registered during the previous 15 years.
Recent growth has been more broadly based,with positive results shared by all subregions:the Caribbean, Central America, and SouthAmerica. A favorable external environment
together with improved domestic macroeconomic conditions helped strengthen
fundamentals and enhanced growth and stability (figure A7).
During 2006, the region recorded large current account surpluses, which have diminished
to a degree in 2007. Growing foreign exchange
revenues made up of export earnings linked tohigh commodity prices for food, metals, andenergy and continued large FDI; portfolio investment; and remittance flows have all contributed to the maintenance of high levels of
foreign reserves and helped support equity

176

Figure A7 Growth outturns were mixed
across Latin America in 2007
GDP growth (percent)
10

2007

8

2006
2005
6

4

o
ic
ex
M

az
Br

ge

nt

in

il

a

2

Ar

currencies pegged to the euro, such as theBaltic states and Bulgaria, have more limited
options. Higher than projected grain prices
could also lead to increased inflationary pressures, particularly among the low-income
countries, where food expenditures represent
a large share of consumption.
Despite gains in a number of Millennium
Development Goal indicators, some countries
in the region, particularly in Central Asia andthe Caucasus, have shown regressing trends
and slower progress toward achieving thegoals. The Caucasus have met the goals
related to carbon emissions and primary education, but concerns remain about the nonincome poverty indicators, such as malnutrition,access to tertiary education, HIV/AIDS, theenvironment, and soil and water management.

Lth atin
e
C Am
ar e
ib ri
be ca
a
C n
ar
ib
be
C
an
en
tra
lA
m
er
ic
a

P R O S P E C T SdE C O N O M I Can

G L O B A L

Sources: World Bank and national agencies.

markets. This positive external situation has
underpinned government finances by boosting
revenues that, despite a significant increase inpublic spending, limited the region’s primary
deficit to 0.3 percent of GDP in 2007, from
0.5 percent the previous year.
Monetary authorities, helped by stronger
fiscal positions and supportive exchange rates,
have been able to achieve inflation targets inmost countries (figure A8). Excluding Argentina
and the República Bolivariana de Venezuela,
average consumer price inflation was stable in2007 at 5.7 percent after declining by almost
1.0 percentage point in 2006. Only one country in the region has experienced inflation
above 10 percent in each of the last five years.
The recent turmoil in financial markets thatoriginated in the U.S. subprime mortgage market
appears to have had limited effects on the region
to date. Spreads have increased, though capital
flows have continued (figure A9). Indeed, growthin 2007 continued to be strong, and although any
sharp slowdown in the United States would eventually affect Latin American and the Caribbean
prospects, the region seems better prepared forexogenous shocks than it was during earlier
periods of crisis or financial dislocation.

R E G I O N A L

Figure A8 Latin American inflation
eases over the last 15 years
Median consumer price inflation in the seven largest Latin
American countries (percent change)
45
40
Median35
30

Average 1990–98

25
20
15
Average 2003–07

10
5

06
20

04

02

20

00

20

20

98
19

96

94

19

19

19

90
19

92

Average 1999–2002

0

Source: World Bank.

Figure A9 Latin America and the
Caribbean sovereign bond spreads
decline, then increase again
Basis points

Latin America andthe Caribbean

Brazil

1,
20
07
ar
.2
3,
20
07
M
ay
2,
20
Ju
07
n.
11
,2
00
Ju
7
l.
21
,2
00
Au
7
g.
30
,2
00
O
7
ct
.9
,2
00
N
ov
7
.1
8,
20
07

MexicoM.2
Jan

Emerging markets bond index global

Fe
b.
1

,2

00

7

325
300
275
250
225
200
175
150
125
100
75

Source: JPMorgan-Chase.

This broadly positive picture for the regionis qualified by substantial variations fromcountry to country. Between 2005 and 2007,
Brazil, which accounts for about one-third of
the region’s GDP, stepped up growth by almost 1 percentage point a year. Significant
monetary policy easing has been a key factor
behind increasing private demand, which together with higher public spending, hasboosted GDP growth. The policy interest rate
was reduced further in the first half of 2007 in

E C O N O M I C

P R O S P E C T S

line with expectations of additional easing in
inflation. Following the credit crisis in the
United States, the exchange rate of the Brazilian real had depreciated from R/$1.86 in midJuly to R/$2.06 in mid-August. The currency
had fully recovered and appreciated further
against the U.S. dollar to R/$1.78 by the end of
November, a move of 9.5 percent. Ample international reserves, a continuing current accountsurplus, and other strong macroeconomic
fundamentals suggest increased resilience. In
2007, Chile resumed rapid 5.7 percent growthat the same level as in 2005 despite a dip to
4 percent in 2006 caused by the delayed
effects of monetary tightening, countercyclicalfiscal policy, mining stoppages, and energy
constraints.
In Mexico, despite uncertainties surrounding the presidential election during the firsthalf of 2007, investment demand rose 10.3
percent. High oil prices supported export revenues, which offset increased spending on imports and helped contain the trade deficit to$13 billion, up from $6 billion in 2006. Despite the positive performance of investment,
private consumption, and manufacturing
output in the first half of 2007, concerns
regarding a weakening U.S. economy and its
repercussions for Mexico have mounted because of the trade and financial links, including migrants’ remittance flows, between Mexico and its northern neighbor. Mexico’s GDP is
anticipated to grow by 2.9 percent for the year.
Growth in Colombia and Peru has been
above the regional average thanks to sustained
strength in investment, which was up 18 percent in Colombia and 19 percent in Peru during 2006. Investment has been led by the private sector, with foreign companies playing animportant role. The improved security situation in Colombia and several massive projects
in the mining and energy sectors in Peru haveattracted investors, and FDI has risen considerably. These factors will continue to support
the pace of economic activity in 2007 at rates
of 6.5 for Colombia and 7.5 percent for Peru.
Central American countries have also performed exceptionally well in recent years.

177

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8Average growth for the aggregate of Costa
Rica, El Salvador, Guatemala, Honduras,
Nicaragua, and Panama has amounted to 5.5
percent over 2004–07, the strongest since theearly 1990s. Strong remittance inflows andthe recent implementation of the Dominican
Republic–Central American Free-Trade
Agreement (a bilateral free trade agreement
between the United States, Central America,
and the Dominican Republic) have underpinned increasing consumer and business confidence and domestic spending. By increasing
exports of manufactured goods to the UnitedStates, this agreement is helping Central
America reduce export market losses in thegarment sector resulting from the expirationof the Multi-Fiber Agreement and increased
competition from China.
Growth in Argentina has been easing
gradually from extremely high rates. GDP
increased 7.8 percent in 2007, down from
8.5 percent in 2006. The prolonged expansion
in Argentina can be explained in part by an undervalued real exchange rate, an expansionary
fiscal policy, and an accommodative monetarystance. Contrasted with the experience ofBrazil, where the currency appreciated andfiscal deficits contracted, in Argentina, intervention in the foreign exchange market has
prevented nominal appreciation, while sterilization operations have contained expansionof the monetary base. Argentina has also put
a series of supplementary measures in place
to suppress inflation (actual levels of inflation remain unclear given the lack of transparency in official consumer price inflation
calculations): the government raised export
taxes on food and fuel and imposed directcontrols on basic consumer prices, formal
wages, and the tariffs on most energy products and public services. Despite massive revenue growth, the government’s fiscal policy
has been procyclical (increasingly so in thefirst half of 2007). Were external conditions
to deteriorate, Argentina would have little
margin to devalue the real exchange rate further or to contract its fiscal surplus in ameaningful way.

178

In the República Bolivariana de Venezuela,
massive oil earnings have continued to financelarge and procyclical government spending.
These outlays supported growth of 8.3 percent in 2007, down 2 percentage points fromthe previous year. Apart from a clear acceleration in inflation, substantial export revenues
have masked the adverse effects of increased
state intervention on the economy. Significant
declines in oil prices or oil production could
lead to large liquidity problems in the future,especially in light of the increased spending,including spending on nationalized enterprises
and numerous social programs.
The outcomes of seven presidential elections held in the region during 2006 did not
result in major shifts in macroeconomic policy
for the region as a whole. However, policy inArgentina, Bolivia, the República Bolivariana
de Venezuela, and more recently Ecuador andNicaragua is now more oriented toward an increasing role for the state in the economy.

Medium-term outlook
Regional GDP is expected to slow further inthe years ahead, coming in at 4.5 percent in2008 and at 4.3 percent in 2009 (figure A10).
This measured slowdown is supported by continued strong growth in Brazil and a reboundfrom a weak 2007 for Mexico. Growth inother countries—notably Argentina and the
República Bolivariana de Venezuela—is likely
to slow. Excluding those two countries, regional GDP growth is expected to moderate
only marginally from 4.4 percent in 2007 to
4.2 percent in 2008—because of weakness in
the United States—before picking up to 4.3 percent in 2009.
Should these outturns be realized, theywould represent the longest positive growthspell for Latin America since the 1960s. Despite a gradual worsening of current accountbalances due to stabilizing commodity prices
and slower growth in global demand, thisstronger growth is likely to persist, supported
by continued expansion in consumption
and investment and buoyed by an environment of low inflation (excluding Argentina

R E G I O N A L

Forecast

10
Latin America andthe Caribbean

8
6
4
2
0

09

08

20

07

06

20

20

05

04

20

20

03

20

02

20

01

20

20

20

00

2

North and Central America

P R O S P E C T S

and the República Bolivariana de Venezuela);
improved fiscal policy (particularly in Mexico);and continued strong capital inflows (especially to Brazil).
Among various groupings of Latin American economies, a number of themes emerges.
Growth among agricultural exporters is expected to slow from 7.1 percent in 2007 to
4.6 by 2009. However, if Argentina—where
growth is expected to slow to more sustainable rates—is excluded from the group, thedeceleration is less marked, from 5.0 percent
in 2007 to 4.5 in 2009. Growth among metals
exporters is projected to remain buoyant, easing from 5.1 percent in 2007 to 4.7 percent by
2009, in large part because of expansionary
policies in Brazil and Chile. Growth among
energy exporters is expected to slow gradually,
from 5.2 percent in 2007 to 4.4 percent in2008, easing further to 4.2 percent in 2009as oil prices begin to soften. A reduced pace

Figure A10 Growth in Latin America andthe Caribbean eases into 2009
Real GDP (annual percent change)

E C O N O M I CSouth America

Caribbean
Source: World Bank.

Table A5 Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
Forecast

GDP at market pricesb
GDP per capitac
Purchasing Power Parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
LAC excluding Argentina
Central America
CaribbeanBrazilMexicoArgentina

1991–2000a

2004

2005

2006

2007

2008

2009

3.4
1.7
4.3
3.4
1.5
4.7
8.1
10.7
⫺0.3
⫺2.8
10.9
—

5.9
4.6
5.6
4.9
1.7
9.7
12.5
15.2
⫺0.4
1.0
7.2
0.0

4.6
3.3
4.5
5.2
3.2
9.7
8.6
12.2
⫺0.7
1.4
6.6
⫺0.7

5.6
4.3
5.4
6.2
3.3
12.2
7.8
13.6
⫺1.4
1.6
10.0
⫺0.5

5.1
3.8
5.1
5.7
4.2
10.2
4.7
9.4
⫺1.3
0.5
8.7
⫺0.3

4.5
3.2
4.6
4.9
3.0
9.5
5.5
9.5
⫺1.2
0.1
5.1
⫺0.9

4.3
3.0
4.4
4.6
2.8
8.2
5.8
8.4
⫺0.9
⫺0.2
4.2
⫺1.1

3.2
3.6
3.6
2.7
3.5
4.5

5.5
4.1
2.6
4.9
4.1
9.0

3.9
3.0
6.7
2.9
2.8
9.2

5.1
4.9
8.8
3.7
4.8
8.5

4.7
3.2
5.5
4.8
2.9
7.8

4.3
3.4
5.2
4.5
3.2
5.7

4.3
3.8
5.0
4.5
3.6
4.7

Source: World Bank.
Note: — = not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.

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2 0 0 8

Table A6 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)
Forecast
1991–2000a

180

2004

2005

2006

2007

2008

2009

Argentina
GDP at market pricesb
Current account balance/GDP (%)

4.5
⫺2.9

9.0
1.9

9.2
2.8

8.5
3.4

7.8
2.2

5.7
2.0

4.7
1.3

Antigua and Barbuda
GDP at market pricesb
Current account balance/GDP (%)

3.3
⫺6.0

4.3
⫺11.9

5.3
⫺8.7

11.5
⫺16.0

5.0
⫺16.6

4.4
⫺17.6

4.2
⫺16.3

BelizeGDP at market pricesb
Current account balance/GDP (%)

5.9
⫺7.3

4.6
⫺14.4

3.1
⫺14.6

5.6
⫺1.9

3.5
⫺4.4

3.3
⫺6.5

3.4
⫺5.7

Bolivia
GDP at market pricesb
Current account balance/GDP (%)

3.8
⫺6.1

3.9
3.9

4.1
5.4

4.6
11.8

4.1
9.2

4.4
8.4

4.2
7.9

Brazil
GDP at market pricesb
Current account balance/GDP (%)

2.7
⫺2.1

4.9
1.9

2.9
1.7

3.7
1.4

4.8
0.7

4.5
⫺0.1

4.5
⫺0.2

Chile
GDP at market pricesb
Current account balance/GDP (%)

6.4
⫺2.7

6.2
2.2

5.7
1.1

4.0
4.0

5.7
4.0

5.1
1.6

5.0
0.8

Colombia
GDP at market pricesb
Current account balance/GDP (%)

2.5
⫺1.9

4.8
⫺0.9

4.7
⫺1.6

6.8
⫺1.5

6.5
⫺1.6

5.3
⫺1.1

4.8
⫺1.0

Costa Rica
GDP at market pricesb
Current account balance/GDP (%)

5.2
⫺3.6

4.1
⫺4.3

5.9
⫺4.9

8.2
⫺4.9

6.1
⫺4.8

5.0
⫺5.4

4.9
⫺5.0

Dominica
GDP at market pricesb
Current account balance/GDP (%)

1.8
⫺16.6

3.2
⫺19.5

3.4
⫺28.8

4.1
⫺18.4

3.2
⫺19.2

3.1
⫺20.6

3.0
⫺20.7

Dominican Republic
GDP at market pricesb
Current account balance/GDP (%)

6.0
⫺3.2

2.0
5.7

9.3
⫺2.0

10.7
⫺2.6

7.2
⫺2.9

5.4
⫺3.8

4.8
⫺4.2

EcuadorGDP at market pricesb
Current account balance/GDP (%)

1.8
⫺2.3

7.9
⫺1.7

4.7
0.8

4.1
3.5

2.4
1.6

2.5
2.9

2.7
2.3

El Salvador
GDP at market pricesb
Current account balance/GDP (%)

4.6
⫺2.0

1.8
⫺4.0

3.1
⫺5.4

4.2
⫺4.7

4.2
⫺5.2

3.8
⫺6.1

4.0
⫺5.7

GuatemalaGDP at market pricesb
Current account balance/GDP (%)

4.1
⫺4.6

2.7
⫺4.4

3.2
⫺4.4

4.6
⫺4.3

5.0
⫺4.1

4.6
⫺5.3

5.0
⫺5.0

GuyanaGDP at market pricesb
Current account balance/GDP (%)

4.9
⫺15.1

3.3
⫺2.5

⫺1.9
⫺12.0

4.7
⫺26.6

4.5
⫺21.2

3.7
⫺22.8

3.5
⫺16.4

Honduras
GDP at market pricesb
Current account balance/GDP (%)

3.3
⫺7.7

5.0
⫺5.7

4.1
⫺1.4

6.0
⫺1.9

6.0
⫺4.9

5.5
⫺5.0

4.7
⫺5.2

Haiti
GDP at market pricesb
Current account balance/GDP (%)

⫺1.3
⫺1.8

⫺2.2
⫺1.7

2.0
1.4

2.3
⫺0.3

3.5
⫺2.0

3.8
⫺3.8

4.0
⫺3.8

Jamaica
GDP at market pricesb
Current account balance/GDP (%)

1.9
⫺2.7

1.1
⫺5.7

1.8
⫺11.1

2.5
⫺10.7

1.1
⫺11.5

3.0
⫺13.7

3.1
⫺13.6

Mexico
GDP at market pricesb
Current account balance/GDP (%)

3.5
⫺3.7

4.1
⫺1.0

2.8
⫺0.6

4.8
⫺0.2

2.9
⫺1.0

3.2
⫺0.9

3.6
⫺1.0

R E G I O N A L

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Table A6 (continued )(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

Nicaragua
GDP at market pricesb
Current account balance/GDP (%)

3.4
⫺28.7

5.1
⫺14.6

4.4
⫺13.0

3.7
⫺13.9

4.2
⫺11.4

4.7
⫺12.1

4.5
⫺10.2

PanamaGDP at market pricesb
Current account balance/GDP (%)

5.1
⫺4.8

7.6
⫺7.5

6.4
⫺5.1

7.5
⫺0.2

8.3
⫺5.6

7.2
⫺6.8

7.1
⫺7.5

Peru
GDP at market pricesb
Current account balance/GDP (%)

4.0
⫺5.5

5.2
0.0

6.7
1.5

7.6
2.9

7.5
1.8

6.4
0.8

6.1
0.4

Paraguay
GDP at market pricesb
Current account balance/GDP (%)

1.8
⫺2.2

4.1
2.0

2.7
0.0

4.0
⫺2.6

4.0
⫺2.6

3.9
⫺3.8

3.8
⫺3.8

St. Lucia
GDP at market pricesb
Current account balance/GDP (%)

3.1
⫺11.4

3.9
⫺16.6

5.8
⫺22.5

5.4
⫺18.9

5.2
⫺16.8

5.1
⫺16.9

5.0
⫺15.0

St. Vincent and the Grenadines
GDP at market pricesb
Current account balance/GDP (%)

2.1
⫺19.8

5.4
⫺29.0

2.2
⫺29.1

4.5
⫺24.2

5.5
⫺19.8

6.3
⫺17.7

5.9
⫺13.9

Uruguay
GDP at market pricesb
Current account balance/GDP (%)

3.0
⫺1.5

11.8
0.0

6.8
0.0

7.0
⫺2.7

5.5
⫺2.7

4.2
⫺3.3

3.8
⫺2.9

Venezuela, R.B. de
GDP at market pricesb
Current account balance/GDP (%)

2.1
2.6

17.9
14.1

10.3
18.5

10.3
14.4

8.3
7.4

5.8
6.9

4.2
4.7

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Barbados, Cuba, Grenada, and Suriname are not forecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

of economic activity in Argentina and the
República Bolivariana de Venezuela could
speed up the regional slowdown for energy
exporters, but a pickup in growth in Mexico
would offset that to some extent.
Despite the gradual reduction in oil prices,
growth among small energy importers is
likely to moderate from 6 percent in 2007 to
5.1 percent by 2009. This outturn reflects the
combined effects of weaker import demand in
the United States, reduced remittance inflows(linked to a slowdown of construction activity in the United States), and increasing competition from China following the phaseoutof textile and apparel quotas under the MultiFiber Agreement. At the same time, GDPshould find support through continued strong
FDI inflows following implementation of the

Dominican Republic–Central American FreeTrade Agreement.
Growth in Brazil is expected to moderatefrom 4.8 percent in 2007 to 4.5 percent inboth 2008 and 2009. The positive fundamentals observed in 2006 and 2007—low interest
rates, a strong currency, and falling unemployment—should continue to underpin a robust pace of domestic activity. At the sametime, a further near-term acceleration in
growth is unlikely. The Central Bank hastaken a pause in interest rate reductions,while quarter-on-quarter GDP figures show aslight moderation from the first quarter to thesecond quarter of 2007.
Argentina’s growth is expected to decelerate sharply from 7.8 percent in 2007 to
5.7 percent in 2008 and to 4.7 percent in

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2 0 0 82009. Despite rising fiscal revenues, persistentand accelerating inflation and increased public
intervention in private sector activity appear
likely to discourage growth prospects. Recent
production and goods trade numbers underscore a weakening in the pace of activity,
caused in large part by the imposition ofenergy rationing. Industrial output gained
2.3 percent in July (year-on-year), the weakest
showing in more than five years, while steel
production contracted by 26 percent.
Growth in Mexico is likely to reboundfrom 2.9 percent in 2007 to 3.2 percent in2008 and to 3.6 percent in 2009. Although remittances will contribute less to domestic activity as growth in the United States slows, increased domestic credit to consumers andbusinesses should support spending. Recent
fiscal reforms also point toward better growthprospects, as improved revenue collection
should allow the government to boost needed
infrastructure outlays. With a rebound of U.S.
activity in the second half of 2008 and 2009,
Mexican exports will make a stronger contribution to growth.
Finally, activity in the República Bolivariana de Venezuela is anticipated to slow
fairly rapidly, with GDP growth declining
from 8.3 percent in 2007 to 5.8 percent in2008 and 4.2 percent in 2009. Activity in late2006 and early 2007 was supported by largescale run-ups in fiscal outlays associated withthe presidential elections, but falling oil revenues over the forecast period make continued
expansion in government spending unlikely.
Private activity is also expected to slow substantially. Higher inflation will likely result in
declines in real wages, a sharp falloff in FDI
will reduce the contribution of investment togrowth, and an uncertain regulatory environment (notably with regard to property andcontract rights) is anticipated to hamper private sector startups and job creation.

Risks
A stabilization of growth in Latin America
and the Caribbean at high rates in a historicalcontext and broad improvements in the region’s

182

fundamentals have been supported by an exceptionally favorable external environment.
Should that environment deteriorate substantially, growth is likely to slow. Moreover, despite
improved fundamentals, some countries may bevulnerable to a sharp reversal in conditions.
Overall, the region’s resilience to shocks
has improved, and better economic policies
have supported this improvement. In particular, the structure of external debt—in terms of
maturity and foreign currency exposure—hasimproved; the accumulation of reserves has, inmost cases, surpassed external borrowing requirements; the region’s fiscal and current accounts have been in surplus during the current
growth cycle; and independent central banks
are imposing countercyclical monetary policies, especially in those countries where inflation targeting is the adopted policy regime.
Notwithstanding these advances, some risks
linked to a worsening of the external environment may remain a concern for the region.
In a potentially difficult phase of rising risk
aversion in global financial markets, the region
has, up to now, demonstrated that it has developed a stronger “immune system.” Asshown in figure A11, the responsiveness of the
spreads on sovereign bonds (noninvestment
grade) for Latin American and the Caribbean
countries with respect to changes in risk aversion, though still elevated, is much lower whencontrasting the July 2006 to end-2007 periodwith the August 1997 to August 1999 period(the period of the financial crises in East Asia
and Russia). Contagion effects to Latin America
and the Caribbean through the financial channel seem less likely than during past challenging
phases. However, there are still some countryspecific issues: Argentina (because of the
INDEC incident—the national statistics
agency producing questionable infection data)
and Ecuador (because of the outright discussion of default) have undermined the perception of their willingness to pay, regardless of
their reserves cushion, and therefore were hit
harder and earlier than the other countries.
The República Bolivariana de Venezuela wasalso affected because of political concerns.

R E G I O N A L

Figure A11 Financial test: Credit

5.3

Real effective exchange rate indexes (January 2000 ⫽ 100)

EMBI Latin index(noninvestment grade)6.3

iny ⫽ 0.9717x ⫺ 0.6581

5.2

6.2

August 1997–August 1999
(left axis)

6.1
6.0
5.9

6.0

6.1

6.2

6.3

Mexico

170
150

110

6.4

6.5

6.6

70
50

4.9

5.9

190

90

July 2006-current(right axis)y ⫽ 0.6955x ⫹ 1.5904

4.8
5.8

210

130

5.1
5.0

P R O S P E C T S

Figure A12 Exchange rate policy
dilemmas?

Lower elasticity of LAC EMBI with respect to risk
aversion (HY bonds)…
EMBI Latin index(noninvestment grade)E C O N O M I C

5.8
6.7

Peru
Argentina

BrazilColombia

30
1993 1995 1997 1999 2001 2003 2005 2007
Source: International Monetary Fund.

High yield index
Source: Bloomberg weekly data; Credit Suisse high-yieldindex; JP Morgan EMBI.
Note: EMBI ⫽ Emerging markets bond index.

Figure A13 Export product (value)
concentration is increasing
Export products concentration, Herfindahl index
0.35
0.30
0.25
0.20
2005
0.15

1996

0.10
0.05

ge
nt
in
a
Br
az
il
C
C hileolom
Ec bia
ua
d
M or
ex
ic
o
Pe
ru
U
ru
gu
Au ay
st
ra
C lia
an
La Ne
ad
tin w
a
Z
th Am elae er nC ic d
ar a
ib an
be d
an

0

Ar

The region could still suffer adverse consequences from a worsening and spreading of
the U.S. subprime crisis through real channels.
Lower remittances may hurt some of thepoorest among Latin America and the
Caribbean’s recipient countries, while lower
external demand may be exacerbated byweaker competitiveness resulting from appreciating currencies, as shown in figure A12.
Finally, terms-of-trade deterioration may
also exert negative pressure on aggregate
output. Figures A13 and A14 summarize theregion’s vulnerability to commodity priceshocks. In recent years, export concentration
for the region, as captured by the Herfindahl
index of exported goods, did not decline. Indeed, it increased in many countries, possibly
because of an increase in specific commodity
prices (as the index is measured in nominal
terms). Increases in this index signal a potential
worsening of the risk associated with volatilityof global commodity prices. Counterbalancing
this tendency is the geographic diversificationof Latin American and the Caribbean’s export
markets. The concentration of Latin exports to
the U.S. market is quite strong, especially for

Sources: World Integrated Trade System.

countries such as Mexico, but the overall trend
is toward diversification.
The emergence of China and India played
a role in explaining the trade patterns displayed in figures A13 and A14, and on a
positive note, may have permanently and favorably changed the terms of trade faced by
the region. In this rosier situation, the region
may be drawn into intensive activities in areas

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2 0 0 8Figure A14 Export market (value)
concentration is falling
Export market concentration, Herfindahl index
0.7
0.6

2005
1996

0.5
0.4
0.3
0.2
0.1

C
hi
le
om
b
Ec ia
ua
do
M r
ex
ic
o
Pe
r
U
ru u
gu
Au ay
st
ra
C lia
an
N
La ew adtin
Ze ath Am lane er
C ic d
ar a
ib an
be d
an
C

ol

il
az

nt
ge
Ar

Br

in

a

0

Sources: World Integrated Trade System.

of comparative advantage, such as natural
resources and skills and technology, but additional progress on some structural factors isneeded to take full advantage of these opportunities. In particular, the region has to improve its investment climate and the skill composition of its labor force.
Compared with other regions, Latin
American and Caribbean fundamentals may
appear to be unimpressive, and the region does
not seem to be catching up in a significant way.
Even for the most recent period, aggregate
GDP growth, gross fixed capital formation (asa share of GDP), and TFP growth remain well
below averages for other developing regions.
The Latin America and the Caribbean region
does not appear, at least not yet, to have been
capitalizing on the favorable external environment to raise its growth path.

and figure A15).1 Continued growth in hydrocarbon receipts among the region’s developing (and high-income) oil exporters was a
key factor supporting growth, as world oil
prices breached records at close to $100 abarrel toward the end of the year. Notwithstanding the severe drought that afflicted
countries in the Maghreb, notably Morocco,
a revival in European demand helped underpin exports for the resource-poor, laborabundant countries in the region, especially
the Arab Republic of Egypt, where a depreciation of the pound against the euro also assisted, and Jordan.2 Moreover, record inflowsof FDI, ample liquidity, and strong domestic
demand all bolstered growth across the diverse countries of the region.
Oil exporters registered growth of 4.5 percent for the year, up from 4.0 percent in 2006,
as GDP in Algeria and the Islamic Republic of
Iran moved higher. The group of diversified
exporters witnessed an easing of growth from
6.2 percent in 2006 to 5.4 percent, largely as
output gains in Morocco plummeted from
8 percent to 2 percent. However, GDP in allother countries picked up or repeated its
strong performance of 2006.
Oil-related revenues for the year increased
9 percent for developing exporters in the
Figure A15 Growth in Middle East andNorth Africa picks up
Real GDP (percent change)

Forecast

87Middle East and North Africa
6
5
4
3
2

Middle East and North Africa

1

Recent developments

0

GDP for the developing countries of the Middle East and North Africa region grew nearly
5 percent in 2007, matching the decade-highpace achieved the preceding year (table A71842000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Oil exporters
Source: World Bank.

Diversified exporters

R E G I O N A L

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Table A7 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

GDP at market pricesb
GDP per capitac
Purchasing power parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

3.8
1.6
4.7
3.8
4.3
3.3
4.4
1.6
0.7
⫺0.5
7.4
⫺2.8

4.8
3.0
4.8
6.3
2.7
8.1
8.6
15.2
⫺1.9
7.4
9.1
⫺2.7

4.3
2.5
4.3
5.0
5.9
8.2
9.1
12.5
⫺1.2
9.6
11.7
3.4

5.0
3.1
5.0
5.2
5.6
11.6
9.5
13.5
⫺1.6
9.6
8.7
2.2

4.9
3.1
4.9
4.9
7.0
13.9
4.3
10.2
⫺2.3
8.2
4.4
⫺0.9

5.4
3.6
5.4
4.9
7.4
11.7
3.8
7.2
⫺1.5
9.5
6.1
⫺1.8

5.3
3.5
5.1
5.2
4.7
11.1
5.2
8.0
⫺1.5
6.2
4.3
⫺1.8

Memo items: GDP
MENA Geographic regionf
Resource poor-labor abundantg
Resource rich-labor abundanthResource rich-labor importingi
Egypt, Arab Rep. of
Iran, Islamic Rep. of
Algeria

3.4
4.2
3.3
3.0
4.6
3.7
1.7

5.0
4.8
4.9
5.2
4.1
5.1
5.2

5.2
3.8
4.6
6.8
4.5
4.3
5.1

4.8
6.2
3.8
4.7
6.8
4.6
1.8

4.6
5.4
4.4
4.2
7.1
5.0
3.4

5.1
6.3
4.6
4.6
7.0
5.0
4.0

4.9
6.1
4.4
4.5
6.8
4.7
3.8

Source: World Bank.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.
f. Geographic region includes high-income countries: Bahrain, Kuwait and Saudi Arabia.
g Egypt, Jordan, Lebanon, Morocco and Tunisia.
h. Algeria, Iran, Syria and Yemen.
i. Bahrain, Kuwait, Oman and Saudi Arabia.

region, rising to $160 billion. Among highincome oil exporters, oil-related revenues rose
13 percent to $382 billion, sufficient to fundongoing infrastructure and social programs
while also adding to massive reserve levels.3
Among developing country oil exporters,
which are dominated in size by Algeria andthe Islamic Republic of Iran, but also include
Oman, Syria, and the Republic of Yemen, theupturn in oil prices had varying effects (figure
A16). For example, in Algeria, hydrocarbon
receipts increased moderately to $54 billion,
widening Algeria’s current account surplus
slightly to $29 billion, or 23 percent of GDP.
In the Islamic Republic of Iran, hydrocarbon
revenues grew 12 percent to $65 billion, but
rapid growth in consumer and government
spending (as well as imports), together withvolume constraints on oil production andshipment, caused the current account surplus
to narrow from $34.5 billion in 2006 to $31
billion in 2007, or from 13.3 to 11.1 percent
of GDP.
The dollar’s swift decline—tied in part to
reductions in U.S. interest rates to shore up
the country’s interbank market—has had differing effects in the region. Oil exporters findtheir dollar-based receipts falling sharply in
relation to the euro, the currency in which amajor proportion of imports are denominated, and are consequently suffering a formof terms-of-trade loss. In contrast, diversified
exporters may find their competitivenessenhanced in the EU market, with local currencies depreciating moderately against the
euro.

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2 0 0 8Figure A16 Hydrocarbon exports continue
to rise on higher prices, modest volume
gains
Oil and gas exports ($ billions)
175
150
125
100
75
50
25
0
2000

2001

2002

2003

2004

2005

2006

2007

Iran, Islamic Republic of

Algeria

Yemen, Republic of

Syrian Arab Republic

Oman

Source: United Nations Comtrade Database; World Bank.

A fall in hydrocarbon output has constrained growth in Algeria, with GDP
advancing just 1.8 percent in 2006 and 3.4
percent in 2007. Oil and gas output growthdeclined 2.6 percent in 2006, but activity unrelated to hydrocarbons expanded by a robust
6 percent in 2007. A major government investment initiative got under way and is slated
to expend more than $22 billion over the coming years on housing, transport, and agriculture. This is boosting job growth in construction and related sectors and underpinningstrong household spending.
In the Islamic Republic of Iran, despite
major fiscal expansion in 2007—seen in the
widening of the budget deficit from 0.2 percent of GDP in 2006 to 2.4 percent—growthis likely to step up just 0.4 percentage points,
to 5 percent given the extent of leakage into
imports that occurred over the year. Exports
advanced a modest 1.3 percent against a
13.5 percent gain in imports.
For the diversified exporters, or resourcepoor, labor-abundant economies, 2007
marked a watershed for several countries in
the area of finance. The Fitch Agency raised

186

Egypt’s Issuer Default Rating to a positive outlook, with growth supported by double-digit
gains in investment. Morocco was awarded
investment grade status for its sovereign
bonds and quickly raised $675 million at alow 55 basis-point spread. GDP growth forthe group—excluding Morocco, where theeffects of drought bias figures for 2007—
increased from 5.8 percent in 2006 to 6.2 percent in 2007 on the strength of 7.1 percent
growth in Egypt, 6.0 percent in Jordan andTunisia, and recovery for Lebanon from thedownturn of 2006.
Growth in Egypt is broadly based, with
non-oil manufacturing and retail trade accounting for half of overall output gains. The
fastest-growing sectors include construction,
Suez Canal traffic, communications, andtourism. Exports have boomed by 23 percent
over 2007 to date, especially non-oil goods,
but at 29 percent growth, import demand iseven stronger and has kept the contribution of
trade to growth negative while widening thecountry’s deficit on trade. But for Egypt andmany of the diversified exporters, services receipts and burgeoning remittances outweighshortfalls on trade, allowing countries tomaintain current account surplus positions(figure A17).
In Egypt, Morocco, and Tunisia, reforms
are improving the business climate and increasing the competitiveness of the export sector. Egypt, Jordan, Morocco, and Tunisia
signed a free trade agreement (the Agadir
Agreement) to help promote intraregional
trade while addressing rules-of-origin
questions that often are part of broader
frameworks, such as the European Union–
Mediterranean agreements. FDI is becoming
an important driver for private investment
and growth in this group of countries, and asreforms proceed, the potential for attracting
additional FDI grows in step.
Indeed, large-scale FDI has been flowing
into the region for the last three years on theback of emerging and increasingly sustained
economic growth, diversification, and ongoing reforms. Flows to the geographic region

R E G I O N A L

Figure A17 Tourism and remittances
offset widening trade deficits for
Maghreb and Mashreq countries
Balance of nonfactor services and net transfers ($ billions)
30
25
20
15
10
5
0
2000

2001

2002

Net transfers

2003

2004

2005

2006

Balance of services

Source: International Monetary Fund balance of payments
statistics.

(including the high-income oil exporters) increased 38 percent, to $64 billion in 2006,
after doubling to $46 billion in 2005. Amongthe diversified exporters, the share of FDI in
GDP doubled from 3.0 percent, on average,over 2000–04 to 5.6 percent in 2006. FDI
flows are tending to focus on the services sector, including finance, telecommunications,and real estate, as well as hydrocarbons andrelated industries. Direct investment flows to
Egypt, in particular, are booming, reaching$11 billion during the country’s fiscal 2007,
up from $6 billion the previous year. Highincome countries in the region have emerged
as major investors in the Middle East andNorth Africa. The United Arab Emirates, forexample, invested $8 billion in Egypt in transport and tourism infrastructure during 2006.
Evidence suggests that FDI continues to flow
into the region’s developing and high-income
countries, setting a strong foundation for future growth and eventual alleviation of the region’s unemployment problem.
Median inflation in the region currently
stands at 5.0 percent, up from 3.2 percent in2006. Inflation has become an important issue
for several countries, including the Islamic

E C O N O M I C

P R O S P E C T S

Republic of Iran (18 percent year-on-year atlatest readings) and Egypt (10.9 percent),
where consumer price inflation has trended
higher because of domestic supply shocks, forexample, the partial elimination of subsidies
in September 2006. More recent accelerationin Algeria and other oil exporters has accompanied rapid growth in domestic demand.
Moreover, the ratcheting up of food and energy costs—the former notably in grains, witha 40 percent jump over 2007 related, in, partto increased global production dedicated tobiofuels—presents difficulties for a number of
economies, causing price pressures throughimports as well as strains on fiscal positions
from widespread subsidies covering fuels andcereals.

Medium-term outlook
Prospects for developing countries in the region appear relatively bright, with aggregate
GDP gains projected to top 5 percent in 2008
and 2009. Despite uncertainties looming in
the external environment for 2008 related to
the financial and real implications of the U.S.
subprime mortgage crisis, growth amongdeveloping oil exporters is anticipated to pickup, in large part tied to domestic developments, although oil prices will likely remain athigh levels ($84 per barrel), thereby helping tosustain revenues supporting large, projectrelated expenditures. GDP gains for the oil exporters are projected to reach 4.7 percent in2008 before receding to 4.6 percent in 2009 as
global oil prices begin to recede.
For the diversified exporters, growth
should pick up sharply in 2008, to 6.3 percent
from 5.4 percent in 2007. A rebound in Morocco to 5.5 percent growth from the depths ofdrought is a factor in this outlook. Investmentled growth appears to be increasingly wellestablished in Egypt, where activity is expected
to remain within a higher 7 percent range overthe forecast period. Sustained growth ofaround 6 percent in Jordan and Tunisia islikely, grounded in services exports and increasingly in investment and construction
funded by FDI. In Lebanon, stronger growth187

G L O B A L

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P R O S P E C T S

2 0 0 8

on a sustained basis is unlikely until the political environment has improved (table A8).

Risks
The region appears to have suffered little in
the way of direct effects from the financial
turbulence of mid-2007. Yet the increasing sophistication of reserves management among
high-income oil exporters and the movement
toward establishing large-scale sovereign
wealth funds may increase the exposure ofsuch portfolios to innovative, yet complex
and hard to price, securities. Regional equity

markets slumped only briefly during the boutof global volatility, and indeed, stock exchanges in the Gulf states have outperformed
the Morgan-Stanley emerging market average through the final months of 2007 (figure A18).
Markets for non-oil commodities, manufactures, and tourism services may suffer amore pronounced slowdown linked to the ripple effects of financial difficulties already present in the United States and the Euro Area.
Should a significant credit crunch occur, slowing growth across the OECD as well as acrossTable A8 Middle East and North Africa country forecasts(annual percent change unless indicated otherwise)
Forecast

Estimate
1991–2000a

2004

2005

2006

2007

2008

2009

Algeria
GDP at market pricesb
Current account balance/GDP (%)

1.7
3.2

5.2
13.1

5.1
20.7

1.8
24.2

3.4
23.0

4.0
24.4

3.8
21.2

Egypt, Arab Rep. of
GDP at market pricesb
Current account balance/GDP (%)

4.6
0.0

4.1
4.3

4.5
3.3

6.8
1.6

7.1
2.1

7.0
2.4

6.8
1.9

Iran, Islamic Rep. of
GDP at market pricesb
Current account balance/GDP (%)

3.7
1.2

5.1
15.9

4.3
16.2

4.6
13.3

5.0
11.1

5.0
12.7

4.7
6.8

JordanGDP at market pricesb
Current account balance/GDP (%)

5.1
⫺4.3

8.4
⫺0.2

7.3
⫺18.7

6.3
⫺15.0

6.0
⫺13.5

5.8
⫺14.6

6.0
⫺12.6

LebanonGDP at market pricesb
Current account balance/GDP (%)

7.2
—

6.3
⫺22.5

1.0
⫺23.2

0.0
⫺16.7

1.0
⫺19.6

3.5
⫺19.0

4.5
⫺15.9

Morocco
GDP at market pricesb
Current account balance/GDP (%)

2.2
⫺1.4

5.2
1.7

2.4
1.9

8.0
2.8

2.0
2.3

5.5
0.6

4.5
0.5

Oman
GDP at market pricesb
Current account balance/GDP (%)

4.6
⫺3.7

3.1
2.3

5.8
13.7

6.0
12.4

6.0
12.2

6.3
17.2

5.8
11.3

Syrian Arab Republic
GDP at market pricesb
Current account balance/GDP (%)

5.1
1.0

3.9
2.4

4.5
1.1

5.1
2.8

3.9
2.5

3.7
3.2

4.8
0.8

Tunisia
GDP at market pricesb
Current account balance/GDP (%)

4.7
⫺4.3

6.0
⫺2.0

4.0
⫺1.1

5.4
⫺2.1

6.0
⫺2.5

6.2
⫺2.6

6.0
⫺2.1

Yemen, Rep. of
GDP at market pricesb
Current account balance/GDP (%)

5.5
⫺4.3

2.5
1.7

4.6
2.3

4.0
0.4

3.8
⫺2.2

4.3
⫺2.3

4.0
⫺5.1

Source: World Bank.
Notes: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Djibouti, Gaza, Iraq, Libya, and West Bank are not forecast because of data limitations.
— = not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

188

R E G I O N A L

Figure A18 Middle East and North Africa
equities rebound from the mid-2007 slump
Index, Jan. 1, 2007  100
150
138

Morgan-Stanley
Composite
Index total

Middle Eastand North Africa

125

Egypt, Arab
Rep. of

113

Saudi Arabia. For reference, the GDP of the developing
countries of the Middle East and North Africa region
accounts for just 62 percent of the geographic region.
3. Changes in the volume of oil and gas production
have been modest in recent years, ranging from 0.5 to
1.0 percent annual gains in Algeria to a decline in theIslamic Republic of Iran and the Republic of Yemen.
Hence the buildup in export revenues is largely due tothe large-scale increase in global oil prices over 2005
through 2007.

South Asia
7
00

7
N

ov
.6

,2

00

7
Se

p.

23

,2

00

7
Au

g.

10

,2

00

7
,2
Ju

n.

14
ay
M

27

,2

20

00

07

7
1,
ar
.3
M

Fe

b.

15

2,

,2

20

00

07

88

n.

P R O S P E C T S

GCC

100

Ja

E C O N O M I C

Source: Morgan-Stanley.

developing countries, demand for crude oiland refined petroleum products could decline
and lead to a sharp fall in prices with the attendant effects ensuing for revenues andgrowth.

Notes
1. For the purposes of this report, coverage of theregion is restricted (for the sake of consistency acrossall regions) to include only low- and-middle-income
countries. These countries include Algeria, the Arab
Republic of Egypt, the Islamic Republic of Iran, Jordan, Lebanon, Morocco, Oman, the Syrian Arab Republic, Tunisia, and the Republic of Yemen. Because ofdata limitations, the middle-income economies of Djibouti, Iraq, Libya, and the West Bank and Gaza are notincluded in the aggregates. High-income countries in
the region are Bahrain, Kuwait, Qatar, Saudi Arabia
and the United Arab Emirates, to which references are
made. Qatar and the United Arab Emirates are not included in the high-income aggregate because of data
limitations.
2. For the developing countries in the region, the resource-poor, labor-abundant countries are Egypt, Jordan, Lebanon, Morocco, and Tunisia. The resourcerich, labor-abundant countries are Algeria, the Islamic
Republic of Iran, Syria, and the Republic of Yemen.
Oman is the developing, resource-rich, labor-importing
country. However, memo items in table A7 cover thefull geographic region, including Bahrain, Kuwait, andRecent developments
South Asia’s regional GDP was vibrant at 8.4
percent growth in 2007, easing only moderately from the 8.8 percent outturn of 2006.
The region continues to build on the momentum of recent fiscal and business-oriented reforms. Private consumption and investment
accelerated in 2007 despite more restrictive
monetary policies. Large capital inflows, rising incomes, and strong worker remittances
have supported private spending. Improvement in business sentiment—both foreign (toward India) and domestic—and rising corporate profits have provided a strong foundation
for investment. Growth in government spending has come down from 12.5 percent in 2006
and is now in line with overall economic
activity. The decline in government spending
is primarily attributable to a sharp falloff inPakistan’s outlays following a spike in 2006
linked to recovery and reconstruction efforts
after the December 2005 earthquake.
Among the larger economies, a modest easing of GDP growth in India, from 9.4 percent
in 2006 to 9.0 percent in 2007 reflects a firming in Indian import demand that yielded anegative net export position, further underpinned by strong appreciation of the rupee(figure A19). The falloff in growth in Pakistanfrom 6.9 percent in 2006 to 6.4 percent in2007 stems from a decline in private sector
credit growth, a slowdown in FDI inflows beginning in July 2007, and weaker exports. In
Bangladesh, tighter domestic credit conditions
induced a softening in investment growth,
while net exports turned negative, explaining189

2 0 0 8

190

Figure A20 Monetary policy is tightenedin response to a buildup in inflation
Consumer price inflation (percent change year-on-year)
and policy interest rates (percent)
10

Pakistan policy rate

9
India policy rate
8
7
6
5
4

7
ct

.2

20

Pakistan Consumer Price InflationOl.

India Consumer Price Inflation

Source: World Bank.

00

07

7
00
Ju

20

07

3
Ap
r.
2

the slight moderation in growth from 6.6 in2006 to 6.5 percent in 2007. In Sri Lanka, anescalation of the conflict between government-led forces and separatists dampened
prospects in the tourism industry and contributed to a 1.1 percentage point falloff ingrowth to 6.3 percent in 2007. In contrast,
growth in Nepal is on course to pick up modestly from 2.3 percent in 2006 to 2.5 percent
in 2007 as the peace process moves forward,
bringing increases in foreign assistance and a
gradual recovery in the tourism sector.
At the regional level, robust investment demand drove rapid import growth—which averaged 11 percent a year and exceeded export
growth by 2.5 percentage points—while currency appreciation also increased demand forimports. Exports remained healthy at 8.5 percent, but were slowed by softening demandin high-income countries and real appreciations that have made export markets morecompetitive.
The regional current account deficit increased as a share of GDP, moving from 1.3
percent in 2006 to 2.4 percent. Current account positions worsened in a number ofcountries over the course of 2007, with
deficits reaching close to 5 percent of GDP inn.

Sources: World Bank and national agencies.

Ja

10.0

06

7.5

.2
00
6

5.0

GDP growth (percent)

ct

2.5

O

0

6

Nepal

20

2005
2006
2007

Bangladeshl.

Sri Lanka

00

Pakistan

JuSouth Asia

06

India

Pakistan and about 2 percent in India.
Pakistan’s current account is of some concern,
having deteriorated by the equivalent of morethan 5 percentage points of GDP in the last
four years. Strong flows of worker remittances
into the region have helped contain the extent
of deterioration in current account positions.
Remittances amount to substantial proportions of GDP in many South Asian countries,
helping to smooth private consumption while
offering a buffer for external trade shortfalls.
Remittance receipts are the equivalent of alarge 16 percent of GDP in Nepal, 9 percent in
Sri Lanka, 7 percent in Bangladesh, and 4 percent in Pakistan. Strong foreign capital flows
to India and Pakistan, in particular, have complemented remittances to provide generally
comfortable levels of external finance.
Inflation pressures in India and Pakistan
eased over the first three quarters of 2007 (figure A20). In India, the appreciating rupee contributed to an easing of wholesale price inflation to 3 percent as of early November(year-on-year), breaching a five-year low.
However, risks of a regional revival in
inflation remain, stoked by an incomplete

20

Figure A19 South Asian economies ease
into 2007

Apr.
2

P R O S P E C T Sn.

E C O N O M I CJa

G L O B A L

R E G I O N A L

pass-through of higher energy costs to thefinal consumer in several countries, increasing
and widespread upward pressure on foodprices, strong credit growth, and sharp gains
in equity markets that have fueled liquidity.
In Sri Lanka, inflation reignited in 2007, with
12-month moving average inflation increasing
to 18 percent in September, up from 6.8 a year
earlier. Inflation has also picked up in Maldives, from 3.7 percent in 2006 to 7.0 percent
in 2007, reflecting expansionary government
spending and a budget deficit anticipated toreach 24 percent of GDP in 2007, caused inpart by continuing post-tsunami reconstruction and large tourism construction projects.
Inflation also appears to be stepping up in
Bangladesh in the wake of the recent cyclone.
In India, monetary tightening and large
capital inflows led to significant currency
appreciation during 2007, with the rupee
reaching a near decadal high of Rs 39.2
against the dollar by the end of November.
This development has contributed to an easingof inflationary pressures through prices ofimports, while at the same time it has reduced
the price competitiveness of India’s exporters.
The strong currency gains prompted theReserve Bank of India to sell rupees to help
contain the rate of appreciation and to introduce selected capital control measures. Pakistan’s currency had been appreciating slightly
against the dollar over much of the year, but it
began to depreciate in response to heightened
uncertainty on international capital markets
and the president’s imposition of a state of
emergency in early November.
The increased volatility of international
credit markets during mid-2007 tied to the
housing market downturn in the United States
initially led to a falloff in equity prices in India
and Pakistan, but markets in both countries
have since recouped their losses. In October,
India’s Sensex index rose above 19,000 for the
first time, driven by overseas fund purchases.
According to the Securities and Exchange
Board of India, foreign investors bought anaverage of nearly $500 million more than theysold in Indian equities during the first half of

E C O N O M I C

P R O S P E C T S

October, compared with daily net purchasesof $232 million in September. In relation to
local currencies, equity markets were up 36
percent in India (50 percent in dollar terms)
and 20 percent in Pakistan (19 percent indollar terms) from January 1 to October 31,
2007.

Medium-term outlook
Tighter credit conditions, volatility in international financial markets, a risk of recession in
the United States, and slowing growth in theEuropean Union should yield a fairly pronounced slowing of external demand forSouth Asia’s exports during 2008. This is
likely to worsen the region’s overall current
account deficit, as will increases in global oil
prices into 2008. Nonetheless, contributions
to growth from domestic demand—both private consumption and investment—are expected to remain relatively high, despite facing
headwinds from tighter monetary conditions
and further consolidation in fiscal positions.
These factors are expected to lead to aneasing of regional GDP growth from 8.4 percent in 2007 to 7.9 percent in 2008, with mostcountries experiencing a modest deceleration(tables A9 and A10). In Bangladesh, however,heightened political tensions and severe flooding were curbing demand in the second half of2007 and will contribute to a full percentage
point reduction in growth to 5.5 percent for2008. Regional growth is expected to pick up
to 8.1 percent by 2009, as recovering growthin the OECD firms up external demand and asreceding oil prices ease pressures on the import bill. Domestic absorption is projected toregain momentum in 2009, assuming thatprice conditions permit an easing of monetary
policy during the second half of 2008.
Tighter credit conditions in international
markets and a decreased appetite for risk
among investors could result in a falloff in regional capital inflows, which have contributed
to recent strong growth outturns, particularly
in India and Pakistan. Although trade openness has generally increased (except in
Afghanistan, Nepal, and Sri Lanka, which are191

G L O B A L

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P R O S P E C T S

2 0 0 8

Table A9 South Asia forecast summary(annual percent change unless indicated otherwise)
Forecast

GDP at market pricesb
GDP per capitac
Purchasing power parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
South Asia, excluding India
India
Pakistan
Bangladesh

1991–2000a

2004

2005

2006

2007

2008

2009

5.2
3.2
6.4
4.0
3.9
5.5
9.0
7.9
⫺0.1
⫺1.5
8.0
⫺7.8

7.8
6.1
7.9
5.7
5.3
10.2
14.5
32.9
⫺3.1
⫺0.1
4.9
⫺6.4

8.7
7.0
8.7
7.1
8.8
14.2
7.0
12.5
⫺1.3
⫺1.2
5.7
⫺6.4

8.8
7.2
8.9
5.6
12.5
14.2
9.0
11.9
⫺0.9
⫺1.3
7.5
⫺6.3

8.4
6.9
8.5
6.4
8.4
15.2
8.5
11.0
⫺0.9
⫺2.4
7.0
⫺6.1

7.9
6.4
8.0
6.3
8.3
13.6
8.4
11.1
⫺1.0
⫺3.0
7.0
⫺5.5

8.1
6.6
8.2
6.6
8.7
12.6
10.5
12.1
⫺0.9
⫺2.7
6.4
⫺5.1

4.4
5.5
3.9
4.8

6.1
8.3
6.4
6.3

6.7
9.2
7.7
6.0

6.7
9.4
6.9
6.6

6.3
9.0
6.4
6.5

6.0
8.4
6.5
5.5

6.5
8.5
6.7
6.5

Source: World Bank.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.

Table A10 South Asia country forecasts(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

Bangladesh
GDP at market pricesb
Current account balance/GDP (%)

4.8
⫺0.4

6.3
⫺0.5

6.0
⫺0.3

6.6
1.8

6.5
1.3

5.5
0.9

6.5
0.2

India
GDP at market pricesb
Current account balance/GDP (%)

5.5
⫺1.1

8.3
0.1

9.2
⫺1.0

9.4
⫺1.1

9.0
⫺2.2

8.4
⫺2.8

8.5
⫺2.5

Nepal
GDP at market pricesb
Current account balance/GDP (%)

5.0
⫺6.4

3.7
⫺0.7

2.7
0.0

2.3
⫺0.1

2.5
⫺1.7

4.0
⫺2.4

4.5
⫺2.9

Pakistan
GDP at market pricesb
Current account balance/GDP (%)

3.9
⫺3.7

6.4
⫺0.8

7.7
⫺3.3

6.9
⫺4.3

6.4
⫺4.9

6.5
⫺5.8

6.7
⫺5.3

Sri Lanka
GDP at market pricesb
Current account balance/GDP (%)

5.2
⫺4.6

5.4
⫺3.4

6.0
⫺3.1

7.4
⫺4.9

6.3
⫺4.8

6.2
⫺5.1

6.5
⫺4.5

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Afghanistan, Bhutan, and Maldives are not forecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

192

R E G I O N A L

all suffering from civil strife), openness remains relatively low in most countries. As aconsequence, the region is likely to be buffered
to a degree from a falloff in external demandtied to the downturn in the credit cycle.

Risks
Relatively large current account deficits in
Maldives, Pakistan, and Sri Lanka remain ofconcern, particularly in an environment of
increased volatility in international financial
markets. In Maldives and Sri Lanka, fiscal
deficits exceed 7.3 percent of GDP, and foreign reserve positions were fairly tight as of
mid-2007, equivalent to 2.5 months of importcover. Although import cover in Pakistan isstill a relatively comfortable four months, it ison a declining trend, suggesting that further
adjustments are required. Accordingly, a sudden and marked slowdown in capital inflows
or a discrete adjustment in global financial
markets could have noticeable adverse economic effects on these countries.
European and U.S. restrictions on somecategories of Chinese textile and clothing exports will be lifted at the end of 2008, and increased competition in 2009 could hurt regional exporters. Potential effects may bediscerned by examining developments in
Canada, which has not imposed safeguard restrictions on China: Bangladesh’s share of
Canada’s textile and clothing market declined
from 7.4 percent in 2005–06 to 6.9 percent
over 2007 to date. Among regional exporters,
Sri Lanka appears to be most at risk: nearly
one-third of its total merchandise exports tothe EU and nearly one-fifth of its shipments to
the United States are in categories in which
Chinese trade will be liberalized (see box 1.1
in chapter 1).
High, and in some cases increasing, commodity prices also present a risk for the region’s economies. Sharp gains in international
food prices are a growing threat in a region
where food imports represent 11–20 percent
of total merchandise imports: Bangladesh(19 percent), Maldives (16 percent), Nepal

E C O N O M I C

P R O S P E C T S(17 percent), Pakistan (11 percent), and Sri
Lanka (12 percent). India’s food imports account for just 3 percent of its total merchandise imports. Aside from putting increased
pressure on external positions, higher international food prices carry potentially serious implications for the poorest members of thesesocieties and could strain government coffers
and generate increased inflationary pressures
given widespread food subsidies. Similarly,
further increases in energy prices remain a risk
for the region, which is highly dependent on
oil imports. In India and Pakistan, for example, fuel imports represent more than 30 percent and 20 percent of merchandise imports,
respectively.
Internal political and military tensions continue to represent downside risks to the projections, as demonstrated, for example, by increased fighting in the civil war in Sri Lanka
from mid-2006 through 2007. Correspondingly, improving relations represent potential
upside opportunities, such as the ongoingprogress in reestablishing ties between India andPakistan with the opening on October 1, 2007,of the first overland truck route across the border after several decades of closed borders.

Sub-Saharan Africa
Recent developments
Economic growth in Sub-Saharan Africa accelerated from 5.7 percent in 2006 to 6.1 percent in 2007, the region’s fastest pace ofgrowth in more than three decades (figure
A21). Robust 8.1 percent GDP growth among
the region’s oil exporters and 5.3 percent gains
for oil-importing countries, not includingSouth Africa, powered the growth. High oil
prices and new oil production, notably in
Angola and Sudan, helped propel growth inthe oil-exporting countries to the highest rate
in almost 35 years. At the same time, theboom in non-oil commodity prices, in conjunction with increased openness and improved
macroeconomic stability, boosted growth inoil-importing economies to a 10-year high(table A11).

193

G L O B A L

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P R O S P E C T S

2 0 0 8Figure A21 Growth in Sub-Saharan Africa
has accelerated markedly…
Real GDP (percent change)
8

Forecast

7
6
5
4
3
2
1
0
1

88
19
91
19
94
19
97
20
00
20
03
20
06
20
09

85

19

82

19

79

19

76

19

73

19

19

19

70

2

Source: World Bank.

Output expansion in South Africa, the region’s largest economy, appears slated to ease
to 5.0 percent in 2007 from 5.4 percent in2006. Quarterly output readings point torobust expansion, with third-quarter growth
accelerating to 4.7 percent (seasonally adjusted annual rate) from 4.4 percent in the second quarter. There are indications, however,that higher borrowing costs have dampened
the pace of consumption growth, while higher
interest rates and a stronger rand are undermining growth in the manufacturing sector.
Meanwhile gross fixed capital formation continues to expand at a robust pace, and will
likely do so in coming quarters as infrastructure spending is under way for the 2010
World Soccer Cup. Softer private consumption growth and a modest improvement in theterms of trade reduced South Africa’s current
account deficit to 6.5 percent of GDP in thesecond quarter of 2007, from a 6.9 percent
gap in the previous quarter. Despite softer private consumption, increased capital and construction materials imports and deteriorationin the terms of trade will cause the current
account balance to widen (table A12).

Table A11 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)
Forecast

GDP at market pricesb
GDP per capitac
Purchasing Power Parity GDPd
Private consumption
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
SSA excluding South Africa
Oil exporters
CFA countries
South Africa
NigeriaKenya

1991–2000a

2004

2005

2006

2007

2008

2009

2.3
⫺0.4
3.4
1.2
2.6
3.7
4.7
4.4
0.2
⫺2.1
10.1
⫺4.2

5.3
2.9
5.5
5.5
5.0
9.1
6.7
9.3
⫺0.9
1.0
7.5
⫺0.7

5.8
3.4
6.1
5.4
4.7
13.7
11.6
14.6
⫺1.1
⫺0.3
6.0
0.6

5.7
3.7
6.1
6.0
6.6
15.7
4.4
12.3
⫺3.0
⫺0.2
6.5
1.6

6.1
4.0
6.5
5.1
6.7
13.2
5.7
8.2
⫺1.2
⫺1.0
5.8
⫺0.2

6.4
4.4
6.7
5.1
6.5
12.5
7.3
8.6
⫺0.9
⫺0.9
4.8
0.6

5.8
3.8
6.1
5.1
6.1
11.8
6.6
8.9
⫺1.4
⫺2.1
4.5
0.1

2.6
2.2
2.6
1.8
2.8
1.9

5.5
6.0
4.2
4.8
6.0
4.9

6.2
7.3
4.0
5.0
6.6
5.8

5.9
6.7
2.8
5.4
5.6
6.1

6.7
8.1
3.7
5.0
5.9
6.3

7.2
9.0
4.5
5.1
7.4
5.3

6.2
6.9
4.1
5.3
6.1
5.1

Source: World Bank.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Measured in U.S. dollars.
d. GDP measured at purchasing power parity exchange rates.
e. Exports and imports of goods and nonfactor services.

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Table A12 Sub-Saharan Africa country forecasts(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

AngolaGDP at market pricesb
Current account balance/GDP (%)

0.8
⫺6.1

11.2
5.9

20.6
15.1

16.9
13.6

24.3
12.4

21.7
9.6

13.4
3.7

Benin
GDP at market pricesb
Current account balance/GDP (%)

4.8
⫺6.8

3.1
⫺7.8

2.9
⫺6.3

3.6
⫺5.4

4.4
⫺5.7

5.1
⫺7.0

5.3
⫺7.4

Botswana
GDP at market pricesb
Current account balance/GDP (%)

6.2
8.1

5.9
2.9

3.8
16.6

2.6
18.0

4.8
17.6

4.4
14.7

3.9
12.8

Burkina Faso
GDP at market pricesb
Current account balance/GDP (%)

4.0
⫺5.6

3.9
⫺11.0

7.1
⫺10.5

6.1
⫺10.1

5.3
⫺10.2

5.5
⫺11.0

5.9
⫺11.3

BurundiGDP at market pricesb
Current account balance/GDP (%)

⫺1.7
⫺3.4

4.8
⫺25.0

0.9
⫺17.9

5.4
⫺17.0

4.2
⫺15.5

5.3
⫺14.9

5.1
⫺13.7

Cape Verde
GDP at market pricesb
Current account balance/GDP (%)

5.8
⫺8.3

4.5
⫺16.3

5.9
⫺5.5

6.2
⫺12.0

6.3
⫺14.6

6.6
⫺15.8

6.4
⫺13.7

Cameroon
GDP at market pricesb
Current account balance/GDP (%)

1.4
⫺3.0

3.7
⫺2.6

2.0
⫺4.2

3.5
⫺0.7

3.8
⫺0.6

4.4
⫺0.9

4.2
⫺2.4

Central African Republic
GDP at market pricesb
Current account balance/GDP (%)

1.6
⫺4.3

1.3
⫺4.6

2.2
⫺4.9

3.3
⫺2.9

3.5
⫺2.9

3.8
⫺3.9

4.1
⫺4.6

Chad
GDP at market pricesb
Current account balance/GDP (%)

2.3
⫺5.5

29.5
⫺18.7

7.9
⫺6.6

1.4
⫺7.3

⫺1.4
⫺4.8

4.2
⫺2.6

2.1
⫺1.8

Comoros
GDP at market pricesb
Current account balance/GDP (%)

1.1
⫺6.8

⫺0.2
⫺3.4

4.2
⫺4.9

1.3
⫺5.9

1.8
⫺5.1

2.5
⫺5.2

2.7
⫺5.5

Congo, Dem. Rep. of
GDP at market pricesb
Current account balance/GDP (%)

⫺5.6
2.0

6.6
⫺8.8

6.5
⫺10.0

5.1
⫺8.9

6.1
⫺9.3

7.3
⫺9.5

6.8
⫺9.9

Congo, Rep. of
GDP at market pricesb
Current account balance/GDP (%)

1.5
⫺16.5

3.6
15.5

7.8
16.2

6.6
11.0

3.2
6.1

6.3
11.0

5.9
8.0

Côte d’Ivoire
GDP at market pricesb
Current account balance/GDP (%)

2.3
⫺4.0

1.8
1.6

1.8
0.4

0.9
3.3

1.7
2.5

2.8
1.0

3.1
⫺0.5

Equatorial Guinea
GDP at market pricesb
Current account balance/GDP (%)

18.4
⫺40.6

10.0
7.3

6.5
6.8

⫺5.2
6.3

8.8
4.3

9.0
7.7

⫺1.4
2.8

Eritrea
GDP at market pricesb
Current account balance/GDP (%)

—
—

1.9
⫺13.6

4.8
⫺28.0

1.7
⫺31.6

1.9
⫺30.9

2.0
⫺30.1

2.2
⫺28.5

Ethiopia
GDP at market pricesb
Current account balance/GDP (%)

2.3
⫺0.8

12.3
⫺6.9

10.5
⫺7.7

9.6
⫺9.6

9.3
⫺7.3

7.7
⫺7.4

7.4
⫺5.6

Gabon
GDP at market pricesb
Current account balance/GDP (%)

2.4
5.7

1.4
12.8

3.0
13.7

1.2
21.4

4.8
17.3

3.9
21.4

3.7
18.6

2009

(continued)

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2 0 0 8

Table A12 (continued )(annual percent change unless indicated otherwise)
Forecast

196

1991–2000a

2004

2005

2006

2007

2008

2009

Gambia, The
GDP at market pricesb
Current account balance/GDP (%)

3.3
⫺1.6

5.1
⫺11.1

6.9
⫺21.6

6.4
⫺21.5

6.1
⫺20.4

5.3
⫺21.2

5.8
⫺18.3

Ghana
GDP at market pricesb
Current account balance/GDP (%)

4.3
⫺6.4

5.6
⫺3.6

5.9
⫺6.5

6.2
⫺8.7

4.9
⫺10.3

5.4
⫺10.2

6.1
⫺8.4

GuineaGDP at market pricesb
Current account balance/GDP (%)

3.9
⫺5.7

2.7
⫺4.3

3.3
⫺5.2

2.4
⫺6.1

2.1
⫺7.3

3.7
⫺10.7

3.2
⫺11.5

Guinea-Bissau
GDP at market pricesb
Current account balance/GDP (%)

1.5
⫺24.0

2.2
⫺4.9

3.2
⫺7.5

2.7
⫺11.3

2.7
⫺10.1

2.6
⫺4.3

3.3
⫺3.3

Kenya
GDP at market pricesb
Current account balance/GDP (%)

1.9
⫺1.6

4.9
⫺2.2

5.8
⫺0.8

6.1
⫺2.1

6.3
⫺3.2

5.3
⫺4.1

5.1
⫺3.6

Lesotho
GDP at market pricesb
Current account balance/GDP (%)

3.4
⫺13.3

3.1
⫺5.6

2.9
⫺7.4

6.9
3.0

4.1
0.1

4.8
⫺0.9

4.4
2.4

Madagascar
GDP at market pricesb
Current account balance/GDP (%)

1.7
⫺7.8

5.3
⫺12.4

4.6
⫺11.9

4.9
⫺8.9

5.8
⫺14.7

6.3
⫺21.7

6.9
⫺21.4

MalawiGDP at market pricesb
Current account balance/GDP (%)

3.4
⫺8.5

7.1
⫺4.7

2.7
⫺9.5

7.4
⫺6.2

6.3
⫺4.0

6.1
⫺5.1

5.6
⫺4.1

Mali
GDP at market pricesb
Current account balance/GDP (%)

4.0
⫺8.9

2.2
⫺8.4

6.1
⫺8.3

4.9
⫺4.9

5.1
⫺4.6

5.2
⫺4.9

5.3
⫺5.2

Mauritania
GDP at market pricesb
Current account balance/GDP (%)

2.9
⫺0.3

5.2
⫺20.1

5.4
⫺46.3

11.7
⫺2.1

2.1
⫺4.0

5.7
⫺11.6

6.7
⫺19.3

Mauritius
GDP at market pricesb
Current account balance/GDP (%)

5.3
⫺1.6

4.7
⫺1.8

3.1
⫺3.7

3.5
⫺5.6

4.1
⫺8.4

4.4
⫺8.9

3.9
⫺7.6

Mozambique
GDP at market pricesb
Current account balance/GDP (%)

5.2
⫺18.2

7.5
⫺11.1

6.2
⫺12.6

8.5
⫺7.3

9.1
⫺9.0

7.4
⫺10.2

6.7
⫺9.2

Namibia
GDP at market pricesb
Current account balance/GDP (%)

4.2
4.1

6.0
10.0

4.2
7.2

4.6
13.0

4.6
15.0

4.3
11.3

3.8
10.6

Niger
GDP at market pricesb
Current account balance/GDP (%)

1.8
⫺6.9

0.0
⫺7.6

7.0
⫺9.4

4.2
⫺9.5

4.8
⫺10.3

4.5
⫺11.0

4.6
⫺10.8

Nigeria
GDP at market pricesb
Current account balance/GDP (%)

2.8
⫺0.8

6.0
23.4

6.6
10.9

5.6
13.7

5.9
9.2

7.4
12.6

6.1
9.5

RwandaGDP at market pricesb
Current account balance/GDP (%)

0.2
⫺3.5

4.0
⫺10.8

6.1
⫺3.9

6.4
⫺7.1

6.7
⫺8.3

5.1
⫺8.2

4.7
⫺7.4

SenegalGDP at market pricesb
Current account balance/GDP (%)

2.9
⫺6.0

6.2
⫺6.7

5.5
⫺7.0

3.1
⫺9.6

4.5
⫺9.7

5.1
⫺8.4

5.3
⫺7.6

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Table A12 (continued )(annual percent change unless indicated otherwise)
Forecast
1991–2000a

2004

2005

2006

2007

2008

2009

Seychelles
GDP at market pricesb
Current account balance/GDP (%)

4.6
⫺7.4

⫺2.0
⫺9.1

1.2
⫺23.8

5.3
⫺28.9

5.5
⫺30.4

5.1
⫺28.8

5.7
⫺20.4

Sierra Leone
GDP at market pricesb
Current account balance/GDP (%)

⫺4.7
⫺9.0

7.4
⫺13.1

7.5
⫺9.3

7.5
⫺6.0

7.3
⫺6.5

6.9
⫺8.3

7.4
⫺9.0

South Africa
GDP at market pricesb
Current account balance/GDP (%)

1.8
⫺0.2

4.8
⫺3.2

5.0
⫺3.8

5.4
⫺6.3

5.0
⫺6.8

5.1
⫺7.8

5.3
⫺7.7

Sudan
GDP at market pricesb
Current account balance/GDP (%)

5.7
⫺6.7

5.2
⫺4.1

8.6
⫺10.9

11.8
⫺14.2

10.8
⫺9.6

9.7
⫺6.5

8.1
⫺6.6

Swaziland
GDP at market pricesb
Current account balance/GDP (%)

3.1
⫺2.6

2.1
4.6

2.3
1.5

1.7
1.0

1.4
0.1

1.1
⫺3.2

1.2
⫺2.4

Tanzania
GDP at market pricesb
Current account balance/GDP (%)

2.9
⫺12.5

6.7
⫺2.2

6.8
⫺4.8

6.2
⫺8.0

7.1
⫺9.4

6.8
⫺11.0

6.7
⫺10.2

Togo
GDP at market pricesb
Current account balance/GDP (%)

2.2
⫺8.5

3.0
⫺10.0

2.8
⫺5.1

1.5
⫺5.7

2.3
⫺6.1

2.1
⫺9.3

2.4
⫺7.8

UgandaGDP at market pricesb
Current account balance/GDP (%)

6.8
⫺7.0

5.5
⫺3.2

6.6
⫺2.2

5.4
⫺4.8

5.5
⫺3.0

5.3
⫺5.4

5.9
⫺4.9

ZambiaGDP at market pricesb
Current account balance/GDP (%)

0.7
⫺10.5

5.4
⫺10.0

5.1
⫺8.6

5.9
1.6

5.3
⫺0.7

5.7
⫺4.6

5.9
⫺6.2

Zimbabwe
GDP at market pricesb
Current account balance/GDP (%)

0.9
⫺7.5

⫺3.8
20.7

⫺5.3
25.7

⫺4.2
45.0

⫺6.3
71.9

⫺4.9
81.7

⫺2.1
82.7

Source: World Bank.
Notes: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Liberia, Mayotte, S~ao Tomé and Principe, and Somalia are not forecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.

Recent turbulence in international financial markets resulted in a moderate depreciation of the rand against the dollar, but that
followed a period of strong appreciation
caused by, among other factors, anticipatedcapital inflows related to merger and acquisition activity. The rand has since returned tolevels prevailing before the period of intense
financial market disruptions of July. Volatility
and declines in high-income financial markets
affected capital markets in South Africa tosome degree, but the change was limited. The

country avoided sharp asset sell-offs, and theall-share Johannesburg Stock Exchange index
reached new highs. Looking forward, limited
spillovers to consumption and investment are
anticipated.
Exceptional outturns in countries like Angola and Sudan underpinned growth among
Sub-Saharan Africa’s oil-exporting economies(figure A22). In Angola, the region’s fastestgrowing economy and its second largest oil
producer, growth continues to be exceptionally robust, with both oil and non-oil sectors

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2 0 0 8Figure A22 …reaching a 35-year high inoil-exporting countries…
Real GDP (percent change)

Forecast

14
12
10
8
6
4
2
0
2
4

88
19
91
19
94
19
97
20
00
20
03
20
06
20
09

85

19

82

19

79

19

76

19

73

19

19

19

70

6

Source: World Bank.

advancing at double-digit rates. Diamond production has also been climbing, supplementing oil revenues and contributing to an increase in the current account surplus.
Nevertheless, the increase in oil production
was an impressive 18.7 percent in the firstnine months of 2007 (year-on-year) after expanding 26 percent in 2005 and 13 percent in2006. The new oil fields scheduled to comeon line over 2007 to 2009 will ensure strong
growth in the oil sector, while robust growthin agriculture, manufacturing, construction,and the power sector will boost activity in the
non-oil sectors to near 20 percent.
Also notable among the oil-exporting
economies is an improvement in macroeconomic stability, with inflation easing, notwithstanding large revenue inflows and stronger
growth in government spending. Furthermore,
recent monetary tightening should help bringinflationary pressures in Angola down further.
Both fiscal and current account balances have
improved tremendously as a result of the oilwindfall. The non-oil fiscal balance also has
improved, but largely as a result of capacity
constraints that limit government spending
increases.
Meanwhile, performance in Nigeria, the region’s second largest economy, has improved
marginally over the course of 2007. GDP

198

growth rose modestly from 5.6 percent in2006 to 5.9 percent, as strong gains in the
non-oil sector offset substantial underperformance in oil. A 9.5 percent expansion in the
non-oil sector during the third quarter of 2007
(year-on-year), driven by strong performancein agriculture and financial services, pushed
overall growth up to 6.1 percent from 5.7 percent in the previous quarter. Crude oil production, including condensates and natural
gas liquids, declined 7.1 percent during thethird quarter (year-on-year), bringing output
down 4.2 percent for the first nine months of2007. This unfavorable result followed a contraction in production of 5.3 percent in 2006.
Economic growth in Mauritania, the region’s
newest oil producer, has also been disappointing. Growth there was subdued largely becauseof a halving in oil output tied to a changeoverin equipment.
Members of the Central African Economicand Monetary Community experienced mixed
economic performance. For example, strong
growth in the non-oil sector in Gabon led to aconsiderable pickup in GDP despite a decline
in oil production. Growth also accelerated in
Cameroon, underpinned by strong domestic
demand, and on the supply side, by strong
performance in the transport and telecommunications sectors. Meanwhile in the Republicof Congo, growth performance fell off as expansion in the oil sector softened, and delaysin public investment affected growth in the
non-oil sector. In Chad, another sharp decline
in oil production and continued decelerationin growth within the non-oil sector caused theeconomy to contract during the year.
Among the region’s oil importers, GDP advances were robust, especially in those countries that are further along the reform path,have achieved greater trade openness, andhave improved macroeconomic stability (figure A23). Increases in nontraditional manufactured exports have helped propel growth inseveral countries. In East Africa, Tanzania
recorded stronger growth in the agriculture
sector and improved its performance in manufacturing, mining, and construction, pushing

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Figure A23 ...and a 10-year high in
oil-importing countries
Real GDP (percent change)
10

Forecast

86
4
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from flooding, slowing growth toward theend of 2007 into 2008.
In Mozambique, growth continues apace,with output up 8.8 percent in the first half ofthe year, but damage from cyclones and flooding slowed the rate of growth from 10 percent
recorded a year earlier (year-on-year). The
country boosted its GDP with investments of$1.4 billion in the Moatize Coal Project and$390 million in other projects during the firsthalf of 2007.

0Medium-term outlook

Figure A24 Contributions of investment
and consumption have increased
Contributions to GDP growth (percent)
10
8
6
4
2
0
2

Fixed investment

09
20

7

08
20

6

20
0

5

20
0

4

20
0

3

Private consumption

20
0

2

20
0

20
0

1

4

0

overall GDP gains to 7.1 percent in 2007. In
Kenya, at 6.3 percent, growth should surpass
a 30-year record set in 2006 (6.1 percent)based on improved tourism arrivals and receipts, stronger gains in transport and communications, and better agriculture output.
Growth accelerated to 7.1 percent in the second quarter of 2007 (year-on-year) as manufacturing expanded 8.6 percent, hotels andrestaurants gained 11.1 percent, and communications expanded 11.8 percent. In Madagascar, large inflows of FDI to the mining sector
are generating an important shift in the structure of the economy, while Uganda is benefiting from strong expansion in construction,transport, and communications, as well asfrom recovery in agriculture.
Growth among members of the West
African Economic and Monetary Union also
picked up in 2007, rising by almost a full percentage point to 3.7 percent, as GDP gains exceeded 4 percent in five of the eight
economies. Yet inadequate energy supplies inmany member countries and difficulties inseveral agriculture subsectors have kept
growth from rising even further. Agricultural
output and private consumption will takesome time to recover in several countries in
the union that sustained significant damage

20
0

Source: World Bank.

Growth in Sub-Saharan Africa is poised to remain buoyant by historic standards, nearing
6 percent over the near and medium terms, despite softening of demand in the Euro Area in2008 and corrections to non-oil commodity
prices, particularly metals, over the medium
term (table A11). For many countries, the impetus for growth will come in part from robust domestic demand, in particular, strong
growth in public and private fixed investment(figure A24).
Fixed investment is expected to remainstrong, despite the credit crunch in international financial markets and the easing in

20
0

88
19
91
19
94
19
97
20
00
20
03
20
06
20
09

85

19

82

19

79

19

76

19

73

19

19

19

70

2

Government consumption
Net exports

Source: World Bank.

199

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 8non-oil commodity prices. Large, strategic,
capital projects initiated by big, rapidly–growing, developing economies such as China andIndia are likely to underpin continued strong
investment. Among recent notable deals is the$5 billion loan agreement reached between
China and the Democratic Republic ofCongo. According to the signed accord, about$3 billion will fund large infrastructure projects, including 2,000 miles of railway and2,125 miles of highway. The project will alsofinance the construction of 31 hospitals, 145
health centers, and 2 universities. The remaining $2 billion will be used to set up a joint
venture mining company between the twocountries. Madagascar and Mozambique arealso experiencing large-scale FDI flows into
their economies.
Several years of strong non-oil commodity
prices, together with rising private capital inflows and remittances, are supporting private
consumption, although spending is anticipated to flatten over the medium term as income growth eases. In South Africa, higher interest rates and an erosion of real incomes islikely to curb real spending. Furthermore, thesharp decline in farmers’ incomes in thosecountries affected by recent floods will constitute a drag on consumption, although private,
government, and donor transfers may mitigate
some of the effects. According to the latest
estimates, the worst-affected countries are
Burkina Faso, Ghana, and Uganda. Adverse
spillovers to personal spending will be felt wellinto 2008. In other countries, recovery fromdrought is translating into improved performance in agriculture, adding impetus to
growth, while the income effect resulting fromseveral years of high prices for non-oil
commodities continues to stimulate private
consumption.
Growth among Africa’s oil exporters is expected to slow to 6.9 percent by 2009, as oil
prices are forecast to decline that year and as
investment projects begin to unwind. However, this transition occurs from peak 9 percent GDP gains in 2008 led by continued

200

advances in Angolan and Sudanese crude oil
output and anticipated recovery in Nigerian
production. Lower oil prices by 2009 could
yield supply responses, at minimum slowing
the pace of oil output growth for manysmaller producers, where production costs remain high. For the region’s major producers,
however, output is projected to continue toincrease.
Growth in Nigeria is projected to pick up
markedly in 2008, buoyed by recovery in theoil sector and strong gains in the non-oil sector. Stabilization in the Niger Delta should
allow oil production to recover gradually andto exceed 2005 levels, supporting gains near
10 percent in Nigeria’s oil sector, following thecontraction recorded in 2007. Investment
growth should moderate, notwithstanding thegovernment’s plans to invest substantial
amounts in roads, railways, and electricity infrastructure and in the dredging of the Niger
River. This investment appears highly importintensive, with import sourcing accounting forsome 75–80 percent of expenditure, thereby
limiting the direct positive effects on Nigeria’s
growth.
Difficulties in the cotton and groundnut
subsectors in several West African countries
are having negative spillover effects on
growth, while electricity shortages and highenergy costs are constraining faster expansion
among oil-importing economies. Some countries are seeing surges in their oil import bills,
in part because many companies use fuel-run
power generators to supplement grid electricity. Growth among West African Economicand Monetary Union economies will be supported by improved performance in the primary sector and increased public investment
spending, financed from savings made underthe Highly Indebted Poor Countries and Multilateral Debt Relief initiatives. Furthermore,
growth in oil-importing economies should
benefit from strong investment growth, aswell as continued demand for non-oil commodities from the rapidly expanding emerging
market economies.

R E G I O N A L

Risks
Among the most important downside risks togrowth in Sub-Sahara African is a larger-thanexpected falloff in high-income country
growth and import demand. Such a falloff
could be tied to continuing difficulties in financial markets, or it could be triggered byweaker growth outturns in major emerging
market economies, such as in China and India,
which might result in weaker export growthfor Sub-Saharan Africa in general, and for theoil-importing countries in particular.
The risk of increasing inflationary pressureis also palpable. Should oil prices increase further or drought conditions affect the food supply, inflation could be the consequence. Increases in international prices of staple
commodities such as cereals and vegetableoils, to a large degree already in the pipeline,
could spill over to fuel domestic price pressures, particularly in countries that are heavily
reliant on imports of wheat and vegetable oils.
In some countries, strong domestic demand
and upward adjustments in public sector
wages are already fueling inflationary pressures. Capacity constraints and overheating insome economies, especially the oil-producing
economies, constitute further upside risks for
inflation. Similarly, in South Africa, high confidence, strong domestic expenditures, rising
employment, buoyant credit extension, andE C O N O M I C

P R O S P E C T S

increasing asset prices all boost consumption
through positive wealth effects and make therisk of a further buildup in inflationary pressures very apparent.
South Africa also faces a specific source ofrisk in the way it has financed its sizable current account deficit, anticipated to be in excessof 7 percent of GDP in 2008 and 2009: thecountry has relied largely on portfolio investments, which could potentially be reversed.
Moreover, a marked depreciation of the randin the event of a sell-off of South African assets
by nonresidents would present the authorities
with additional financial management issues toaddress as well as inflation pressures.
Finally, negative terms-of-trade shocks(lower non-oil commodity prices, further
increases in oil prices, or both) may come to affect disposable incomes in oil-importing countries, undermining private consumption while
also yielding worse external balances. Conversely, higher oil prices would benefit growthin oil-exporting countries. Sociopolitical tensions also remain a source of downside risk forcountries such as Côte d’Ivoire, the Democratic Republic of Congo, Ethiopia, Guinea,
Guinea-Bissau, Somalia, and Togo. In Nigeria,
the risks associated with the activity of militantgroups in the Niger Delta remain substantial,with oil production still about 25 percent
below the 2.9 million barrels daily capacity.

201

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The World BankGLOBALECONOMIC PROSPECTS
Global Economic Prospects 2008:
Technology Diffusion in the Developing World
Global Economic Prospects 2008: Technology Diffusion in the Developing
World examines the state of technology in developing countries andthe pace with which it has advanced since the early 1990s.
It reveals both encouraging and cautionary trends. On the one
hand, the pace of technological progress in developing countries
has been much faster than in high-income countries—reflecting
increased exposure to foreign technology as a result of linkages
with high-skilled diasporas and the opening of these countries
to international trade and foreign direct investment. On the other
hand, the technology gap remains large, and the domestic factors that determine
how quickly technologies spread within developing countries often stymie progress, especially among
low-income countries.
This year’s Global Economic Prospects comes on the heels of an extended period of strong growth and a 15
year period of strong performance in much of the developing world, which has contributed to substantial
declines in global poverty. While high oil prices and heightened market volatility may signal a coming pause
in this process, over the longer term continued technological progress should continue to push back poverty.

New! Prospects for the Global
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“Rapid technological progressin developing countries has
been key to the reductionof poverty in recent decades.
While the integration of
global markets has played andwill continue to play a vitalrole in this, future successwill increasingly dependon strengthening technicalcompetencies and the businessenvironment for innovative
firms in developing countries.”— Graeme Wheeler
Managing Director
The World BankT

echnology and technological progress are central to economic
and social well-being. The creation and diffusion of goods andservices are critical drivers of economic growth, rising incomes,social progress, and medical progress. Global Economic Prospects 2008:
Technology Diffusion in the Developing World examines the state of technology
in developing countries and the pace with which it has advanced since
the early 1990s.
It reveals both encouraging and cautionary trends. On the one hand,the pace of technological progress in developing countries has been much
faster than in high-income countries—reflecting increased exposure to foreigntechnology as a result of linkages with high-skilled diasporas and the openingof these countries to international trade and foreign direct investment.
On the other hand, the technology gap remains large, and the domestic
factors that determine how quickly technologies spread within developing
countries often stymie progress, especially among low-income countries.
Repeating the rapid progress of this past decade will be difficult and may
require that basic technological literacy is improved further; that government
efforts to adapt and disseminate preexisting technologies throughout theeconomy are strengthened; and that regulatory regimes are modified toencourage business innovation.
This year’s Global Economic Prospects comes on the heels of an extended
period of robust growth and a 15-year period of strong performance inmuch of the developing world that has contributed to substantial declines
in global poverty. While high oil prices and heightened market volatility
may signal a coming pause in this process, over the longer term sustained
technological progress should continue to push back poverty.
For additional information, please visit www.worldbank.org/prospects.
An online companion to the prospects section of this report, including
access to additional data and analysis not reported here, is also availableat www.worldbank.org/globaloutlook.

ISBN 978-0-8213-7365-1

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