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2lj N`orld D've'opment Repor 1999/2000
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Entering
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Summary
The World Bank
Washington, D.C.



©) 2000 The International Bank for Reconstruction and
Development / The World Bank
1818 H Street, N.W., Washington, D.C. 20433, U.S.A.
Cover design by W. Drew Fasick, ULTRAdesigns.
Illustration/calligraphy by Jun Ma. The cover depicts the Chinese
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Inside design and typesetting by
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Manufactured in the United States of America
First printing September 1999
This document summarizes World Development Report 1999/2000,
published by Oxford University Press for the World Bank. It is a product
of the staff of the World Bank, and the judgments made herein do not
necessarily reflect the views of its Board of Executive Directors or the
countries they represent. The World Bank does not guarantee the
accuracy of the data included in this publication and accepts no
responsibility whatsoever for any consequence of their use.
ISBN 0-8213-4389-0
Text printed on recycled paper thar conforms to the American Standard
for Permanence of Paper for Printed Library Material Z39.48-1984.



Contents of World Development
Report 1999/2000
Overview
The frontiers of development t-hinking
Globalization and localization
Supranational issues
Subnational issues
Translating policies into actions
Introduction New Directions in Development Thinking
Building on past development experiences
The many goals of development
The role of institutions in development
The record and outlook for comprehensive development
A changing world
Chapter 1 The Changing World
International trade
International financial flows
International migration
Global environmental challenges
New political tendencies in developing countries
Emerging subnational dynamics
Urban imperatives
Implications for development policy
Chapter 2 The World Trading System: The Road Ahead
How the global trading system benefits developing countries
WTO mechanisms for promoting and maintaining liberal trade regimes
Sustaining the momentum for trade reform
International trade and development policy: the next 25 years
Chapter 3 Developing Countries and the Global Financial System
The gathering pace of international financial integration
Toward a more robust and diversified banking system
The orderly sequencing of capital account liberalization
Attracting foreign investment
Revitalizing international macroeconomic cooperation
Chapter 4 Protecting the Global Commons
The link between national and global environmental issues
Moving from national to international action
The ozone treaties: a success story
iIII



IV    WORLD DEVELOPMENT REPORT 1999/2000
Climate change
Biodiversity
Exploiting the links between global environmental problems
Chapter 5 Decentralization: Rethinking Government
What is at stake?
From centralized to decentralized governance
Balancing political power between central and local interests
The structure, functions, and resources of subnational governments
Making subnational governments accountable
Policies for the transition
What lessons for the future?
Chapter 6 Dynamic Cities as Engines of Growth
What makes cities grow?
The national government's role in urbanization
Local policies for urban economic growth
Chapter 7 Making Cities Livable
The unfinished urban agenda
Learning from the past
Service provision in developing countries
Looking ahead
Chapter 8 Case Studies and Recommendations
Making the most of trade liberalization: Egypt
Reforming weak banking systems: Hungary
Macromanagement under fiscal decentralization: Brazil
Improving urban living conditions: Karachi
Cultivating rural-urban synergies: Tanzania
The shifting development landscape at the dawn of the 21st century
Bibliographical Note
Appendix Selected Indicators on Decentralization, Urbanization, and the Environment
Selected World Development Indicators
Index



Summary
he development landscape is being  to reducing poverty, these challenges
transformed, presenting policymakers  include issues of food security, water
with new challenges at the global and  scarcity, aging populations, cultural loss,
local levels. This report charts the way  and environmental degradation.
forward by analyzing the contours of    These challenges must be confronted
the new landscape and distilling lessons  even as manv forces reshape the devel-
from the past. It examines the unfold-  opment terrain: innovations in technol-
ing dynamic at the supranational and  ogy, the spread of knowledge, the growth
subnational levels. And it proposes new   of population and its concentration in
rules and structures to serve as a foun-  cities, the financial integration of the
dation for development policy in the  world, and rising demands for political
21 st century.                       and human rights. Some of these forces,
Fifty years of development experi-  like population growth, will work their
ence have yielded four critical lessons.  way gradually, giving policymakers time
First, macroeconomic stability is an es-  to respond. Others, such as financial con-
sential prerequisite for achieving the  tagion, could batter apparently healthy
growth needed for development. Sec-  economies without warning unless pre-
ond, growth does not trickle down; de-  emptive measures are in place. Some will
velopment must address human needs  give rise to challenges, like social wel-
directly. Third, no one policy will trig-  fare funding, that most nation-states can
ger development; a comprehensive ap-  cope with on their own. Others, such as
proach is needed. Fourth, institutions  global climate change, will be beyond
matter; sustained development should  the reach of any one state and will call
be rooted in processes that are socially  for international agreements.
inclusive and responsive to changing    If they are managed well, these forces
circumstances.                       could revolutionize the prospects for
These insights are central to how the  development and human welfare. How-
World Bank envisions its work in the  ever, the same forces are also capable of
21st century and to the way in which it  generating instability and human suf-
proposes to tackle the principal devel-  fering that are beyond the ability of in-
opment challenges ahead. In addition   dividual nation-states to remedy.



2     WORLD DEVELOPMENT REPORT 1999/2000
This report views the changes that have been set in  countries in the world, has had remarkable economic
motion as contributing to-and as manifestations of-    success with a development strategy that involves only a
two phenomena: globalization and localization. Global-    limited dose of market liberalization and privatization.
ization, which reflects the progressive integration of the  The failure of centrally planned economies to keep
world's economies, requires national governments to    pace with their market-oriented counterparts has dem-
reach out to international partners as the best way to  onstrated clearly enough that planning entire economies
manage changes affecting trade, financial flows, and the  at the central government level is not a productive path
global environment. Localization, which reflects the   to long-term  development. But the experiences of
growing desire of people for a greater say in their govern-    Japan, East Asia, and China make clear that it is possi-
ment, manifests itself in the assertion of regional identi-    ble for a country to have an interventionist government
ties. It pushes national governments to reach down to re-  and still enjoy extremely rapid economic growth over a
gions and cities as the best way to manage changes     period of decades.
affecting domestic politics and patterns of growth. At    Brazil also grew very rapidly in the 1960s, in part by
both the supranational and subnational levels, institu-  making widespread use of import-substitution policies.
tions of governance, negotiation, coordination, and regu-  These policies certainlv appeared helpful to Brazil at the
lation will play a critical role in promoting a new equilib-  time-at a minimum, they did not prevent a surge of
rium between and within countries-and in abetting the  rapid growth-but this success does not mean that sim-
creation of the stable environment that will make possi-    ilar policies would make sense in other countries, or even
ble the implementation of development programs.       in Brazil three decades later. Similarly, certain policies
The frontiers of development thinking                  that helped Japan develop in the 1 950s and 1 960s, gen-
erated growth in East Asia in the 1970s and 1980s, and
As the 20th century draws to a close, mainstream devel-    sparked China's economic boom in the 1 980s and 1 990s
opment thinking has evolved toward a broad pragma-     were specific to the time and place. They may not have
tism. As with many subjects, a deeper understanding of  worked well in other countries, nor are thev likely to be
development involves a recognition that sweeping be-   appropriate in the opening decades of the 21st century.
liefs are often incomplete, that layers of complexity are  In any given country, progress depends on a constel-
buried not far beneath the surface, and that wisdom is    lation of factors, and on shifts in their configuration t-hat
often contingent on the particular conditions of time  take place over time. What is required is to step beyond
and place. In recent decades both experience and intel-    the debates over the roles of governments and markets,
lectual insight have pushed development thinking away  recognizing that they need to complement each other,
from debates over the role of states and markets, and the  and to put to rest claims that any particular policy in-
search for a single, overarching policy prescription.  tervention-in education, health, capital markets, or
Investment in physical and human capital, for exam-  elsewhere-is the magic formula that will inspire devel-
ple, should encourage economic growth, and as a gen-   opment in all times and places. This shift in develop-
eral rule, empirical evidence supports this proposition.  ment thinking can be summarized in four propositions:
But in a number of cases, high rates of investment and    Sustainable development has many objectives. Raising
education have not been enough to deliver rapid growth.  per capita incomes is only one among many develop-
A similar lesson holds true for industrial policies. Many  ment objectives. Improving quality of life involves more
countries decided, after experimenting with export sub-  specific goals: better health services and educational op-
sidies, that the subsidies enriched business owners but  portunities, greater participation in public life, a clean
did little to speed economic growth. They saw well-    environment, intergenerational equitn, and more.
intended industrial subsidies turn into a costly form of  Development policies are interdependent. No single
corporate welfare, an expensive way of providing tax-  development policy can make much of a difference in
payer support for private jobs in a narrow range of in-  an unfavorable policy regime. Countries need inte-
dustries. Yet East Asian economies, making active use of  grated policy packages and institutional environments
export subsidies and credit allocation, experienced the  that reward good outcomes, minimize perverse incen-
most powerful sustained surge of economic development    tives, encourage initiative, and facilitate participation.
the world had seen in decades. And China, which alone     Governments play a vital role in development, but there
includes 40 percent of all the inhabitants of low-income  is no simple set of rules that tells them what to do. Beyond



SUMMARY       3
generally accepted rules, the role of government in the   These items do not constitute an exhaustive list of
economy varies, depending on capacity. capabilities,    all the concerns development should embrace. Issues of
the country's level of development, external conditions,  gender and equity are integral to every part of the
and a host of other factors.                           framework. Moreover, as mentioned earlier, macroeco-
Processes a re just as imnportanr as policies. Outcomes  nomic stability is a necessary condition for the success
of policies based on consensual, participatory, and     of development initiatives. How important each of
transparent processes are more easily sustained. Institu-  these concerns is to individual countries depends on the
tions of good governance that embody such processes     particulars of time and place. Every country will bene-
are critical for development and should encompass       fit from identifying and prioritizing its needs-an ex-
partnerships among all elements of civil societv.       ercise that reveals the economic or governmental weak-
nesses and institutional failures that stand in the way
Creating new guidelines for development                of full development.
In light of these propositions, the World Bank is intro-
ducing a comprehensive development framework to         Building institutions andpartnerships
serve a number of purposes: to sharpen the focus on the  Effective development requires partnerships among dif-
major goals of development. to highlight the integrated  ferent levels of government, the private sector, donor
nature of policymaking, to emphasize the institutional  groups, and civil societv. A comprehensive strategy is
processes required to sustain development, and to co-   simply too demanding for any one level or area of gov-
ordinate development efforts.                           ernment or for a single donor. National governments
The framework underscores the growing realization    need to provide the guidance that agencies and organi-
that the many elements that make up the development     zations require to coordinate their efforts to remove
process must be planned together and coordinated in     bottlenecks to development.
order to obtain the best results--and sometimes in order  A solid foundation of effective organizations and en-
to arrive at any results at all. A school-building project  abling institutions is a necessary precondition to devel-
is a good example. Physically putting up the building is    opment. In this context ;'institutions" are sets of rules
only a start. Raising educational levels will depend on  governing the actions of individuals and organizations,
many other things, such as effective mechanisms for se-  and the interaction of all relevant parties and the nego-
lecting, training, and remunerating teachers adequately  tiations among the participants. Specifically, countries
and sufficient resources to buy enough textbooks and    need institutions that strengthen organizations and pro-
supplies.                                               mote good governance, whether through laws and regu-
What is true of a school-building project is also true  lations or by coordinating the actions of many players,
of privatization programs, social safety nets, and sus-  as international treaties and public-private partnerships
tainable energy programs. The complementarities be-     do. Rule-based processes increase the transparency of
tween projects and processes are vital to success. A com-  policies designed to create desired outcomes and of or-
prehensive framework makes these complementarities      ganizations used to implement them.
explicit by emphasizing the relationships among the       The message of this report is that new institutional
human, physical, sectoral. and structural aspects of    responses are needed in a globalizing and localizing
development.                                            world. Globalization requires national governments to
The human and physical aspects of development are    seek agreements with partners-other national govern-
well known. Sectoral aspects stress the importance of   inents, international organizations, nongovernmental
cross-cutting elements such as coordination, manage-    organizations (NGOs), and multinational corpora-
ment, and maintenance of an effective enabling envi-    tions-through supranational institutions. Localization
ronment for private business and community initia-      requires national governments to reach agreements
tives. Structural aspects focus on the need for good    with regions and cities through subnational institutions
governance, transparent decisionmaking, efficient legal  on issues such as sharing responsibility for raising rev-
and judicial processes, and sound regulatorv systems.   enues. Both globalization and localization often require
This identification of rules and processes as a critical  responses that are beyond the control of a single na-
foundation for sustained development adds a new di-    tional government. Yet national governments will re-
mension to mainstream development thinking.             main pivotal in shaping development policies in an en-



4     WORLD DEVELOPMENT REPORT 1999/2000
vironment that circumscribes, constrains, and redefines  Figure 2
their role. In an interconnected world in which coun-    All but a few democracies have decentralized
tries may continue to fragment, development agendas      some political power
must respond to both global and local imperatives.          Number of countries
Globalization and localization                           75 -
Technological advances in communication have made
it possible to know in an instant what is happening in a  50 -
household or factory or on a stock market half a world
away. The growing importance of services and informa-
tion in the world economy means that an increasing       25
proportion of economic value is weightless-that is, it
can be transmitted over fiber-optic cable rather than
transported in a container ship. At the same time im-                Without                    With
provements in transportation networks and technology            subnational elections    subnational elections
are reducing the costs of shipping goods by water,         Note: Figure shows ai courtries classified as multiparty demccracies
ground, and air, and improvements in information           for wh ch dawre vve available.
Source: Freedom House, Freedom m the IVorld, 998 asopendix
technology have made it easier to manage the new in-      tab e A 1
terconnections (figure 1). Multinational companies         -                                        -
now rely on production chains that straddle manv
countries. Raw materials and components may come
from two different countries and be assembled in an-        Rising educational levels, technological innovations
other, while marketing and distribution take place in    that allow ideas to circulate, and the economic failure
still other venues. Consumers' decisions in, say, London  of most centrally planned economies have all con-
or Tokyo become information that has an almost im-       tributed to the push for localization. National govern-
mediate impact on the products that are being made-      ments have responded to this push in various ways.
and the styles that influence them-all over the globe.   More countries have become democracies, and politi-
cal participation through elections has expanded at
Figure 1                                                 both the national and subnational levels. National gov-
Computers are linking the world                          ernments are increasingly sharing responsibilities and
revenues with subnational levels of government that are
Internet hosts worldwide z
(millionse                                            closer to the people affected by policy decisions (figure
50 -                                                     2). People are also forming NGOs to pursue objectives
such as political reform, environmental protection,
cgender equality, and better education.
40 -                                                        Globalization and localization are terms that provoke
35 -                                           :  5      strong reactions, positive and negative. Globalization is
30 -                                                     praised for the new opportunities it brings, such asac-
25 -                                                     cess to markets and technology transfer-opportunities
20 -                                                     that hold out the promise of increased productivity and
15                                                       higher living standards. But globalization is also feared
10 -                                                     and often condemned because it sometimes brings in-
5m       .E hIIIII                                      stability and unwelcome change. It exposes workers to
o - s  *  *  *  I  *  *  |                              competition from imports, which can threaten their
Jan. July Jan. July Jan. July Jan, July Jan. July Jan. July Jan.    jobs; it undermines banks and even entire economies
l99i3   1994   1995    1996   1997   1998  1999     when flows of foreign capital overwhelm them.
Source: Network W zards, Internet Domnair Survey, January 1999  Localization is praised for raising levels of participa-
(vI,vW. nw. comr).                                     tion in decisionmaking and for giving people more of
a chance to shape the context of their own lives. By de-



SUMMARY        5
centralizing government so that more decisions are        to the best practices of foreign firms and to the demands
made at subnational levels, closer to the voters, local-  of discerning customers, encouraging greater efficiency.
ization nourishes responsive and efficient governance.    Trade gives firms access to improved capital inputs such
But it can also jeopardize macroeconomic stability.       as machine tools, boosting productivity as well. Trade
Local governments that have borrowed heavily and          encourages the redistribution of labor and capital to
spent unwisely, for example, may have to be bailed out    relatively more productive sectors. In particular, it has
by the national government.                               contributed to the ongoing shift of some manufactur-
This report does not praise or condemn globaliza-      ing and service activities from industrial to developing
tion and localization. Rather, it sees them as phenom-    countries, providing new opportunities for growth.
ena that no development agenda can afford to ignore.         The creation of the World Trade Organization
While national governments rernain central to the de-     (WTO) in 1995 built on the General Agreement on
velopment effort, globalization and localization require  Tariffs and Trade (GATT) and is the latest multilateral
that they engage in essential institution-building at     step toward creating an environment conducive to the
both the supra- and suboationial levels in order to cap-  exchange of goods and services (figure 4). A number of
ture the benefits of growth in the 21st century.          other important measures must follow, so that the mo-
mentum for reform is not lost.
Supranational issues                                         Fuituire trade talks will require a forward-looking
National governments will inevitably face frustrations    agenda for broader trade liberalizationz if they are to repeat
in dealing with globalization, and these frustrations will    their past successes in opening markets. The Millennium
be magnified for small developing economies. But such     Round, which is scheduled to start in November 1999
countries stand to gain more from international trade     under WTO  auspices, may be the first test of such
and finance than their larger counterparts, since they    an agenda. Reducing trade barriers in agriculture and
face tighter resource and mark-et-size constraints. At the  services should be high on the list of priorities. Trade in
same time these economies may feel any disruption the     agricultural products is one area that offers many devel-
global economy generates far more intensely. An eco-      oping economies real opportunities-if these opportu-
nomic shock that may feel like only a ripple to an enor-  nities are not blocked by trade barriers in wealthy coun-
mous economv like the United States, or even to a rela-   tries. Trade in services is another issue that must be
tively large developing economy like Brazil, is a tidal
wave for an economy the size of Ghana or Bangladesh.      Figure 3
When it comes to environmental issues, national gov-      Trade is growing much faster than national
ernments can strike their own balance on domestic         income in developing countries
problems by, for example, determining how to apply            i
pollution standards to regions that lie entirely within      (percentage of GDP)
the country. But unless developing countries work         50 -
through international agreements, they have little abil-
ity to address global environmental problems like the     45 -                                   E
threat of climate change. This report considers three di-          Industrial countries
mensions of globalization: trade, financial flows, and
environmental challenges.                                 35 -
Trade                                                     30 -   Developing countries
Foreign trade has grown more quickly than the world
economy in recent years, a trend that is likely to con-   25 -
tinue (figure 3). For developing countries, trade is the
primary vehicle for realizing the benefits of globaliza-    1981  1983  1985  1987  1989  1991  1993  1995 1997
tion. Imports bring additional competition and variety
to domestic markets, benefiting consumers, and exports     serv ces.
enlarge foreign markets, benefiting businesses. But per-    Source World Bank, Word Development Irdicators, 1999
haps even more important, trade exposes domestic firms



6     WORLD DEVELOPMENT REPORT 1999 /Z00O
Figure 4                                                ucts are not sold below what is considered a "fair" price
Countries are joining the WTO in increasing             on domestic markets. But such rules can easily be turned
numbers
into barriers to imports, diluting market access and re-
Number o7f member countries in GATT/WTO             versing the gains from previous trade agreements. One
140 -                                      134          solution is to treat the pricing decisions of importers
and domestic firms according to the same criteria. UJnder
120 -                                                   this approach only antitrust issues such as predation are
100 -                    100                            remedied directly.
85             :       
80                                                      F Financialflows
Financial flows across national borders have risen far
60 -    -                -                 -           more quickly than trade in recent years. These capital
40 -                                                   flows can be divided into foreign direct investment, for-
eign portfolio investment, bank loans, and official de-
20 -                                                   velopment flows. Foreign direct investment is ma(le up
0 -   1980_of flows intended to purchase a stake in the manage-
1980             1990              1999          ment of a company or factory. Foreign portfolio invest-
Soorce  7TO, Arnua, Report, var ous years.             ment includes purchases of "paper" assets like equities
and bonds (below the threshold required to give own-
ers managerial control of physical assets). The increase
in foreign direct investment and portfolio flows is par-
addressed. Driven by advances in information and com-   ticularly striking (figure 5).
munications technology, it is growing explosivelv-         Flows of foreign capital offer substantial economic
25 percent between 1994 and 1997 alone. This type       gains to all parties. Foreign investors diversify their risks
of trade offers another opportunity for developing      outside their home market and gain access to profirable
countries, which can readily supply many sought-after   opportunities throughout the world. Economies receiv-
services.                                               ing inflows of capital benefit in many ways. Initially,
Countries must make greater use of WTO mechanisms.    inflows raise the level of investment. When foreign di-
For example, a country that wants to strengthen its com-  rect investment is involved, management expertise,
mitment to reducing (and maintaining) low trade barri-    training programs, and important linkages to suppliers
ers can "bind" its tariffs by incorporating the decision to  and international markets often accompany the capi-
lower them  into its international obligations at the   tal. Yet international capital flows, especially flows of
WTO. The more countries view the WTO and interna-       volatile short-term investments, also expose developing
tional trade rules as mechanisms for advancing national  countries to certain dangers. Among these are sharp
goals (rather than as obstacles to self-determination), the  changes in investor sentiment and waves of speculation
greater will be the support for such institutions,      that can upset exchange rate regimes, imperil banks and
Public policies must take into account the plight of    large firms, and wreak havoc on economies. Putting the
worker-s displaced by the forces of trade. These policies  genie of foreign capital back in the bottle is not possi-
must address the concerns of displaced workers in gen-  ble-and ultimately not desirable. But such capital
eral, since many workers will blame foreign trade for   comes with a challenge: to devise policies and institu-
job losses and wage cuts whether it is responsible or   tions that tip the balance so that capital mobility bene-
not. Augmenting trade liberalization with labor market  fits developing economies rather than injuring therm.
policies that ease workers' adjustment to the effects of   Governments of developing countries can begin this
global trade will reduce pressure to close domestic mar-  process by reforming their banking sectors and nurtur-
kets to foreign goods.                                  ing capital markets. The paucity of mutual and pension
Gov)ernments must change policies that are still allowed  funds and the weakness of stock and bond markets in
under existing trade rules but that hinder rather than pro-  developing countries make banks the primary providers
mote trade. For example, antidumping laws are allowed   of financial intermediation. Creating a robust banking
under the \X5TO. They are intended to ensure that prod-  regulatory framework offers a substantial economic



SUM,MARY       7
Figure 5                                                  Countries can hedge these risks to some extent, but reg-
Private capital flows to developing countries             ulations are needed to moderate the demand for short-
have increased dramatically                               term foreign borrowing in the first place. One such
Net capital flows                                     measure could require that a part of all capital inflows
(billions of U.S. dollars)                            not intended to purchase productive physical assets be
160 -                                                     set aside for a specified period, therebv raising the cost
140 -                                                     of short-term borrowing from abroad.
S 1990                                   In a world where financial markets continue to ;'go
120                U 1998                                 global," developing countries need to work toward be-
100*                                                      coming good homes for long-term foreign investment.
80                                            *          Building an investment-friendly environment requires
a commitment to a transparent regime of investors'
60   _               _                        *          rights and regulations, a legal system tbat offers equal
40-                                                      treatment and protection to foreign and domestic in-
*i               *                        *vestors, sound macroeconomic fundamentals, and in-
20 I_  '_-*'                                             vestment in human capital. When investment is inte-
0-                                                      grated into a well-functioning local economv, other
Official   Private debt    Portfolio  Foreign       .                             3
flows        flows       equity       direct        'vestors will alwavs be ready to step in should one in-
flows     investment     vestor decide to withdraw.
Note: Private debt ficos nclode bank cans and :onods The Reoubic  International institutions have a role to play in help-
of Korea is inc uded in the I gu,es for deve op ng countries  in, developing countries promote financial stabilitv and
Source Wenord BarK GPIoca,Deveopreotr Finance 1999       .                      p
investment. International banking agreements such as
the Basle Accords can serve as models for local bank ac-
counting standards. The International Monetary Fund
payoff. An effective regulatory regime creates an envi-   (IMF) can monitor economic performance and coordi-
ronment that encourages prudent risk-taking. A regu-      nate short-term relief for liquidity problems, dampen-
latory structure for banking also sets out the conditions  ing the severity of a financial crisis. Trade agreements
for establishing banks, the services they can provide, the  can help keep responses to financial shocks from turn-
level of capital they must hold, and the amount of in-    ing into a beggar-thy-neighbor cycle of protectionism.
formation they must disclose. And a sound regulatory      Regional and international talks on coordinating macro-
framework specifies the prudential steps regulators are   economic policies can seek ways to avoid actions that
required to take if these standards are nor met.          favor one economy at the expense of its neighbors.
Increased competition in the financial sector im-
proves incentives for both banks and their customers.     Global environmental challenges
Competition increases as the domestic financial sector    Just as a country's economy can be swamped by global
develops and securities, stock markets, and other inter-  economic forces it has little power to control or deflect,
mediaries begin playing larger roles. Allowing foreign    its environment can be threatened by activities taking
banks to enter a country, especially when their home      place beyond its borders and its control. In somc low-
countries have sound regulatory systems in place, boosts  income countries the threats may be severe enough to
regulation by importing high-quality risk-management      jeopardize furrher sustainable development. Climate
standards, regulatory practices, and trained managers.    changes, for example, could raise ocean levels, swamp-
Banks in developing countries must balance two         ing the homes of millions of people in low-lying coun-
risks. Banks often raise short-term  money on global      tries like Bangladesh. Governments acting alone, and
markets in one currency, such as U.S. dollars or Japan-   even regional organizations, cannot respond effectively
ese yen, and then loan that money out for longer peri-    to this kind of environmental problem. The response
ods in domestic currency. These bank-s run the risk of    must be global. Industrial countries are responsible for
losing their supply of short-term foreign money if the    most of the existing global environmental problems-
market dries up. as well as the risk of losing much of    especiallv man-made greenhouse gases-but develop-
the value of their assets if the exchange rare depreciates.  ing countries arc catchiitg up rapidly. Tlleir capacity to



8     WORLD DEVELOPMENT REPORT I9992-000
contribute to future environmental damage increases as  on Climate Change created at the 1992 Rio Earth Sum-
they grow.                                              mit form a basis for moving forward. The Global En-
The world has already seen one genuine environ-      vironment Facility (GEF) is a joint initiative of the
mental success story in the Montreal Protocol of 1987,  United Nations Development Programme, the United
which brought all countries together to address a com-  Nations Environment Programme, and the World Bank.
mon environmental threat. The Montreal Protocol at-    The GEF provides grants and concessional funds to
tempts to solve the problem of chlorofluorocarbon       cover additional costs countries incur when a develop-
emissions, which reduce ozone concentrations in the     ment project aLso targets one or more of four global en-
upper atmosphere. In the 1 980s scientists realized that  vironmental issues: climate change, biodiversity loss,
allowing these emissions to continue unchecked would    the pollution of international waters, and depletion of
dangerously increase ultraviolet radiation in the higher  the ozone layer. National governments can take a num-
latitudes, raising rates of skin cancer and cataracts and  ber of actions that improve domestic welfare while
damaging the environment. Thanks to the Montreal        helping preserve the global commons. Removing fuel
Protocol and follow-on agreements, global interna-      subsidies and improving public transportation, for ex-
tional production of chlorofluorocarbons has fallen     ample, not only are in the best interest of individual
steeply, and global cooperation to reduce ozone deple-  economies but also contribute to reducing global car-
tion appears to be succeeding.                          bon dioxide emissions that affect other countries.
The world faces a number of other pressing environ-
mental problems that threaten the global commons. Per-
haps the best known is climate change, which is associ-  Even as globalization directs the attention of national
ated with increasing emissions of carbon dioxide into the  governments to events, forces, and ideas outside their
atmosphere. Others include biodiversity loss, which is    borders, localization highlights the opinions and aspira-
occurring at an alarming rate; desertification; the deple-  tions of groups and communities at home. Two aspects
tion of fish stocks; the spread of persistent organic pol-  of localization receive particular attention in this report:
lutants; and threats to the ecologv of Antarctica.      decentralization and urbanization.
The ozone success story provides a model for future
international agreements on global environmental is-    Political pluralism and decentralization
sues. The scientific case for addressing the risk of en-  Localization has generated political pluralism and self-
vironmental damage needs to be made forcefully in       determination around the world. One of its manifes-
open and robust public debate. The world's peoples and  tations is the increase in the number of the world's
their governments must share the belief that the costs  countries, which has climbed as regions win their inde-
of environmental damage are heavy enough to justify     pendence. Another is the change in countries' choice of
immediate action. Alternatives to current behavior      governments. As recently as 25 years ago, less than one-
must be technically feasible and reasonably inexpensive,    third of the world's countries were democracies. In the
and all countries must be willing to participate in inter-    late 1990s that proportion has risen to more than 60
national accords. Sometimes this willingness will come  percent (figure 6).
at a price, with high-income countries paying low-        The ability of people to participate in making the de-
income economies to comply with an agreement and        cisions that affect them is a key ingredient in the process
groups of signatories imposing penalties on countries   of improving living standards-and thus in effective de-
that fail to meet the standards the agreement sets. Fi-  velopment, But political responses to localization, such
nally, the standards themselves must be flexible, because  as decentralization, can be successful or unsuccessful,
very rarely is there a "one size fits all" solution to global  depending on how they are implemented. The follow-
problems.                                               ing are several important lessons for governments to
The conditions surrounding biodiversity and cli-    consider when embarking upon decentralization.
mate change suggest that reaching international agree-    Decentralization is a/most always politically. motivated.
ment on these issues will be more complex than it was   Often its primary objective is to maintain political sta-
with ozone depletion. But the international community   bility and reduce the risk of violent conflict by bringing
has already begun seeking solutions. The Convention     a wide range of groups together in a formal, rule-bound
on Biological Diversity and the Framework Convention    bargaining process. Arguing about whether decentral-



SUMMARY   9
ization should happen is largely irrelevant; the way it is   hastily, and granting local elections is a relatively fast
implemented will determine how successful it is.             and easy step to take. But devising new regulatory rela-
Devising a successfil decentralization strategy is com-   tionships between central and subnational governments
plex because decisionymakers do not always filly control the  is a slow and difficult task, as is the transfer of assets
decentralization process. Decentralization requires chang-   and staff from the central to the local level. Equally dif-
ing the system of governance and establishing new po-        ficult is the conversion of a svstem based on annual
litical, fiscal, regulatory, and administrative institutions.  budgetary transfers between units of a centralized ad-
It involves not simply the decision to permit local elec-    ministration to one based on the assignment of taxes
tions but also a series of choices about electoral rules     and expenditures at different levels of government.
and party practices that will affect the options available      National governments need to demonstrate their^ com-
to voters. It involves more than a decision to devolve a     mitment to the new rules of the intergovernmental rela-
certain type of responsibility-for education, say-to         tionship at the very outset. Precedents matter, because
the local level. It requires deciding which level of gov-    they affect expectations. One of the most important
einment will be responsible for financing education          precedents a central government can set for newly de-
(particularly in poor regions), which level will establish   mocratized subnational governments is to keep the cen-
curricula and develop instruction materials, and which       tral budget constraint hard. Local governments must
level will be responsible for the day-to-day management      know that if they overspend, the national government
of the schools, including hiring, promoting, and dis-        will not bail them  out and that local taxpayers and
missing teachers. So that decentralization does not          politicians will bear the burden of adjustment.
occur at the expense of equity, it requires granting rev-
enue sources to subnational authorities and designing a      Urbanization
system of intergovernmental fiscal transfers to comple-      More and more of the world's population is moving
ment local resources. It demands rules governing sub-        from rural to urban areas. Twenty-five years ago less
national borrowing. And finally, it must include steps       than 40 percent of the world's population lived in
to build the capability of subnational governments to        urban areas; 25 years in the future this share could
carry out their new responsibilities.                        reach nearly 60 percent. Of the urban dwellers of the
The elements of reform must be synchronized. The po-     future, nearly 90 percent will be living in developing
litical impetus that is often behind decentralization        countries. Half a century ago just 41 of the world's 100
prompts central governments to make concessions              largest cities were in developing countries. By 1995 that
Figure 6
There are more countries .. .                                ... and more democracies
Democratic countries
Number of countries in the world                             (percentage of total countries)
200 -                                                        100 -
180 -                                                        90 -
160 -                                                        80 -
140 -                                                        70 -
120-                                                         60
100 -                                                        50 -
80 -                                                         40 -
60 -                                                         30 -
40-                                                         20 -
20-                                                          10 -
1974            1990              1998                       1974            1990              1998
Source-Freedom House Freedom in the World, 1998; Larry Darmond, "Is the Third Wave Over0 " Journal of Democracy. 1996.



10     WORLD DEVELOPMENT REPORT 1999/2000
number had risen to 64, and the proportion keeps ris-     equate legal framexvork and a firm central government
ing (figure 7).                                           commitment against bailouts. Land use planning is an
Some national governments tax rural areas or place     important and useful tool, but the rules need to be spe-
restrictions on the prices of rural products as a way of  cific to local circumstances.
supporting cities, on the grounds that such policies         Countries do not need to wait until they become
encourage a "modern" economy. Other governments,          wealthy to improve urban services. Innovative institu-
concerned about the growing population of urban poor,     tional arrangements can result in much better service
have tried to discourage rural-urban migration, some-     provision, even at low levels of income. Recent trends
times by requiring official permission to move to a city.  in providing essential services point to the potential of
Neither course of action has worked especially well. Pre-  public-private partnerships.
venting individuals from moving in response to incen-
tives generally fails, as national governments have not   * Housing. Private developers, voluntary agencies, com-
proven adept at deciding where households and firms         muniry organizations, and NGOs need to provide an
should locate. Governments will be better off if they       increased share. For its part, the public sector must
pursue development policies that benefit both urban and     focus on property rights, financing and subsidies,
rural areas, recognize that the process of development      building regulations, and trunk infrastructure.
will spur urbanization over time, and plan accordingly.   u Water. Large cities are moving to private sector pro-
Local governments can take steps to make their           vision. Private concessions have already replaced pub-
cities more hospitable venues for economic develop-         lic providers in Buenos Aires, Jakarta, and Manila.
ment. One important step is to maintain a sufficient        The role of government is to regulate this industry
level of investment in essential infrastructure, includ-    and foster competition.
ing water, sanitation, roads, telephones, electricity, and  m Sewerage. Governments are often unable to fund the
housing. Increasingly, local governments are working        heavy initial investment required for citvsvide solu-
with the private sector, which has an important role to     tions. But communities are managing, with the as-
play in housing, on-site infrastructure, and municipal      sistance of NGOs, to implement affordable solu-
utilities. But municipalities will still be required to raise  tions, providing a model for future efforts.
substantial sums to finance capital investment, particu-  m Transportation. Public education and creative part-
larly during the rural-urban transition. Private capital    nerships can reduce air pollution. But the greatest
markets are a promising source, but they require an ad-     payoff is likely to come from  channeling urban
Figure 7
Urban population is growing-primarily in developing countries
World urban population                                    Location of the world's 100 largest cities
(percentage of total population)                          (number of cities)
60-
80-
50 _-
40-                                                       60 -       *                In evlpigcountries
30 -
-    I40-                                                                           * Inindustrialcountries
20-
20 -
10 -
0-                                                        0-
1975           2000             2025                      1950            1995             2015
Source: Jrited Nations Department of lnte'national Ecornonics ard Social Affairs, /lorld Urban!zation Prospects, 1998.



SUMMARY       II
growth along public transit routes to create more ef-  processes of globalization and localization will evolve.
ficient transportation corridors.                     The report presents five case studies that illustrate how
governments and organizations can capture some of the
It is sometimes argued that poverty alleviation is    benefits of these two phenomena and respond to poten-
purely the national government's responsibility. While   tial disruptions. The studies cover trade liberalization
the national government should play a prominent role    in the Arab Republic of Egypt; the reform of Hungary's
in providing subsidies to the poor, many services that  banking sector; Brazil's efforts to structure the fiscal re-
affect the poor most-water, health, education, and      lationships between regional and national government;
transportation-are best managed at the local level in   efforts of community groups and local developers to
ways that respond effectively to local needs.           improve living standards in Karachi, Pakistan; and the
creation of an urban-rural synergy in Tanzania.
The challenges for development are many: poverty,
Globalization and localization offer exceptional oppor-  hunger, ill health, lack of housing, and illiteracy, to name
tunities, but can also have destabilizing effects. This re-  a few. Much progress has been made, so that people in
port identifies some steps governments can take, singly  some regions such as East Asia are far better off than
and together, to minimize potential crises. National    they were several decades ago. Even in Sub-Saharan
governments have a leading role, but international orga-  Africa, where economic performance has been dismal in
nizations, subnational levels of government (including  recent decades, life expectancies and educational levels
urban governments), the private sector, NGOs, and       have risen. Still, the number of people living on less than
donor organizations all play vital supporting parts.     $1 per day is rising. This trend can be reversed, to the
These organizations are building the institutions-the   benefit of the world's people, by harnessing the forces of
formal and informal rules-that shape the way the        globalization and localization in the 21st century.






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G0"  ,)-0    lobalization and localization-the integration of the world
economy and the increasing demand for local autonomy-are
two of the most important forces shaping development as we
enter the 21st century. These forces will affect trade, capital
flows, the global environment, decentralization, and urban
development, and will require countries to seek a dynamic
equilibrium at both international and subnational levels.
This summary of the 22nd edition of the World Development
Report analyzes how these forces could reshape the inter-
<Inatnal landscape in the new millennium. The full report
proposes rules and structures on which to build a more
efftive, comprehensive approach to development; pro-
vides valuable insight into how current viewpoints can be
adapted to fit evolving development concerns; and offers
guidance for decisionmakers, researchers, and others with
an interest in development.
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
w
0        i        _     S                                             Telephone: 202 477 1234
Facsimile: 202 477 6391
R                                                                Telex: MCI 64145 WORLDBANK
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D        s     E   b 2                                             Internet: www.worldbank.org
E-mail: books@worldbank.org
B
A
Our dream is a
world free of poverty