metadata: authors: 0: author: Harrison, Ann
1: author: Sepulveda, Claudia
count: India
docna: 0: docna: Learning from developing country experience
            : growth and economic thought before and after the 2008-09 crisis
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Gender and Development,International Trade and Trade Rules,Economic Growth,Inequality
teratopic: Poverty Reduction,Health, Nutrition and Population,Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
abstracts: cdata!: The aim of this paper is twofold. First,
            it documents the changing global landscape before and after
            the crisis, emphasizing the shift towards multipolarity. In
            particular, it emphasizes the ascent of developing countries
            in the global economy before, during, and after the crisis.
            Second, it explores what these global economic changes and
            the recent crisis imply for shifts in the direction of
            research in development economics. The paper places a
            particular emphasis on the lessons that developed countries
            can learn from the developing world.
geo_reg_key: 80475,80451,80470
repnme: repnme: Learning from developing country experience
            : growth and economic thought before and after the 2008-09 crisis
display_title: Learning from developing country
            experience : growth and economic thought before and after
            the 2008-09 crisis
listing_relative_url: /research/2011/08/14985485/learning-developing-country-experience-growth-economic-thought-before-after-2008-09-crisis
topicv3: Economic Growth m1326241 471,Poverty m1326687 695,Trade m1326924 698,Industry Policy m1327403 1075,Gender m1327621 615
publishtoextweb_dt: 2011-09-07T00:00:00Z
historic_topic: Poverty Reduction,Health, Nutrition and Population,Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
no_of_pages: 29
model_extractions: WPS5752 Policy Research Working Paper 5752 Learning from Developing Country Experience Growth and Economic Thought Before and After the 2008–09 Crisis _Ann Harrison Claudia Sepúlveda_ The World Bank Development Economics Vice Presidency August 2011
Policy Research Working Paper 5752

# **Abstract**

The aim of this paper is twofold. First, it documents the changing global landscape before and after the crisis, emphasizing the shift towards multipolarity. In particular, it emphasizes the ascent of developing countries in the global economy before, during, and after the crisis.

Second, it explores what these global economic changes and the recent crisis imply for shifts in the direction of research in development economics. The paper places a particular emphasis on the lessons that developed countries can learn from the developing world.

This paper is a product of the Development Economics Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted may be contacted at ann.harrison@berkeley.edu and Csepulveda@worldbank.org.

> _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._

Produced by the Research Support Team
# **Learning from Developing Country Experience: Growth and Economic Thought Before and After the 2008-09 Crisis**<sup>**1**</sup>

Ann Harrison and Claudia Sepúlveda The World Bank

> 1 We thank Indira Rajaram and Arvind Subramanian for their helpful comments, as well as other participants at the “Restoring Inclusive Growth in Advanced Economies: A Conversation with Economists and Policy Makers from G-20 Countries,” conference held at New York University on October 7, 2010.  Cristina Constantinescu and Jing Cai provided excellent assistance.

The paper is also available at the Comparative Economic Studies Journal by following this link: - <u>http://www.palgrave journals.com/ces/journal/v53/n3/abs/ces20116a.html</u>
# **Introduction**

The 2008-9 financial and economic crisis has shown that the world economy and its recovery are much more fragile and interdependent than previously thought. The crisis has also revealed that we are in a new world, with multiple sources of growth and new powerful links between developing and developed countries and among developing countries. The crisis accelerated the change in the global economic landscape, one in which developing countries have acquired increasing importance in global economic growth and share of global GDP. Nearly half of global growth today comes from developing countries.

The crisis and the new global economic landscape that has emerged with developing countries taking center stage has not only given rise to the Group of 20 (G-20) as the relevant forum for global economic cooperation, but it has also compelled policymakers and researchers to question whether development economics in its present form is well positioned to tackle the most urgent issues of the day. What can developed countries learn from the rise of the emerging economies? These two landmark developments, the severe 2008-2009 crisis and the changing global landscape, have led to a serious questioning of the old orthodoxy.

The aim of this paper is twofold. First, we document the changing global landscape before and after the crisis, emphasizing this shift towards multipolarity. In particular, we emphasize the ascent of developing countries in the global economy before, during, and after the crisis. Second, we explore what these global economic changes and the recent crisis imply for shifts in the direction of research in development economics. We place a particular emphasis on the lessons that developed countries can learn from the developing world.

We emphasize four sets of issues that deserve attention moving forward. First, we emphasize the importance of structural transformation in the process of economic development, and the role that the government can play in accelerating or retarding that process. Second, we discuss the importance of promoting inclusive growth, which we refer to as broadening opportunities. Third, we highlight the increasingly risky global environment, with fluctuations in weather, capital flows, and trade highlighted in particular. Finally, we underline the importance of aid effectiveness, and seek to understand how we can better learn from results. These four areas we 2
refer to as the ―TORR‖ framework, which is shorthand for a focus on transformation, opportunities, risks and results.

The paper is organized as follows. Section 1 presents stylized facts of the global economic landscape since the early 1980s and projections into 2030. Section 2 discusses the researchable questions and lessons that have emerged post-crisis, grouped into four set of issues: Transformation, Opportunities, Risk, and Results (TORR). The last section concludes.

# **1. A New Global Economic Landscape**

The increasing importance of developing countries in the new global economy and in the global political arena was evident long before the 2008-09 crisis. The crisis—which originated in the developed countries and affected them more severely--only served to reinforce the recognition of decade-long shifts in the global economy. This new global economic landscape— in which developing countries are playing a central, if not lead, role—was acknowledged in November 2008 when for the first time the Group of 20 (G-20) leaders convened in Washington, D.C., to consider cooperative efforts to cope with the financial crisis and to lay the foundations for restoring sustainable and balanced growth.<sup>2</sup>

# **Before the Crisis: Stylized Facts**

The increasing globalization that the world has experienced in recent decades—supported by multilateral trade policy reforms, broad liberalization in domestic trade and investment environments, and technological advances—has facilitated the acceleration of growth in developing countries and, by extension, the importance of these countries in the global economy. These changes in the global economic landscape are not the outcome of the crisis, but rather the result of decade-long shifts, as discussed below.

If we use a conventional measure of trade volumes, such as export shares in GDP, developing countries are now more integrated into the world economy than developed countries. Figure 1 shows that developing country exports surpassed developed country exports as a share of GDP in the early 1990s. By the mid-2000s, developing country shares of exports in GDP exceeded developed countries by at least 5 percentage points of GDP. Figure 1 also documents

> 2 See Fardoust, Kim, and Sepulveda (2011).

3
China‘s incredible export surge in the last 30 years. China overtook the developed country average in the mid-1990s, and surpassed the developing country average around the same time that it entered the WTO, at the end of 2001.

**Figure 1 Export Shares in Developing and High-Income Countries**

<!-- Start of picture text --> 40<br>35<br>30<br>25<br>20<br>High income Countries<br>15 Developing Countries<br>China<br>10<br>5<br>0<br>1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008<br>Exports of good and services (% of GDP)<br><!-- End of picture text --> Source: World Development Indicators It is likely that this increasing globalization is one factor that can be used to explain the high growth rates that developing countries exhibited over the last decade. During the 2000s, developing countries grew on average at 5.6 percent and in 2010, developing countries are estimated to grow at 7.0 percent (World Bank (2011)). In comparison, developed countries grew at only 1.3 percent in the previous decade and in 2010 are estimated to grow at 2.8 percent (see Figure 2a). However, these high growth rates in developing countries mask the vastly different growth patterns of individual economies over the last several decades.

4
<!-- Start of picture text --> 10<br>Lo JdWorld High-income= =—Middle-income = Low-income<br>8<br>6 y ae esp © == oe —-_<br>4 ~ & ‘o<br>7<br>2<br>0<br>-2<br>-A<br>2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012<br>S Lx / ><br>J o-S Z<br>> oe<br>\veoes ———e<br>IN 7<br>NS OEE AY<br>*<br><!-- End of picture text -->
rates, on average, than high income countries for decades prior to the crisis. The gap in growth rates between East Asia and the Pacific, where GDP per capita grew at least 6 percent per year since the mid-1980s, and the rest of the world is remarkable. Yet, by the end of the 2000s, all regions including Sub-Saharan Africa were growing at a faster pace than high income countries in per capita terms.

# **The Crisis and its Aftermath**

The 2008-09 global economic crisis is possibly the deepest and most complex crisis since the Great Depression. Three primary factors made this crisis unusual in comparison to previous crises. First, the crisis originated in a developed country. Second, many developing countries were able to cushion the effects of the crisis for the most vulnerable groups by increasing or maintaining social spending and safety nets due to strong economic fundamentals prior to the onset of the crisis. Third, and unlike previous crises, developing countries generally fared better and recovered faster than developed countries.

The crisis originated in the collapse of the U.S. subprime housing market after the burst of a major housing boom in 2007 and subsequent fall in the value of mortgaged backed securities (Bordo (2008) and Gorton (2008)). This led to a crisis in the U.S. shadow banking system that quickly spread to European countries through the drying up of interbank liquidity. Although the Federal Reserve, European Central Bank, and the Bank of England all provided liquidity in the fall of 2007, the collapse of Lehman Brothers worsened the crisis and the credit crunch led to a recession in the U.S. and Europe. In the early stages of the crisis, most experts believed that its negative impact would be confined to developed countries. As the crisis progressed, however, developing countries felt the effects through various transmission mechanisms, such as trade, commodity prices, capital flows, and remittances leading to a global downturn (Mishkin (2010)).

However, unlike other crises, developing countries were able to cushion the negative impact of the crisis on output and human development indicators by implementing countercyclical fiscal policies that allowed them to maintain social spending and increase safety nets. The effects of crises on fiscal and household spending depend on the severity of the downturn, government policy, and fiscal flexibility in continuing spending. Empirical evidence on the cyclical response of government spending to the economic cycle shows a different pattern for developing and high income countries. Developing countries tend to have a procyclical fiscal 6
policy, reducing spending in a downturn, while high-income countries pursue countercyclical fiscal policy, raising expenditures in a downturn. The latter reflect automatic stabilizers in place as well as discretionary spending to stimulate the economic recovery (Aghion and Marinescu (2007), Talvi and Végh (2000), Perotti (1999), Darby and Melitz (2008), Kaminsky, Reinhart and Végh (2004)).

What it is interesting about this crisis is that developing countries have become more sophisticated at fiscal management, and implemented countercyclical spending by temporarily expanding safety nets, protecting social sector spending, and redirecting fiscal resources to retain social services. This is in sharp contrast to the reaction of developing countries to past crises, in which many countries pursued across the board cuts in government expenditures with little concern for the incidence of fiscal allocation. Therefore, although poverty has increased as a consequence of the crisis, it has increased less than would have been the case otherwise. (World Bank (2010a) and Lewis and Verhoeven (2010)).

Moreover, in contrast to previous crises, the 2008-09 crisis found many developing countries with the required credibility and fiscal breathing space to conduct countercyclical fiscal policy. Among the factors that helped developing countries achieve resiliency to the ongoing economic and financial crisis and be much better prepared to respond to this crisis than more developed countries were higher fiscal surpluses, a better build-up of reserves, lower inflation, and avoidance of currency mismatches which could have led to exchange rate speculation and insolvency (Didier, Hevia and Schmukler (2010a, b) and Frankel and Saravelos (2010)).

Finally, unlike previous crises, developing countries generally fared much better and are recovering more quickly than developed countries. This can be seen in Figures 2a, Figure 3, and Figure 4. Figure 2a shows that developing country growth rates fell less and recovered more quickly than developed countries. The projected growth rates, prepared by the World Bank Prospect Group within Research, also show systematically higher growth rates for 2011 and 2012 in developing countries. Figure 3 documents the evolution of trade before and after the crisis. Figure 3 shows that developing countries are leading the recovery in trade, with their import demand rising at twice the rate of that in high-income countries in volumes and values.

7
<!-- Start of picture text --> 80<br>=o<br>ge ® aX<br>Es 40 »f..<br>g2 204Z7A\ ; aeiP - a *<br>Ee 0 a sant — of ant<br>gy B -20 ‘A fi<br>z £ ‘i [.-<br>= § \<br>rd —40 NG<br>FE 60<br>—E a]<br>80<br>gaN ps)ay $s)“\ Dd“\ SS% gS% Es)% is)% 5a ;RS) a ;& ©<br>gs € Fe4 Me ~~4 YKSy x F KC« YS¥ x? ¥<br>date<br>values volumes<br>developing = ——— ————<br>high-income <-—=——— eeseeteerereee<br><!-- End of picture text -->
**Figure 4 GDP  per Capita Growth in Past and Current Crises**

<!-- Start of picture text --> 8.0<br>6.0<br>4.0<br>2.0<br>World (3 crises)<br>0.0<br>World (2009)<br>World (2009) Projected<br>-2.0 LICs (3 crises)<br>LICs (2009)<br>LICs (2009) Projected<br>-4.0<br>-5 -4 -3 -2 -1 0 1 2 3 4 5<br>Growth rate<br><!-- End of picture text --> Source: World Bank (2010 a) Note: The figure plots the average per capita GDP growth in the world and in Low-income countries 5 years before and 5 years after the global crises (centered at zero on the horizontal axis) of 1975, 1982 and 1991, and the current crisis. Also shown in dashed lines are WEO projections until 2013.

# **The Changing Global Landscape**

The long term shifts in the global economic landscape, as well as the performance of developing countries in the aftermath of the crisis, have cemented the emergence of a multi-polar growth world. Developing countries contributed around 40 percent of global growth in the past decades, and in 2010 their projected contribution will approach 50 percent (see Figure 5). Because developing countries are growing faster, they are also increasing their share in global GDP. Whereas developing country GDP represented approximately 17 percent of global GDP in 1980, as of 2008 that share had increased to 29 percent, when measured at market exchange rates and close to 45 percent if purchasing power parity (PPP) weights are used. Those that are contributing the most to this new global economic landscape are the developing countries that are also members of the G-20; China, and to a lesser extent India, have been the main drivers of these shifts. In 1980, China accounted for 1 percent of global GDP. As of 2008, China‘s share had increased to 6 percent of world GDP (11 percent in PPP terms), accounting for a larger share 9
<!-- Start of picture text --> 10<br>&8<br>£<br>a<br>a we ro 7 ] f<br>z ai mn aa i UA ANATA [ T<br>a] NEN ALA<br>3= 0 a | Ho I ml\<br>5Le) -2 }<br>4<br>ge &iS) & & Ss ae&.<br>year<br>HB G-20high-income Onon-G-20high-income Mi G-20 developing<br>XO] non-G-20 developing countries = —— world<br><!-- End of picture text -->
<!-- Start of picture text --> be<br>67 0 a oz: a —<—tstsi‘imees CO@S<br>Worldat spe —| rs]<br>market prices<br>30 ts 1<br>20<br>25<br>10 17 a, 20<br>0 oil 8Boe femw<br>1820 1870 1913 1950 1973 2001 2015 2025<br>Source: Angus Maddison, OLCD G China @ India © Japan © United States mTM Big 4 European<br>10<br><!-- End of picture text -->
Different periods of history have been associated with the rise and fall of different schools of thought in economics. Keynesianism was popular in the 1930s and 1940s, the neoclassical tenets of Milton Friedman and others reached ascendance in the 1980s. In development circles, the Washington Consensus was popular into the 1990s. But now we are asking ourselves how we can go _beyond_ the Washington Consensus. Policymakers and researchers looking at this new global landscape are asking whether development economics in its present form is well positioned to tackle the most urgent issues of the day and whether developed countries can learn from the emerging economies ascent.

The 2008-09 crisis has made the need to rethink development economics only more compelling and some of the lessons learned are most relevant for developed countries. The World Bank‘s president summarized the preliminary lessons and key researchable questions going forward in speech he gave at Georgetown University in September 2010. The speech drew on a document prepared by Alan Gelb, Ann Harrison, and Martin Ravallion, ―New Research Directions―(World Bank (2010b)). The document suggested that new research directions should focus on four broad topics: economic _transformation_ , broadening _opportunities_ , mitigating _risk_ , and focusing on _result._ We refer to this as the TORR agenda. We need to better understand how economic _transformation_ happens; how to broaden _opportunities_ to ensure that all individuals can participate in the benefits of, and contribute to, such transformation; how to deal with the emerging new global challenges related to _risk_ and vulnerability; and finally, to assess the effectiveness and _results_ of development efforts, including external assistance.

# **Securing Transformation**

Why have few countries been able to achieve sustained growth, while others appear to remain trapped in poverty? The Commission on Growth and Development (2008), led by Michael Spence, Roberto Zagha and others, identified 13 countries that were able to maintain high sustained growth over 25 years in the postwar period.<sup>3</sup> One insight of the Growth Commission report rests in the observation that countries that have made the transition from low income to middle or high income countries have sustained high investment-to-GDP rates (both private and public investment). These differences are shown in Figure 7. By investing resources,

> 3 The Commission on Growth and Development report identified 13 success stories of sustained high growth: Botswana, Brazil, China, Hong-Kong (China), Indonesia, Japan, Korea, Malaysia,  Malta, Oman, Singapore, Taiwan (China), and Thailand.

12
<!-- Start of picture text --> 50<br>44<br>40<br>34<br>-_<br>5 30<br>&<br>25<br>20<br>10<br>1971 1976 1981 1986 1991 1996 2001<br>China = India<br>=m Russia = Latin America & Caribbean<br>Sub-Saharan Africa = Growth 13<br><!-- End of picture text -->
Important questions related to this agenda are the respective responsibilities of the market, the state, and the private sector in sustaining the dynamics of structural change. What roles do markets and states play in the transformation? How do political economy and governance factors constrain the scope for effective public action in promoting structural transformation? What should be the role of infrastructure, and who should provide it? The answers may vary, depending on political leadership and the ability of governance structures to withstand capture by powerful elites. However, all successful countries have used market signals and international competition as the fundamental mechanism for resource allocation. For example, in Figure 1 we documented the increasing importance of trade in the integration of developing countries into the world economy.

In addition to heeding market signals, however, successful countries have also recognized that the state has a role to play in the transformation process. The role of the state in promoting certain patterns of industrial development has been a highly contentious subject in politics and economic research. Most governments attempt to promote industry, yet evaluations of their interventions have been few and rarely rigorous. There is a pressing need for new research efforts to evaluate these policies. It would be misleading to make general policy prescriptions for successful economic transformation based on the success of a few countries with particular policies and against a particular national backdrop. In many of these example cases, the government played a strengthened role in infrastructure provision, skills development, and creating an enabling regulatory framework. For example, instead of using blanket subsidies to promote exports and attract FDI, the government of China has given companies tax incentives and provided infrastructure for special economic zones in key sectors like electronics and telecommunications to attract multinationals.

The key challenge is how to design policies that are most effective in achieving structural transformation and diversification by successfully promoting winners, not losers. Harrison and Rodriguez-Clare (2009) distinguish between ―soft‖ industrial policy, whose goal is to develop a process whereby government, industry, and cluster-level private organizations can collaborate on interventions that can directly increase productivity and ―hard‖ industrial policy that can distort prices. Their idea is to shift the policy design to interventions that deal directly with the coordination problems that keep productivity low in certain sectors. Thus, instead of tariffs, 14
export subsidies, and tax breaks for foreign corporations, they suggest focusing on programs and grants to help particular clusters by increasing the supply of skilled workers, encouraging technology adoption, and improving regulation and infrastructure, for example. While ―hard‖ industrial policy is easier to implement than ―soft‖ industrial policy measures, tariffs and subsidies more easily become entrenched and are more subject to manipulation by special interest groups.

Lin (2010) and Lin and Monga (2010) argue that policies that target activities which are ―comparative advantage facilitating‖ (CAF) type are the most successful in contributing to structural transformation. Governments should not target production activities that are not aligned with the country‘s comparative advantage. Public policies should be of the ―comparative advantage facilitating‖ (CAF) type, helping to solve and overcome the problems of coordination and externalities that beset processes of structural transformation and innovation.

# **Broadening Opportunities**

There is also a need to better understand how to broaden access to economic opportunities to ensure rapid poverty reduction and promote human development. Inequalities of opportunities lie at the heart of inequitable growth processes. Atkinson, Piketty, and Saez (2011) have documented the evolution of inequality of opportunities by looking at the top income shares over the long run for more than 20 countries using income tax statistics. They found that in the last 30 years top income shares increased substantially in English speaking countries, China, and India (Figures 8a and 8b). They attribute this increase in part to an unprecedented surge in top wage incomes. Broadening opportunities is as relevant for developing countries as it is for highincome countries.

15
<!-- Start of picture text --> ==aoO 3026 wee ebroocchasoi!f ieet1!' -La---}iHHiH 'H4pons dan=:!HH! aaa 'H!! iii!i ! !1] ii uCanadanitedI+Hl SatesH:i H! —2—cacuntea'! AustH! itedratiaKingdom1 aTidocochanocheH ! --<br>aa Ireland —nNew Zealana |i |<br>B20 1-1' gakonbPoExg b- ESi ' H H H .<br>@ My ie ioe -4---4.---4RAG t _<br>=21s2=5 t- - -|-h---HPPA‘il)Ni ptesamasan a, nitH i PotH 7| dEi1podi idE oma1 ponI_awere,Hb a H<br>22a 0 +----}-- 1 IRSA EeH1 '1 sa1 iioH aaRN| Ns+saeayaaaafi ewboat1 tot' ShotsFOROS saatectonns--}----}----}foo “s| oop]Pootanr ae| oopooocbeo-| Z| ot<br>5 PoEPoE' ' EGEb i fo4' $44 1 i+ 'I t'i !''PoP!1HPoPHt:I i}!|EE1I ifinLook'Hpoof1 rootsHt 1 1! '||moe1111<br>2 8 8 w J<br>a =28 8 ~ = wD<br>=_ eSa SoD &_“2 Ss3 228—_ ao—_ ao=_oO unawo_— c=)&—] &~ &282 —_ 8 8Sfa &2 &&<br>30 i I 1 1 1<br>i I i i<br>i1 t1 i ~<br>1 China _a— Ind<br>onesia<br>“4c _<br>= 25 4----41 poi1 |1 \sPooton eee 1 an —— , — India.<br>1 1<br>oa9=< 20 ----4t=i bi:|1 pt--45I idIifV Ay!'1oe |i, iv ot iioocobon _<br>= \ ingapore<br>i<br>1 '<br>H ok aR H ' alt ai i i<br>=Li] 1 NA a '<br>ptt ye bet Q ' t. a” ti ' pocdescs<br>2 A a1 i 1<br>' ed he ! ! i! : = ! a _+*Fo-ooI' ad tf|I1 _<br>-r--- .<br>5 10 a: Hof VM' jo! ! when'g dntit, ata1rooTr--7 1G 1s<br>H ' | r Bt Fi1 H I '1 i1 1<br>1 H 1<br>= 1 IH iH I ! 1 1 4 ba q| Pol1 ef1 -u 11 I:<br>----d-nn ie ba ---4-- J-----be-1 ---4-- 983 O__<br>1I H ' 1b----4I i i '1 1 r 7oo a<br>1 1 ! I i i' i' 1<br>1 1 i ; ' 1<br>H ' I I H ' ss ae1 eee !1 oa1 vs a 1 AoH bo |1<br>H 1 1 1 1<br>0 t I H 1t I fPoEt i 1; pott |t ron; i I<br>s o 3 =< _ o 4 o<br>~s 8 $8a oa + 4 oS&a rsuwa to=a >oon aa uwa a<br>- = = 2 Sf &= = = _ = = a 2 a2 S§ Pr)&~TM<br><!-- End of picture text -->
element. However, across countries, social outcomes are only weakly related to spending in social sectors and, in many countries, additional spending on social services is subordinated to other priorities. Understanding why similar programs work better in some countries than others and identifying the binding constraints to better service delivery are key questions to improve access to opportunities.

Governance plays a role in explaining the inadequacy of services to the poor. Past research has documented large-scale job absenteeism and poor on-the-job performance by frontline service providers. Reforms to improve provider incentives frequently face substantial political opposition, because improving the quality of service delivery is not as politically popular as the provision of protected jobs or price subsidies. Too often front-line service providers and political decision makers have weak incentives to improve services. Publically documenting and understanding these deficiencies in service provision are key to achieving better services. One intervention of this nature focused on using information to train and mobilize local community agencies in India with legal powers to improve the village public school. While this did not have any direct impact on the public school system, it did succeed in stimulating large scale private volunteer teaching which improved literacy levels dramatically. Building on these findings, civil society organizations in Africa and India are experimenting with making local information more available to politicians by disseminating public service performance indicators at the level of electoral constituencies.

Another important area for development economics research is on gender equity, the focus of the World Bank‘s World Development Report 2012. Gender disparities in rights, access to resources and economic opportunity, and in voice and political participation vary across and within countries, but remain pervasive worldwide. On the one hand, more rapid development can help attenuate gender disparities. In the other direction, reducing gender inequality can help improve development outcomes. There is increasing awareness of the costs that gender disparities impose on individuals and societies, and of the resulting implications of these inequities for development prospects.

However, there are still large knowledge gaps in how and why gender equity matters for development and in the understanding of how best to take account of and address gender differences in policy design. As Figure 9 shows, these questions are complex to tackle, even in 17
<!-- Start of picture text --> Annual Salaries<br>500,000 (2006 dollars)<br>ees<br>450,000 ~——<br>Male Mean<br>400,000<br>350,000 —<br>300,000<br>Female Mean<br>250,000<br>200,000 — — Male Median<br>150,000 : ee ee<br>11 0|0)\0| 0 ———— Female Median<br>50,000 +<br>O 2 4 6 8 10 12 14<br>Years since MBA<br><!-- End of picture text -->
households‘ inability to access financial services on economic growth and poverty alleviation, and to better identify different ways to improve access, ranging from microfinance innovations to making improvements in the functioning of mainstream financial institutions and systems. For example, one frequently used policy for improving micro-, small-, and medium-size enterprises‘ access to bank loans is creating a credit guarantee scheme that insures banks against borrower default. However, there is very little rigorous evidence on the impact of these schemes that can guide policy discussion.

# **Managing Risk and Vulnerability**

Recent natural disasters (such as earthquakes and tsunamis), health pandemics, wars and civil strife, the oil and food price shocks of 2007-08, and the global economic crisis of 2008-09 have reminded us that the world is a risky, interconnected, and sometimes fragile, place.

Moreover, recent history has confirmed that a large fraction of the developing world‘s population remains particularly vulnerable to these shocks. Developing countries are assessing how the most recent crisis will affect their near-term growth prospects and how they can better protect themselves going forward against current and prospective risks.

In the area of natural disasters—extreme weather events such as cyclones, floods, and earthquakes— research in Bangladesh has highlighted the success of relatively simple and costeffective protection measures, such as providing emergency shelters large enough to accommodate family members and their livestock, which counteracts households‘ tendencies to remain in the path of a disaster to protect the bulk of their wealth. Other work on disaster preparedness has emphasized the need for regulatory reform, as well as new regulations to lower hazard exposure. For example, land use regulations to limit settlements in flood-prone areas are often difficult to enforce; reform of commercial building codes and regulations, on the other hand, may help to reduce housing shortages and provide stronger price signals to housing suppliers for improving quality and safety.

Another important area for research is the establishment of social safety nets at reasonable costs. Safety nets for the poor are sometimes seen as harmful, or at best neutral, to economic growth; however, recent research has suggested that some of these traditional concerns need to be reconsidered. Past work has focused on the problem of avoiding ―leakage‖ to the non19
poor and given too little attention to other issues, including assuring better coverage, maintaining incentives for escaping poverty by other means, and devising social protection policies that can act as automatic stabilizers in times of crisis. Such stabilizers do not require long lead times to provide help and do not inhibit access for those in need. Furthermore, the establishment of safety nets does not necessarily mean ―better targeting,‖ which can come at (often hidden) costs, including to poor people. The scope for nongovernmental partnerships in social protection has also been under-emphasized in the research community. Developed countries have already learned from safety nets solutions founded in developing countries and transferred to rich ones as is the case of the Mexico‘s ̳Oportunidades‘ program.

Most countries, including those that have experienced rapid development success underpinned by financial deepening, have suffered from financial crises interrupting the growth process, and sometimes setting back progress for a decade or more. Heightened risks at the level of the individual firm and households have reinforced the role of financial instruments and markets for hedging and managing risk at the micro level. Risk management, including crisis prevention, needs to become a central part of the research agenda on financial development. Building on past work, further effort is needed to investigate the impact of supervision strategies as well as the impact of compliance with Basel Core Principles on bank stability, the interaction of bank insolvency resolution and deposit insurance policies, and the impact of financial globalization on bank efficiency and access to financial services.

Another important sub-theme concerns how to better utilize and protect various aspects of the global commons in a growing and rapidly urbanizing world. While globalization has been a potent force for development, the recent financial and economic crisis has exposed the fragility of growth to policy failures, the spillover effects of shocks between developed and developing countries, and the global interconnectedness of natural resources. Figure 10 shows that globalization has increased the transmission of global shocks to local economies. While industrial production was not closely linked in Mexico and the United States prior to the formation of NAFTA, after its formation movements in industrial production between the two countries became closely aligned. The increasing interconnectedness of economies through trade and capital linkages must be used to promote shared growth, and means must be found to address the greater risk associated with greater exposure to global shocks.

20
**Figure 10**

# **Industrial Activity Index in Mexico and USA, 1980-2009**

(Seasonal Adjusted Data, Mexico 1993=100, USA:1994=100) <!-- Start of picture text --> 180<br>160<br>NAFTA<br>140<br>120 México<br>USA<br>100<br>80<br>60<br>Sources: INEGI and Federal Reserve<br>1980/01 1981/01 1982/01 1983/01 1984/01 1985/01 1986/01 1987/01 1988/01 1989/01 1990/01 1991/01 1992/01 1993/01 1994/01 1995/01 1996/01 1997/01 1998/01 1999/01 2000/01 2001/01 2002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01<br><!-- End of picture text --> Source: Esquivel (2011) Economic growth also places increasing pressure on common resources like the environment. Given demographic imbalances between countries, and the threat of larger-scale environmental disruptions in the future, migration also looms as a growing issue. How should global arrangements be reformed to ensure that these challenges are widely seen as important and legitimate, and that international responses provide a robust and supportive framework for sustainable development?

New challenges can also be expected for food security. Demand for food is expected to grow substantially over the next half-century in response to population growth and rising incomes, especially among the large and populous emerging economies. Agricultural productivity growth is needed, given constraints on the use of additional land or water, but in recent decades productivity growth appears to have slowed, in part because of past cutbacks in support for public agricultural research and development. Further sharp spikes in food prices, as in 2007-08, are expected when adverse shocks coincide with low stock levels. One of the 21
<!-- Start of picture text --> US$/ton<br>300 Wheat daily prices for 2070,CME Nearby contract,<br>Announcementof the export ban by Russia| August 5) ~<br>270<br>240<br>210 -<br>Weather elated problems began unfolding ~,<br>150<br>150<br>Jan-10 0 Feb-70 Mar-70 Apr-710 May-170 Jun-10 Jul-10 Aug-10 Sep-10<br>Source: Chicago Mercantile Exchange<br><!-- End of picture text -->
expanded upon proven success, as was the case for SOE reform in which private firms gradually increased their participation in the workforce through joint venture activities (Figure 12).

**Figure 12 China Workforce by Firm Type**

<!-- Start of picture text --> Evolution of total workforce: 1998-2007 (1998 = 100)<br>180<br>160<br>140<br>120<br>100<br>80<br>60<br>40<br>20<br>0<br>1998 1999 2000 2001 2002 2003 2004 2005 2006 2007<br>Domestic public firms Domestic private firms<br>Year<br>Total workforce index<br><!-- End of picture text --> Source: Du, Harrison, and Jefferson (2011) The ability to learn from country experiences rests heavily on the quality of those data collected. There is still much work to be done in improving these data, such as in reducing comparability problems, understanding data inconsistencies, reducing biases in data collection, and better linking across types of data. At the macro level, research has long had an important role in creating the tools, especially the data, needed for monitoring overall development effectiveness at country and sub-national levels. At the micro level, credible evaluations of development policies and projects (both ex ante and ex post) are accompanied by continuing methodological and data-related challenges. Methods will vary depending on the nature of the interventions that are being studied. There have been important advances in the use of both experimental and non-experimental evaluation methods for assigned programs (meaning that some observational units get the programs and some do not). However, these tools can be misleading for informing development policy (including scaling up) and may not be appropriate 23
for many of the most important questions we face in development policy making, where the intervention is not assigned or its assignment entails large spillover effects.

# **3. Conclusions**

This essay presents empirical evidence of the better growth performance of developing countries before and after the 2008-09 economic and financial crisis and how this better performance has led to a changed global economic landscape in which developing countries are taking center stage as multiple growth poles emerge. Nevertheless, against this backdrop it is important to acknowledge that this paper has not addressed issues like global imbalances, decreasing aid budgets, and trade protectionism, among others, that may influence the growth and development of developing countries in the future.

We also present a new research framework for development economics that highlights key topics to be addressed, and critical researchable questions, which can offer lessons to developed countries. This new framework encompasses four areas we refer to as the ―TORR‖ agenda. First, Transformation, that is, what underlies structural changes? Second, Opportunities, how can it be ensured that the benefits of growth are shared by all? Third, how can countries manage the Risks associated with environmental, trade, and financial shocks? Fourth, the profession must orient its policy prescriptions around a new focus on Results and aid effectiveness.

24