oaches to Economic Development and

nternational Development Assistance

Nicholas C. Hope
Director
Stanford Center for International Development
CDDRL Lecture, November 28, 2011

Approaches to Economic Development and

International Development Assistance
Outline:
1.
Growth and the development experience
2.
The (not so?) elusive quest for development
3.
Approaches to development
4.
How much consensus is there?
5.
Have bilateral and multilateral aid agencies
helped?
6.
The continuing debate

1. Growth and the development experience

Assertion: We live in an extraordinary period
present some figures/charts to justify that
statement, which has probably been made for
centuries, if not millennia
Acknowledge our debt to Angus Maddison, who
died early in 2011, for a life spent illuminating
humankinds economic progress in the tradition
of Kuznets and Clark, but with a canvas
incomparably broader

1. Growth and the development experience

Worldwide Growth in Real GDP/Capita, 1000- Present (%)

Source: Reproduced from Economic Growth in the 1990s: Learning from a Decade of Reform, Page 1; Original
source: DeLong 2000.

1. Growth and the development experience

A vast literature on growth theory, economic development, political
economy, the evolution of institutions, technological change and
knowledge creation that endeavors to explain the phenomenon
illustrated in the previous slide (See bibliography to Economic Growth
in the 1990s).
Impossible to do justice to all of the explanatory factors here: my
sense is that invention and innovation have played a major role,
especially in medical care, agriculture, and costs of communication.
Recognize that causality is elusive; very hard to substantiate.
Greater prosperity closely associated with the expansion of the
market through the opportunity to trade and invest beyond a local
community.
Advances in knowledge about economic policy-making also
contributed in important ways.
All the more striking due to increases in population that accompanied
economic growth; further questions about cause and effect.

1. Growth and the development experience

Emphasize growth since World War II, with reference to
earlier periods to explain the motivation for policy and
institutional changes that have marked the post-war period
Progress in the past 60 years (only 50 shown in the next
chart)
uneven, but essentially universal
Different countries/regions associated with periods of
exceptional growth: Germany and Japan; East Asian NICs;
China, now India; more recently, several African economies
The Commission on Growth and Development singled out
13 individual countries that have sustained fast growth for
exceptionally long periods in the post-WWII era; concludes
they defy generalization

1. Growth and the development experience

PER CAPITA INCOMES, BY REGION, 1950-2000
(1990 Geary Khamis [version of PPP] dollars)
Western
Europe

Western
Offshoots

Asia

Africa

World

1950

4,579

9,268

712

894

2,111

1960

6,896

10,961

1,029

1,066

2,777

1970

10,195

14,560

1,530

1,357

3,736

1980

13,197

18,066

2,034

1,536

4,520

1990

15,966

22,345

2,771

1,444

5,157

2000

19,002

27,065

3,817

1,464

6,012

4.15

2.92

5.36

1.63

2.85

Ratio: Income
2000 to 1950

Source: Angus Maddison, The World Economy Historical Statistics, OECD Development Centre Studies, OECD, Paris, 2

1. Growth and the development experience:

GDP of major economies: 1960-2010

Source: World Development Report

1. Growth and the development experience:

major OECD economies GDP per capita: 1970-2

Source: World Development Report

1. Growth and the development experience:

major OECD economies GDP per capita: 1970-2

Source: World Development Report

1. Growth and the development experience:

GDP per capita of BRICI: 1970-2010

Source: World Development Report

1.Growth and the development

experience:
major traders international trade in
goods

Sources: IMF (1990-2008), World Bank

(2009-2010)

1. Growth and the development

experience:
Chinese and Indian growth: 1990-2010

Sources: World Development Report, World Bank (2009),

IMF(2010)

1.Growth and the development

experience:
Chinese and Indian growth: 1990-2010 (%
per year)

Source: World Development Report

1. Growth and the development experience

Greater post-WWII prosperity has been almost universal, but with the
US far and away the dominant economy. The US share in global GDP
finally seems to be trending down, but to exceed the US in nominal
dollar terms still requires combining the economies of China, Japan,
Germany and another major European country

Past 20 years, the most exciting in my professional career, with the

emergence of China and India. With close to two-fifths of the global
population, hope now exists for continuing major reductions in global
poverty

The challenges are obvious, including countries ability to sustain

policy reform, and the resource and environmental implications of
continuing fast growth

A hopeful sign, recently, and into the sharp economic down-turn of

2008-10, developing countries are out-performing richer ones
Note the significance of 2004.

2. The quest for development

Although many definitions might be proposed, one that
serves my needs is:
Economic development is the process that transforms a
countrys capacity to provide for the material well-being
of its people narrow; neglects much of what people
value, especially as they move beyond the boundaries of
subsistence.
associated with (requires?) economic growth; which
needs to be sustained over time for successful
development
success of process usually judged also by distributional
effects (and, more recently, by broader considerations of
sustainability environmental impact; resource depletion)

2. The quest for development

Concern for development an outgrowth of the
determination post-WWII to avoid a recurrence of the
1930s
Initial focus on recovery of war-ravaged economies;
from mid-1950s, emphasis shifted to growth prospects
of poorer countries LDCs or (more politely)
developing economies.
Immediately after WWII, most of the load carried by the
US Marshall Plan, but an important role also for the
Bretton Woods institutions IMF, World Bank (IBRD,
initially), and GATT (now WTO).
Soon joined by many more bi- and multilateral aidgiving agencies.

2. The quest for development

Probably fair to say that, despite the evidence to the contrary
presented in earlier slides, the popular view of the international
efforts to promote growth of poor countries would be negative:
many countries still poor, and some of them dysfunctional
failed states
IFIs and bilaterals seen as wasteful and ineffective Peter
Bauer on official development assistance (ODA) taking from
the poor in rich countries to give to the rich in poor countries.
my view: opposition to aid-giving is often mean-spirited; an
excuse to disregard the suffering of much of humanity. Where
aid has failed, imagination has also failed, in the sense that the
delivery mechanism has been inappropriate to the recipients
circumstances.
a potentially legitimate concern, however: whenever aid is
available, governance suffers. One can argue that aid inevitably
creates incentives for rent-seeking and fosters corrupt practice.

2. The quest for development

A host of highly complex issues to consider in arriving at an
objective judgment. Beyond the scope of this lecture to
endeavor to resolve the issue, except to note that there are
examples of spectacular successes in both post-war
reconstruction and development in which aid giving has
played its part.
Which leaves a key question:
Why have some countries been able to develop
successfully and rapidly, while others cannot?
From the viewpoint of the international aid-givers, after years
of experience, untold billions of dollars spent, and unending
analysis of the problem, why have so many developing
countries been unable to sustain growth?

3. Approaches to development
The development literature is replete with a host of reasons
for the differential success of developing countries Latin
American disappointments; East Asian success stories;
lagging Africa. Many embarrassments, historically, in
scholarly comparisons of countries prospects and
predictions of comparative success.
An important consideration, often neglected, is the need for
persistence over time. A country growing at 7% a year
needs ten years to double its GDP; if population is growing
fast as well, then doubling per capita GDP takes even longer.
The implication is that even potentially successful strategies
take time to make significant progress; more time than the
tenure of most governments, and beyond the limits of the
patience of many donors.

3. Approaches to development
Since WWII, many development strategies have been promoted as
solutions to the development problem. Some assumed the aura of
the silver bullet and disillusionment quickly followed when desired
results were long in coming.
One can identify a list of vogues in advancing policies to promote
development that have appealed to policy makers in the post-WWII
era. The list presented here is neither exhaustive nor authoritative,
but does give a flavor of the many approaches that have influenced
strategies for aid giving during the period.
In the 1950s and 1960s:
central planning
(aid for infrastructure; industry. Issues:
industrialization
(project v. program aid; tied or untied aid;
import substitution (multilateral v. bilateral aid
Note that the early 1950s was a period in which the World Bank was
still engaged in supporting the recovery of war-ravaged economies

3. Approaches to development
This was an era of the Harrod-Domar and Solow growth
models; the surplus labor model (Lewis, and debates about
the productivity of rural labor); the merits of balanced or
unbalanced growth and the big push (Rosenstein-Rodan); the
low-level equilibrium trap (Leibenstein and Nelson) ; and the
foreign exchange constraint (Chenery, Bruno and friends).
A common theme was that development relied on
augmented savings/investment and adequate supplies of
foreign exchange (for imports of capital goods).
Also stages of growth (Rostow, and others; flying geese)
approaches emphasized a natural progression as economies
advanced; data were tortured to make stages credible, if not
persuasive.

3. Approaches to development
In the 1970s, a shift in emphasis:
basic needs and poverty reduction McNamara, Nairobi 1973
integrated area development
investment in social sectors human capital

Concerns for the distributional consequences of growth; sharing

benefits of development more equally (Ahluwalia and Chenery)
Increasing influence of the success of the NICs in East Asia;
trade, capital flows, and engagement with the global economy.
A step away from import substitution and export pessimism.
Context included the first OPEC oil shock, a commodities boom,
and wide-spread surge in inflation.
Developing countries begin to attract substantial flows of
international debt capital; mainly from banks for the more
credit-worthy, but export credit agencies ensured that even the
least credit-worthy importers were able to secure external
finance.

3. Approaches to development
In the 1980s:
The debt build-up from the 1970s became burdensome as the
developed countries (especially the US under Federal Reserve
Board Chairman, Paul Volcker) took steps to eliminate inflation.
Interest rates rose sharply, trade growth slowed, and further oil
price increases all contributed to a debt crisis that engulfed
much of the developing world.
Of necessity, the emphasis of aid givers shifted:
to structural adjustment fundamental changes in the nature
of support from the IMF and MDBs. The policy
advice/requirements of the IFIs became increasingly
controversial as conditions for programmatic support from
them were perceived as unacceptably onerous
true to an extent, as the limited funding available to the IFIs
led to adjustment programs that required implausibly sharp
changes in policy direction

3. Approaches to development
In the 1980s : (Cont)
implementation of the adjustment programs proved politically
difficult for most governments, many of which chose to make no
serious attempt to meet the programs conditions. Not
surprisingly, many adjustment programs were judged to have
failed. (Note: Stanley Fischer WB Chief Economist, 1988-90
recommended a return to an emphasis on project lending)

later in the decade, environmental issues began to take center

stage and the activities of the aid agencies came under the close
scrutiny of activist NGOs

The sustained growth of East Asia and the indifferent results of

policies recommended under structural reform programs led to
renewed investigations into appropriate growth-promoting
policies for developing economies.

3. Approaches to development
In the 1990s:
Spurred to a large extent by the collapse of
communism, which caused analysts to seek appropriate
policies for transition from central planning (command)
to market, the early years of the decade witnessed:
the East Asian Miracle;
John Williamsons summary of the policy conclusions
from the turbulent 1980s (reflecting experience with the
policy requirements of IMF/WB adjustment programs),
termed the Washington Consensus; and
with the collapse of communism, numerous recipe
books on policy advice directed at the transition
economies the merits of the big bang were debated.

3. Approaches to development
In the 1990s: (Cont.)
By the mid-1990s, the aid agencies were entreated to
support a range of new solutions to the problems of
development:
private provision of traditional development investments
in infrastructure as part of a generally enhanced role for
the private sector
enhanced design of development projects and programs,
to be
focused on agreed (comprehensive) strategies for
poverty reduction
more far-reaching in scope: in addition to the accepted
financial, economic and technical analyses, project
preparation should include detailed social
assessments, environmental impact assessments, etc.

3. Approaches to development
In the 1990s: (Cont.)
curtailment of corrupt practices that were considered to
undermine the effectiveness of foreign assistance as well as
domestic growth policies. The result has been to hold aid
agencies to higher standards of financial rectitude in both
implementing projects in their client countries, and their internal
management practices.

Under James Wolfensohn as its President, the World Bank became

even more introspective, subjecting its activities to ever-greater
scrutiny and introducing a host of additional safeguards to ensure
member countries that the Banks projects were untainted by
corruption.
Increasingly, knowledge began to be emphasized as a means for
lagging countries to catch up; the IT revolution gave substance to
the contention in the digital divide.

3. Approaches to development
Since 2000:
Detailed reassessment of the impact of policies on growth
prospects: see the World Banks Economic Growth in the
1990s: Learning from a Decade of Reform (2005), which led
to the formation of the Growth Commission headed by
Michael Spence (former Stanford GSB Dean) and The
Growth Report: Strategies for Sustained Growth and
Inclusive Development (2008).
Much wisdom in these reports; three broad conclusions:
most economists would see the Washington Consensus
prescriptions as necessary, but not sufficient, to sustain
growth;
growth is essential for substantial, sustained reductions in
poverty; and
desirable reforms of both policies and institutions are
largely country specific. One size decidedly doesnt fit all.

3. Approaches to development
Much attention in this decade also to other solutions to underdevelopment, including:
establishment of appropriate institutions (more important
than policy)
promotion of better governance:
anti-corruption
( Issue: a cause of
democracy
( development or a
bureaucratic competence ( consequence?
corporate oversight
( generation issues
And more proposed remedies that have something of the silver
bullet about them: micro-credit; social entrepreneurship
Finally, renewed emphasis on human capital partly a result of
the focus on knowledge; distributional issues; and growing
concern about environmental impacts of growth.

4. How much consensus is there?

So what have we learned, and how much
agreement is there on the factors that promote
growth? Almost all probably would agree that:

Policies matter
Institutions matter
Human capital matters education; health, too
Capital accumulation matters
Acquisition of technology matters

Are these conclusions too uncontroversial to be of

much use?

4. How much consensus is there?

My view: persistence also matters. Development is a timeconsuming process. Policies can be changed reasonably
quickly (part of the problem, if frequent changes in
government?), though their full impact is likely to take many
years to be realized.
Building institutional capacity, physical infrastructure, human
skills, and technological expertise takes at least a generation,
or two, or more. Countries that maintain continuity of
approach over lengthy periods tend to enjoy greater success
( Assumes they are trying to grow!!) than those that lack
commitment.
In that regard, almost all of the solutions presented earlier
can contribute to the success of the development process in
most countries. Cant be expected to carry an unrealistic load;
require that the effort to implement them is sustained.

4. How much consensus is there?

What I take from the Washington Consensus is that development
needs:
an effective capacity for macro-economic management
sufficient stability in the economy that investors and consumers
can have confidence in their ability to predict outcomes of their
actions
in a market economy, alignment of prices with real economic
costs implies integration with the international economy and
prices that reflect those in world markets
appropriate balance between the public and private sectors
neither should be expected to do everything; attempting to do
so virtually guarantees that things are done badly.
Governments should concentrate on policies, institutional
architecture and the supply of public goods
Private agents can handle most directly productive activities
Still leaves plenty of areas where mixed approaches may
achieve better results.

5. Have bilateral and multilateral aid agencies

Having spent nearly a quarter century in one, I can
hardly present myself as unbiased in judging how
much these agencies have contributed to
international development.
I feel strongly that the Bretton Woods institutions
have contributed in an important way to post-WWII
prosperity, and to the orderly conduct of
international commerce. (See Anne Krueger paper)
The role of the US undoubtedly very important in
this regard, directly and through its influence on
the operational priorities and policies of the IFIs.

5. Have bilateral and multilateral aid agencies

The restoration of confidence, once lost, in a countrys capacity
for effective economic management is a difficult task; the IMF is
unappreciated until needed, then criticized.
The MDBs have tried. Could be taken to task for lack of
persistence; continuing changes in priorities stemming from
pressure from their Boards, as well as transition of senior
managers.
A great contribution is collecting and analyzing data on all
aspects of development. Tireless in analyzing progress: what
works; what doesnt. In the WB, great effort expended in selfevaluation; its internal criticism should be an object lesson for
other agencies, especially most NGOs. The UNDP and other UN
agencies, too Human Development Reports.
Are there too many agencies; too many reports?

5. Have bilateral and multilateral aid agencies

World Bank Funding By Sector (US$ Billions; FY05-11)

Source: The World Bank Group, 2011 Annual Report

5. Have bilateral and multilateral aid agencies

World Bank funding, sectoral shares (%, 2008, 10

Source: The World Bank Group, 2011 Annual Report

6. The continuing debate

Conclude by returning to the question: Why give aid? Long ago,
G. Ohlin (others) suggested:
Political influence
Economic self-interest
Humanitarian objectives

As I have noted, my view is that it is moral to do so. To reiterate:

criticism of aid and its failures to achieve objectives seems best
directed at our inability to devise successful schemes to deliver
it rather than an argument for not doing so. Note the MDGs.
For me, a compelling concern is: will aid inevitably create rentseeking behavior (corruption) in recipients and so undermine
good governance? A research topic.